Showdown in Sound Money
“No one says that gold is an abstractly “perfect” money, whatever that may be. It is far more trustworthy, however, than government… Unfortunately, now that the last vestiges of the gold standard are gone, the Fed has the power to create more money indefinitely; and so long as we continue to allow them to retain such power, they will continue to use it, with disastrous results.”
Murray Rothbard
- There exists a considerable amount of tension between gold investors and Bitcoin enthusiasts, who frequently engage in disputes, demeaning each other’s preferred asset.
- The concept of intrinsic value is a point of contention between critics and supporters of Bitcoin, but the subjective preferences of individuals ultimately determine the value of an asset.
- Bitcoin may at this stage be considered money by only a small minority, but it has certainly gained some kind of “moneyness” if we take Hayek’s approach and view money as an adjective.
- While gold has physical properties that make it valuable, Bitcoin has unique digital properties that offer advantages such as low transaction costs and the ability to transfer wealth quickly over long distances.
- Bitcoin and gold are complementary, not competitive, as stores of value. Each has unique advantages and limitations. Investors should educate themselves and consider a diversified mix of noninflatable monetary assets as integral to their portfolios.
Gold vs. Bitcoin
Gold investors have been advocating, explaining, and crusading for sound-money principles for over a century, bearing the brunt in the fight against fiat currency and central bank exuberance. Again and again, we have been vocal in our criticisms of the prevailing monetary system, to put it mildly.[1] Even so, in the late 2000s it appeared as though sound money principles had been defeated, and the gold community was left with a sense of hopelessness. In 2009, Satoshi Nakamoto appeared out of nowhere with a revolutionary new technology. In a “sly, roundabout way”, he introduced something that governments could not stop – as had been prophesied by Nobel prize-winning economist Friedrich Hayek in 1984:“I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop.”
Bitcoin has brought a fresh wave of interest to the sound-money community and has attracted a new generation of supporters. The term fiat currency was barely known ten years ago. Thanks to the invention of Bitcoin and the rise of cryptocurrencies, an entire generation has been nudged into asking some very fundamental questions about money. It seems that especially during the last two cryptocurrency manias, the interest in debating and questioning fiat currency was ignited, as Google searches suggest.Google Trends (Worldwide): Fiat Currency, 01/2004–05/2023
Source: Google, Incrementum AG
This alone should be hailed by everyone who is sincerely interested in reinstalling sound money in the future. However, the response from many gold investors has been to not only reject Bitcoin but to campaign against it, accusing it of being a scam, a speculative bubble, the new Tulip Mania.
Despite the fact that Bitcoin and gold are complementary assets with their own unique value propositions, some gold investors remain closed off to the potential of Bitcoin and unwilling to embrace it as a new form of sound money. This has led to a backlash from the Bitcoin community, with some members taking an aggressive stance towards gold. As a result, an intellectual “civil war” has arisen in the sound-money community; and today, many gold investors and Bitcoin enthusiasts hold extreme opinions about the opposing asset.
In this chapter, we will examine the origins of the rift between the gold and Bitcoin communities and the reasons for the division. We have been following Bitcoin for over 10 years now and have had an annual feature in our In Gold We Trust report for the past seven years, as we consider Bitcoin to be a groundbreaking monetary invention that we expect to continue to gain significant relevance. We therefore want to address some of the misconceptions that gold investors hold regarding Bitcoin, and vice versa, thereby highlighting the positive aspects of both assets. Ultimately, we aim to strengthen our case for investing in both assets and to bridge the gap between the two communities.[2] Our hope is that this article can contribute towards harmony and collaboration within the sound-money camp.[3]
The bugs vs. the maxis
Gold investors often hold a negative opinion of Bitcoin, for various reasons. One key factor is their perception of its being a speculative investment rather than a safe-haven asset. Bitcoin’s price is in fact highly volatile and has seen significant fluctuations in a short period of time, which may deter investors seeking stability.
Gold and Bitcoin, 90D Annualized Volatility, 01/2019-05/2023
Source: Reuters Eikon, Incrementum AG
In addition, gold has established itself as a store of value over a long history, whereas Bitcoin is a relatively new asset, and its long-term value is uncertain. Moreover, some gold investors may perceive Bitcoin as a threat to the traditional precious metals market, and as a result may be biased against it.
Upon closer examination of the writings of Satoshi Nakamoto, we find that he mentions gold several times. In fact, he references gold in the Bitcoin White Paper, a 3,219-word document that outlines what Bitcoin is and how it operates: “The steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.”
Based on this quotation, it could be reasonably argued that Satoshi had a good understanding of gold, and it is clear that he endeavored to digitally emulate the supply characteristics of gold, and even modelled the concept of Bitcoin mining on gold mining.
Also, it is almost certainly no coincidence that he dates his birth as April 5, the day former US President Franklin D. Roosevelt issued Executive Order 6102, which prohibited private ownership of gold in the US.
The starting point of a broader discussion within the gold community about Bitcoin may be traced back to the year 2013. Peter Schiff, a wellknown character within the English-speaking gold community, published the very first Tweet about Bitcoin: a link to a video, outlining his thoughts about Bitcoin vs. gold:
In this video, he starts off by explaining Bitcoin (quite well) in what sounds like a positive light. Then, at the 2:30 mark, Peter starts to explain why Bitcoin can “never be money”: “Bitcoin has all the properties, except the most important one. Without that property, gold would never have been money. I’m talking about value. Intrinsic value of the metal itself. You see … Bitcoin doesn’t have any.”
He then goes on to explain his concept of intrinsic value and mentions Ludwig von Mises’ regression theorem. The first shots in the sound-money showdown had been fired. Since then, Mr. Schiff and many other gold investors have grown increasingly vocal in their dislike of Bitcoin.
Revisiting the regression theorem
The regression theorem was first proposed by Ludwig von Mises in 1912 in Die Theorie des Geldes und der Umlaufmittel (The Theory of Money and Credit). We wrote about the regression theorem in 2011. It has been a thorn in the side of Bitcoin since the cryptocurrency’s inception, with the theorem being wielded not only by gold investors but by the Austrian economic community in general. It is widely used by Bitcoin sceptics in the following context: For something to be money, it first needs to have value beyond its monetary value; therefore Bitcoin can never evolve to being money. We prefer this interpretation by Hans Hermann Hoppe:
“Any type of money must initially be a commodity money, traded in barter, because only then do people have an idea of what the initial purchasing power of this commodity is. Then, additional purchasing power is added to it as this commodity is also demanded for the first time as a medium of exchange.”
The first Bitcoin transaction was a barter for pizza. After that, people bought and traded Bitcoin for many years without considering it a form of money. Critics of course don’t consider Bitcoin to be a form money even now, but it undoubtedly has a market value. One could argue that Bitcoin is either still in the “pre-money” stage, as described by Mises in the regression theorem, and could still become money; or it is already a form of money. An insightful thought by Friedrich Hayek from his book Denationalization of Money is quite helpful in this regard:
“I have always found it useful to explain to students that it has been rather a misfortune that we describe money by a noun, and that it would be more helpful for the explanation of monetary phenomena if ’money’ were an adjective describing a property which different things could possess…”
We would argue that Bitcoin in fact has gained some kind of moneyness already. Expanding on that thought, one can revert back to Carl Menger, who defined money as the asset with the highest saleablity. Although saleability is not the exact same thing as liquidity, the liquidity of any monetary asset may actually be quite a good hint as to the degree of “moneyness” of any given asset. We therefore want to compare the liquidity of Bitcoin, gold, and short-term US Treasury bills to put these three assets into relation.
Average Daily Trading Volumes, in USD bn, 2021
Source: World Gold Council, coinmarketcap.com, Incrementum AG
The intrinsic value dispute
We will now argue that the notion that Bitcoin, or any asset for that matter, lacks intrinsic value is incompatible with Austrian economic theory both theoretically and empirically. In fact, the term intrinsic value itself is quite problematic if one takes seriously the principles of Austrian Economics, going back to Carl Menger. Ludwig von Mises, in his seminal work Theory and History, expounds upon the subjectivity of value and dedicates several chapters to this topic. A cursory review of his writings serves as a timely reminder that the concept of value is entirely dependent on the subjective preferences of the individual:
“All judgments of value are personal and subjective. There are no judgments of value other than those asserting ‘I prefer, I like better, I wish’. It cannot be denied by anybody that various individuals disagree widely with regard to their feelings, tastes, and preferences and that even the same individuals at various instants of their lives value the same things in a different way. In view of this fact it is useless to talk about absolute and eternal values.
This does not mean that every individual draws his valuations from his own mind. The immense majority of people take their valuations from the social environment into which they were born, in which they grew up, that moulded their personality and educated them. Few men have the power to deviate from the traditional set of values and to establish their own scale of what appears to be better and what appears to be worse.
What the theorem of the subjectivity of valuation means is that there is no standard available which would enable us to reject any ultimate judgment of value as wrong, false, or erroneous in the way we can reject an existential proposition as manifestly false.”
Although the subjectivity of economic value is irrefutable, the real underlying problem that gold enthusiasts possibly fail to articulate correctly is Bitcoins’ lack of industrial utility or in a broader sense its lack of physicality.
One of gold’s most important characteristics for investors is the ability to hold the metal in their hands. Bitcoin does not possess this property. In fact, according to Bitcoin’s creator, Satoshi Nakamoto, physicality is gold’s greatest weakness, which enables governments and other aggressors to confiscate gold, and is the basis for gold’s low salability across space. Precisely the lack of physicality enables the users of Bitcoin with a different kind of utility that can be fundamentally useful hence valuable. Bitcoin was created in order to overcome gold’s weakness, as Satoshi Nakamoto explained on the Bitcointalk forum:
“As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties:
– boring grey in colour
– not a good conductor of electricity
– not particularly strong, but not ductile or easily malleable either
– not useful for any practical or ornamental purpose
and one special, magical property:
– can be transported over a communications channel”.
However, absent any industrial utility, there are many practical instances where Bitcoin can be highly useful to individuals. For instance, Bitcoin could be used when people urgently have to leave their current location and are unable to carry physical gold as a store of their wealth to their new destination. One very practical example are refugees who likely would be stripped of their savings in gold while on the run. These people could relocate without this risk if they could store their keys on an electronic device or even just remember their seed key. Another example is Bitcoin’s advantage of low transaction cost and high speed of the transfer of wealth over long distances.
Even if one prefers to stick to the concept of intrinsic value – which we would be very critical about – a reasonable argument can be made that the unique properties of Bitcoin do provide intrinsic value, not as a function of the physical properties of the asset, but as a function of its unique digital properties.
Bitcoin and Crypto
In order to understand why Bitcoin’s digital properties are so unique, it is crucial to understand the difference between Bitcoin and crypto generally. Bitcoin critics often conflate Bitcoin with the wider crypto space. This is, in our opinion, a massive divider between gold investors and Bitcoiners, as illustrated below. We wrote about Exter’s pyramid in detail in the In Gold We Trust report 2019.4 The radical difference in views about where Bitcoin belongs on Exter’s pyramid could explain the tensions between gold investors and Bitcoiners. Note that Bitcoiners consider crypto (other than Bitcoin) as highly risky and volatile.
Where Bitcoin critics place Bitcoin on Exter’s pyramid
Where Bitcoin enthusiasts place Bitcoin on Exter’s pyramid
The opinion of a mainstream commentator regarding why Bitcoin is better than other cryptocurrencies, might be akin to this: Bitcoin is widely regarded as the first and most well-known cryptocurrency. It has a large and established network, with a long history of secure transactions and a solid track record of stability and reliability. Additionally, it has a large and active community of developers, investors, and users who have all helped to ensure its continued success. These factors make Bitcoin a more attractive investment option than altcoins, which may not have a strong community, network, or track record.
What is often overlooked is that Bitcoin was created with the explicit aim of replacing the current, trust-based currency system. No other notable cryptocurrency attempts to achieve this. Regardless of what other cryptocurrency projects claim their use case to be, none of them are attempting to be Bitcoin or even come close to replicating Bitcoin’s unique features and capabilities.
One of these features is Bitcoin’s stock-to-flow ratio, which is currently in line with that of gold. In a sense, Bitcoin can be viewed as digital gold, while other cryptocurrencies can be compared to countless other resources, each with its own possible use case, or not.
Bitcoin Stock (lhs), in Coins, and Gold Stock (rhs), in Tonnes, 01/2010–01/2030
Source: blockchain.com, World Gold Council, Incrementum AG
One of the most significant aspects that sets Bitcoin apart from other cryptocurrencies is its decentralization. While many cryptocurrencies are managed by a central organization or group of individuals, Bitcoin is entirely decentralized. This means that there is no central authority controlling the currency, and every user has an equal say in the network’s operation.
Bitcoin’s decentralization has several advantages over other cryptocurrencies and traditional currencies. It is more resistant to fraud and hacking attempts, as there is no central point of control for hackers to compromise. Additionally, the lack of a central authority means there is no entity that can manipulate or control the currency’s value, making it more stable and resistant to market manipulation.
Navigating the volatility trap
With the term volatility trap we want to describe a behavioural finance phenomenon whereby investors get caught up in the emotional rollercoaster of an asset’s price movements. In the case of Bitcoin, its high volatility can cause traditional investors to panic and sell off their holdings during periods of sharp price declines. All assets are prone to severe bear markets; however, a bear market in Bitcoin seem to be even more brutal than in other assets. While Bitcoin has faced substantial price declines from previous peaks, it has also demonstrated remarkable resilience and recovery in the face of adversity. In its short 14-year history, Bitcoin has already experienced several boom-and-bust cycles, with each cycle resulting in a higher overall price floor than the previous one.
Drawdowns of Major Assets from All-Time Highs
Source: Reuters Eikon, Incrementum AG
As experienced investors know, volatility is a natural part of investing and should not be the sole indicator of an asset’s value or potential. In fact, some investors view periods of volatility as an opportunity to accumulate assets at a discount, knowing that the market will eventually correct itself.
Therefore, while the volatility trap can be a real challenge for investors, particularly those new to the cryptocurrency market, it is essential to maintain a long-term perspective and focus on the underlying technology, use cases, and adoption potential of an asset like Bitcoin. By doing so, investors can avoid getting caught up in short-term price movements and instead focus on the bigger picture of the asset’s potential over time.
One potential solution to mitigate the risk associated with Bitcoin’s volatility is to combine it with gold in a diversified portfolio. Gold’s historical stability can help balance the high volatility of Bitcoin, potentially reducing the overall risk of the portfolio. This strategy could allow investors to benefit from the potential upside of Bitcoin while also mitigating the downside risk associated with its volatility.
Incrementum Bitcoin/Gold Strategy, 100 = 02/2020, 02/2020–05/2023
Source: Reuters Eikon, Incrementum AG
Conclusion
As illustrated above, the primary concerns that investors have expressed regarding Bitcoin are often misleading or unjustified. However, obtaining objective and impartial information about Bitcoin, its underlying technology, and its potential influence on the financial landscape can be a daunting task, especially given the cacophony of other cryptocurrencies competing for attention in the market. As a gold investor, it’s understandable to be skeptical of Bitcoin and its potential as an investment.
Gold has a five-thousand-year track record, and Bitcoin is hardly a teenager. However, as we’ve discussed, many of the criticisms levelled at Bitcoin are based on misconceptions or red herrings. The reality is that Bitcoin offers a unique combination of decentralization and security that is unmatched by any other asset. Bitcoin’s growing adoption and potential for widespread use make it a viable option for investors looking to diversify their portfolios. As Rick Rule formulated it:
“Do I think that that there is room, as a medium of exchange, for an algorithm that also obviates the need for trust, is seamless and private, like Bitcoin? Absolutely. Do I want all of my savings stored in a unit of value, whose only value is an algorithm? No. I, as a consumer of currency, want lots of currencies, and I want to pick and choose the utility at different points in time in my career for different purposes.”
Bitcoin and gold are complementary assets rather than competitors. Each asset has its unique characteristics, benefits, and limitations.
Bitcoin’s key advantages include its digital nature, speed of transfer, and limited supply, while gold’s strengths lie in its historical significance, physical durability, and widely accepted value. Therefore, the respective communities behind each asset should acknowledge their differences and unique features and understand that they can coexist and complement each other in an investment portfolio. Let’s bury the hatchet.
[1] See for example: “From risk-free returns to return-free risk”, In Gold We Trust Classic; “The monetary system at the crossroads”, In Gold We Trust Classic
[2] See “In Bitcoin We Trust?”, In Gold We Trust Classic
[3] See “Gold and Bitcoin: Stronger Together?,” In Gold We Trust report 2019; “Crypto: Friend or Foe?,” In Gold We Trust report 2018
[4] “The Enduring Relevance of Exter’s Pyramid,” In Gold We Trust report 2019
