Bitcoin VS Gold

Being elbows deep in all things crypto…

I had a look over the weekend at what people were saying about bitcoin on social fabric destroyer Twitter.

“Bitcoin still shaking out the weak hands” said one comment (if you recall bitcoin got hammered last week; it’s staging a tentative recovery so far this week).

“Bring the pain. Let’s test the weak hands and the weak mines to the limit,”said another.

Ah, the “weak hands” meme. I remember it fondly from my days working in gold.

Any rally was a vindication of the True Believers.

Any sell-off an even bigger vindication of their True Beliefs, their Strong Hands, their fortitude in the face of shadowy manipulators.

Personally I’m wary of mixing such quasi-religious fervour with the decisions I make about money.

You can hold an allocation to gold as a hedge against systemic crisis. I think that’s a good idea myself.

Similarly, you can take a position in cryptocurrencies because there’s an outside chance it could net you a life-changing fortune.

But neither investment requires you to sign up body, soul and mind to a set of beliefs that define your core identity.

Remember that.

Another parallel I’ve noticed between crypto and gold is a wariness of government that’s immediately abandoned whenever a government does something seen as positive for gold.

Back in the day, talk of China launching a gold-backed currency was all the rage.

This month, Jim Rickards draws our attention to the People’s Bank of China’s efforts to create its own digital currency.

“Bitcoin fans go on and on about how digital crypto-currencies are a form of liberation from state power and government control,” says Jim.

He goes on:

“The libertarians and anarcho-capitalists join the chorus (in addition to the drug dealers, tax evaders, and terrorists who already inhabit the dark web).

“There’s only one problem with this viewpoint. It completely ignores the reality of state power.

“You don’t actually believe governments will allow an attack on their money monopoly without pushback do you?

“Cryptocurrencies may have encryption, but states have guns, jails, detention centres, firing squads, confiscatory power and, in some cases, torture chambers.

“Who do you think wins that fight when push comes to shove?

“Governments are also good at lying in wait, letting the crypto fan boys and girls get full of themselves, and then pouncing like a hidden tiger or snake in the grass.

“As evidence of this, the attached article shows how China is testing its own digital currency.

“The IMF also announced this past week that they are encouraging other governments to do the same.

“The bitcoin fans take this as “proof” of the success of their new paradigm.

“It actually proves the opposite.

“Once these new state-controlled digital currencies are ready, captive citizens will be ordered to use them (so the state controls and sees everything).

“Then the competing cryptocurrencies will be crushed (unless exchanges offer to cooperate by giving up user information).”

So some of the more high-minded arguments for cryptocurrencies may well have fatal flaws.

Is that a reason to avoid them entirely?

Not necessarily.

“I find that gold and Bitcoin are actually somewhat complementary – that one’s strengths are the other’s weaknesses, and vice versa,” writes Nathan Lewis, author of Gold: The Once and Future Money, writes in this Forbes post.

Lewis sees a future in which people seek to escape an unreliable currency by using gold as a long-term savings account and having a small amount of cryptocurrency AS a kind of current account for day-to-day purchases.

He continues:

“This model is actually not much different from similar arrangements we have seen worldwide. People in Turkey, like many such places with a history of unreliable currencies, might use euro-denominated assets as a store of value, and also have prices denominated in euros. However, actual transactions can be made in Turkish lira.

“A thousand years ago – also in the present-day location of Turkey – the Byzantine Empire had a system that was based on a highly-reliable gold coin, the solidus, which did not change in value for over seven centuries. However, especially during the fourth century, most commerce was conducted with a variety of junky copper coins, whose market value against the solidus was quoted daily.”

Of course, in this schematic it’s gold that is the long run store of value. Bitcoin is just the “junky copper coins” (so who knows what that would make the hundreds of smaller “alt-coins” riding on bitcoin’s undercarriage).

I’ll confess I rather enjoy this kind of “What is money?” style discussion.

In fact, I plan to dust off a short essay I wrote a couple of years back for tomorrow’s DR, and re-examine it through the prism of cryptocurrencies.

Again, though, I’d be wary of letting such ideas drive your investing decisions.

For most of us, our interest in crypto is straightforward.

Can I make money from it?

To which my answer is, you probably won’t, but if you do you could make a serious return on a relatively small investment.