The expansion experienced by cryptocurrencies in recent years, and especially in 2020 as a result of the global pandemic, has turned these assets into real protagonists in the financial markets. Along these lines, a question is repeated very often: Is Bitcoin the new gold?
This transformation process is being so fast that in a short time securities such as Bitcoin or Ethereum have gone from being marginal means of payment to being in the focus of attention of large and small investors around the world.
Perhaps due to the not-so-distant historical experience of the gold standard and the Bretton Woods system, the fact that so many people flock to a common currency free from government intervention is somewhat reminiscent of the role that gold has always played. For this reason, it is common to hear speculation about the possibility that at some point one or more cryptocurrencies could replace the gold metal, but is it really possible?
Gold, refuge value par excellence
In the context of the current monetary system we do not have to think of an asset that serves as a backing for the total volume of fiat currency. This function was that of the gold standard , but this system was abandoned in the first decades of the 20th century and its last vestiges permanently disappeared with the end of the Bretton Woods agreements in 1971.
Thus, although it is true that today central banks accumulate large gold reserves, these constitute only a part of the assets they have on their balance sheets. Therefore, we should not think that money in circulation is backed by gold, much less under an automatic conversion ratio.
¿Cuál es entonces el papel del oro en el mundo actual? Se trata esencialmente de un activo más, aunque tiene características propias que lo convierten en un bien especialmente valorado en los mercados financieros. El oro tiene usos muy diversos, lo cual garantiza un cierto nivel de demanda a la vez que impide que su precio se vea ligado directamente a la evolución de un sector concreto. Es fácilmente transportable, maleable y su aceptación se ha generalizado en todo el mundo, lo que facilita su rápida conversión en liquidez. Pero además, el oro tiene una cualidad especial que lo diferencia de otras materias primas: es escaso, y además su oferta apenas puede crecer muy lentamente.
It is precisely the scarcity that constitutes one of the great advantages of gold, in part because its production depends on natural reserves (which by definition are limited) and is not subject to the arbitrariness of any central bank. Thanks to this, the markets do not have to assume the risk of investing in assets that could later be artificially devalued by political decision, as sometimes happens with fiat currency or public debt.
In this sense, it is interesting to note that while much of the economic literature qualifies public debt as a risk-free asset , the truth is that the price of these securities may be more volatile than that of gold and even present a greater risk of non-payment. It may seem contradictory, but sometimes even the coercive ability of the State to collect taxes cannot offer a guarantee comparable to the high probability that there are buyers of gold under the spontaneous order of the market.
All of these factors have traditionally made gold a very attractive opportunity for investors. In some cases the motivation may be purely speculative, taking advantage of short-term movements in prices, but the general perception is that it constitutes a safe haven asset . In other words, many of the investors who bet on buying gold do so to protect their assets through a relatively stable and liquid asset. This character of refuge value has always accompanied the gold metal, but even more so since the end of the convertibility into precious metals of the main world currencies.
The role of cryptocurrencies
Global money markets since leaving Bretton Woods have experienced periods of both growth and contraction, but we can observe a long-term expansionary trend. In general, in boom years we tend to see an increase in the money supply, which is natural if we take into account that in fractional reserve banking systems, entities tend to lend more easily and by doing so create new money. What does not seem so logical is that in periods of recession some central banks decide to redouble the bet and continue printing money, with the intention of injecting liquidity into the system and thus facilitating the recovery of the economy.
Of course, this expansionary trend is not a rule that is always fulfilled and in fact we can observe numerous monetary restriction policies in the last 50 years, but it is a fairly frequent habit. It was the preferred recipe for the great economies to get out of the Great Recession since 2008 and it is being so in practically the whole world as a result of the new crisis that began in 2020.
The biggest problem with this solution is that it has very different results depending on the country where it is applied, at least in the short term. In economies with developed financial markets , solvent states and currencies considered as safe havens, the new money supply can be absorbed without creating inflationary tensions. In fact, if uncertainty increases and with it the demand for money, moderately expansionary policies can be limited to supplying a greater preference for liquidity without creating major macroeconomic imbalances in the short or medium term.
However, when these policies are carried out in economies with underdeveloped financial systems, foreign debt problems or lack of confidence in the national currency, the result is usually an inflationary process from which it can be very difficult to get out. This is the case of countries like Argentina, where the money supply doubles every year and therefore the markets are flooded with a currency that they do not demand. Naturally, the consequence is an escalation of inflation that in a short time can destroy the liquid assets of savers, which pushes them to look for other investment alternatives.
A long way to go
If we look at the previous graph we will see that among the safe haven securities the highest total price is monopolized by currencies, especially those issued by central banks that inspire confidence in markets such as the European Central Bank, the Federal Reserve or the Bank of Japan. However, we also see that gold continues to be a relevant asset, to the point that the total value of its balances is much higher than the aggregate M1 of dollars. We could say, therefore, that if gold were a currency it would be the second most important in the world.
On the contrary, Bitcoin is a long way from gold, but we must remember that just a few years ago this comparison was unthinkable. In fact, it is the growth rate of this cryptocurrency, not its current price, that makes many think that it could surpass the gold metal.
It is very difficult to predict whether this possibility will eventually materialize, but we can at least point out how it could happen. Taking into account that to date the total number of Bitcoin is around 19 million and that there may be a maximum of 21 million issued, the total price would barely reach one trillion ceteris paribus . Not counting that yes, the amount of lost and unrecoverable Bitcoin.
Therefore, it is evident that if Bitcoin in the future were to approach gold it should do so via prices, that is, by raising the value of each monetary unit in the market. Specifically, its price should be multiplied by 11 so that both assets end up having a similar capitalization.
Naturally, these calculations do not invalidate the possibility of a rapprochement between the two values, but they do confirm that there is a long way to go. In any case, the instability of many currencies and the expansion of the digital economy are creating by leaps and bounds a favorable framework for the development of cryptocurrencies and especially Bitcoin.
Reinventing the gold standard?
These considerations can help us understand why Bitcoin seems to be more successful in countries with relatively unstable currencies than in the eurozone or the United States. In a certain sense, it can be said that savers in these countries seek the security of a security whose supply is fixed, precisely because they escape the arbitrariness of their central banks.
However, the fact of having a predictable global offer by rules established in advance (even with a nominal maximum limit) is not the only advantage of this cryptocurrency. So is its growing acceptance and the ease of owning and transporting (given its virtual nature), qualities that are also characteristic of gold and which at the time allowed to organize a world monetary standard based on this metal.
As a result of this situation, some people wonder if it would be feasible to return to a standard similar to gold but based on some cryptocurrency, which is very difficult to predict. However, we can list some of its hypothetical advantages.
Advantages of the Bitcoin pattern
First, a common monetary standard would allow the same currency to be used as a reference worldwide, in this case a cryptocurrency. National currencies, as in the nineteenth century, would not be more than local denominations of the universal currency. In turn, the conversion ratio of each currency with the reference standard would be a reflection of factors such as external indebtedness, central bank reserves and the demand for local money, which could lead to more transparent money markets.
On the other hand, countries that decide to maintain a certain stability in said conversion ratio and do not have a positive external balance should clean up their public accounts and refrain from continuing to print money, which would force governments to seek a balance at the monetary and fiscal. As happened under the gold standard, this could also translate into price stability, combining economic growth with practically zero inflation.
However, the adoption of a common monetary standard also raises some objections. The most important of them is that currently the volume of circulating money is so high that it makes it very difficult to think about going back to gold as a reference and would force us to turn to cryptocurrencies. However, these are viewed with distrust by governments and central banks, which on many occasions try to regulate or even limit their use.
It is common to hear that the hostility of politicians towards these currencies is due to the fact that they threaten their current monopoly on the currency, since adopting an objective monetary standard would prevent them from making expansionary policies that can bring electoral benefits. In any case, the truth is that if some authority ended up controlling Bitcoin in some way, this currency would probably lose one of its main attractions for investors: its independence.
For all these reasons, it is difficult to think of a substitution of gold for Bitcoin in the short or medium term. Quite the contrary, both values may be able to complement each other and find a growing demand in a world where central banks seem bent on devaluing their own currencies, and savers on preventing their wealth from sinking with them.