You know stuff’s going down when I write two posts in a row about Bitcoin, something which almost never happens anymore. In Friday’s piece, Is the Bitcoin Civil War Over? Here’s How I’m Thinking About Bitcoin Cash, I discussed a potential strategy that “big blockers” might attempt to execute should the 2x part of Segwit2x not happen later this year. Today, I want to discuss how the entire episode has actually served to highlight one of Bitcoin’s (and cryptos in general) huge competitive advantages in the realm of monetary-type assets, but also examine why gold is still important.
There’s been a lot of FUD written at length about the whole scaling debate, in addition to the fair observation that network splits cause confusion and can be bad for the Bitcoin “brand.” As I mentioned in Friday’s piece, I don’t see this being the case with Bitcoin Cash (BCC), since I don’t think there will be any real debate about which one is Bitcoin and which is an alt-coin. Interestingly enough, although the nastiness of the scaling debate has left a bad taste in a lot of people’s mouths, it’s also highlighted one of Bitcoin’s greatest strengths.
Earlier today I came across a tweet from an account I had never seen before, but it was simply genius in its poignant simplicity.
— CowOperate (@CowOperate) July 30, 2017
What this person is referring to is how the lack of support for BCC from several popular wallet providers/exchanges like Coinbase and Bitstamp, has led to a flood of requests from Bitcoin holders to move their coins off the exchange in order to access the BCC if desired after August 1st. This is essentially akin to a run on the bank, and any third party playing games with their customers’ assets will be exposed in due course. The fact that it’s so easy for a Bitcoin holder to initiate a withdrawal from a third party holding their asset is a huge advantage of Bitcoin versus gold and other traditional monetary safe-havens. It doesn’t take long to see why if you think things through.
Storing your own Bitcoin private keys is very much like holding actual gold or silver in your possession. One thing that hardcore gold bugs like to say over and over is “if you don’t hold it, you don’t own it.” At the end of the day, I think that’s right. It’s also what makes a gold backed digital asset less appealing than you might think at first glance.
When you hold your own Bitcoin private keys, not only do you have possession, but you also have a spendable asset. Gold can never replicate this competitive advantage. If you trust someone else to hold your gold, you’re exposed to counter-party risk. You are trusting someone else to secure your asset and be honest. You don’t need to do that with Bitcoin. Likewise, if China, Russia or any other government launch a gold-backed digital currency, you’re trusting the honesty of governments to have the gold they say they do. We know governments lie constantly, so I think it’d be completely foolish to trust such a monetary regime, and we don’t have to.
Before gold bugs start turning red in the face and cursing my name, let me finish. This is not to suggest that Bitcoin is a substitute for gold, or that I think the advent of crypto-currencies makes gold irrelevant as an asset. If I really felt that way, I wouldn’t still own precious metals. In fact, whenever the next economic criss happens I think gold will do exceptionally well, particularly versus stocks and bonds, as the traditional financial world will not rush headlong into cryptos as a safe-haven asset (though some will). Most funds probably aren’t even set up to be allowed to do that, so they’ll go to what has always worked and what they’re comfortable with, and that is precious metals.
We don’t need to be binary when it comes to the question of gold and Bitcoin. Gold has advantages Bitcoin will never be able to surmount, including thousands of years of history and genuine immutability. On the flip-side, Bitcoin has advantages gold will never be able to totally overcome. Namely, it’s an easily spendable asset that you can hold in your possession with zero counter-party risk. Moving large amounts of Bitcoin around is trivial compared to gold, which is an undeniably important attribute in the world we live in. You still need someone else’s help to move gold from a vault in let’s say Zurich to one in Singapore. You have to ask permission. Such permission is unnecessary with Bitcoin.
In summary, I think both are important for different reasons, and both should be included in a portfolio of assets. One was created by humans and one wasn’t. As such, one can create genuine value in a changing world, while the other preserves value over generations. Both of these characteristics are instrumental to human freedom and we shouldn’t belittle one in favor of the other. They are very different things, and I appreciate both for different reasons.