Why Bitcoin Never Was, Is Not, And Will Never Be The New Gold Standard

  The Thinker  by Rodin, at the Musée Rodin photograph by Andrew Horne, public domain courtesy of  Wikimedia

The Thinker by Rodin, at the Musée Rodin photograph by Andrew Horne, public domain courtesy of Wikimedia

TAKEAWAY: The purchasing power of gold is very stable for reasons we understand very well, and has been for a long time.  Nobody knows – and nobody can possibly even make an educated guess -- what bitcoin is going to be worth ten minutes, ten days, ten months or ten years from now.

There have been rather a lot of promiscuous claims that bitcoin is the new gold standard.  This demonstrates a terrific lack of understanding of the mechanics of the gold standard, or of Bitcoin, or both. Bitcoin, like G-coin, is something great. But it’s apples and oranges.

Bitcoin never was, is not, and will never be the new gold standard. The comparison makes as little sense as that of the Mad Hatter, in Alice’s Adventures in Wonderland posing the riddle, ‘Why is a raven like a writing-desk?’ The Hatter confesses, after Alice gives up guessing, ‘I haven’t the slightest idea.’ (‘Nor I,’ said the March Hare.)

In its early days, bitcoin was worth so little that on May 22, 2010 a fellow named Laszlo Hanyecz, as reported by Business Insider,

“posted on BitcoinTalk that he would give 10,000 bitcoins to anyone who brought him a pizza. Someone in the U.K. took him up on it, ordered two pizzas from Papa John's in Hanyecz’s area, paid $25 for them, and got the 10,000 bitcoins in exchange.”

Those 10,000 bitcoins, wherever they are, were worth around $91,500,000 as of 11:21AM on February 3, 2018. That’s about half of what they were worth six weeks previous to that. One hopes those two pizzas came with extra pepperoni!

A run up in value by a factor of 3.6 million over less than a decade – or the halving of market value, implying something like a $90 million loss, in six weeks -- is not a characteristic of gold. “Forget it Jake. It’s Bitcoin.”

So, what’s the big difference between gold, including gold-on-the-blockchain such as Responsible Gold’s G-coin, and Bitcoin?  Larry White to the rescue!

Dr. Lawrence White, a professor of economics at George Mason University and Cato Institute Fellow -- my favorite university monetary economist (and a personal friend) -- recently published a piece at Alt-M.org -- a reliable and nearly definitive source – entitled How A Bitcoin System is Like and Unlike a Gold Standard. To cut to the chase for you TL;dr-types, Prof., White concludes:

As a result of the long-run price-elasticity of gold supply combined with the smallness and infrequency of supply shocks, the purchasing power of gold under the classical gold standard was more predictable, especially over 10+ year horizons, than the purchasing power of the post-WWII fiat dollar has been under the Federal Reserve. As I have written previously: “Under a gold standard, the price level can be trusted not to wander far over the next 30 years because it is constrained by impersonal market forces. Any sizable price level increase (fall in the purchasing power of gold) caused by a reduced demand to hold gold would reduce the quantity of gold mined, thereby reversing the price level movement. Conversely, any sizable price level decrease (rise in the purchasing power of gold) caused by an increased demand to hold gold would increase the quantity mined, thereby reversing that price level movement.” Bitcoin lacks any such supply response. There is no mean-reversion to be expected in the purchasing power of BTC, and thus its purchasing power is much harder to predict at any horizon.

In other words, the purchasing power of gold is very stable for reasons we understand very well. It has been stable, and we have understood why this is so, for a long time.

Nobody knows – and nobody can possibly even make an educated guess -- what bitcoin is going to be worth ten minutes, ten days, ten months or ten years from now. Gold and bitcoin are as different as apples and oranges.

For those readers who are interested in drilling down further.

“The most important difference between Bitcoin and gold lies in their contrasting supply and demand mechanisms, which give them very different degrees of purchasing power stability. The stock of gold above ground is slowly augmented each year by gold mines around the world, at a rate that responds to, and stabilizes, the purchasing power of gold. Commodity (non-monetary) demands also respond to the price of gold and dampen movements in its value. The rate of Bitcoin creation, by contrast, is entirely programmed. It does not respond to its purchasing power, and there are no commodity demands.

“The key difference in the supply mechanisms is in the induced variation in the rate of production of monetary gold in response to its purchasing power, by contrast to the non-variation in BTC. A rise in the purchasing power of BTC does not provoke any change in the quantity of BTC in the short run or in the long run. In Econ 101 language, the supply curve for BTC is always vertical. (The supply curve is, however, programmed to shift to the right over time, ever more slowly, until it stops at 21 million units).

As noted in a previous blog here, the Grand Architect of the gold standard was Sir Isaac Newton, when master of the Royal Mint of Great Britain, and widely considered the founder of classical physics. The Grand Architect of Bitcoin is a mysterious genius writing as Satoshi Nakamoto about whom little is known. (If he still owns his bitcoins, he is one of the richest people in the world.)

This is no aspersion on Bitcoin. As a technology, the blockchain, of which Bitcoin is the most famous version, is widely seen as having enormously valuable applications in a wide variety of industries, from finance to healthcare to supply chain management (and more). G-coin is built on a blockchain.

As is relevant to investors, however – people who wish to buy and hold assets for their long term value – there is always one key factor to keep in mind. The value of everything – yes, everything – is determined exclusively by two and only two factors: supply and demand. Period.

We know, based on hundreds, really thousands, of years of data a lot about both the supply and demand for gold. We know, to quote Prof. White, “Under a gold standard, the price level can be trusted not to wander far over the next 30 years.”  We also know that as for Bitcoin, “There is no mean-reversion to be expected in the purchasing power of BTC, and thus its purchasing power is much harder to predict at any horizon.”

Gold, whether in your pocket or, as with G-coin, held in a warehouse for you and securely evidenced by the blockchain, is a solid asset. There is good reason to believe it will tend to hold its purchasing power over time, a great store of value, come what may.

The future value of bitcoin, approaching ten years old, pure blockchain connected to nothing else, is a riverboat gamble. Speculation as to the value of one bitcoin ranges from zero to $1 million. Round and round she goes, where she stops, nobody knows.

Invest accordingly.