Introduction – Gold: a dirty history
Gold mining has always been and remains to this day a dirty business. Dirty for the environment, of course, but also dirty because of working conditions, organized crime, and government corruption. How many people died for gold, how many lives were ruined, and how many are still suffering today? There is something about gold that drives humans crazy. Thankfully, this is changing fast. Young people living in developed countries don’t care much about gold anymore. As I’m writing this, I do not have a single piece of gold on me. Thinking about it, I don’t think I own any gold at all. My wife may have some in her jewelry box, but nothing extravagant. Will our children even value gold as much? Probably not. And while there remains an industrial need for gold, it’s nothing significant. So why then are we still frantically digging gold out, you would ask?
Well, to put it back underground, essentially! How strange is that? Most of the gold that has been mined in the world’s history is indeed back underground, stored in vaults. For example, over 6,000 tons of gold are stored underground in downtown Manhattan. Why? Because it’s a scarce metal impervious to corrosion, exceptionally malleable, and it can’t be forged efficiently. Despite gold’s strong appeal, we only manage to mine an additional 2% of gold per year. For this reason, gold has been our go- to solution as a means of exchange and as a store of value for millennia.
Fiat currencies: a history of mixed success
Fast forward hundreds of years. Today, gold is no longer the dominant means of exchange: fiat currencies are. We first used fiat currencies in the form of coins and bills. Now all is mainly done electronically. Let’s admit it; it was silly to carry around pockets full of heavy coins and colorful pictures, some of it counterfeit. But it did the trick. People have been willing to accept cash in exchange for goods and services for quite a while, and successfully so. Digitalization is changing all of this. Today in developed countries, cash is on the brink of extinction, being replaced by electronic transactions. That’s terrible news for counterfeiters and bank robbers who have to find themselves new careers. We are also losing a little more of our privacy in the process. But one can’t argue against the increased efficiency.
Thus, our coins and colorful pictures have been outdone by zeros and ones floating in cyberspace. What a leap of faith if you think about it! The transition to digital is working because we collectively trust our banks and our governments to keep it together. The financial industry does deserve some credit here. Every day, we find our money waiting for us in our bank account, and we can pay our bills securely. We can even send money across frontiers, if not swiftly and cheaply, at least safely. The financial system may still be subject to frauds, but we have made progress tracking them and protecting people against them. We take the reliability of the banking industry for granted today, but it results from decades of incremental progress.
We can say that the transition from gold to fiat currency as a medium of exchange has been successful. But we certainly can’t say the same at all about fiat currency as a store of value. Fiat currencies have fared terribly at this. So much so that even the all-mighty dollar has lost up to 99% of its value in the last century. Many currencies have done the same in just a few years, few months, and even a few days. This is happening all the time, and it is not about to go away. Countries simply don’t have the discipline regardless of their maturity or constitution to keep the lid on money printing. As a result, gold is still the dominant store of value in the 21st century.
Bitcoin: digital gold comes to the rescue!
When you think about it, it’s quite incredible that, by now, we have not found a better way to store value than gold. We flew to the moon, for God’s sake! Just how hard can it be to artificially create something in limited quantity? Well, extremely hard, it turns out. That’s because humans tend to be creative, skilled counterfeiters, always looking for shortcuts. Therefore, the world is brimming with illicit copies of things supposedly in limited quantities, such as paintings, diamonds, jewelry, baseball cards, and, of course, dollar bills. And what about in the virtual world? Digitalization is so awesome that there must be a digital solution to the problem. Unfortunately, things are even worse in the digital world. Copying a digital object, whether a program, a picture, a song, or anything else, can be done at almost no cost. Consequently, anything of value in the digital world is destined to be copied and copied until it becomes virtually worthless. Suddenly, mining gold and putting it back underground doesn’t seem so crazy after all, despite all the devastations it brings.
Here comes Bitcoin – the first technology that truly prevents digital copying. This is what blockchain technology is all about. It is simple yet very powerful. Bitcoin blockchain keeps track of every Bitcoin ever created, making copying any one of them impossible. Each Bitcoin has a life history that can be traced back to its origin via blockchain. No Bitcoin ever appears out of thin air. This simply can’t happen without rewriting the entire Bitcoin transactions history, hence, rewriting the entire Bitcoin blockchain.
To prevent such an event from happening and prevent humans from doing what humans do when they are in a centralized position, the system’s security and integrity are distributed and trusted to the Bitcoin ecosystem. For example, a few people in a centralized system could come together and decide to increase the number of dollar bills in circulation. This can’t be done in the Bitcoin world where nobody has special powers and everyone has a voice. The glue that keeps it all working together is the value of Bitcoin. Each participant is paid in Bitcoin and therefore incentivized to ensure that Bitcoin will retain its value. It’s a bulletproof system.
Objectively, Bitcoin has all the characteristics required to be a store of value in the digital world the same way gold does in the physical world. The skeptics would point out, and rightfully so, that Bitcoin’s price volatility is incompatible with proposing it as a store of value. They would also say that Bitcoin too has a concerning environmental impact, wondering how we can trust such a young technology for such a pivotal role. Bitcoin is indeed a new technology, and like any new technology, it must keep improving. Yet, the overall reliability of its core technology is simply remarkable. Yes, there have indeed been issues in the Bitcoin ecosystem, but the Bitcoin core itself has never been compromised and has an uptime close to 100%. Bitcoin price volatility results from an immature market driven by emotion and victim of excess margin trading. For now, this market lacks the stabilizing force of large institutional investors.
Bitcoin energy consumption is also often overstated and misunderstood. Far from being the environmental threat we hear about, I argued (here) that Bitcoin could be the best tool we have right now to accelerate our economic transition to sustainable energy. The biggest challenge is trust. Investing in gold is, by definition, a flight-to-safety decision. The same cannot yet be said of Bitcoin, for its novelty as a paradigm and technology is still looked at with suspicion by older market actors.
Conclusion – Bitcoin is digital gold
There is no question that to this day, mining gold has disastrous environmental and human consequences. While the practice of digging out gold to put it back underground sounds crazy at first, it was the best market answer available to a reliable store of value. Indeed, this old legacy carries on simply because of the lack of a better alternative. It turns out to be highly complicated to engineer a replacement for gold’s limited quantity and hard-to-forge qualities. When central authorities attempted this, it resulted in repeated failures. The proof of this is that, as I previously mentioned, no fiat currency was able to retain its value over time, not even the almighty dollar. There seemed to be no substitute for gold until the arrival of Bitcoin.
Now, we have a technology that prevents digital copying and relies on a decentralized system. Thanks to Bitcoin, there is now an alternative to gold as a store of value in the digital world. Bitcoin shares the same quality as gold in the real world, combined with the advantages of the virtual world. The issues with Bitcoin we often hear about are overstated and inaccurate. In contrast, the issues with gold are permanent and structural. That is why I believe it is time to phase out gold as a store of value and to phase in Bitcoin in its stead.
I am convinced we will soon see gold investors progressively increase their Bitcoin holdings at the expense of their holdings in gold. This is the rational way forward, may it be, at first, to satisfy the growing sustainability pressure. It will drive the price of gold downward and consequently accelerate the transfer of value toward Bitcoin. A significantly lower price point for gold might create new industrial use. But I do not believe it will create additional demand in the retail segment.
On the contrary, the lower price will only contribute to the new generations thinking that wearing gold jewelry is as lame as having golden teeth was lame to my generation. New generations will surely find owning gold as an investment as alien as these lines probably sound for older generations right now. This will put additional pressure on the price of gold until, at last, gold mining makes absolutely no sense. Since there is enough gold in vaults to satisfy industrial needs for many decades, this will create a massive and unique oversupply conundrum as well. We can expect to see the price of gold at a fraction of what it is today in such market conditions. Central banks will likely be the last to jump ship. Once they do, there is no telling how low the gold price could go.
We keep pushing the digital frontier further and further. So it was just a matter of time before we would find a digital solution to gold as a store of value. Bitcoin is that solution. It is digital gold, and with digital gold available, we can finally move on from using physical gold as a store of value and terminate the dirty business of mining gold. Our planet and our kids will be thankful for this.
