Hardcore PK gold: Bitcoin and gold, who is the better hedge asset? (on)

There is a simple and crude consensus in the currency circle: as long as deflation is in effect, prices will rise. Their theoretical basis is the "supply and demand theory" of neo-classical economics. The evidence used to support this is the "gold" century-old anti-inflation data. They concluded that "half of bitcoin is good for the currency price."

The author believes that the above is all wrong.

The underlying logic is different, Bitcoin and gold are not comparable

Gold's anti-inflation and anti-risk characteristics are inseparable from the "gold standard". It is the result of the combined effect of political background, economic environment and cultural customs, and it is also a historical choice intertwined with inevitability and accident. Bitcoin will never repeat the history of gold. The underlying logic of Bitcoin and gold is different, and gold's investment logic cannot be simply applied.

Mistake # 1: "Error Attribution" of Logical Fallacy

The subtext of the consensus in the currency circle is: Gold is known to be scarce, and Bitcoin is also scarce. Because gold resists inflation, so does Bitcoin. A common logical fallacy is made here-wrong attribution, two things may be related, and it is concluded that one thing is the cause of the other. Gold is scarce, but is scarcity the fundamental reason why gold resists inflation? Obviously not.

Not only is gold scarce in the world, but also lithium, rubidium, cesium, beryllium, titanium, zirconium, hafnium, vanadium, niobium, tantalum, molybdenum, tungsten, gallium, indium, thallium, germanium, thallium, thallium, radium and other metals … … Even after a long period of drought and sweet rain, I know from my hometown that the kisses of my lover in the later years are scarce. Scarcity is not the fundamental reason for gold's resistance to inflation, nor is it the rational logic that supports the rise in bitcoin prices, nor is it a strong argument for bitcoin to become a substitute for gold.

Mistake 2: Measure everything with "supply and demand theory"

The consensus of the currency circle believes that according to the "supply and demand theory", the destruction of platform coins and the halving of bitcoin means less supply, so the price will definitely rise. This argument is wrong in assuming that the prices of all goods apply to the "supply and demand theory."

It is true that "supply-demand theory" is the most commonly used analytical method when analyzing the economic value of commodities in neo-classical economics. It also has a more visual statement called "invisible hand". In a competitive market, the supply and demand, price, and quantity of goods will reach a natural equilibrium, as if the market was guided by God. Less supply leads to higher prices; higher prices lead to lower demand and higher supply; higher supply leads to lower prices and higher demand, thus forming a dynamic equilibrium.

Don't take things out of context, this theory is conditional: perfectly competitive markets, price elasticity, sufficient information, and rational economic people. Does the platform currency match? of course not. Does gold and bitcoin fit? Gold is not compliant, Bitcoin is partially compliant. The specific reasons are as follows:

(1) Completely competitive market: Completely competitive markets require countless buyers and sellers, rich homogeneous products, free flow of resources, and producers and consumers have sufficient information. Therefore, scarce goods usually cannot constitute a perfectly competitive market, the most typical being art. Gold also exists in a scarce form in nature, and does not meet the perfectly competitive market assumption. However, bitcoin is special and scarce but not monopolized. Anyone can become a node, participate in the network or withdraw at any time. Anyone can "price" and trade bitcoin according to their own wishes, and eventually form a "full market price."

(2) Price elasticity: This mainly refers to the ability to automatically adjust prices based on supply and prices. Obviously, neither gold nor bitcoin fit. The annual output of gold is very limited, and the annual output of Bitcoin is fixed. Their supply is inelastic and there is no adjustment.

(3) Sufficient information: Gold suppliers include international financial institutions, central banks, various investors, etc. Information production institutions are very complex, and it is difficult to fully possess sufficient information of suppliers and demanders. The Bitcoin network is completely transparent and anyone can understand every issue and transaction in the system.

(4) Rational economic man: Gold does not meet this point, because there is a large proportion of rigid demand for gold, it is held by the central bank and international financial institutions, and it is not sensitive to short-term prices; gold jewelry needs for emotional satisfaction, It is also inert to prices. For Bitcoin, everyone asks themselves, what is the demand for holding Bitcoin? Are you a rational economic person?

The conclusion is that gold is not a general commodity and does not apply the theory of supply and demand, while Bitcoin follows a completely competitive market. In other words, Bitcoin and gold follow fundamentally different price feedback mechanisms and do not constitute comparability. Even if Bitcoin and gold are both anti-inflation, their underlying investment logic is completely different. Scarcity is an important factor affecting the price of bitcoin, but scarcity has little effect on the price of gold, which is related but does not constitute a cause and effect.

The history of gold, Bitcoin cannot repeat itself

Gold's resistance to inflation and risk has nothing to do with scarcity. What does it have to do with it? The gold standard. Is it possible for Bitcoin to repeat the history of gold at this level? impossible. In order to discuss this point of view, I want to bring everyone to recall the history of gold.

As early as 10,000 BC, mankind discovered the substance "gold", and formed the worship of gold in ancient civilizations such as Egypt, China, Greece, and the Inca, and became a "luxury product" showing a distinguished identity. Gold, as the sole value measure, has formed a worldwide "gold standard" consensus, which began in the 17th century and went through two stages.

The first stage was initiated by the British Empire, which never stopped. In the 17th century, England battled for years, the state treasury was empty, and the main currency and silver coins ran into a crisis. People sold silver coins in exchange for gold, and gold rose to become the main currency. In 1717, the British Parliament passed a resolution linking the value of gold to the face value of the pound and becoming the initiator of the "gold standard."

In the second stage, under the background of World War II, Britain was frustrated, Western Europe was weak, and the United States was inflated. At that time, the United States, which held 75% of the world's gold reserves, established the "gold standard" at the Bretton Woods meeting, that is, the US dollar was linked to gold, and the US dollar became the international reserve currency and the currency of settlement and settlement.


Stage 1: Newton was forced to choose "gold"

In the 17th century, silver coins were the main currency in the most powerful Britain. However, Britain has fallen into civil war, anti-Dutch war and anti-French war, and military expenditure has become the largest expenditure. There are rumors that the government will issue new coins in a way that reduces the quality of silver coins, and the Bank of England has run into a crisis. So people sold silver coins in exchange for gold, which made the value of silver coins plummet.

At that time, the British Royal Mint was in charge of the famous scientist Newton, who was unable to solve this problem. Newton had a lofty sense of morality and did not agree that ordinary people should bear the losses caused by the devaluation of the currency by reducing the fineness and weight. His decision made the Royal Mint bear more debt pressure. The mint has no silver to cast, but it has to take on more and more minting tasks. For a total of 3 years, the required number of mints could not be completed, which completely lost the credibility of silver coins in the public.

Rather than choosing "gold" for history, Newton was forced to choose "gold." He submitted a personally written investigation report to the cabinet, demonstrating in detail how silver has gone and become a subsidiary currency, and how gold has become popular and became a major currency.

In 1717, the British Parliament passed a resolution linking the value of gold to the face value of the pound and becoming the initiator of the "gold standard." In 1817, Britain formally legislated to confirm the monetary gold standard system. With the conquest of the world, Britain also brought the gold standard to the world. In 1873, the U.S. Coinage Act of 1873 disguised the gold and silver restoration system in the United States. In 1876, Italy, Belgium, Switzerland, the Netherlands, and Belgium successively implemented the gold standard system. Until the end of the 1870s, of the major countries in the world, only India and China still adhered to the silver standard.

Phase 2: The US dollar uses "gold" as a stepping stone

During World War II, the United States expanded its trade surplus at an alarming rate. The US gold reserves increased from US $ 14.51 billion in 1938 to US $ 25 billion in 1945, accounting for 75% of the world's gold reserves, which provided an objective basis for the establishment of the US-led international financial system.

Against this background, in July 1944, a meeting was held in Bretton Woods, USA. The central theme of the meeting was: ending the chaotic economic order during the war and seeking new ways of international currency cooperation. Around this issue, a well-known British economist, Keynes, and the US Treasury official, White, had a fierce dispute, which was historically called the "Kaihuai dispute".

Their consensus is to use gold as a currency benchmark and international payment method. Because gold has always played the role of a regulator, maintaining the basic exchange relationship between currencies. The difference is that Keynes proposed the establishment of a clearing union, an international organization to issue an international currency called "Bancor", which is directly linked to gold at a fixed ratio. White believes that only a dollar with sufficient gold reserves is eligible to take on the responsibility of an international currency.

In the end, the United States represented by White won an absolute victory. The Bretton Woods conference adopted the International Monetary Fund Agreement and the International Bank for Reconstruction and Development, based on the White Plan and supplemented by the Keynes Plan, collectively known as the "Breton Forest Agreement". The agreement stipulates that the currencies of various countries are linked to the US dollar at a fixed exchange rate and float within a range of 1%. The US dollar is linked to gold. Governments of various countries exchange gold for the United States at the price of 35 dollars per ounce of gold.

Is it possible for Bitcoin and gold to go the same way?

As mentioned above, the "gold standard" is the result of historical contingency and political necessity. Prior to the 17th century, many countries implemented the gold-silver standard, while China's Qing Dynasty was the silver standard. Britain chose to abandon silver coins in favor of gold, and there was historical contingency. But the world follows Britain's gold standard, not China's silver standard, which is the necessity of international politics, economy, and military. Similarly, the Bretton Woods agreement is not a victory for gold, but a victory for the dollar.

After the collapse of the gold standard, the community of interest still exists

Taking a step back, after the collapse of the Bretton Woods monetary system, in 1976, the IMF's Board of Governors adopted the Second Amendment to the IMF Agreement, which clarified the de-monetization of gold. But it does not prevent gold from being the most special asset. This is not only related to emotional inertia, but also the result of long-term binding of interests.

Gold reserves are one of the important means used by the central bank to prevent financial risks, and are also an important indicator of the financial health of a country, generally accounting for 10% of foreign exchange reserves. In addition, the International Monetary Fund (IMF), which was established with the Bretton Woods system, also follows such gold policies: Gold is an essential element of the IMF's balance sheet, so whenever gold is used, it must be avoided to weaken the overall institution Financial situation; IMF assets must continue to maintain a significant amount of gold, not only for prudent needs, but also to meet unexpected needs.

The historical accumulation and interest binding of gold is the fundamental reason why Bitcoin cannot imitate it. The gold standard is the product of a strong country defending its own interests. It is the result of a top-down government. The public can only accept it passively. However, Bitcoin and gold have completely different genes. It is a bottom-up civil experiment, which has nothing to do with government interests.

Will Bitcoin open the Pandora's Box?

Can't Bitcoin repeat the history of gold? Can't it lead to a different future? What you really want to ask is: Can Bitcoin resist inflation and risk like gold? possible. Bitcoin does not require authoritative endorsement. The value it possesses and the distributed consensus behind it are mutually causal and supportive. In other words, as long as enough people think that Bitcoin is anti-inflation and anti-risk, then its value will reflect this characteristic. But I thought that this might open a Pandora's box?

Use gold to illustrate this. Everyone says "buy gold in troubled times", in fact, in real troubled times, you can't buy gold at all. For example, after World War I, European countries produced a large amount of war compensation, so severe inflation occurred, and people rushed for gold to form a run-in crisis. As a result, in the early 1930s, most countries abandoned the currency system issued by the government for paper currency convertible to gold, and eventually even the pound and the dollar broke away from the original price relationship with gold.

Imagine if a country ’s economy was hit hard by natural disasters and human calamities, and short-term oversupply of money to save the market would cause inflation, currency depreciation, and price increases. In the golden age, the state blocked the exchange of fiat currency and gold through political means. Every citizen paid the bill, and no one could escape. But it is because everyone has shared the losses that the world can recover and get better soon.

With Bitcoin? If it is really anti-inflation, anti-risk, and not subject to national will. When the fiat currency is devalued, people sell and convert it into bitcoin, which will aggravate the devaluation of the domestic fiat currency and cause trample. At this time, a "prisoner's dilemma" was formed. A rational person in economics is born with self-interest. No matter what other people choose, he chooses "betrayal" to obtain the greatest benefit. As long as this gap exists, the individual will try to escape, and the whole will fall into a vicious cycle. Isn't this Pandora's Box?

Hardcore PK Gold: What is the history of abandoned gold, what can it inspire Bitcoin? (under)

References: 1. Duan Shihua, "A Practical Reading of Gold Investment", Tsinghua University Press, 2011 2. [US] James Ricaz, "Currency War", Shanghai Translation Publishing House, 2018 3. [US] Clay Craig Rowland, J, M. Lawson, "Harry Brown's Permanent Portfolio: Undefeated Investment Law Fearless of Market Fluctuations", Machinery Industry Press, 2017

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