For the last few years, bitcoiners and gold bugs have engaged in a digital battle to determine who is the king of fighting inflation. Is it the peer-to-peer decentralized cryptocurrency that spikes or plunges a couple of percentage points after each sip of coffee? Is it a precious metal that has been around for 5,000 years and utilized as currency by civilizations throughout history? As the warring factions duke it out on Twitter and in the global financial markets, they have forgotten about their common enemy: fiat money. This currency system is only supported by trust in the government or central bank. But who can trust the central bankers these days anyway?
Tulip Mania 2.0?
In the 17th century, tulip mania became the world's first economic bubble. Thanks to the coin debasement crisis and economic fallout from the plague, people thought they would make their fortune in tulips. After soaring to market capitalization equivalent of a mansion in Amsterdam at the time, tulips crashed and became a footnote in the history of speculative bubbles.
Is the same speculation transpiring in bitcoin as it continues to post fresh record highs?
Peter Schiff, the president and CEO of Euro Pacific Capital, has been one of the most outspoken critics of bitcoin. From his podcast to his writing, Schiff has warned that the virtual currency is in a bubble and that it would never overtake gold as a hedge against inflation. If you were to read the comments on his Twitter threads, hundreds of bitcoin proponents routinely rail against Schiff's views, pointing to its price and market prevalence. Gold advocates also intervene, comparing it to the tulip craze of 400 years ago.
Bitcoin acolytes present the case that it is not in a bubble, despite showing all the hallmarks of one. There are a few reasons to explain bitcoin's 300% rally in 2020. First, the cryptocurrency's supply is capped at 21 million, so its scarcity spawns an inherent value. Second, bitcoin's investment demand is skyrocketing, and when you have a paucity of supply, the valuations make sense. Third, industry observers assert that it is the other digital currencies flooding the market that are the ones in a bubble.
Gold, on the other hand, is up 20% this year. While that is nothing to sneeze at in this type of market, you would expect more from something that has been the go-to asset amid inflation woes and global uncertainty for time immemorial.
The gap in valuations has led to a series of questions. Is bitcoin millennial gold? Is the yellow metal a relic of the past, and bitcoin, the inflation-hedge of the future? Does the fact that bitcoin is not backed by anything matter to sound money and cryptocurrency enthusiasts? Could gold ever emulate bitcoin's impressive meteoric ascent?
Here is the one-ounce of gold or one bitcoin question: Does it matter at this point?
Gold, Bitcoin, and Fiat
The fiat hegemony has a stranglehold on international commerce and the broader economic system. From the dollar to the euro to the yen, the value of these currencies has been devalued over the years, thanks to aggressive fiscal campaigns and ultra-aggressive monetary stimulus efforts. In the United States, the Federal Reserve has eviscerated about 90% of the greenback's purchasing power since its inception, requiring more dollars to purchase fewer goods and services in the marketplace. In the end, monetary inflation leads to price inflation, which is the nature of the beast.
In an era of unlimited quantitative easing and deficit-financed budgets, inflation is more of a concern than at any other period. Governments and central banks are coming off a decade of bingeing to rescue the economy from the clutches of the Great Recession, which they are still paying for today. Now that COVID-19 has crippled the global economy, policymakers have put their pedal to the metal and spent, borrowed, and printed like it is nobody's business.
And it is this type of policymaking that has ignited interest in gold and bitcoin. Gold is money, and bitcoin is trying to be money. As the dollar's international reserve currency status diminishes, will the world return to a gold-based system? Hardly. There is not enough gold in the world to cover the planet's IOUs. Could bitcoin replace the fiat system we know and loathe today? Perhaps not bitcoin, but rather the central bank digital currencies (CBDCs) popping up worldwide.
A Free-Market Currency?
Be it gold, silver, bitcoin, or dogecoin – if currencies were devoid of state intervention, it is safe to say that it would not be a piece of paper backed by faith. A plethora of currencies would arise in a free market, like a silver-backed certificate, bitcoin, or some gimmick – even a Federal Reserve Note could compete for shoppers' attention. As time goes by, fraudulent currencies would be tossed to a nearby waste bin, and competition and consumer demand would spur growth in sound money. Everyone's living standards would improve amid stronger purchasing power. This is a world that gold bugs and bitcoiners should strive for, rather than getting into petty fights on Twitter.
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Read more from Andrew Moran.
