As the dollar price of bitcoin continues its seemingly inevitable ascent to $100,000, more and more people are jumping on the cryptocurrency train. After all, who can blame them? Yes; there are problems with cryptocurrencies. Despite this, many people who invested in bitcoin since its inception in October 2008 have become millionaires – and a few of the earliest adopters have become billionaires.
Meanwhile, the dollar price of other cryptocurrencies continue to rise as speculators dip their toes into the marketplace. Even dogecoin is drawing a lot of interest these days, despite the fact that it originally started out as a joke; it is now among the ten biggest cryptocurrencies.
However, when it comes to a store of value, gold and silver are superior to any cryptocurrency. Why? Because, unlike the precious metals, cryptos have an Achilles’ heel: that is, they are ethereal. Therefore, they must be valued in terms of something else.
That isn’t an issue as long as the current fiat monetary system remains intact. But what happens if hyperinflation destroys the US dollar (which, in turn, would topple all of the other fiat currencies like a bunch of dominos)? If the value of the fiat US dollar goes to zero — as Voltaire assures us will happen at some point in the future — then, by definition, you’ll need infinity dollars to buy a loaf of bread. Well … obviously that’s impossible.
So what does this have to do with cryptocurrencies? Actually, quite a bit.
We are told that cryptocurrencies are the ultimate store of value; a safe haven from a world that is seemingly incapable of removing itself from the treadmill of runaway debt, and the inevitable hyperinflation that will come in its wake. But are they really?
Actually, they’re not.
The reality is, when it comes to currencies, only precious metals — that is, physical gold and silver — can claim to be the ultimate insurance against hyperinflation. Here’s why:
Gold and silver are real; they are elements on the periodic table. As such, they are physical items with mass, and are therefore self-referential. That is, we can refer to them in terms of a common benchmark such as grams, ounces, or kilograms. That benchmark can then reliably price other goods and services. For example, a loaf of bread is typically worth 0.1 grams of gold (give or take).
You can’t do that for cryptocurrencies.
So if the fiat system completely breaks down, then the logical solution for cryptocurrencies will be to value them in terms of gold. Ironically, that means the true value of all cryptocurrencies is in the hands of those who hold the yellow metal.
Only then will we discover the true relationship between, say, bitcoin and gold.
As a gold holder, I wouldn’t trade one gram of gold for a single bitcoin. Never mind the 30+ troy ounces of gold that bitcoin is currently fetching in the fiat-dollar denominated market.
Of course, there are surely other physical gold holders who feel differently.
Since market prices are determined at the margin, if the fiat monetary system ever goes belly up, then the actual value of cryptocurrencies – and bitcoin, in particular – will probably fall somewhere between those two extremes. Although I strongly suspect it will be much closer to the bottom of that range than the top. But only time will tell.
Photo Credit: stock photo
This is the best argument I’ve seen in favor of gold over Bitcoin (or any other crypto coin for that matter). Does Bitcoin have positive attributes? I think so. Nobody can argue against its speculative potential even at its current price. But a “store of value” isn’t one of them.
When it comes to Bitcoin, ‘currency’ isn’t one of them either. Transaction speed is way too slow and costs are way too high compared to other alternatives.
Len Penzo says
Thank you, Michael.
There is a place for both gold and cryptos. I know I’m probably never going to sell my bitcoin. I think it has proven itself as a superior store of value over the last decade.
Len Penzo says
I’m not sure how you can say an asset like bitcoin that has been around for a little more than a decade has proven itself as a store of value.
That’s quite a leap of faith.
Gold, on the other hand, has preserved humans’ wealth for 5000 years, and across multiple financial and monetary crises.
The Lindy effect will… take effect soon, solving this.
Everyone today sees the internet as a permanent feature of the world.
Give Bitcoin another 5-10 years and it will be treated the same.
RD Blakeslee says
Bitcoin’s creation and maintenance requires electricity. What happens if that’s interrupted?
Gold is being mined by children (among others) throughout the world and is retained by owners in ordinary physical proximity
Len Penzo says
It’s a great point. I’ve seen proponents say such a scenario is inconceivable, as it would imply the world has essentially ended as we know it.
However, that completely ignores the inconvenience of being unable to access and use bitcoin — or any other cryptocurrency — during short-term crises that result in a loss of power for several months, weeks, days, or even hours. Never mind its inability to be used in locations with no access to electricity, or other postulated alternatives such as, say, battery-powered short wave radio.
Of course, physical money (gold and silver) doesn’t have that issue — which is a huge advantage over ethereal cryptocoins.
Gold is the best store of value. I cannot see something so volatile as btc being a store of value. However, some cryptocurrency projects stand out on their utility for growth into the future. Meme coins are foolish speculation, Bitcoin is sluggish and expensive to use because it is proof of work, but drop and hbar are each less 100x less expensive to use than credit cards, and banks and corporations are actually using them at rapidly increasing rates! (They settle in a few seconds instead of days too.) Look at the iso 20022 timeline on swifts website and you will see why. Xrp and hbar will likely stay around for decades, eliminating bank nostro vostro accounts and freeing up trillions. They are a planned part of the Great Reset mentioned by name by the BIS and the WEF. Yes, gold is the best store of value, but some cryptos will outperform gold by orders of magnitude in the years ahead. They derive their value from improving the current system. Being ethereal is irrelevant if functionality is improved by them. I hold both gold and these cryptos.
Len Penzo says
I think you’ve done a good job pointing out that gold and cryptocurrencies each have their place; gold as a store of value and cryptos as speculative investments. One thing gold should not be considered is an investment (speculative or otherwise); first and foremost, it is wealth insurance.
Crypto is so much more than just bitcoin at this point – it’s a 3 trillion dollar asset class that’s still in it’s VERY early stage and it’s growing fast. Everything is going to be programmed on top of these blockchains in the future. Insurance will be coded in smart contracts, real estate transactions will be recorded on blockchain, decentralized finance is happening NOW on ethereum, so banks better watch out. It’s a totally new asset class that we’re all alive to witness. I just encourage everyone to be a bit more intellectually curious about the space without dismissing it, because it’s coming. It will disrupt everything in a similar way that the internet did.
Own gold, silver, etc, but who are you going to sell it to? Millenials and gen z, the generations that are digital natives, have no interest in buying that stuff from you even if it were for sale. And that’s the point of owning assets right? It’s not an asset if the generations to come don’t view it as such. Give me BTC/ETH over gold any day of the week and twice on Sunday because that’s the way the world is moving. Onwards!
Thanks for writing this, it was interesting.
Len Penzo says
Thanks for your comments, Marissa. You make some good points. The one mistake I think you made is that you assume millennials and Gen Z have no interest in gold or silver. I have two Gen Z kids and I can assure you that they understand the importance of owning physical gold and silver.
As I pointed out to another crypto proponent in another article, the attraction to precious metals transcends generations. In fact, humans have an innate attraction to physical precious metals — especially gold. Here’s an experiment that proves it:
By age 5, most kids understand the concept of money. Hand a 5-year-old a real gold coin and a plastic coin (or even a real coin made of non-precious alloys), and tell them they can only keep one of them; then observe which one they choose. Repeat this experiment with 99 other 5-year-olds. At the end of the experiment, come back and tell me with a straight face that gold has no intrinsic value, which is what you are essentially arguing.
Agreed on gold 100%. My children know its value, and I did not have to present arguments to convince them.
I’m not arguing that gold has no intrinsic value, just that it decreases in value over time. I’d argue that it has already started. If you bought $100 worth of gold 10 years ago, it’s worth less today. I think that trend continues over time. The world is moving to a place where folks trust digital ownership just as much as what you refer to as physical “ethereal” objects. Don’t get me wrong, gold never goes to zero, but neither does BTC.
And, to be fair, you’re a gold bug so I’m sure your millenial and gen z kids like it as well 😀 I seriously question that folks my age (29) and younger are interested in buying a bunch of gold though.
Good discussion. You actually sound very similar to bitcoin maxis. So much so that it’s surprising that you’re not a bitcoin fan. I own BTC, but I’m much more interested in ETH going forward.
Len Penzo says
Appreciate your comments, Marissa. But 5000 years of history have proven that gold and silver hold their value over time – minor short-term fluctuations not withstanding.
The most obvious example is a 1964 silver US quarter; it bought a gallon of gas in 1964. Today, the melt value of that quarter is about $4.50, which will still get you a gallon of gas – if not more – in most places in the US.
More historical proof here: https://lenpenzo.com/blog/id47735-historical-gold-and-silver-benchmarks-for-job-wages-and-commodity-prices-2.html
(And BTC can most certainly go to zero, for the reasons I already explained. Will it happen? Beats me; but that doesn’t change the facts.) 😀
Agreed on crypto, Marissa. However, if you love ETH, you should check out hbar (hedera.com). ETH transfer and minting fees are ridiculously high! For example, to mint and NFT on ETH it costs $500-50,000!! On hbar, it costs $1. Hbar is faster, greener, cheaper and more secure than ETH. It is also able to take ETH programs and run them on its network without any changes. Take a look at hbar. I have not looked back at ETH ever since.
Also, Hedera has a whole slew of companies who are parters with them, and there are even more programs and transactions on hbar than ETH, even though it is only half the age. The programmers in ETH are migrating over in droves. The only reason ETH is still expanding is because of speculators and new blood who have not experienced the high gas fees.
Lately for utility, gasoline and diesel, along with with coal and wood. At least I will be warm 😃 thanks for the reminder about ethereal items. Dependent upon energy, much fossil fuel supplied.
Len Penzo says
My pleasure, CO2.