BTC_vs_fiat

Gold and Bitcoin - more similar than you think - Bitcoin as hard money


InvestAnswers on Youtube loves to emphasize that Bitcoin is hard money. Recently he dove deeper into his reasoning for this, comparing Bitcoin with Gold and Fiat. I have also recently been thinking and writing about this and I thought a quick summary and comparison might be useful to compartmentalize some of these thoughts.

 

Similarities

Gold and Bitcoin share many similarities:

  • Fear and greed shills - "supply squeeze" or "the dollar is dying" - i.e. profit while the world burns

Both Gold and Bitcoin advocates capitalize on fear and greed narratives, disregarding any fundamental analysis. There are deeper reasons why both could be considered worth owning.

  • Store of value/inflation hedge narratives (I talked about these in my previous article, have a look if you are interested)
  • Scant inflation

I will elaborate on Bitcoin inflation below, but even when Gold is found, it cannot be considered truly inflationary until it has been mined and refined, only then does it truly enter circulation. In terms of mining, much of the low-hanging fruit has been gathered, it is unlikely that any gold deposits found would significantly dilute the current mined supply.

  • Proof of work

Mark Maloney (on Wealthion) explained that when Gold was the basis of the monetary system, borrowing money e.g. to buy a house, involved an exchange of something for something. The gold that backed the money had to be located, mined, purified, melted and cast into a shape. The work put into this would be an exchange for the work needed to produce the materials needed to build the house - and build the house. Whereas in the modern fiat system when you take out a loan, you are effectively exchanging nothing for something. The money for your loan is printed out of thin air.

This reminds me an awful lot of Proof of Work. Perhaps minus the proof part, but the presence of physical Gold (bullion bars, etc.) is evidence of it having been mined and refined. With Bitcoin, miners exchange value for energy. Many companies now use excess energy to mine Bitcoin, to ensure they capture value from all of the energy they themselves produce or procure from the grid.

 

Differences

Bitcoin and Gold differ in their:

  • Volatility (no need for explanation)
  • Auditability

Gold requires physical audit and this involves an element of trust. Bitcoin's location and quantity can be verified by anyone that knows how to interpret the data, all of its transactions are stored on a public blockchain. Gold auditing requires verification of purity.

  • Reputation (again don't think I need to explain)
  • Gold has useful physical, chemical, optical and aesthetic properties. Bitcoin has no physical presence (some confuse this for it having no utility).

I recently wrote about Monetary Metals, a company that leases Gold to productive institutions, offering the suppliers of gold a yield paid in gold. Bitcoin is fungible code but has no real-world presence. It cannot be used to produce physical materials. Bitcoin cannot be altered or turned into something else. There are ways to get yield on Bitcoin (lending, yield protocols such as GMD, just to name a few), which rival or greatly exceed those achievable with Gold.

  • Bitcoin defi (on the Bitcoin network) is slowly bleeding into reality. While Gold-backed tokens do exist (e.g. PAXG), there is currently no way to earn yield on them (as far as I'm aware - free business or protocol idea for you).

Currently, there is no real-world Bitcoin financing for e.g. mortgages (yet) due to its volatility. Gold can be used to finance companies that use Gold in their manufacturing processes. But Bitcoin can be lent on platforms such as Aave and used as collateral to borrow certain coins or tokens, in a sense to finance defi operations. This is not financing in the same sense and so I don't see this as a similarity.

Companies such as Goldfinch are however financing real-world businesses with USDC, with yields of just over 7% APR (they require two weeks' notice for withdrawals), in terms of yield this is probably about as real as it gets. See this Twitter thread for more information about crypto-based financing companies (I think they are companies and not protocols) and other protocols dealing with the tokenization of real-world assets (RWAs). 

 

Bitcoin as hard money

Here is Investanswers rationale.

Fiat debases by 5 - 14% per year. BTC is volatile but as a store of value over time has proven to be better than Fiat (I guess depending on when you bought it and how low the BTC price goes this bear market).

In terms of the characteristics of a functional reserve currency, Bitcoin ticks all boxes (according to Investanswers). 

BTC vs Fiat

A reserve currency also needs to have a scalable means of payment. Bitcoin is still working on that, the Lightning Network is an interim solution, however, is it not an entirely decentralized or sophisticated solution (many describe it as a spreadsheet). But it is a solution nonetheless.  

The properties of Gold, Bitcoin and Fiat are compared in the following table.

BTC vs gold vs fiat

The number of BTC being held by individuals over time is shifting, with whales (e.g. 10 - 100 BTC holders) slowly selling off and krill (e.g. 1 - 10 BTC) building bigger bags over time. This indicates that BTC is becoming more widely distributed.

BTC holdings

There's a lot more Bitcoin-related information in the episode entitled, "Do we need Alts? Making the case for Bitcoin Maximalism!," this is just a small sample to continue the discussion and help clear your head amidst the ongoing bear market blues.

Investanswers (his name is James) gives updates on such stats from time to time, follow him on Youtube to stay updated.

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DrRice
DrRice

Postgraduate degree in science. Crypto, Defi and NFT enthusiast. Proficient in data analysis and summarising complex topics.


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