The crypto community is built on the idea that Bitcoin is digital gold and has the potential to become world money. It’s done so usually by disparaging not only fiat money but physical gold, creating a line of contention between Bitcoin and the precious metal upon which much of its design is based.
This kind of divide is problematic because it’s focused more on one side winning than on impartiality to separate facts from fiction and come closer to an objective understanding of the trend.
It’s resulted in crypto supporters glossing over important issues and distorting realities, to such an extent that little else but significantly lower prices will be enough to release them of the convictions that keep them so tied to their HODLing philosophy.
To supersede gold, Bitcoin must be better than gold. In one regard, Bitcoin is—physical gold lacks borderless transferability. This is a deficiency in modern times because of increasing efforts by governments to restrict capital outflows, and thus to restrict the ability to move gold freely.
But otherwise, gold has a major quality Bitcoin lacks—demonstrated intrinsic value, independent of environment and time. And it is this quality that must be properly understood to comprehend why Bitcoin is problematic as money.
MEANING OF STORED VALUE
For anything to survive as money, it must be a store of value. You need to be confident that the purchasing power you store is maintained not only over time but despite any political, social or cultural changes. This independence of environment, or non-arbitrariness, is what “intrinsic” refers to. That value is not merely declared or bestowed upon by any person or group is critical to ensure confidence that the purchasing power you store can be relied upon to be there if you leave it unattended over a long period.
Gold has industrial uses, but these are largely immaterial as they pertain to money—most are recent, like in microchips, and others are due to phase out, like in dental fillings. Gold’s true value is its immutable beauty.
Beauty is a very real, non-arbitrary end-value, woven into the fabric of human experience as much as love, wealth and happiness. One can no more dismiss the value of beauty in objects like gold than a man can dismiss the value of beauty in a woman, nor a woman the value of beauty in her material surroundings, whether today in Asia or in the story of Helen of Troy 3,000 years ago.
That gold has been prized for its beauty for thousands of years, across independently developed cultures isolated by oceans and continents, shows that gold’s value is not arbitrary to time or environment but intrinsic to itself. It cannot be removed by human declaration or social disapproval.
And gold’s naturally limited supply allows its beauty to be quantified in purchasing power, to a value that’s remained within a range of consistency unmatched by any other form of money used. This is critical because its intrinsic value and limited supply together gives confidence that you can always sell it later at a price comparable in purchasing power to what you paid for it, as much as you can expect that people will continue to value beauty in the opposite sex.
Bitcoin, however, is different. Bitcoin was designed using the parameters of gold. Even terminology like “mining” was lifted, and later its visual representation, a gold coin with a “B.” But for all these parameters, Bitcoin cannot take what gives gold timeless, non-arbitrary value—beauty.
WHAT CRYPTO MISSES
This is what crypto supporters miss. A wedding ring store keeps a ledger to track of the rings in inventory. The tally marks in the ledger refer to the rings they have. It’s the rings that are of value, not the the tallies that refer to them. No one wants the tallies if they don’t refer to the rings.
But Bitcoins are the tallies themselves. There’s no actual value to them—they don’t refer to anything, and that they exist on a distributed ledger is meaningless if Blockchain is open-source freeware and can be created ad infinitum.
This is the problem fiat money has—fiat was receipts that referred to redeemable gold, that became receipts that refer to nothing. Their only value is the value the government declares them to have, which depends on people maintaining confidence in the government to not mismanage it.
This has never succeeded, because governments are run by people, who have proven historically incapable of preventing self-interest, ignorance and irresponsibility from interfering with sustainable management of an unbacked money.
And herein lies the rub. The value Bitcoin has is predicated on confidence as well, as with fiat, in people to behave counter to historically demonstrated human nature. While fiat depends on confidence in government, Bitcoin depends on confidence in technologists, governments, and holders to behave in ways people never have.
This reality is simply less obvious, because it’s shrouded behind techie lingo, Blockchain hype, and lottery-ticket greed, resulting in a maze of rationalizations to defend a jenga-like structure.
The root of this problem is that bitcoin violates a timeless principle of money—alchemy cannot turn lead to gold. This is less about lead and gold than the principle that something of intrinsic value cannot be created from nothing. If it occurred, greed would cause the supply of gold to inflate to the point it held no more value than that of lead.
A modern equivalent is central banks “creating money out of thin air,” an almost cliche saying, and a fact that motivated the creation of Bitcoin. But the problem isn’t central banks. The problem is human involvement in the control and management of a money supply. Gold’s value is intrinsic and thus outside the control of humans, but Bitcoin’s isn’t—human involvement exists throughout the ecosystem.
Confidence in Bitcoin rests on confidence on three pillars: Blockchain as a technology, Bitcoin’s security, and Bitcoin’s user network. If one falls, the others fall, and while human involvement is obvious in the third, it actually pervades all three, making all three pillars.
The first pillar is confidence in the premise that Bitcoin’s Blockchain limits its supply, such that inflation will never destroy Bitcoin’s value. Nominally, this is true—Bitcoin’s supply is fixed. But the supply of Blockchains isn’t. And because Bitcoin is merely a tally on a Blockchain, anyone can create another Blockchain with the same tallies and call them digital gold.
2K CRYPTOS IN MARKETPLACE
This is what has happened. There are now over 2,000 cryptocurrencies, and while none are Bitcoin itself, they compete based on minor variations to the parameters of their Blockchains.
This is the equivalent of creating an endless supply of new non-gold precious metals apart from silver, palladium and platinum. There’s also been divides within Bitcoin itself.
Bitcoin has “forked” nearly 100 times due to in-fighting and greed, resulting in a new version of Bitcoin on a new Blockchain, with a comparable supply to the original, with every split. This is the equivalent of physical gold dividing into two metals, one the original and one the “new gold,” each with the entire supply of the pre-fork gold, with each side claiming to be the better.
People overlook this as inflation because the price of Bitcoin has trended up over years, but the reality will catch up to people eventually as Bitcoin’s price continues to fall partly in response to the expanding supply.
Ultimately, anyone can create his own cryptocurrency, and this will continue to occur so long as doing so is a call-option to riches. To believe that bitcoin’s supply is truly limited is to be blind to this, and confidence should crumble as this reality becomes recognized.
The second pillar of confidence is in Bitcoin’s security. The idea is that its history of transactions and current allocation across holders is immutable because it’s too costly to take over 51 percent of Bitcoin mining power and change the record.
This is because Bitcoin has the longest history of any crypto and thus the largest user base and the most miners. But this is not secure, as it relies on two beliefs: first, that Bitcoin will always be the biggest cryptocurrency. But the first is rarely the last in technology. Technology evolves, and no user network will stay loyal to an outdated, less capable Blockchain if a better one exists, no more than people stayed loyal to MySpace.
Second, it relies on the belief that the cost of a 51% attack is prohibitively high. The cost is estimated to be around $40 billion. While most individuals can’t afford this, Bitcoin’s biggest competitor can—governments. To think that governments will simply relinquish their monopoly on money when central banks can print the money to corrupt Bitcoin’s Blockchain is to succumb to wishful thinking, that those in power give up that power easily.
The third pillar is confidence in the size of the network. The belief is that Bitcoin’s network of users is so large that it will always be there, to prevent a total collapse in Bitcoin’s price, to keep the cost of a 51% attack high, and to attract more users. The problem is these notions are predicated on faith that Bitcoin’s short nine-year history has created an unalterable trajectory.
The majority of Bitcoin’s users don’t use Bitcoin but merely hold it hoping to get rich, which makes the network even more fragile than MySpace’s.
With MySpace, there was no cost to maintaining an account. But if the main motivation for Bitcoin holding is financial, if the price continues to fall, holders will leave the network far faster than MySpace users abandoned it. And as the public experiences first-hand the price of Bitcoin collapse, confidence that Bitcoin can store value will collapse, too. TJ
Confidence in a money without intrinsic value is tenuous, and history has shown that once it’s lost, it’s lost for good. No unbacked money has survived because human involvement always means human mismanagement, and holders of Bitcoin are in the early stages of discovering that now.
But because Bitcoin and others like it are likely to fail doesn’t mean cryptocurrency technology also will. Unbacked cryptocurrencies are not an end in themselves but likely a transitional technology, to couple with real-world assets to allow trustless, encrypted transferrability of equity and other securities, government-enforced fiat, and hard assets of intrinsic value like gold, that to this point have had difficulty adapting to a modern age that’s increasingly less local and more digital.
Those who understand this will be able to sidestep the further losses coming in the crypto market.