19
$\begingroup$

I am reading this article here that explains why bitcoin is a better store of value than gold.

In sum, here are some of the reasons proposed:

enter image description here

If someday a "bitcoin standard" does come to fruition, would it still be susceptible to the problems that plagued the gold standard?

$\endgroup$
7
  • 2
    $\begingroup$ There are two stages to this question. (1) Could any large country peg its currency to Bitcoin? (2) What happens if all countries pegged their currency to Bitcoin? The problem with (2) is it assumes that the answer to (1) is “yes”, when it is arguably “no.” $\endgroup$ Feb 14 at 15:07
  • 11
    $\begingroup$ I'm an economist and I recommend you read economists with PhDs from top places like MIT. Anything else is essentially a waste of time. The opening sentence of the "article" (technically, a blog post) you link to is incorrect. "Gold and oil have historically been reliable stores of value." Everything is wrong about this. Gold and oil have fluctuated wildly and have been very poor stores of value. Why don't you grab a textbook by Paul Krugman, Greg Mankiw, Olivier Blanchard, Joseph Stiglitz, Ben Bernanke, etc. and look up "store of value" in the index. Good luck, it will take time. $\endgroup$
    – PatrickT
    Feb 15 at 9:55
  • $\begingroup$ Caveat here: your Title and your question are NOT ASKING THE SAME THING! A "bitcoin standard" implies, as 1muflon1's answer replies to, that bitcoin is merely the backing of the - conventional - local currency. Meaning that any citizen can trade their local currency for bitcoins. HOWEVER, if you just go by your questions title and interpret it as "everyone just uses bitcoin for payment", then his answer absolutely does not apply. Because then there is no financial policy anymore, and no more exchanges $\endgroup$
    – Hobbamok
    Feb 15 at 13:08
  • $\begingroup$ Did you notice how Bitcoin fared in the table you Posted? Either way, why would any measure not be prone to the same problems that plagued the gold standard? In any case, what real problem was there with the gold standard, other than countries being allowed to leave… rather like today's theorized Grexit from the Euro? $\endgroup$ Feb 18 at 23:19
  • $\begingroup$ @PatrickT : can you provide a precise reference where it is explained how and why gold has been a poor store of value? Graphs of gold price in constant dollar seem to show the opposite... (and I do not understand why) $\endgroup$
    – J.Mayol
    May 17 at 18:05
29
$\begingroup$

It would not just be plagued by the same problems it would create some new ones.

Following the Weber (2016) who actually written research exploring exactly the question that you are asking here:

The scope of monetary policy would be more limited under the Bitcoin standard than under the gold standard. The ability to issue fiduciary currency would give central banks limited ability to act as lenders of last resort. However, virtually costless arbitrage of Bitcoin across countries would prevent central banks from implementing interest rate policies to affect their domestic economies.

An empirical examination of countries’ experience with the gold standard leads to the following conjectures about how the Bitcoin standard might perform:

  1. In the long run, there would be moderate deflation that would increase over time until reaching a rate of deflation equal to the negative of the rate of growth of world output around 2026.
  2. Price levels of the various countries would be highly, but not perfectly, correlated, much as they were under the gold standard.
  3. Exchange rates among the fiduciary currencies of various countries would be fixed at par, because the cost of Bitcoin arbitrage is essentially zero.
  4. There would still be financial crises, because they can occur under any fractional reserve financial system.

The paper concludes by speculating that even if the Bitcoin standard were to come into existence, it would not last long, for two reasons: (1) The payments world is changing so rapidly that there will be a technological innovation that provides a potential medium of exchange with the same or greater benefits of Bitcoin or with lower costs. Such an innovation could come either from the private sector or from the government. (2) There would be pressure to return to a fiat money system so that a more activist monetary policy could be pursued.

In a nutshell, it would be pretty similar to gold standard but with some extra strings attached that would just additionally constrain monetary policy making it even slightly worse. As a consequence, if Bitcoin standard would ever become adopted it would likely perform even worse than Gold standard did (which is saying something), and would likely go the same way. You can find more detail on the workings of such standard in the paper itself.


Response to Edit:

The above still applies but let me also respond to the new infographic that was added to the question.

  1. Scarcity - This is exactly why Bitcoin would perform worse, and it is connected to what was written above.
  2. Durability - Given that gold has very long half-life and under gold standard it was mostly stored in vaults not actually used (hence no wear & tear) this never was issue with gold standard.
  3. Portability - Same as above, under gold standard people mostly moved claims to gold, actual gold moved from vault to vault only occasionally. Also note in both Bitcoin and Gold standard people would not pay with Bitcoins or Gold respectively, they pay with banknotes that are backed by either Bitcoin or Gold respectively (and which would be on fixed exchange with banknotes e.g. 1USD=0.1 Bitcoin for example).
  4. Divisibility - This is moot point. You can have 0.000001 troy ounce. In fact gold is for all practical purposes infinitely divisible (up to the scale of individual atoms of course).
  5. Storage - this was never significant issue with gold standard, in addition people still store investment gold in vaults its just not tied to money.
  6. Counterfeit - Again completely moot point. Under gold standard gold would mostly just sit in vaults. People would not pay with gold coins. Banknotes backed by either Bitcoin or gold would be equally difficult to counterfeit as regular fiat banknotes since that is what people would be using as money under Bitcoin standard.
  7. Adoption - Again not relevant, if we talk about Bitcoin standard adoption requires fixed exchange between a currency and Bitcoin - to my best knowledge no country did this to the date. Also, I never heard of use of market capitalization as measure of adoption when it comes to monetary system so the metric does not provide any argument either in favor of gold or Bitcoin.
$\endgroup$
7
  • 6
    $\begingroup$ It all depends on what you mean by worse. If you think that being unable to set interest policies and or increase monetary supply via fiat would be beneficial - it would certainly be a benefit. To some, this ability represents a power that perhaps should not be confined to the hands of the few, perhaps especially not the hands that are already deep in the cookiejar. I am not necessarily such a believer myself - but I do sympathize with the argument. $\endgroup$ Feb 15 at 13:30
  • 5
    $\begingroup$ @StianYttervik by worse I mean that empirically 1. Gold standard (GS) produced macroeconomic instability. Even very small shocks to macroeconomy could be easily exacerbated by the GS. 2. GS was unworkable outside expansions and in every large crisis most gold standard countries had to suspend it. 3. Gold standard is equivalent of being in currency area (see Eichengreen and Tamin 2010) which can only work if either a) countries are in fiscal Union- that implies some global government. B) all factors are perfectly mobile - e.g absolutely unrestricted migration. 4. Under GS gov can still control $\endgroup$
    – 1muflon1
    Feb 15 at 13:47
  • $\begingroup$ How much one buck is worth in terms of gold in principle. So the power is still there. Rather issue is that the conversion rate cannot be changed so flexibly meaning that monetary policy is much harder to execute. In such case if a gov wants to conduct macro management it has to resort to fiscal policy much more than otherwise which often produces worse result as then the macroeconomic management is done mostly by lawyers instead of professional macroeconomists $\endgroup$
    – 1muflon1
    Feb 15 at 13:51
  • $\begingroup$ But you might argue that this is because gold is an actual thing, which has both uses and sources. It requires storage and transport. A fiat currency is mostly free from this (there is still proveny on the minted coins and bills). A cryptocurrency would also be free of being an actual material or having a physical representation. I don't disagree with you, but there are several ways to consider it. Maybe a government shouldn't have the power to implement a monetary policy. This has also seen its fair share of economic disasters... $\endgroup$ Feb 15 at 14:06
  • 3
    $\begingroup$ @StianYttervik no in the above I purposefully excluded the issues with gold standard being based on physical thing - that’s a whole another issue of wasting scarce resources but unconnected to what was mentioned before $\endgroup$
    – 1muflon1
    Feb 15 at 14:09
9
$\begingroup$

If someday this "bitcoin standard" does come to fruition, would it be susceptible to the problems that plagued the gold standard?

A bitcoin standard implies that all major countries have pegged their currencies to Bitcoin.

It is extremely unclear how a country could peg its currency to Bitcoin, nor is there any incentive for a country to do so.

If we can wave away this complication — which is difficult to justify — the resulting system would face the same issues that most historical versions of the Gold Standard face. The issue is that trade deficit countries are forced to tighten fiscal/monetary policy to stem losses of the asset backing their currency, while surplus countries were not obligated to adjust policy.

One could argue that a 100% cover ratio would solve that problem, but that then implies that the entire worldwide monetary base is Bitcoin. That makes the adoption problem even more difficult.

$\endgroup$
8
  • $\begingroup$ "It is extremely unclear how a country could peg its currency to Bitcoin" - ??? It would be no different than pegging to gold, surely? Have a reserve of Bitcoin and interchange between your currency and Bitcoin whenever anyone asks. $\endgroup$
    – user253751
    Feb 15 at 9:09
  • 4
    $\begingroup$ @user253751 : at least gold was a well-established and relatively stable currency. Bitcoin, on the other hand, looks more like a speculative bubble. Why would any countries peg their currencies to a speculative bubble? $\endgroup$
    – vsz
    Feb 15 at 9:43
  • 2
    $\begingroup$ @vsz "Why" is often harder to answer than "How". $\endgroup$
    – Taemyr
    Feb 15 at 12:43
  • 2
    $\begingroup$ @user253751 How does the US buy enough Bitcoin to back its currency 100%? Everybody see that coming, and refuses to sell at a reasonable price. Countries were able to do things like seize gold, and get gold via having trade surpluses with countries with gold. No countries have Bitcoin reserves to allow the trade channel to work. $\endgroup$ Feb 15 at 12:50
  • 2
    $\begingroup$ @BrianRomanchuk And if that scenario played out as you say with the price of bitcoin skyrocketing before the government could buy enough of it, that essentially impossible to make the switch to a "bitcoin standard". When they inevitably abandoned the plan the price of bitcoin would crash back down. It would become orders of magnitude more of a speculative bubble than it already is, which is saying something. Each time another large economy decided to attempt to join the bitcoin standard the price would again wildly fluctuate, destabilizing any economy already pegged to it $\endgroup$
    – Kevin
    Feb 15 at 22:42
7
$\begingroup$

The only real advantage of "bitcoin standard" over gold standard is that bitcoin standard wouldn't drive gold prices up, thus depriving of it industries which need gold as a raw material.

Pretty much every other aspect of a monetary system based on a fixed quantity of monetary units remains the same, regardless of the nature of this monetary unit. For a start, there will be a problem of equal distribution (countries which currently don't have any bitcoins and accept them as a monetary standard will be just like those hedge funds who sold GameStop shares short, and now need to buy them no matter the price). And then there will be an ever-lasting problem of a fixed monetary supply which doesn't match the economic growth, and no way to stabilize the economy using monetary policies.

$\endgroup$
33
  • 3
    $\begingroup$ And that's because a "bitcoin standard" is a completely braindead idea. Either you just use bitcoin (or any other, more suitable crypto) INSTEAD of a local currency, or you don't $\endgroup$
    – Hobbamok
    Feb 15 at 13:09
  • 2
    $\begingroup$ Since gold is a far less useful commodity than electrical power, I'm not sure that we can really call that an advantage, that aside, I think this hits the mark. $\endgroup$
    – JimmyJames
    Feb 15 at 17:21
  • 3
    $\begingroup$ The problems with deflation are often underappreciated. Every person who accumulates wealth in an inflationary system is driven to invest. In a deflationary system, if I expect my money to grow in value over time, why risk investing it or loaning it? Deflation is economic suicide. $\endgroup$
    – JimmyJames
    Feb 15 at 17:30
  • 3
    $\begingroup$ This isn't really an advantage because all you're doing is inflating the price of one resource rather than another. In this case it would drive the price of graphics cards and ASICS even higher than they already are, and it would take an immense amount of electricity to power the bitcoin mining industry to keep everything running. $\endgroup$
    – Kevin
    Feb 15 at 22:44
  • 2
    $\begingroup$ @JimmyJames Yes, but your assumption that bitcoins will be mined is incorrect. There will only ever be 21 million bitcoins in existence. 18.5 million of those have already been mined. If governments hoard bitcoins they will do so (mainly, or entirely) by purchasing them, not mining. With the lightning network, low-priority transactions, and cryptocurrency exchanges, the electricity costs of transactions can be kept arbitrarily low $\endgroup$
    – JBentley
    Feb 16 at 8:14
1
$\begingroup$

Gold standard did not have any real problems, so Bitcoin would not have any real problems.

Issue/problem with Bitcoin is not that it is bad, issue/problem is that it is good.

Governments like power, and power to print money is a lot of power.

Quotes from Ray Dalio(2020):

Rather than it being far-fetched that the government would invade the privacy and/or prevent the use of Bitcoin (and its competitors) it seems to me that the more successful it is the more likely these possibilities would be.

It is hard for me to imagine that they would allow Bitcoin (or gold) to be an obviously better choice than the money and credit that they are producing. I suspect that Bitcoin’s biggest risk is being successful, because if it’s successful, the government will try to kill it and they have a lot of power to succeed.

and Alan Greenspan(1966):

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

$\endgroup$
1
  • 1
    $\begingroup$ That Greenspan quote is kind of ridiculous. "Welfare statists" make no secret that they want to redistribute wealth, so there is no reason for them to be "insidious" in opposing financial systems that prevent them from doing so. I'm also rather sceptical that that's the only disadvantage of a gold standard, even if it does also have some advantages. $\endgroup$
    – IMSoP
    Feb 16 at 22:27
0
$\begingroup$

It would have all the same "problems" (in quotes because some of its perceived problems were probably beneficial) only moreso. One key problem with gold was that it enforced liquidity constraints when emergency demanded flexibility. Bitcoin being a finite quantity is the exemplar of inelasticity and it will cause the same problem only moreso. Beyond this, its distribution is radically skewed in a way which gold never was....gold was more egalitarian. In short, whatever BTC becomes it will not be a "bitcoin standard" in the way that the world was once constrained by a "gold standard".

$\endgroup$
6
  • $\begingroup$ Yes, if this actually happened it would make the people who currently hold large amounts of bitcoin even more wealthy and powerful. There are currently whales that hold billions of dollars worth of bitcoin and that would go up by orders of magnitude if a large economy completely switched to using it as their currency $\endgroup$
    – Kevin
    Feb 15 at 22:47
  • $\begingroup$ Couldn't the liquidity problems be solved in part by governments simply hoarding a lot of coins most of the time and then just releasing them when needed. The coins being out of circulation makes them effectively non existent. And then releasing them into circulation has the same effect as printing new money. The major difference is that they can't print without limit like they can now. $\endgroup$
    – user4574
    Feb 16 at 21:46
  • $\begingroup$ @KevinWells as opposed to being one who can get the fiat money early through state largess before its inflation affects are felt as this early money trickles through the economy. Boom/bust and malinvestments. $\endgroup$
    – paulj
    Feb 17 at 19:18
  • $\begingroup$ @paulj Yes, wealth inequality and generational wealth can be problems with almost any economic system, but bitcoin is particularly susceptible because there are a small number of people who hold a huge amount of it because of their early adoption of it. Nakamoto is believed to hold around a million bitcoins, which is already worth tens of billions of dollars currently, if bitcoin became a currency standard its price could increase by orders of magnitude, which would make him potentially the richest person to ever live. He would then have unprecedented power of the global economy all by himself $\endgroup$
    – Kevin
    Feb 17 at 20:26
  • $\begingroup$ @KevinWells but he will never be able to print billions of more bitcoin making my bitcoin worth ever less. $\endgroup$
    – paulj
    Feb 20 at 1:10

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.