Bitcoin sure ain’t behaving like gold

See the latest Australian dollar analysis here:

Macro Afternoon

The two arguments that support Bitcoin as some kind of worthwhile asset for the future are worth revisiting again today. We know that some see it as the currency of the future with a spreading role as an exchange of value. That path is fraught with peril because it is the one in which government taxation and monetary monopolies will be most threatened.

I have argued therefore that the only viable path for BTC is as a store of value that operates as an alternative currency holding debased fiat regimes to account. That is, much like the role of gold.

But, if so, shouldn’t we expect BTC to behave like gold? To fall when the primary reserve currency is strong and to rise when it is weak?

This relationship is holding for gold:

But not for BTC. At least, not in recent weeks as the US dollar rallies strongly, gold sinks but BTC remains bid:

There are a few possible explanations:

  • As a new asset, BTC may still be gathering market share so its bid may be related to increasing penetration into the investment community, offering no signal at all.
  • Or, it might be that BTC is signaling that more US dollar is ahead with further easing from the FOMC, in contradiction with the gold market.
  • Or, BTC may not reference the US dollar at all. It might some new asset that references fiat debasement in general. Like some whacko version of Keynes’s bancor.
  • Or, BTC may not reference anything at all. In which case it is a simple ponzi scheme.

All I can say is that until you can answer any and all of these questions then buying BTC is not so much acquiring as asset as it is taking part in some wild monetary experiment with absolutely no notion of the outcome.

David Llewellyn-Smith
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Comments

  1. There have also been strong outflows from the passive bitcoin ETFs etc..
    Yet the price isn’t falling. Should be ringing alarm bells for regulators.

      • I'll have anotherMEMBER

        Highlights one advantage of crypto versus equities.

        Cannot fraudulently adjust btc price, however shares, particularly ETFs are notorious for this via futures manipulation and straight up dishonesty. Silver a case in point.

        That is not to say the BTC price is not heavily manipulated by large owners. There is no difference there to the share market though. Even gold is heavily manipulated to reference the comparison made above.

          • A token pegged to fiat and a free floating token are 2 VERY different beasts.
            I have to wonder what the point of a token pegged to fiat is at all. BankTokens™ have been freely transferrable electronically for decades with a perfect record of maintaining their peg.
            All you are doing is trading trust of the banking system for trust of Tether Inc.

          • Differences is that banks promise to redeem their tokens into fiat at a fixed exchange rate and bank token issuance cannot be used to increase the price of fiat 1) because banks have no economic incentive to do so because it wouldn’t effect their P&L as assets and liabilities are matched due to fixed exchange rate and 2) because the fiat price is set based on macroeconomic objectives (2% crawling peg in terms of goods)

          • “Differences is that banks promise to redeem their tokens into fiat at a fixed exchange rate and bank token issuance cannot be used to increase the price of fiat ”
            That describes TETHER pretty accurately. They agree to redeem 1USD for 1 Tether.
            HOWEVER, tether being created out of thin air to increase the value of BTC would actually seem to have quite a bit in common with banks creating credit out of thin air to increase the value of property they have mortgages over as securities…

          • No it’s different because Tether isn’t promising to redeem Tether into bitcoin at a fixed exchange rate.
            That would be the same set up as banks and then you can see why it wouldn’t happen because there would be no P&L impact if banks issued deposits and bought fiat.

          • Tether is agreeing to redeem for a fixed USD.
            Banks aren’t agreeing to redeem houses for a fixed price either.
            TETHER is the logical equivalent of a bank deposit which isn’t actually FIAT although is used interchangeably due to being pegged.
            The fact is tether could infalte the price of anything and everything because it is not inherently connected to bitcoin at all. Tether could be redeemed for USD and used to inflate the stock market just as easily
            They are just easier to use to buy bitcoins much like banktokens™ are much easier to obtain to purchase a house than for any other purpose, hence pushing up house prices.

            Edit: to clarify
            Tether is to USD what Banks are to USD
            Tether is to bitcoin what banks are to housing(To stretch an analogy)

          • There are big differences as above. To have the same scenarios in bitcoin as in banking Tether would be redeeming in bitcoin. So if the price of bitcoin went up it would have no effect on the Tether (“bank”) because their obligations go up by the same amount.

            The problem is where you’ve got a scenario where Tether can be used to buy bitcoin on the assumption that Tether/bitcoin exchange rate is the same as the USD/bitcoin exchange rate.
            The assumption is crazy so no one would accept payment of Tether in exchange for assets outside of bitcoin land. So how could Tether manipulate stocks? If it really is 100% backed Tether would have to be both short and long USD to buy stocks.

          • Tethers obligations are in USD they are not linked to bitcoin at all.
            You misunderstand what tether is, it is a crypto USD proxy.

            The claim IS that tether is 100% backed. If that is a lie then that’s a different argument, not the one you are making.

            Of course the banks are only Fractional Reserve, so they aren’t backed fully either…

            Edit:
            And of course this is why I say crypto pegged to USD is pointless and ridiculous, because it implies you trust the entity issuing them to have the reserves to allow you to actually redeem for USD.

          • I understand that. I understand Tethers model.
            What I’m saying is that it’s completely different to the relationship banks have with fiat.

            For the relationship to be the same as in bankingTether would be promising to redeem in bitcoin (fixed) and therefore would have no interest in the price of bitcoin.

          • Edit: to clarify
            Tether is to USD what Banks are to USD
            Tether is to bitcoin what banks are to housing(To stretch an analogy)

            Complaining about tether inflating the price of bitcoin is equivalent to complaining about banks inflating the price of houses.
            Tether is not issuing btc proxy, it is issuing USD proxy that can be used to buy (houses,btc)

          • Ok I get what you are saying.
            But it’s still different because banks use fiat to buy houses in your example.

          • Agreed it’s not a perfect analogy but tether doesn’t need to be buying btc directly either to influence the price.
            Them creating money that is directed into crypto exchanges is roughly equivalent to the banks creating money out of thin air via credit and giving it to people to buy houses. Indirectly the banks do benefit from this as they can lend more money on houses worth more that results in more interest payments.

      • It’s not behaving like a risk asset or safe asset. It seems to be uncorrelated to everything.

        • Actually, I find its value correlates very closely to the awesomeness and profound foresight of its fanbois.

  2. How dare you try to insert sound reasoning and constructive thought into the BTC debate. Hater!

  3. “as it is taking part in some wild monetary experiment with absolutely no notion of the outcome.”
    Doesn’t this describe the whole western world + china at this point

  4. Gold is the king of commodities (or the queen if you think platinum is the king). Together with platinum, silver, titanium, copper, crude oil, etc., commodities collectively serve as an inflation hedge because, well, inflation is nothing other than inflating prices of commodities!! All commodities are real and so is gold. One can be certain that gold will preserve its purchasing power over time. But there is nothing special about gold as a commodity, except that it won’t corrode, etc., but then again, platinum is just as good in that regard.

    BTC, on the other hand, is not a commodity so one would not expect it to behave like gold. I am not sure what BTC is. I have been trying to figure it out for several years now. I am still trying to figure it out.

    • Gold is primarily stored in vaults, so it’s primary function is not as a commodity.
      So there actually is something special about gold as a commodity.
      Copper, crude oil, wheat and other things that are purely commodities are not stored for decades in vaults as a store of value but stored until they are needed for use.
      Silver and platinum(?) verge much more towards gold in this regard.

      • Yes, but I think it is the other way around. I mean, gold became a store of value over the years (centuries and millennia) precisely because it is a convenient commodity for long-term storage. It does not corrode and its density is so high that its unit mass does not occupy much space. I bet any other commodity that has the same feature, like platinum, can substitute gold.

        Copper, wheat, crude oil, etc., are less dense, require more space (and hence cost more) for storage, are not chemically stable, could catch fire or even explode, etc., so they are much less convenient and carry much greater risks for storage than gold or platinum.

        My point being – gold is real, like any other commodities, but cannot command artificially inflated prices with respect to the other commodities. I mean, where can one draw a line? Platinum, palladium, silver, copper, titanium?

        • What does artificially inflated mean?
          I’d argue that gold’s price is massively inflated over it’s actual value as an industrial metal, so clearly it can be.
          What gold has is very limited supply in comparison to other commodities.
          Much like pieces of paper vs fiat banknotes.

          • I thought the prices of platinum, silver, copper, crude oil, wheat, etc., when denominated in gold, remained largely constant over the last 150 years or so, within a band of fluctuations that spike up or down from time to time? I don’t think gold has been artificially inflated more than the premium it can rightfully claim for its convenience for storage?

          • Even StevenMEMBER

            Yes, gold can be notionally segregated into industrial use and storage-of-value use. Hard to quantify how much to attribute to each although I’m sure many have tried.

            Bitcoin could be a competitor to gold for the storage-of-value use. It is possible the desirability of gold’s storage-of-value use declines over time as Bitcoin (or other crypto currencies) become popular. My point is that we can’t be certain gold can maintain its purchasing power.

          • ” when denominated in gold, remained largely constant over the last 150 years or so, within a band of fluctuations that spike up or down from time to time?”
            Quite possibly, but why was it at a reasonable value 150 years ago when it had even less industrial use?

          • Perhaps, because the technologies for storage were much less developed back then? It would have been much more difficult to reliably store wheat or oil than gold back then, which might have resulted in relatively higher premiums for gold?

  5. BTC will stabilise eventually and become a useful currency – one day.

    Now, I think the price of BTC goes up because people need something that goes up, so pay just about whatever, pushing more money into a relatively fixed space –> price goes up. At the moment, the price goes up because it went up, and generally goes up; hence, it’s still ‘safe’, not as a store of value, but as a speculative asset that generally always goes up.

    It could go on like this for a fair while? I don’t see why it couldn’t go to $100K – I’m serious. The only thing BTC might run out of is faith, as there’s plenty of fiat to go around. Then, correction, and hopefully less speculation, so it can stabilise and become useful as a currency (which is all it is).

    My 2c

    • There is a fixed supply of BTC, much like there is a fixed supply of land(kind of, especially zoned).
      As more people want the(land,btc) the price will go up as people pay the same but get smaller and smaller pieces of(land,btc) for their money.

      • You can build and live on land, or you can farm it. You can charge others for the use of your land. This is why people, basically all people, want it. Why do you assume that more, more, and forever more people will continue to want BTC?

    • Did you see the Realvison crypto gathering interview with Alex Mashinsky? Super fascinating guy, current CEO of Celsius Network. He was there at the start of the internet and was heavily involved in the creation of VOIP.

      My favourite part of the interview is where he spoke about the similarities between cryptocurrencies now and the internet in the early days. Right now we are seeing the creation of MOIP (money over internet procol). It’s a battle between open-source (BTC/ETH), private (Diem[Facebook]) and proprietary (CDBC). The same happened with the internet open-source v proprietary v private. In that battle, open-source won out. He was clear to say this time around it’s not clear who will win as the regulatory arm of governments will play a much bigger role.

      Ian

  6. mikef179MEMBER

    “taking part in some wild monetary experiment with absolutely no notion of the outcome.”

    Sounds like the fiat system we are living in right now. I will take my chances with BTC.

    • Even StevenMEMBER

      It’s not the same. Yes, fiat is being devalued. But the monetary system is still based on people wanting to purchase things.

      The fiat devaluation is only a problem if you have a substantial portion of your assets in cash. As alternatives you can buy corporate bonds, equities, commodities, property. Bitcoin is well down on my list because its desirability is highly uncertain and it doesn’t provide a form of return like others I’ve mentioned.

  7. mikef179MEMBER

    The way that BTC will be adopted is through speculative attack ala Soros and the Bank of England. That is, at some point, people will borrow at low rates and use it to buy BTC. This will weaken the currency that is being borrowed in and put upward pressure on interest rates. There’s an article about it on the Nakatomo Institute site, but I can’t seem to put links in my comments.

  8. BTC are digital tulips!! buy now and rely on the next fool to pay more for it than you did! simple as! what could go wrong LOL

  9. mikef179MEMBER

    Isn’t the fiat system a giant ponzi scheme? It all started when Tricky Dicky decided he didn’t want to pay his gold obligations. Instead of defaulting, the US decided to set up a ponzi scheme called the petrodollar and force everyone on to it. If you don’t like it well, they’ll just roll in the tanks.

        • Like the bad maths and physics orthodox economics uses you say ….. you see the so called maths are just symbolism for the tortured deductive axioms hiding underneath it all.

          Same goes for the crypto sales pitch, like scarcity is some immutable law that grants value* to a thing, not that its basically a tax dodge with a side of laundering hot money – but yeah banks … what shadow sector thingy ….

  10. mikef179MEMBER

    Oh, btw, if you want to figure out what is happening with BTC, google 4 year halving cycle.

  11. Rikki StocksMEMBER

    How is bitcoin any different to mining gold in World of Warcraft other than a fixed maximum # coins?
    And NFT’s ?? Has the world lost its mind, is everyone taking stupid pills?

    • Because gold in World Of Warcraft is the equivalent of the central bank. Push a button and more comes out.

      Next time you think NFT, think COVID toilet paper scarcity and you will understand the human compulsion that comes around scarce things (artificial or not). Humans are hard wired to horde scare objects (think cavemen and food, mates, water etc)

      Ian

    • How is AUD notes different to monopoly money?

      Answer that one satisfactorily and you may understand.

          • Trade shocks can create all kinds of dramas and I don’t think a few electrons can stop the after math, yet with Gov Fiat the built up machinations of rational agents[tm] was adverted. The drama seems to be the distribution vectors and how that’s played out for the unwashed.

            Any hard currency is inherently deflationary so the result is already baked in, seems the drama is more multivariable so why are some still clinging to stuff that fails when you need it the most.

  12. I view BTC as the ultimate bluff call to central banks’ reckless monetary policies world wide. I don’t think a rising long end will be enough to crash BTC. The price of BTC is telling you it is calling the market’s bluff about the threat of rising inflation. Unless short term rates are aggressively hiked, it seems nothing can stop BTCs rise. And if short term rates are hiked aggressively, the very foundations of the modern financial system will be at risk. BTC is therefore a great bet (assuming you put a small% of your portfolio in it).

    • mikef179MEMBER

      At some point you may even get a crowd-sourced “borrow fiat and buy bitcoin” campaign ala Gamestop. Though this has the potential to be much bigger. What will Central Banks do then?

      • Not care because ultimately all it does is redistribute some fiat around the place, along with claims on some virtual tokens.
        Much like people buying gold, or stocks .

  13. Some seem to confuse currency which is a tool to facilitate trade and a rock or its electron doppelganger …

    And aside … is it just me or are crypto sell side story telling corner fables just like gold bug offerings …. how wrong was that mob post GFC …

  14. @DLS:
    Genuinely understanding the bitcoin phenomenon means understanding the philosophy and history of the cypherpunk movement from which it was born. The following was written in 1993. As you can see, it was extremely prescient, on issues of privacy and identity as well as money:

    https://www.activism.net/cypherpunk/manifesto.html

    There’s a lot of overlap between Cyperpunk, the original MIT definition of Hacking, the free and open-source software movement (which now powers the majority of the Internet and your phone). It’s a fascinating part of history which is now often forgotten.

    Forget about the value of Bitcoin, as measured in USD. Focus on the philosophy behind it and the (fascinating) history of what we consider to be money and how this has changed over time, especially the emergence of fiat currency – which only today PayPal was forced to describe as “unbacked”:

    https://twitter.com/DocumentingBTC/status/1376938941761388545

    For the true believers, Bitcoin was never about making money. It was a serious and deliberate attempt by very clever people to change the way that society worked. I’m really not sure their utopia won’t be a dystopia, but they seem to have locked us into a future in which we will find out.

    • Yes, this is close to my understanding about BTC.

      Alas, its pricing nowadays is determined by essentially the same factors as that of a piece of Picasso. People pay incredible amounts of money to a mixture of paints and paper, not because people understand arts but because they think others will also want a piece of it. Of course, this is not Picasso’s fault.

      Who’ll come a Waltzing Matilda with me?

    • yes, correct.
      it has nothing to do with libertarianism. it has nothing to do with libertarianism. it has nothing to do with libertarianism.

  15. Bitcoin … so many positive news lately compared to gold.

    Mar 30, 2021 – PayPal will let US users pay with Bitcoin, Ethereum, and Litecoin starting today

    MARCH 29, 2021 – Visa Inc said on Monday it will allow the use of the cryptocurrency USD Coin to settle transactions on its payment network, the latest sign of growing acceptance of digital currencies by the mainstream financial industry.

    April 1, 2021 – Goldman Sachs Group Inc (NYSE: GS) is preparing to introduce cryptocurrency investment options amid rising clients’ rising interest. A newly-appointed global head of digital assets, Mary Rich, said in an interview with CNBC that the bank is getting ready to offer its “first investment vehicles” in digital assets in the second quarter to its wealth management clients, not specifying what kind of products will be provided.

    MAR 30, 2021 – Tether’s reserves for its USDT stablecoin exceed the amount required to redeem the digital asset tokens, according to auditing firm Moore Cayman.

    FEB 11, 2021 – $41 TRILLION GLOBAL CUSTODIAN BNY MELLON ANNOUNCES BITCOIN STRATEGY
    The custodian of more than $41 trillion in assets plans to hold, issue and transfer bitcoin on behalf of clients.

    There’s about $1.2 trillion in offshore money waiting to park their money in crypto stable coins. Why? USD interest rates are 5-10% APY compared to fiat banks of around 0.1% APY.

  16. I do question if Bitcoin really is ‘sticking it to the man’, why is the establishment (including central banks) so keen to join in?
    I think many of these companies are simply attracted to the volatility. That is where the money is made in the trading of the asset.

  17. BakuninMEMBER

    Fiat money is a creation of the state and is an imaginary commodity substitute for a durable commodity money (Shubik, 2000). Individual trust in the government depends on how the government violates conservation. The state violates this conservation by “printing” money ad infinitum which is inflationary. Bitcoin is an economic mutation and innovation that is beyond the control of the state and has the potential to rewrite modern monetary theory. It is a scarce unit of account which renders fiat money (and traditional banking) redundant. It facilitates trust and reduces the risk of costly failure through the use of an open source distributed peer to peer network protocol and the public verifiability on the blockchain. Hence, Bitcoin ultimately facilitates trust in banking and commerce. It is scarce, can’t be centrally controlled and never stops trading. Bitcoin is that durable money commodity.