Nick Hubble – Capital and Conflict (Great Britain) –
It’s International Women’s Day today. I thought I’d better mention that. But today we focus on a specific moment that took place last week.
On 2 March something important happened. But nobody knows exactly why it’s important. Today we’ll try and figure it out together. But don’t get your hopes up. The answers are elusive.
Last Thursday the price of bitcoin jumped 3%. The price of gold tumbled 2%. The result was that one bitcoin became worth more than one ounce of gold for the first time ever. You might say we live in bitcoin’s golden age. Or beyond it.
What does this mean? Why does it matter? Is gold defunct? Is bitcoin the new gold?
First of all, it’s important to note the price of bitcoin versus gold is pretty much meaningless. They’re not denominated in the same measure. So you can’t compare them. Gold and platinum are comparable by weight. Different currencies are comparable by what they can buy – the famous Big Mac Index for example.
As Stefan Wieler from Goldmoney.com put it, “comparing the price of 1 bitcoin vs 1 troy ounce of gold is a little bit like comparing the shares of Seaboard Corp. (USD4,179 per share) to those of Apple Inc. (USD116 per share) and concluding that Seaboard Corp. is worth 35 times as much.” (Seabord is tiny compared to Apple.)
A lot of people make this mistake with shares and currencies. It drives me bananas when they think travelling to Japan is cheap because a single pound buys you 138 Yen. Or when they think high share prices tell you a company is big.
So the crossover of gold and bitcoin prices is purely symbolic. But bitcoin’s rise in price is important. Only because it’s a symptom. A symptom of increased usage. And that’s by far the most important thing about bitcoin – whether people use it. Not invest in it. Not speculate in it. But use it for transactions.
You don’t need to know the ins and outs of bitcoin to follow what’s going on here. Just as you don’t need to understand Tesco’s inventory management system to buy stuff. For today, let’s assume bitcoin can live up to its supposed features.
But what are they? Bitcoin allows you to make anonymous transactions instantly without any intermediary for free. Why does that matter? Well I’m trying to buy a car at the moment. But my money is in another country. The result is a dystopian and financial nightmare that remains ongoing. Bitcoin doesn’t do weekends, bank holidays, transaction limits, transaction fees or settlement times. Thanks to bitcoin it’s literally easier to buy a kilo of cocaine from Columbia than a car from down the road. Apparently of course.
The value of bitcoin is not bitcoin itself, but the technology behind it. There is no authority controlling the currency. The system runs on fixed rules. Because of that, the slow increase in the number of bitcoins is fixed. It can’t be inflated like our government run money. Bitcoin’s scarcity is predetermined. The more it’s accepted and used, the higher the price goes.
Also, similar to illegal sharing of songs and movies, the bitcoin system is decentralised. It runs on so many computers it’s impossible to shut down or fight against. Any disruptions are just ignored by the rest of the system.
Aficionados debate how true all this is. For example, to swap your money for bitcoin most people use exchanges. That means they use an intermediary that can go broke or defraud you. Those have already happened.
But if you use bitcoin as intended, it seems to live up to its ideals. What about gold? Why has it been such an important feature of our economy for millennia?
Just like bitcoin, gold’s features make it useful as money. It’s rare and it can’t be created. It’s durable and divisible into smaller portions. And it’s fairly easy to transport, although nowhere near as easy as bitcoin.
Most people can’t get their head around this one. Can something be valuable because it’s useful as money? The answer is yes. That’s the basis of our government controlled monetary system too. Paper with numbers printed on it has no value. Except to make transactions convenient.
Barter is annoying because you probably don’t have on you the particular things that your trading buddy wants in exchange for their goods. Money solves the problem by giving you something that anyone will accept. Therefore it’s very valuable. It solves a basic problem just as a shovel does.
Shovels dig holes. Money facilitates transactions. It’s just that we don’t think about money that way on a daily basis. Digging a hole without a shovel is almost as annoying as swapping a car for milk without using money inbetween.
As you can tell by now, bitcoin is basically a digital version of gold. It has many of the same characteristics, but the convenience of being digital. The fact that gold and bitcoin are used in very similar ways illustrates this nicely.
Bitcoin and gold are about avoiding government money. They’re both far from perfect themselves. But life is about alternatives. And government money has a rubbish track record compared to gold and, so far, bitcoin.
Currencies have come and gone. We’ve had 10 hyperinflationary episodes around the world in the last 100 years alone. Each time governments try to regain faith in their currencies, they link them to gold or something else valuable, like the US dollar (which is valuable because of its use in trade). They’re piggy backing credibility off something else to stabilise government money.
Gold continues to prove itself as the backup plan for individuals too. Thanks to the US’s sanctions on Iran, it became impossible for Iranian expats to send money to their families back home. Instead, groups of expats banded together and sent wooden boats loaded with gold across the Persian Gulf. The gold was distributed to the families in Iran who could use it to buy goods.
Now I don’t know about you, but this sounds like a pirate’s wet dream. Ships laden with gold crossing a narrow straight, headed towards a country that’s rather unpopular with the world’s military superpower.
That’s where bitcoin comes in. You don’t get on any boats or have to meet anyone. Your name doesn’t have to be associated with the transaction. It’s instant. And free.
Bitcoin’s first big users were drug dealers and their customers. People wanted to be able to transact anonymously to buy drugs. Bitcoin was the perfect solution.
But drugs aren’t the only transactions that governments crack down on.
The crackdowns will continue until morale improves
Governments around the world are banning cash so they can keep track on you. They’re tracking large transfers of funds. And sometimes they stop you from moving your money around altogether. Cyprus’ forced bank holiday a few years ago was one example. British expats and tax haven users were caught out.
At the moment, it’s China that’s in the news. The country has restricted how much money its citizens can send overseas. So they just use bitcoin instead. And that’s why bitcoin is surging in price – it’s useful. And there are a lot of Chinese who don’t trust their government and its money. They want out. Bitcoin offers the way to do it.
By creating solutions for you and me, bitcoin creates very big problems for governments. Each time governments clamp down on transactions of any kind, bitcoin’s price jumps. Its usefulness is proven again.
This means bitcoin’s price is an indicator for government interference in your financial life. So let me ask you, do you think governments will crack down on your financial life in the future?
Then invest in bitcoin.
But there may end up being more to the story for you than an investment. The real beauty of bitcoin is its usefulness. The more governments crack down on financial matters, the more bitcoin become useful in practical terms too.
At some point you will want to move funds overseas when you can’t. Or you’ll want to buy something or send someone money to someone, but the government won’t let you. Or the banks are too bloody slow to get it done in time.
Then you’ll have bitcoin to turn to.
Until next time,
Editor, Capital & Conflict