Bitcoin versus gold

Via Morgan Stanley:

‘…so you’re a commodity analyst, and you don’t track bitcoin? Should I be worried about that?’ – bitcoin enthusiast

Latest fiat money: Bitcoin’s value has lifted about 5x since a period of relative stability pre-Nov-16, to over $4,000/bitcoin (Exhibit 1,2), on mainly rising geopolitical tensions. Curiously, we’re receiving investor queries on this price performance. As commodity analysts, we don’t model the bitcoin market, or set price forecasts for it. Yes, to expand total bitcoin supply, parties are invited to engage in ‘mining’. But this is a misleadinguse of the term. The fact is,as a globally accessible ‘cryptocurrency’,electronically exchanged directly between players,via a decentralized, intermediary-free, repository-free system (since only 2009) – bitcoin’s really just another fiat money,not a commodity. Why flag it then? Well, beyond its ongoing price surge, some investors believe that bitcoin’s better than gold as a hedge against inflation/uncertainty.

A currency, defined: Both gold and bitcoin possess the properties of a viable currency:a widely accepted medium of exchange;are fungible, durable, portable, divisible and scarce. Butunlike gold, bitcoin exists within a system that can instantly transfer value worldwide + supply is constrained, potentially underpinning its long-term price. These other properties confirm that bitcoin is not a commodity money like gold, but a type of fiat money, consistent with trade currencies:a currency established by law (i.e. in this case,not by government, but certified by network nodes + recorded in public ledger = ‘blockchain’).

Better than gold? So for global money transfers – bitcoin’s a good medium. Indeed, for this function, bitcoin’s better than gold; probably better than conventional fiat currencies too (i.e. transaction costs). But the popular view that this immature currency is also superior to gold as a hedge against inflation/uncertainty, still needs to be tested. Some claim that the protocol limiting bitcoin’s supply growth rate + total that can ever be created (i.e.21 million, by 2140),underpins its value. But if bitcoin is successful long term, we should continue to see competitor cryptocurrencies and market strategies emerge (Global Financials & Payments: Blockchain: Unchained? 16-Jun-17) to exploit the new economic rent – a bearish risk for bitcoin’s price (i.e. few barriersto-entry). And what of uncertainty? Over millennia,gold has demonstrated its ability to endure and preserve value under all circumstances. By contrast, bitcoin’s global platform literally requires the lights to stay on.

It’sa risk: Gold’s value to financial markets has already been incrementally marginalized over the centuries, by the rise of trade-/productivity-backed fiat money. Bitcoin is the latest money to offer gold’s long-standing capabilities + some other unique benefits. While it too may somehow undermine gold’s demand outlook, the rate/scale of the shift depends on the willingness of investors to engage bitcoin/cryptocurrencies. And willingness first requires a time-consuming, trust-building exercise.

Let me ask, then, is bitcoin an asset or a currency? With the wild volatility current at large does anyone seriously hold bitcoin as a fiat currency? I mean, shit, why buy a pizza today with bitcoin at $5 when next month it’s it’ll be $2.50? Next year it might by 50 cents or 5 cents or $100. It’s complete nonsense to discuss it as an inflation hedge when it has effectively no value as a currency.

To see pricing stabilise, bitcoin and other cryptos will have become so widely used so quickly that they’re very unlikely to ever make it. Moreover, the infinite creatibility of cryto means that value can never be stable (wanna buy some MBcoin?), unlike gold, which is just nice and shiny like nothing else.

Sorry so say it but crypto remains nothing more than the first ever fully digistised global ponzi scheme.

I’m surprised governments have not shut it down already.

Comments

  1. Of what earthly use is bitcoin in an era of growing geopolitical instability?

    Big money is going to be made shorting this cunting pig.

    • Yep.

      “Over millennia,gold has demonstrated its ability to endure and preserve value under all circumstances.”

      By contrast, bitcoin has survived exactly zero major economic crises / downturns / wars.

      • migtronixMEMBER

        “The Spanish Price Revolution is a period, beginning as early as 1470 and lasting until as late as 1650, when gold and silver poured into Spain from the New World; Mexico, Peru and the rest of the Spanish Empire.[1](p70)The specie flow through Spain increased Spanish prices and consequentially spread inflation through Western Europe. This enlarged the money supply and price levels of many European countries. The Spanish Price Revolution is overwhelmingly the most prolonged and influential occurrence of rampant inflation in modern history.[1] In addition to leaving negative effects on the Spanish society and market, the price revolution spurred numerous economic, historical and political theories that continue to fascinate scholars today.”

        Just saying

      • Mig, on your Nazi point – the gold didn’t lose value. The people in question lost their gold.

        You raise a fair point though – valuable things can be stolen. But at least to steal gold you have to go and get it.

        Is it easy to steal bitcoin? Will the incentive to steal it go up as its value does? Will this undermine faith in bitcoin as a store of wealth in times of trouble?

        One answer:

        https://www.businessinsider.com.au/south-korean-bitcoin-exchange-bithumb-hacked-ethereum-2017-7?r=UK&IR=T

        https://www.forbes.com/sites/laurashin/2016/12/20/hackers-have-stolen-millions-of-dollars-in-bitcoin-using-only-phone-numbers/#48d7f7b738ba

        https://www.theguardian.com/technology/2016/aug/03/bitcoin-stolen-bitfinex-exchange-hong-kong

        https://phys.org/news/2017-05-bitcoin-popular-exploited-theft-fraud.html

        Etc. Etc. Etc.

      • migtronixMEMBER

        That was stealing from the exchanges – hell I had the FBI steal 8 BTC when they raided Silk Road. It’s worth A$40k today. Nothing has ever gone missing from my wallets…

      • Sure, but I’m not sure an investor concerned about wealth preservation is going to consider that a sufficient distinction. If bitcoin gets a reputation for being vulnerable to theft – remotely, using hacking – it will lead to mistrust and a fall in value, especially in times of trouble.

        Whereas gold being stolen does not cause people to stop trusting gold.

      • Indeed – certainly bitcoin’s price keeps going up. But it’s hotly debatable whether it is currently being used as an unproductive store of wealth (like gold) or an asset (possibly a speculative one).

        My argument is that we don’t know how it will handle a crisis / war / etc, and that will determine how people see it long term – ie it will either hold its value nicely, or it will crash as people rush to traditional safe havens. I reckon that in times of trouble, any hint of mistrust – “the exchanges can be hacked!” – will severely undermine the price. Of course I don’t know for sure. It’s uncertain. But the point of safe havens like gold is that people use them to avoid uncertainty.

      • Question for you migtronix:

        Why do you think bitcoin is a better store of value than ethereum or litecoin or dogecoin or MBcoin or Migcoin or whatever else comes along?

        I understand the appeal of cryptos for anonymous transactions, but the imagined scarcity that makes it an “asset” rather than a currency is not sustainable

      • migtronixMEMBER

        Well Coming because
        I) it was first
        II) survived all the assaults
        III) I’ve seen this movie before

        BTW I have 20,000 LTC

      • migtronixMEMBER

        Coming: *groan* “why do you think BTC rather than other crypto”

        Mig: gives response

        Coming: gold

        😴😴😴

      • Even though you are a crypto astroturfer, I hope you manage to get out before it crashes

        good luck to you son – don’t push it too far

      • Mig-i….

        Crypto is based on fear and nothing else w/ a side of quantity in the form of an electron and lest than normal price swings… too any psychological disturbance in the force.

        Come on mig…. and you give RE specufuckulators a serve…. please…

        Disheveled… you can’t have it both ways mig… wank on about productivity and virtuous cycle crap and then wank on about crypto…

  2. migtronixMEMBER

    As always I have to point out that far and away more “money” is transacted daily in FX than is transacted in trade. So, for instance, the AUD has been a fully digital ponzi since the 80s, by this metric…

  3. Bitcoin…
    ..is not an inflation hedge (far outperformed and not enough history to judge).
    ..is an asset.
    ..can be used as a currency (though doesn’t appear to be purpose of most recent buyers).
    ..is experiencing a speculative frenzy.
    ..is not a ponzi (unless bastardising the traditional definition).

  4. great article and I agree entirely

    A few generations form now people will laugh at the bitcoin bubble
    Its really the closest thing we have to ‘tulipmania’

    What really surprises me is the normally intelligent posters here who are blind zealots when it comes to cryptocurrency
    How can you think land is in a bubble, but bitcoin isn’t?! it really makes no sense

    If you like BTC because you think fiat is going to zero, surely land and gold will at least hold their value in bitcoin terms (and skyrocket in fiat terms)

    The only thing I can see that would drive further increases in the currency are
    -an increase in demand for purchasing illicit goods (and most countries are moving towards legalizing drugs, while guns and slaves are not usually traded by average joes)
    -capital controls (in which case you can bet that government agencies will launch multinational campaigns to be up your backside if you even think about using a cryptocurrency)

      • “Stupid” – you’re rather emotional about this arent you?

        A Ponzi scheme (/ˈpɒn.zi/; also a Ponzi game) is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities or profit of financial trading.

        Well in the sense that the only revenue is the capital gain, then I would say it fits the definition reasonably well

        The demand for bitcoin to actually use for anonymous purchases is fairly static wouldn’t you say?
        Not like there is some new illegal good that requires purchasing
        And any other crypto could fulfill the same role

      • Is many things, but Bitcoin is not a ponzi scheme by most definitions[1] – ie. later investors paying returns to the early ones. This is because mining continues and is the source of some new wealth.

        IMHO MB would probably get a lot more interest in their MB Fund if it were launched as an ICO (initial coin offering).

        [1] https://en.wikipedia.org/wiki/Ponzi_scheme

      • I think it is exactly that: new investors paying returns to early ones

        The new mining contribution shrinks constantly (not as the economy expands, as it would with fiat for instance)
        In that sense it is similar to gold

      • @Coming. Emotional? No.

        Definition of stupid: lacking intelligence or reason.

        The argument for Bitcoin as a ponzi scheme lacks intelligence or solid reasoning.

        The suggestion that Bitcoin is only used in anonymous/illegal transactions is also stupid.

        I understand since being legalised in Japan for payments there has been a substantial uptake. That said it would be difficult to separate those transactions which are speculative in nature vs those which have a transactional purpose. What analysis are you using to measure this demand?

        Even if Bitcoin was only used in illegal transactions, it’s market cap/price could still (potentially) be justified today if it increasingly became used in such trade.

        An asset which increases in value due to a larger number of investors / flow of capital through it doesn’t automatically make something a ponzi.

        Read Charlie’s link on the origins of the word and then come back and make an intelligent and reasonable argument that Bitcoin is a ponzi.

      • Bullion Baron

        here is a reasonable argument

        I contend that the overwhelming majority of investment in bitcoin and the consequent value of said bitcoin is due to purchases with the intention of increasing capital value (in USD or AUD or whatever equivalents)

        It really has no advantage over government fiat currencies for legal (and taxed) transactions
        In fact, it only has disadvantages (cumbersome) for that purpose

        You seem to be fixated on the semantics of “ponzi” but I don’t think, even if you could exhume Charles, that language can ever be so precise

      • Advantages over fiat as a currency:
        Can be transacted without a third party to facilitate.
        Can be owned and transacted without identifying yourself as an owner of the account (wallet).
        Total number of Bitcoins can’t be increased without consensus.

        All of these could be advantages alongside legal use of the coin, unless you are are a supporter of the ‘nothing to hide’ argument: https://en.wikipedia.org/wiki/Nothing_to_hide_argument

        I agree fiat currency is of greater benefit to a majority of people (even me). However, that still doesn’t make Bitcoin a ponzi.

      • BB….

        Contrary to ideological opinion of rational agent models cyrpto has no intrinsic value other that psychological, akin to drug laundering if that’s ones bag.

    • Just because a currency like this hasn’t been tried and found to work before doesn’t mean it won’t be a success.

      But it does speak to the likelihood of success to some extent.

      All the blokes who tried to find America (or whatever) and failed … it doesn’t mean that America (or whatever) wasn’t there to be found. It just means they failed. Same with successful currency/cryptocurrency.

      • Correct. As I say – a lack of success to date speaks somewhat to likelihood of success in the future.

    • If fiat goes to zero, lead will be worth more than bitcoin. So will anything you can screw, keep you warm, dry,heathy, get you drunk or wipe your ass with.

  5. Charles Babbage

    People use Bitcoin all over the world as currency – what are you talking about ?

    There are Bitcoin ATM’s – are we aware of this ?

    How are Bitcoins mined ? Answer – by maintaining the ledger.

    How long will it take to mine all the bitcoins ? Answer 2140

    People use Bitcoin to buy a vast array of things on the net AND as a hard currency.

    BUT THERE ARE OTHER CURRENCIES !!!

    Yes – the AUD is not the only currency.

    Sheesh.

  6. blakemorrowMEMBER

    It is both – there is an exchange to work out the little details of whether it’s $2.5 (worth of bitcoin) or $5 (worth of bitcoin). Not a big deal at all, you pay the same in AUD/USD just under a different currency.

  7. The value in cryptocurrencies is that they don’t require a trusted 3rd party to act as intermediary for transactions. That means I can transfer value to any country in the world within minutes, without having to go through all the usual processes and without fear that a 3rd party may intervene.

    Once my transaction is verified by the network, it becomes almost impossible to reverse. With each further verification (via the mining of blocks) it becomes even more difficult to reverse.

    Cryptocurrency, as the name suggests, is protected by cryptography. Bitcoin’s integrity is protected by a cryptography structure called a Merkle Tree (think of it like a fly getting trapped in amber). So you sign a transaction and then put it through this process of the Merkle Tree, by sending the transaction through the block chain. Once you do that and sign it with your private key, you can’t later deny that you sent it. After a few cycles (called block times), which generally take about 1-10 minutes each depending on network congestion and the miner fees paid, it gets exponentially more difficult to deny or take back that the transaction took place. In effect, as the amber becomes larger and larger, you know that the fly has been trapped there for a larger amount of time.

    Governments haven’t shut down bitcoin, because they can’t. They may be able to shut down exchanges, sure, however they can’t shut down the blockchain without turning off the internet. The fact that anyone can create a cryptocurrency that is based on the same maths as Bitcoin doesn’t mean that currency is equal in value to bitcoin. If I transfer 1 BTC to someone, they know that they have received 1BTC. Then it’s just simply a matter of the market finding the correct exchange rate to convert 1 BTC to another currency, if so desired. BTC has more perceived value, at this point in time, than other cryptocurrencies because it has a longer history, has processed more transactions and has already proven itself to have value by virtue of the mining process (i.e. energy is required to “mine” a bitcoin, in the same way energy is required to mine gold). If a cryptocurrency comes along that is fundamentally better than Bitcoin (some argue Ethereum may be so), then that currency will ultimately have a higher value than Bitcoin.

  8. Don’t know why people keep bringing up the “low barrier to entry” myth.

    The barrier is about as low as the barrier to creating the next Facebook. Sure, you can create another social media site, but unless you get people to use it your new site has no value. It’s exactly the same argument for cryptocurrency.

  9. robert2013MEMBER

    I think BTC is the most likely mechanism by which the invisible hand will eventually put a stop to central bank shenanigans.