Bitcoin and Reserve Currencies, Vol. III
- Market Capitalization of Gold and Bitcoin
- Gold is widely owned and seems to be gaining more support from global central banks amid record government spending
- Bitcoin, on the other hand, has been gaining institutional support among financial firms
Despite the ongoing debate on Gold Vs Bitcoin as a store of value, investors are adopting digital assets for their portfolios.
Learn which institutional private equity and hedge funds on our platform can provide your clients’ portfolios with cryptocurrency exposure.
The barbarous relic? Pet rock? Store of value?
Bitcoin Maximalists often refer to the cryptocurrency as digital gold.
This begs the question, why would crypto adherents want to compare such a volatile asset to a stable store of value that has been called a pet rock?
We can start with its market cap. The amount of gold held above ground has been estimated to have a market value of anywhere from $8-10 trillion. Because the gold supply is not fixed, its market cap can go up even if the price were simply to remain stable.
But since Bitcoin has a fixed long-term supply of 21 million coins, stating that it aims to take market share from this $8-10 trillion ultimately requires its price to rise. Gold’s market cap is an easy number to point to as an attainable goal because both are alternative stores of value that exist independently of global governments and the global monetary system.
A Golden Foundation
Next, gold has underpinned the global financial system in the past. This is something many Bitcoin Maximalists believe that Bitcoin can achieve in the future. This is also the context in which John Maynard Keynes, the famous economist and policymaker, coined the phrase “the barbarous relic.” As a policymaker, Keynes disliked the constraint that gold created for being held by many government treasuries around the globe. He thought that he could do things better.
He suggested a global unit of account called the Bancor, which could be used by governments but not individuals, to minimize imbalances in global trade. Special features of the proposed Bancor included the ability to manage foreign exchange rates, as well as the ability to tax excessive debtor or creditor nations.
However, as discussed earlier, the Gold Exchange Standard was ultimately adopted instead.
Constraints of Gold-Backed Currencies
A famous aphorism states the golden rule as follows: He who has the gold, makes the rules.
Bitcoiners have big aspirations. But so do policymakers. Politicians are in the business of getting elected. In order to successfully get elected time and again, politicians need to deliver for their constituents. This is done by directing government spending and projects to the areas they represent and to industries that finance their campaigns.
In Volume I of this series we wrote, “Under an [Modern Monetary Theory]-minded legislature, the ultimate limit on the ability to spend is due to inflationary pressures.”
Gold’s role historically has been a constraining or stabilizing one amid politicians with big aspirations! When currencies are backed by gold, holders of currency can demand to trade their currencies for the yellow metal. This can effectively limit the amount of government spending and the issuance of new currency attached to such legislation.
But constraints on government spending doesn’t win elections. BIG promises and government spending do!
For example, the GOP has consistently controlled the senate seats in Georgia but lost both this year in a close election. The election followed actions by the Senate Majority leader to send out lower government stimulus checks than had been previously been reported.
No Gold Standard Means No Legal Constraints
In 1971, Richard Nixon “temporarily” de-pegged the US Dollar from gold.
We wrote last month about why the US Dollar is likely to remain the leading global currency. But it is losing market share! This is not the first time in history where the global monetary system was not based on a gold standard by any means.
By leaving the gold standard, the only legal constraints on the US government spending are debt limits set by Congress, which are also subject to change at the reigning party’s discretion. But there can be economic constraints on the government’s ability to spend, namely through inflation or shortages of goods. These types of occurrences are frequently seen in emerging markets. But with numerous governments around the world acting as if there are no economic constraints on their spending, Central Banks the world over have been taking notice!
Below you can see that the US Government has run budget deficits essentially every year since it left the gold standard. The US hasn’t seriously suffered from this fact for decades, but with the Dollar’s share as a global reserve currency falling, it could make an impact in the future.
Total Deficits, Primary Deficits, and Net Interest
Source: Congressional Budget Office
Some Big Customers
Even before the mayhem induced by COVID, the Netherlands Central Bank put out a note stating that gold could be used to re-anchor the global monetary system in the event of currency problems. This is notable because, as a part of the Euro, the Dutch surrendered their ability to print currency, which means they had to find the available funds to make a purchase of gold instead of printing fresh currency for such a transaction.
Hungary, who sits outside the Euro currency zone, has purchased record amounts of gold year over year to provide stability for a less dominant currency against the Euro.
Following up, Brazil recently upped its purchases of gold.
Even Peter Thiel’s company Palantir recently purchased $50 million of the yellow metal.
Thiel’s original vision for the global payments behemoth PayPal was to launch a currency, so it’s not shocking that he looked to a neutral currency for his corporate treasury. Interestingly, however, the famous technologist didn’t turn to digital gold, i.e. Bitcoin, due to his technology bonafides. Perhaps he didn’t think it was appropriate for a government contractor to hold the cryptocurrency on a balance sheet. Yet, by buying gold he joins a long line of gold owners, the largest owner of which is the Federal Reserve.
Sources: Cointelegraph, Oct 2019. “ Dutch Central Bank: World Will Need Gold if Entire System Collapses.”; Bloomberg, Aug 2021. “Hungary Tripled Gold Reserves as Central Banks Turn Buyers Again.”; Kitco, Jul 2021. “Brazil's central bank buys 41.8 tonnes of gold in June.”
Why is it called a pet rock then?
Gold is being purchased by governments and companies all over the world. But it takes two to make a market and not many investors look down on owning gold instead of companies or fixed income. Gold is an alternative asset, after all.
So why is the term “gold bug” used pejoratively in much of the investment community?
Let’s ask none other than the legendary financier Warren Buffett,
“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility.”
This is a crucial point. Despite the global desire for gold, the precious metal is still considered by many as an unproductive asset because it doesn’t produce anything. Yes, gold has industrial applications, but the price is set due to high demand for investment, not industrial use.
Gold is known to hold its purchasing power over the long term.
Derek Thompson noted in the Atlantic about a decade ago, that the cost to go to Yale in 2012 and 1900 measured in gold grams was relatively stable.
But does this also mean that no return was earned?
Bitcoin is often referred to as Digital Gold.
Gold is widely owned and seems to be gaining more support from global central banks amid record government spending.
Bitcoin has big aspirations to replace the yellow metal. But as the latest infrastructure bill showed, government action could change the burgeoning crypto sector for better or worse.
One might say regulation is a rite of passage. It’s been nearly 90 years since FDR confiscated the gold that still sits on the Federal Reserve’s balance sheet today. Gold metal still plays a vital role in the global monetary system today.
While Gold may still play a role as a safe-haven asset that holds its value, Bitcoin has been gaining institutional support among financial firms. But the cryptocurrency really has yet to nab a notable country’s central bank as a buyer. El Salvador has adopted Bitcoin as legal tender — that’s a far cry from the many central banks of developed nations positioning themselves with gold.
But Bitcoin has outperformed Gold quite handily since the pandemic. This can be attributed to Bitcoin being considered more of a risk asset, while Gold acts as a store of value. Yet despite underperforming cryptocurrencies, gold is generally not a bad role model to have for Bitcoin. Gold has a 5,000-year history and Bitcoin is nipping at its heels.