RIP gold. Killed by Bitcoin

See the latest Australian dollar analysis here:

Australian dollar parties as assets melt-up

Some interesting tweets from various financial mavericks overnight on the ongoing gold versus Bitcoin debate. Pater Schiff versus Mark Cuban:

Some muddy thinking there. If BTC turns you into a banker, then it obviously competes (that is, threatens) other bankers. This is the conundrum that confronts all private currencies. The more they succeed the closer they get to failure as the threat to existing issuers of currency grows. This includes every nation-state.

So, to the extent that BTC is a medium of exchange, it is therefore doomed, and that argument can’t be used to justify its role as a store of value like gold.

Can the store of value argument hold up for BTC without it being a medium of exchange? It has for gold for thousands of years so quite possibly. Gold is money but it’s not readily usable currency. BTC could be considered in the same light.

The artificiality of BTC’s value is a problem. It can be argued using cultural relativism that gold is no more intrinsically valuable than BTC. But it does have a long history, especially as a reserve currency, that must be worth something. Can we see central banks buying BTC? Certainly not if it develops as a parallel medium of currency that undermines them.

Likewise, gold is the outcome of production. BTC consumes resources to produce nothing. Not that that is necessarily a problem in a virtual world but it again weighs against the perception of BTC as a store of value. So does the fact that BTC is a truly useless item if some kind catastrophe befalls society which does underping the value of gold in some measure.

As well, if BTC is a store of value then in relation to what? If it is “digital gold” then it should respond to the same price inputs. Real interest rates and the value and stability of the prevailing reserve currency should determine its value. So far, that has kind of been the case but if it keeps going up now as real rates rise and the USD turns higher, which is why gold is falling, then BTC starts to look a lot more a free-floating ponzi-scheme.

One thing I can agree on with Mark Cuban is that, for the time being, the lure of BTC has proven strong enough that it has killed gold as the reflation metal.

David Llewellyn-Smith

Comments

  1. I read somewhere some crypto person that you aren’t just buying a digital coin you are buying into the Bitcoin platform
    Also gold is a commodity, I don’t think you can compare

    • Peter PanMEMBER

      Looks like China’s Inner Mongolia region plans to ban new cryptocurrency mining projects and shut down existing activity in a bid to cut down on the energy-consuming operation by April 2021.
      Bitcoin mining consumes an estimated 128.84 terrawatt-hour per year of energy, more than entire countries such as Ukraine and Argentina.
      Inner Mongolia alone accounts for around 8% of all bitcoin mining globally, more than the United States which accounts for 7.2%.
      I guess no mining = no BTC transactions. The slack will be taken up elsewhere for now, but you may just see someone start to campaign against BTC for environmental reasons. If that gains any serious traction BTC mining could be history and so will be BTC. I guess that is if it is believed CO2 reduction is more important that BTC wealth. I would not be surprised if BTC becomes environmentally extinct if people think they face a choice between BTC and Global Warming. Maybe Mongolia is the trigger for the start of the end of BTC.

      • Cynical snake

        A single pc is all that is REQUIRED to mine bitcoin, the more people that want to, the more it uses and the converse.

        • Peter PanMEMBER

          If we go back in time to where BTC was mined by single PCs because no one wants it, then maybe it will go back to being what it was priced at when people were doing pc mining. That would be worth cents or fractions of cents per BTC.
          But maybe it is suggested that if you want to transact in BTC, then you have to do your own mining. My understanding is that it becomes harder to perform mining(complete a transaction) as the system grows. Hence we are now at the point where this is consuming the same power as small countries. You can’t do that with a pc. You will need a lot of friends and their PCs.
          Anyway, I’m not trying to get into an argument. I’m not a BTC fan. Couldn’t care less if people were buying it or not. Just pointing out that an environmental uprising may cause BTC some trouble even if maybe only some public opinion issues.

          • Cynical snake

            “it becomes harder to perform mining(complete a transaction) as the system grows”
            it becomes harder to perform mining as more people mine, or to be more specific the system adjusts how hard mining is to stabilize block production at the desired rate. If people stop mining it will become easier, and the system will otherwise carry on as before. The price merely decides how many people are willing to mine in order to claim the btc on offer.

        • Peter PanMEMBER

          In terms of cost of power consumption some newer btc mining computers have a breakeven cost for mining btc at about $7000 (USD). Some older miners around $24000(USD) when the cost of power is around 7c/kwh. So I hope your PC is not too old and energy hungry. Maybe best to turn the screen off if you are using it for mining.

          • Cynical snake

            This is all ENTIRELY dependent on the difficulty, which is dependent on how many people are currently mining.

      • I think you’re right. The entire world seems to be jumping on the ‘green energy’ (which is no such thing) bandwagon. And according to the article below, yep, bitcoin uses the same amount of power as Ireland and twice that of copper and gold.

        Cynically, I think so many companies and govts are jumping on the green bandwagon as they see profit and an expansion of GDP through it. Sadly, the amount of energy required for a green transition would bring on CC with bells on.

        The reality is that to prevent a 3 degree warming we have to abandon GDP and make do with less. Which will never happen until it’s forced upon us.

        https://damnthematrix.wordpress.com/2020/11/15/the-physical-impossibility-of-renewable-energy-meeting-the-paris-accord-goals/Or any oil left:

        Same article but behind a paywall:
        https://www.wsj.com/articles/if-you-want-renewable-energy-get-ready-to-dig-11565045328

        https://www.theguardian.com/technology/2018/nov/05/energy-cost-of-mining-bitcoin-more-than-twice-that-of-copper-or-gold

  2. Ronin8317MEMBER

    If crypto doesn’t fail, the amount of electricity used to mine BitCoins and the like will kill off humanity. And we will deserve it.

  3. “the fact that BTC is a truly useless item if some kind catastrophe befalls society”
    Not sure gold fairs much better on that front. In any sort of catastrophe that destroys modern infrastructure to the point of disabling bitcoin you aren’t going to be able to eat or hunt with gold bars, assuming you are storing them in your home and have access in the first place.

    • That’s true but old mate up the road might trade you some food or clean water for gold.

      Or some firearms and ammo (a lot of gold)

      “Bitcoin?! Yeah ok clownshoes, this is armageddon, not 2021, jog on”

      • Cynical snake

        Maybe, but unless your bitcoin is coming back, that gold is pretty useless to joe up the road as well.
        A shovel has far more present value than gold in that situation. You’d only take the gold in hope of future ???

  4. Gold isn’t just sports stars jewellery, its also used in smart phones etc.

    To me Bit Coin is ether. There is no tangible product. If it drops to zero, all you can do is huff about it.

    If gold drops to zero, at least you have a door stop or something to throw at noisy neighbours.

  5. Good luck cashing in your $hitcoin millions and suddenly finding “it doesn’t work” because someone took a copy of the data somewhere along the line

  6. Eh?!
    Was I spam filtered?!

    If so: Guys, you really have to work on that stupid spam filter. It blocks long time members who best I can tell, would never have been profiled as spammers.

  7. Will Indians be burying Bitcoin in the their Hoppers Crossing backyards, like gold? That is the question

  8. DingwallMEMBER

    tbf I have no idea of all the hype and otherwise …. in 10 years time will we have Bitcoin, TheGodKingcoin (aka Socialcreditratingcoin), Litecoin, Etherium, woofcoin, woofwoofcoin, cockalegcoin, barkingcoin, LGBTQIAcoin, Trumpcoin, antiTrumpcoin, X Æ A-12coin, NZcoin, poocoin (aka Oz version), BigPutinnoshirtcoin ….or none of these at all? Its endless if any person just opens a PC and makes a new one – MBcoin? Why would I buy one over the other? Why would I buy any at all?

    • Cynical snake

      “Its endless if any person just opens a PC and makes a new one ”
      Kinda like fiat and printers…

      • Not quite – the fiat is tied to real things, and perceptions of real things.

        Further, it typically decreases the relative value of the currency.

        BTC basically just keeps going up.

        Where are the BTC anchors?

        It seems that, currently, the best reason to pay more for BTC is that it might go up further…is that the only reason to pay more for BTC?

        • Cynical snake

          “BTC basically just keeps going up.
          Where are the BTC anchors?”
          If gold was “invented” last decade it would be behaving similarly.
          The anchor is when it reaches an equilibrium of acceptance rather than early adoption stage.

    • This taps into my post below.

      ie. Why? Where the anchor into reality? Where are the essential differentiators, and how substantial are those differentiators anyway, with respect to reality?

      So, hence, what price for each coin? And why?

      Frankly, I’m playing with the idea that the best way to have a functional digital coin system is just to anchor is to something else more real.

      (To currency/money cynics: yes, I do think that fiat currencies are still more ‘real’ than digital coins are, as they are tied to a government’s and nations capabilities and prospects, and their ability to keep their promises, etc. Still arbitrary, but seems less arbitrary than the digital coins, currently…)

        • Its value is determined because the person who has power over you (via laws and regulations and the monopoly of violence) uses that power to compel you to accept it as a store of value. Many people don’t believe in fiat personally but the government system they operate in means they still end up using it and needing it. As long as there is enough people “needing” it as a result then it has value, if not by belief/buy-in then by both coercive and systematic forces.

          i.e. I don’t need to believe that it is a store of value as long as I know that others have to accept it, and contracts will be enforced if i use it by a very powerful enforcer (courts, legal system, government).

          BitCoin and other crypto’s on the other hand don’t have this. If everyone decided not to use it tomorrow, or I decided to price my house in BitCoin there’s no reason why the person has to pay me or rather even if he did why I need to bother signing the house off to that person. The government won’t back the transaction.

          IMO I personally think the innovation in using cryptography combining it with economic game theory is quite an innovation of BitCoin and some other crypto’s. I’m just not sure whether that alone given all the tokens out there and more to come whether it is an actual investment in the long term. Of course it may be good to own anyway to hedge your bets.

          • Cynical snake

            ” the person who has power over you (via laws and regulations and the monopoly of violence) uses that power to compel you to accept it as a store of value.”
            If this was true, hyperinflation wouldn’t be a thing…

            “price my house in BitCoin there’s no reason why the person has to pay me or rather even if he did why I need to bother signing the house off to that person. The government won’t back the transaction.”
            Actually, you can price your house in bannanas, sign a contract to trade it forsame and the government will most definitely enforce that contract.

        • I haven’t invented it yet, but we discussed in a Macro Afternoon the idea recently. We think like Dogecoin it has merit.

    • “in 10 years time will we have Bitcoin”

      In 10 years time we may be lucky to have a grid

  9. I know I keep saying it…but…

    BTC, sure: but at what price? Why $100? Why $55,000? Why $500,000? Why?

    The value of something has to be in the context of other things, particularly of utility.

    ‘Because market’ actually isn’t a good enough reason, on its own, if the market is detached sufficiently from utility. If sufficiently detached, then the object – in this case TBC – is a speculative asset; and, in this case, the gains for holders seems to be from new entrants being willing to pay a higher price simply to have BTC, in the hope that they can make speculative gains, too someday, by finding another greater fool.

    Surely the price of BTC has to, in some way, be connected to the price of energy used to mine it? The cost of the computing and internet hardware? Pollution produced to mine it? Etc.

    So, again, why $100? Why $55,000? Where is the anchor? If little to no anchor, then surely it is mostly a speculative asset at this point, and its price is a strong function of the price of other money used to buy it (USD, etc)?

    Further, whilst I think it is very interesting that the BTC system halves the amount of coins in use periodically, this is not something that gold does (Note: I am not a gold bug). Can you imagine if gold did that? It can’t, really, without government confiscation – and even then I’m not sure that it would work, as the market surely would price according to what is essentially a false scarcity – the gold does still exist.

    Imagine if governments then started to bleed the hold back into the market? That’s a strange system, surely?

    I’m philosophising, sorry, but trying to figure out how and what a ‘fair’ price for BTC might be. I really don’t know.

    • Cynical snake

      “Further, whilst I think it is very interesting that the BTC system halves the amount of coins in use periodically, this is not something that gold does (Note: I am not a gold bug). Can you imagine if gold did that?”
      You understand that you have no idea what you are talking about, right.
      BTC halves the amount of new coins added to the system every day, periodically.
      Imagine if the amount of new gold getting dug up decreased, if most of the easy stuff was already dug up, for instance…

      • Thanks for the correction.

        Certainly not true that I have no idea what I’m talking about, just that I didn’t know the particulars of the halving. So, no, your critique is invalidly over-extended.

        The halving, whilst interesting, still seems arbitrary.

        Where’s the tie-in to reality? What is the fair price range, and how would it be anchored? ‘Market’ isn’t a real reason if the market is also sufficiently detached from reality.

        • Cynical snake

          “The halving, whilst interesting, still seems arbitrary.”
          It is an asymptotically approaching a fixed supply. Kinda like gold…

          • kannigetMEMBER

            Yep, its a finite supply and while the “coins” can be subdivided there is a limit to that as well. This basically means that as a currency it has inflation built in. As it becomes harder to subdivide and the “value” goes up, holders horde more to protect its value. Eventually you get to position that no one can / will trade using it.

            To fix this you issue Bitcoin 2.0. which almost immediately crashes bitcoin 1.0 and rinse repeat.

            At least with gold I can melt it and make Ornanments, jewellery, circuit boards and teeth with it. Bitcoin only has intrinsic value as long as it is seen to have value.

      • The “easy stuff” of every commodity, including gold and oil, was dug up long ago. That’s why it’s unlikely there will be a commodity boom and why we’re ultimately going down – population still growing and less and less stuff, including soil and water, to go around. I can’t see where BTC could be remotely useful in this future. So, in this context, as so many others have commented here, it’s likely just a pyramid ponzi scheme.

        The world will one day regard BTC as synonymous with tulips

        • Cynical snake

          In that context very little other than weapons has any use ala mad max.The later ones anyway.

    • I'll have anotherMEMBER

      The value is relative. To other currencies.

      Like anything in commerce, the value is what someone will pay for it.

      Like any form of currency, its intrinsic value is that people agree on the fact they will use it.

      As far as central banks / government / anyone else interfering, it’s decentralized, how can they? They can and do to a point already in many cryptos, including BTC. On one hand, ATO says it’s a commodity so tax you at CGT rates, on the other say you can’t buy it off an exchange anonymously because you will use it as a currency to buy stuff…. They can say it’s illegal to own but how will they enforce such a thing? If you want to get it anonymous just buy off an overseas exchange or simply via an in person transfer.

      The other problem is that the technology is deeply entrenched in our future. How will we move forward based on ignoring such technology? The countries which don’t will end up eating those that do.

      It’s also very unlibertarian to think governments could say, oh you can’t have crypto because the printing press is not effective without it. Unlikely in a democracy.

      Governments will need to figure alternative methods to money management, banning crypto is unlikely even possible let alone conductive to good democratic society.

      Personally I have started moving even more of my share portfolio into crypto. Am tired of overvalued equities. Whenever you find value most of the time it gets shorted to infinity. My portfolio in this “Bull market” everyone goes on about has been bleeding red for weeks now.

      I’d like to see the class action against government if they did seriously step in to drive its value to zero somehow, would be enormous. It’s a bit like smoking, they can make it difficult but too many people are invested in some shape or form to just nail it on the head if they even could because it would destroy the accounts of many and likely cause a massive dent to the global economy. There are many serious investors pouring billions in. Most of the price movement in 2021 was not retail at all.

      If the gov is going to try knock it over, they better act fast. As more boomers who hate it retire from investing and or die, there will be less and less who are so faithless in its ability to store value. Fact is, it’s over a decade old now and truly alive and kicking.

      • DingwallMEMBER

        Like any form of currency, its intrinsic value is that those people who believe in it agree on the fact they will use it.

        • Fiat does not require belief though. It just requires enforcement and laws compelling people to accept it via that power. While I’m not pessimistic of crypto’s I do understand when people mention belief others think of a ponzi scheme straight away. Fiat is a little more than belief; its enforced at all levels of society through a government system.

          • Cynical snake

            “Fiat does not require belief though. It just requires enforcement and laws compelling people to accept it via that power.”
            Zimbabwe, Venezuela.

          • To be honest though they don’t actually have that power in so far that they’ve made their currency completely unworkable to use. You can’t enforce something that is just plain impossible to do (e.g. if money is inflating that fast, it is unworkable for day to day living). Enforcement and its power dies down when no matter how much threats the people stuggle to comply.

            That isn’t the case for most Western countries. If they let goods and everyday inflation run rampant where business can’t price appropriately and everything is volatile then yes – enforcement wouldn’t be enough to get people to use it because it would be too hard to do so.

          • Cynical snake

            So it just requires enforcement, except for when that isn’t enough.
            You make a very compelling case….

          • Until the fiats and the governments collapse under a tsunami of debt. Happened may times through history.

          • I don’t have to make a compelling case. It is happening daily in the lives we live. Never said crypto didn’t have any value. I’m just saying fiat doesn’t have value to me or that its value is only because people “believe in it” is also equally invalid. I find both sides of the argument take extreme positions and crypto currency “enthusiasts” don’t always mention the value of the government fiat money exaggerating and making out its worthless. To the average joe in debt he wants AUD to meet his monthly commitments, to him it is still scarce.

            The interesting thing about debt money is while it increases the current supply of money (via chequebook money) it also increases future demand for the same currency due to debt repayments.

            My point is fiat in “workable” currencies does have some value in that i can count on a state power to enforce my contract in it. If the currency is screwed up and mismanaged obviously I wouldn’t need this enforcement. So assuming a currency is at least managed in a way so to the average people money is relatively scarce to demand enforcement and the services in securing transactions has some value. Just like in BTC mining and distributed consensus has some value.

    • The cost of mining BTC and processing transactions (same thing I think?) is a floor on the price of BTC. If the price fell below that point no one could transact because no one would mine any more. Before it got to that point, the price of transactions would rise, the supply of BTC would fall and presumably the price would stabilise at a point where mining was profitable again. A reasonable price ceiling for BTC might be some multiplier of market cap of gold divided by the number of BTC issued, with the multiplier representing your belief in the likelihood of BTC assuming the role of gold in the financial system.

      • Cynical snake

        actually, bitcoin was designed by people who knew what they were doing and as less people mine the cost of mining adjusts down.

  10. Gold is not being killed by Bitcoin. It’s falling in value because longer term real US bond yields are rising and the US dollar is stable-to-stronger. This is very apparent if you model gold as a function of these two variables in a simple OLS equation.

    Bitcoin is out performing gold but gold is doing what gold does. The two shouldn’t be conflated.

    • I think gold is falling simply because it got expensive compared to its commodity peers.

      • FUDINTHENUDMEMBER

        And also long – term yeilds are trending up. Oh and the bullion chart looks like sh1te

  11. If someone can come up with a system of vouchers with no counter-party risks that can replace both BTC and gold as *the* store of value.

    But no one can.

  12. Gold is a stupid asset because dummies like Peter Schiff have been expecting natural market forces to over-come the gargantuan manipulation in gold prices through the paper derivatives market and the LBMA cartel (of imaginary gold no one ever sees or audits).

    Wishing for a higher gold price won’t fight the fed or any other gov’t printing press. Gold will only go up when it is allowed to. And no earlier.

  13. At the end of the day, Gold is considered a store of wealth because you cant print it, it has a limited supply and will always be worth something, Crypto currencies are the exact opposite, they are absolutely limitless, there is no limit to the number of crypto currencies that can be created, hell we could have one for every man woman and child on earth, they have at the end of the day No value, except to rely on the greater fool theory, and when we run out of fools?.

    • I don’t think we are going to run out of fools anytime soon so if that is the limiting factor then it’s Bitcoin to the moon. In other respects, I agree completely that new crypto keeps on being created and if someone can’t invent a better model with lower energy consumption in the next decade than Bitcoin I will be bitterly disappointed.
      I don’t know who invented gold (sarc), but it seems to have worked as a store of value for a few millenia and across multiple cultures and geographies. Will Bitcoin be around in 20 years time?

  14. Fabian AlderseyMEMBER

    I still don’t see what it’s going to do for me personally. A while back a bitcoin enthusiast explained to me that bitcoin isn’t money.
    I went onto the simple Wikipedia page for bitcoin and that doesn’t explain what it’ll do for me.
    What’s the elevator pitch? I’m a guy who gets paid in Australian dollars, and they function fine for all my purchases, whether online or not. How will bitcoin enhance my life? For the people who are into it, what is it enabling in their day to day life? What are they getting out of it which they can’t get out of anything else? Is it a case of “the government can take my house, my shares, my money, all my material possessions, but they can’t take my bitcoin”? Is it simply the case that if Australia turns into some dystopian wasteland and everything is taken from me, I can escape overseas with my bitcoins?

    • Fabian Aldersey – If you want to murder someone or perform some other sort of transaction on the dark web it would be of great use to you, “untraceable payments”, as for why you would want to buy it, think Tulips!!

  15. PolarBearMEMBER

    Bitcoin is in many ways a social movement with hype and speculation added to the mix. People are fed up with the debasing of fiat currencies and the goosing of equities (throw in the class/generational war for extra disenchantment) and want a place to store value that is immune from government manipulation. Gold is the traditional option. But bitcoin offers more freedom. If enough people believe in bitcoin, then it may overcome its current speculative phase, which the faithful call the first adopters phase. I’m just not sure that a social movement is enough to cement in place a new global store of value when we already have gold. Yes bitcoin is also a technological innovation but it comes with as many disadvantages as it does advantages. At the end of the day it is all about perception of value and safety. It may be that gold eventually triumphs on safety owing to its inviolable physical properties. Or that gold and bitcoin co-exist serving different mixes of needs of safety vs freedom.

  16. Blockchain is here to stay but I don’t personally really see the value in BTC as a proposition as it’s so volatile it really isn’t a useful tool to use for blockchain transactions. If I have a need to make transactions I’d prefer a stable coin with the lowest cost possible, Bitcoin isn’t it.

    It’s a speculative vehicle right now.

    The most amusing arguments I’ve seen for Bitcoin is people talking about how fiat currencies have lost 95% of their value since WW2 (or whatever) as if I hold all of my wealth in paper currency. You point out that investments provide a compensation for inflation and the Bitcoin fanboys eyes glaze over.

    • Cynical snake

      If I have a need to make transactions I’d prefer a stable coin with the lowest cost possible, Bitcoin isn’t it.

      No paypal, or the banking system is probably.