Crypto Revolution – Bitcoin Seen as a Substitute for Gold

Jerome Powell, who is the Federal Reserve Chairman during a webinar talked about cryptocurrency, Bitcoin in particular.

He commented that crypto assets, predominantly Bitcoins were very unpredictable and therefore not durable as a store of value. He saw them as assets more than as a means of payment. According to him, Bitcoin is rather a substitute for gold than the dollar.

This comparison drawn by Powell takes us back to the ancient currency system known as the Yapese stone money.

In 1871 Irish explorer David O’Keefe shipwrecked on the coast of a small island community in the remote pacific. The islanders were graced enough to assist David. But little did they realize that this would alternatively spell doom for the island’s own economy.

After David’s recovery, he noticed that the islanders were using stones known as Rai stones as a measure of value. These stones were very difficult to procure and thus they were deemed to have value. This gave David an idea, he would hire some of these islanders and sail them to another remote island. With the help of modern tools, he would have these islanders procure more Rai stones.

So he did just that and traded those stones for real resources. By creating more Rai stones, David essentially inflated the supply of money on the island and pillaged the resources. This left the Island’s economy to collapse. As soon as the scarcity of the money was lost the rai stones became worthless.

Throughout history commodities like salt, precious stones like gold and even cigarettes in today’s prison systems have been used as forms of money. However, the most successful forms of money display some key properties; they are durable, divisible, transferable, and scarce. Keeping these key properties in mind it makes sense that civilization tendered converge on valuing gold as money as early as 700 BC. Gold is one of the most durable elements and can be divided into smaller fractions. Similarly, it is easy to transfer, and of course one of the most scarce resources on the planet. This is why governments back their currency with gold to prove that their currency has value.

Durability, divisibility, transferability, scarcity, each of these properties is embedded in the Bitcoin code. Bitcoin is durable as data never degrades. Bitcoin is divisible, each bitcoin can be divided into a hundred million units. It is transferable, you can send it to anyone anywhere. Bitcoin is scarce as the supply schedule is predetermined. Today there exists about 18 million Bitcoins, with a maximum of 21 million expected to be created by the year 2040. An added property of Bitcoin is that it is certainly more democratic. Anyone with an internet connection can buy it, accept it or contribute to its development.

These properties of Bitcoin coupled with the fact that its price is surging each day, surely make it a good substitute for gold.

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