Bitcoin and Gold: Rethinking Future Investment Products | TokenInsight

This article partially quotes the views of Michael J. Casey in the article Money Reimagined: Bitcoin vs. Gold Is a Battle of Narratives .

Summary of key points

● The cultural importance of gold is actually more important than its physical properties. People’s consensus on values ​​makes gold a universal model of value storage.

● The value of investment products not only comes from their own unique attributes, but also is based on broad social consensus. When people believe that investment products are valuable, they are "valuable".

● Compared with the public's pursuit of "digital gold", the central bank prefers physical gold and tries to use gold to build a value consensus based on sovereign digital currency.

● The future society’s attitude towards investment products will be open: people will accept gold, and will also be happy to accept “digital gold”.

The concepts and technologies that digital assets are trying to disrupt are not just a few years or decades old. They can be traced back hundreds or even thousands of years.

Take gold, for example. As the price of Bitcoin soared to a record high, a group of well-known investors, including Larry Fink, CEO of Blackstone Investments, and Stanley Druckenmiller, a hedge fund tycoon, have been talking about the prospect of Bitcoin as a scarce safe-haven asset. This has sparked a debate between gold believers and Bitcoin fans.

Gold supporters, represented by Austrian economist and precious metals trader Peter Schiff, pointed out that Bitcoin is a speculative tool that lacks physical attributes, which means that once extreme situations occur (such as a crisis in the digital asset market), investors will lose all their money. Gold, on the other hand, has a stronger ability to resist crises because it has physical guarantees.

Bitcoin fans don't think so. From the perspective of payment, they believe that Bitcoin's encryption and non-replicability make it safer than gold, and easier to store and carry; its social recognition is gradually catching up with gold.

But at the end of the day, an investment can have many valuable attributes, but if it is not accepted by society and trusted by people, then its value is just paper. This is true for both gold and Bitcoin.

Gold: The King from Ancient Times to the Present

"Currency is not gold by nature, but gold is currency by nature." A more common view is that gold is a reliable means of preserving value because it can be used to hedge the risk of legal currency depreciation. In the general perception of society, gold is indestructible, has a constant value, can be decomposed as needed, and is easy to carry to a certain extent. But most importantly, gold is scarce in nature and has a limited supply.

However, these properties also apply to Bitcoin. Other precious metals, such as silver and platinum, have similar properties. There are more than a few digital assets that share the same mechanism as Bitcoin. The reason why gold and Bitcoin stand out is the social consensus of value: when people generally believe that they are "valuable", gold and Bitcoin have value.

For gold, this consensus has existed in human society for thousands of years, and gold has become a recognized synonym for power and wealth. But the value of gold is based on cultural construction and the general logic of society: there is evidence that gold was used as jewelry before it became a currency. The cultural importance of gold is actually more important than the natural properties of gold. People's consensus on value has made gold a universal value storage model.

Bitcoin: A challenger from the digital age

In recent years, "new members" have begun to appear in the traditional wealth consensus. Admittedly, legal currency and gold are still symbols of wealth, but with the advent of the digital age, more and more people are beginning to accept the new concept of "digital gold".

"Digital gold" is generated based on mathematical models. Taking Bitcoin's "Proof of Work" consensus model as an example, users need to find a string of randomly selected numbers in a huge data set. The stock of Bitcoin is limited (only 21 million), so as more Bitcoins are "mined", it becomes increasingly difficult to find the remaining Bitcoins, and the required resources (that is, the electricity to support the operation of mining machines) and costs (electricity costs, labor costs, etc.) continue to rise, resulting in a limited supply of Bitcoin and a decreasing overall supply trend over time, which brings about the scarcity of Bitcoin.

However, this is not the main reason why Bitcoin realizes its value storage function. Bitcoin's algorithm and source code are replicable, and there are countless fork projects similar to Bitcoin.

One of the main reasons why Bitcoin is Bitcoin is that Bitcoin calculation (also known as "mining") and the maintenance of the Bitcoin system are things that a large number of people participate in and invest time, money and energy in. As more and more people believe in Bitcoin, more and more investors are coming, and this belief and value consensus has led countless developers to join the queue to maintain the Bitcoin network to protect the value of Bitcoin, which makes the cost of attacking and controlling Bitcoin higher and higher, so that no one can afford it. This makes Bitcoin more and more secure, which further strengthens people's belief in the scarcity of Bitcoin and the value consensus.

Therefore, consensus on value is the capital for Bitcoin to challenge gold. Just like electronic payment: when people believe that the numbers in electronic bank accounts can be exchanged and withdrawn, these numbers have value.

Central Bank: Gold is still there, and the numbers are promising

A report by financial news agency Fingold may reflect the current attitudes of major economies towards gold and digital currencies or digital assets. Through a survey of the world's 12 largest economies, the agency found that the central banks of the United States, Russia, India and China hoarded up to 208.34 tons of gold between March and early December this year, while the gold reserves of the other eight countries had a net outflow of 12.78 tons.

Changes in gold reserves of major economies in the world in the past nine months. Source: finbold.com

This seems reasonable: as the COVID-19 pandemic becomes a global crisis, central banks see gold as a hedge against economic and monetary pressures, so it is natural for major countries to hoard gold. However, given the different situations of these major countries, their hoarding of gold may not only be for risk protection.

The gold hoarding of the United States and India is relatively easy to understand: for the Federal Reserve, its large-scale medium-term monetary expansion will inevitably require the establishment of a large balance sheet, in which gold plays an important role. As for India, due to traditional cultural factors, it has always been one of the big buyers of gold, so the growth of its gold reserves may not be particularly meaningful.

For the other two countries, hoarding gold may be for a longer-term purpose. Normally, they would hold US dollar assets in the form of treasury bonds by purchasing US treasury bonds. But this year, the People's Bank of China has continuously reduced its holdings of US treasury bonds and hoarded gold, which may indicate that its consensus on the US dollar has been reduced to some extent. But the role of this gold is more than that.

Some experts pointed out that the central banks of some countries have obviously been increasing their gold reserves significantly, but no one knows how much gold they actually hold. He speculated that the gold was prepared for sovereign digital currencies (CBDC): At present, gold is still a solid foundation for currency, and it is also a high-priority safe-haven asset and value endorsement. And people's consensus and belief in gold can also provide sufficient endorsement for the international promotion of sovereign digital currencies, thereby encouraging other countries to use them. After the sovereign digital currency is rolled out, a consensus based on sovereign digital currencies can be gradually established-just like the US dollar in the Bretton Woods system and what Bitcoin is trying to achieve today, but the path is different.

Will the central bank accept digital assets? Perhaps in the future, when Bitcoin consensus reaches a certain scale, Bitcoin will also be included in the reserve system as a value endorsement, and strengthen the consensus of each other with sovereign digital currencies in society. But at this stage, gold is still the first choice of the central bank, and the central bank is more inclined to create digital assets based on gold and national credit (such as sovereign digital currencies), while the consensus on "digital gold" will continue to remain at the private level for a long time.

The establishment, substitution and integration of value consensus

Looking back at history, from shells to gold and silver, and then to paper money, Bitcoin and sovereign digital currencies, with the advancement of science and technology and society, the value consensus has gone through a process from specific items to valuable physical objects, and then from physical objects to symbols of value consensus. Value consensus is not permanent, and the old and new consensuses will coexist for a long time, but it is an inevitable trend for the new consensus to replace the old consensus.

It has only been twelve years since the emergence of Bitcoin, and a consensus on the value of the new "digital gold" has been initially formed. However, as of now, the status of gold remains unshakable, and the new consensus based on Bitcoin or other digital assets often needs to complement the current consensus on gold and gradually iterate in the process of integration.

Some social groups have already accepted Bitcoin, while other groups and central banks are still embracing gold. This means the beginning of an era of coexistence: in the future, people will be open to investment products. They will accept gold as a safe-haven investment product, and will also accept Bitcoin as an investment product based on the broad value consensus of society, or other digital assets with similar characteristics as investment products. Although this is still a long way from "digital gold" truly replacing gold, there is no doubt that gold is no longer the only choice.

Reference article: Michael J. Casey, Money Reimagined: Bitcoin vs. Gold Is a Battle of Narratives

Original link: https://www.coindesk.com/money-reimagined-bitcoin-vs-gold-narratives