Gold Fund: Bitcoin Will Make Gold “Global Money” Again
Posted by Tyler Durden on November 23, 2017 11:45 pm
Tags: Alternative currencies, BITCOIN, Blockchains, Business, Copper, Cryptocurrencies, CURRENCY, Decentralization, digital currency, Dubai, Economics of bitcoin, Estonia, Finance, Gold standard, Google, India, Legality of bitcoin by country or territory, Monetary Policy, MONEY, Precious Metals, Silver Fund, World Gold Council
Categories: Alternative currencies Bitcoin Blockchains Business Copper Cryptocurrencies Currency Decentralization Digital currency Dubai Economics of bitcoin Economy Estonia Finance Gold standard Google India Legality of bitcoin by country or territory Monetary Policy money Precious Metals Silver Fund World Gold Council
The manager of Old Mutual Gold & Silver Fund, a precious metals fund with over $220 mln under control has said Bitcoin is “paving the way” for a global gold comeback.
Speaking to Bloomberg in an interview published today, Ned Naylor-Leyland said that the marriage of Bitcoin and gold was essentially a logical one given the characteristics and remit of both.
“Bitcoin was explicitly designed to be digital gold,” he said.
“So if you’re going to have a small proportion of a fund in Bitcoin, it should be in a gold fund because that’s exactly the point.”
As CoinTelegraph’s William Suberg notes, the fund, which began in April this year, is aiming to allocate up to five percent to cryptocurrency, creaming off profits from price upticks to reinvest back into gold and silver.
Naylor-Leyland is highly bullish on the concept going forward, echoing CME Group’s Chairman Emeritus Leo Melamed in his desire to bring discipline to the scene for investors.
“It’s about bringing the ownership of disciplined money into the modern world,” he continued.
“Bitcoin is paving the way for the reintroduction of gold as global money.”
As we previously discussed, the real importance of bitcoin is not making cheap, easy payments. It’s not a way of making fast payments. It’s not going to allow for microtransactions or all these other use cases that we’ve heard are important for bitcoin.
The most important thing that bitcoin offers is a new form of sound money outside the control of any authority or government in the world. And that is something very, very important for the world economy. Bitcoin is hard money as opposed to easy money.
Easy money refers to money whose quantity is easy to increase, in case there is an increase in demand for it. So if people move toward using copper as money, it is very easy for copper miners to increase the supply and bring the price back down, which will hurt the people who used copper as the store of value for their savings. So copper is bad as a store of value, because it’s easy to produce in response to an increase in demand.
Gold, on the other hand, is hard money because even if the price of gold goes up a lot, it is very hard for gold miners to increase the supply of gold in the world. It is hard to bring the value down. Therefore, gold serves as a good store of value in the long run. It’s a much better store of value than other forms of money over time.
Bitcoin is far closer to gold. It is a digital equivalent of gold.
Bitcoin’s supply is strictly limited. There will only ever be 21 million bitcoins. And the code that controls the issuing of the bitcoins is decentralized among thousands, tens of thousands of nodes that operate the bitcoin software. And if it were to change, it would need the majority agreement of everybody involved.
Since everybody involved has an interest in maintaining the monetary policy in a way that maintains the value of the money, it is highly unlikely that we’re going to witness any change in the monetary policy. Even technical changes, like changing the block size or various parameters, have been almost impossible to make in bitcoin.
It’s possible to make a copy of bitcoin, but it’s not possible to change bitcoin. There will always be some people that want to stick to the inflation schedule as it is. So the monetary policy of bitcoin is immutable, it isn’t going to change, and since the supply is strictly limited and the network is distributed and nobody can control it, we might just have the digital equivalent of gold.
This, I think, is an enormously important innovation, because it has many good properties that gold doesn’t have. It’s very easy to send across the world very quickly, and it’s much harder to confiscate than gold. Therefore, the possibilities are exciting for people who believe in the importance of sound money for society.
Look at the era of the classical gold standard, from 1871, the end of the Franco–Prussian War, until the beginning of World War I. There’s a reason why this is known as the Golden Era, the Gilded Age, and La Belle Epoque. It was a time of unrivaled human flourishing all over the world. Economic growth was everywhere. Technology was being spread all over the world. Peace and prosperity were increasing everywhere around the world. Technological innovations were advancing.
I think this is no coincidence. What the gold standard allowed people to do is to have a store of value that would maintain its value in the future. And that gave people a low time preference, that gave people the incentive to think of the long term, and that made people want to invest in things that would pay off over the long term.
With bitcoin, once you’ve started holding some bitcoin and you see it appreciate, you start understanding that there is a very high opportunity cost to spending, and you start thinking twice about spending frivolously.
Also, bitcoin matters for moving very large quantities and high amounts of value, particularly in transactions in which you’re trying to avoid censorship or economic inflation from the central bank. So as a store of value, this is what bitcoin’s importance is.
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Not everyone in the wider gold industry is as happy with the status quo, however.
Discussing a drop in profits, BullionVault Research Director Adrian Ash said earlier this month that Bitcoin “noise” was “distracting” some investors and leading to gold being sidelined.
As John Rubino previously noted, sound money advocates who love the concept of cryptocurrencies but don’t want to abandon precious metals have been trying to clarify their thoughts of late.
Risk Hedge just helped, with a comprehensive statement of the pro-gold position.
The following is an excerpt. Read the full article here.
Despite what the crypto-evangelists will tell you, digital tokens will never and can never replace gold as your financial hedge.
Here are six reasons why.
#1: Cryptocurrencies Are More Similar to a Fiat Money System Than You Think.
The definition of “fiat money” is a currency that is legal tender but not backed by a physical commodity.
It’s clear that cryptocurrencies partially fit the definition of fiat money. They may not be legal tender yet, but they’re also not backed by any sort of physical commodity. And while total supply is artificially constrained, that constraint is just… well, artificial.
You can’t compare that to the physical constraint on gold’s supply.
Some countries are also exploring the idea of introducing government-backed cryptocurrencies, which would take them one step closer toward fiat-currency status.
As Russia, India, and Estonia are considering their own digital money, Dubai has already taken it one step further. In September, the kingdom announced that it has signed a deal to launch its own blockchain-based currency known as emCash.
So ask yourself, how can you effectively hedge against a fiat money system with another type of fiat money?
#2: Gold Has Always Had and Will Always Have an Accessible Liquid Market.
An asset is only valuable if other people are willing to trade it in return for goods, services, or other assets.
Gold is one of the most liquid assets in existence. You can convert it into cash on the spot, and its value is not bound by national borders. Gold is gold—anywhere you travel in the world, you can exchange gold for whatever the local currency is.
The same cannot be said about cryptocurrencies. While they’re being accepted in more and more places, broad, mainstream acceptance is still a long way off.
What makes gold so liquid is the immense size of its market. The larger the market for an asset, the more liquid it is. According to the World Gold Council, the total value of all gold ever mined is about $7.8 trillion.
By comparison, the total size of the cryptocurrency market stands at about $161 billion as of this writing—and that market cap is split among 1,170 different cryptocurrencies.
That’s a long shot from becoming as liquid and widely accepted as gold.
#3: The Majority of Cryptocurrencies Will Be Wiped Out.
Many Wall Street veterans compare the current rise of cryptocurrencies to the Internet in the early 1990s.
Most stocks that had risen in the first wave of the Internet craze were wiped out after the burst of the dot-com bubble in 2000. The crash, in turn, gave rise to more sustainable Internet companies like Google and Amazon, which thrive to this day.
The same will probably happen with cryptocurrencies. Most of them will get wiped out in the first serious correction. Only a few will become the standard, and nobody knows which ones at this point.
And if major countries like the US jump in and create their own digital currency, they will likely make competing “private” currencies illegal. This is no different from how privately issued banknotes are illegal (although they were legal during the Free Banking Era of 1837–1863).
So while it’s likely that cryptocurrencies will still be around years from now, the question is, which ones? There is no need for such guesswork when it comes to gold.
#4: Lack of Security Undermines Cryptocurrencies’ Effectiveness.
Security is a major drawback facing the cryptocurrency community. It seems that every other month, there is some news of a major hack involving a Bitcoin exchange.
In the past few months, the relatively new cryptocurrency Ether has been a target for hackers. The combined total amount stolen has almost reached $82 million.
Bitcoin, of course, has been the largest target. Based on current prices, just one robbery that took place in 2011 resulted in the hackers taking hold of over $3.7 billion worth of bitcoin—a staggering figure. With security issues surrounding cryptocurrencies still not fully rectified, their capability as an effective hedge is compromised.
When was the last time you heard of a gold depository being robbed? Not to mention the fact that most depositories have full insurance coverage.
The gold vs bitcoin debate has a long way to run. But if the outcome is a world in which money is what the market – rather than the government – says it is, then hopefully there will be room for both.