Fighting inflation: Is Bitcoin the new gold?
A curious thing is happening with Bitcoin. Despite ongoing warnings from experts who say that a price correction is inevitable now that Bitcoin is above $10,000, the price of the world's most popular cryptocurrency continues to climb. Even more curious is its rise in the face of speculation that the U.S. is headed for another recession.
Two recent stories from the Coin Telegraph website may give us a clue to what's going on. They seem to indicate that people might be looking at Bitcoin as a hedge against inflation, the same way traditionalists have long viewed gold. That leads to the inevitable question of whether or not Bitcoin is on its way to replacing gold as they go-to commodity in times of economic downturn.
Bitcoin gains market share
The first Coin Telegraph story comes from contributor William Suberg who reported on Bitcoin's eclipsing of the $13,000 mark in the early hours of 10 July (2019). Suberg's headline made mention of the fact that data from the U.S. Federal Reserve indicates that the U.S. economy is now at its highest risk of recession since 2008.
Though Suberg didn't come right out and say it, the implication of this story suggests that the two are related. As evidence, consider the fact that Bitcoin continues to look bullish while many of its competitors are either in decline or struggling to remain stable. Even while Bitcoin was eclipsing $13,000, competitors including Ethereum, Bitcoin Cash, Litecoin, and XRP were on the losing side.
Punctuating all of the data are numbers that show Bitcoin is reclaiming market share - that is in addition to enjoying decent price increases. According to Suberg, Bitcoin now commands just over 65% of the total cryptocurrency market. Its increased market share demonstrates that people are shedding other coins and putting their money into Bitcoin instead.
Bitcoin as a hedge
The second Coin Telegraph story is also 10 July post, this time from contributor Marie Huillet. Her story is about a prominent venture capitalist who now believes Bitcoin is the "single best hedge against the traditional financial system." The significance of such a statement should not be taken lightly, especially when it comes from a successful venture capitalist.
Huillet reports that Social Capital CEO Chamath Palihapitiya considers Bitcoin "shmuck insurance under your mattress" regardless of where an individual might stand on fiscal and monetary policy. His comments, made on the Squawk Box TV program on CNBC, led to the show's hosts admitting that the mainstream media has lagged behind the times when it comes to cryptocurrency.
Huillet went on in her story to echo some of the same points made by Suberg regarding recession. She made mention of Deutsche bank and its plans to reduce its risk weighted assets by 40% while slashing some 18,000 jobs. Overall, Huillet doesn't appear to see a bright short-term future for the traditional banking sector.
So what does all of this mean? Are we headed for another global recession and, if so, what role will cryptocurrency play? There is plenty of speculation but few answers.
Gold as a hedge
In the world of investing, a hedge is a kind of investment designed to act as an insurance policy of sorts in case other investments fail. Gold is seen as a hedge against losses from a variety of other assets simply because it is a precious metal that some believe will always have value. This explains why so many experts were pushing gold during the Great Recession.
As the thinking goes, gold will always be valuable even if fiat is not. Investors are more likely to put money into gold when they aren't so sure of their stock portfolios. They will keep their stocks and shares mostly intact, but still put money into gold just in case their portfolios start losing too much value.
Likewise, average consumers not involved in financial markets sometimes buy gold as a hedge against inflation. They believe that even if inflation eats into the value of their fiat, they will always have the gold to fall back on. In both cases however, there is a fatal flaw that nullifies the beliefs of gold investors and casual buyers alike.
What is that flaw? You cannot spend gold. The world is not set up to accept gold as currency or legal tender. So even if we entered another recession and you had to rely on gold holdings to keep your finances in order, you would still have to convert your gold to fiat for it to be of any use to you.
Once you make that conversion, you are still left with the same worthless fiat everybody else has. You have also devalued your gold by liquidating it. That doesn't make a whole lot of sense, which is why gold doesn't really act as a very good hedge even though people swear by it.
The Bitcoin advantage
Understanding the crucial flaw in gold as a hedge simultaneously reveals that Bitcoin has a big advantage. You cannot spend gold during a recession, but you can spend cryptocurrency. In fact, it is quite easy to do so. Cryptocurrency is very easily exchanged simply by pushing coins from one wallet to another.
Another advantage of Bitcoin is its infrastructure. The reason you cannot spend gold like you do fiat is that there is no mechanism in place to transact business with it. In other words, merchants are not set up to accept payment in gold. As for purchasing online, that speaks for itself. The infrastructure for gold just isn't there.
Bitcoin's infrastructure is already established. Any merchant who wants to accept Bitcoin payments could get him/herself set up to do so in mere minutes. Moreover, merchants do not have to utilize payment processors if they don't want to. Customers can pay them directly in Bitcoin just by initiating a wallet transfer.
If it ever became necessary, customers and merchants could immediately make the switch to cryptocurrency and not miss a beat. Buying and selling with crypto could go on unabated without any need to convert digital assets into less valuable fiat.
Value in distributed ledgers
One of the CNBC hosts mentioned in the Huillet piece made a curious statement. In responding to what Chamath had said about Bitcoin being schmuck insurance, the host said, "Bitcoin was probably trading at around $9,000 when I realized that distributed ledgers probably imbue more inherent value on something than a government does."
That is a fascinating statement. The host was essentially crediting distributed ledgers for creating inherent value in a digital asset. Moreover, the host in question apparently believes said value is greater than the value government adds or assigns to fiat.
Fiat is essentially a government owned monetary system. Let us take the U.S. dollar for example. The U.S. federal government is in charge of printing bills and minting coins. They own all of the money they mint. That means they also determine its value. However, this is where things get a bit sticky.
Regulators cannot come out and simply say "this will be the value of the U.S. dollar" and be done with it. The value of the dollar has to be compared against other fiat currencies and the goods and services it is capable of purchasing. That means the dollar's value is neither static nor arbitrary.
Fiat vs. cryptocurrency
So how does government control its value? Through a combination of monetary and fiscal policy. The federal government handles fiscal policy. What the Congress and president to do with the federal budget greatly influences U.S. economics. And by the way, fiscal policy covers everything from government spending to taxation and economic stimulus.
Monetary policy is handled by a central bank. In America's case, that is the U.S. Federal Reserve. Their job is to control money supply. While government leaders are manipulating the economy through their fiscal policy, central bank officials are doing the same thing by constantly adjusting the amount of fiat in circulation. Combining the two creates the power to control not only the U.S. economy, but the value of the dollar as well.
One of the things that makes cryptocurrency so inviting is the fact that it is completely decentralized. Bitcoin is not manipulated by government regulators through fiscal policy. It is not manipulated by central banks through monetary policy. So the value created by its distributed ledger rests solely in demand for the product.
The differences between centralization and decentralization more or less proves the CNBC host's point. There is more value in distributed ledger and blockchain projects because the digital assets they produce are controlled by the people who own those assets, not governments and central banks. And unlike fiat, which can be manipulated as regulators see fit, cryptocurrency is left completely to market forces.
Is Bitcoin the new hedge against the flaws of the traditional financial system? It is too early to tell, but there are strong indications to that end. We will know for sure when the next recession comes around. If people put their money into Bitcoin instead of gold, it is a good bet they feel safer using it as a hedge.