Is Bitcoin really digital gold?
In other words, I support a system where anyone in the private sector can freely present business ideas, and investors, with the help of AI platforms, can make their own investment decisions through direct transactions (DeFi). As a result, I am looking forward to a Web3 economy with abundant new added value.
That's why I invest in functional coins, which are tools for this. However, I believe that Bitcoin still has some shortcomings in becoming 'digital gold.'
The mindset of those who believe in Bitcoin as digital gold.
Saifedean Ammous, a prominent figure who argues that Bitcoin is "digital gold," presented this logic in his books The Bitcoin Standard (2018) and The Fiat Standard (2021).
He is originally from Lebanon, holds a Ph.D. from the London School of Economics, and has taught at various universities. His core argument is that Bitcoin solves the limitations of fiat currencies.
Specifically, he claims that central banks’ overproduction of fiat money leads to inflation, devaluing people's savings and encouraging short-term consumption instead of saving. According to him, Bitcoin provides a structure that can completely prevent this dysfunction. But is that really the case?
The background behind the growing interest in Bitcoin:
The U.S. dollar is the world's reserve currency.
The size of the dollar's base money (M0) was under $1 trillion before the 2008 financial crisis, but it has surged to $5.6 trillion today.
The reason central banks are quickly issuing currency is to absorb (or buy) government debt when it is issued.
There have been two major events: first, the process of converting private debt of financial institutions into public debt to resolve the financial crisis, and second, the deficits resulting from the economic shutdown caused by the COVID-19 crisis. From 2008 to the present, while the U.S.
GDP has doubled, base money has increased more than five times, which clearly suggests a devaluation of currency.
This has created a need for a "currency that can be controlled by the private sector’s issuance power" to defend against such risks.
This is the background for the creation of Bitcoin after the 2008 financial crisis, and the reason its value has risen ever since.
The core logic behind viewing Bitcoin as digital gold:
Gold has a natural beauty and excellent metallic properties, which is why it is recognized as a precious metal.
So, what is Bitcoin’s intrinsic value? In short, it is resistance to traditional currencies. The desire to escape from a currency that is overly inflated and losing value is seen as the main reason Bitcoin is perceived as gold.
Bitcoin has a fixed supply of 21 million, giving it scarcity, and it is considered secure against hacking, providing a sense of safety for one's savings. (However, if other cryptocurrencies, like a second or third Bitcoin, continue to emerge, will scarcity still hold?
The oversupply of currency did not cause inflation.
After 2008, the U.S. central bank rapidly increased the money supply, yet inflation actually subsided.
This was because the money wasn’t circulating. In other words, no matter how much money is supplied to the market, if it isn’t being invested, it remains idle and does not cause inflation.
If money begins circulating and triggers inflation, the central bank can defend against it by either selling bonds to withdraw money from the market or raising interest rates. However, if there is concern about a surge in new money, the fear is that the increased money supply might eventually lead to potential inflation on some future day, beyond the central bank's ability to control it.
On the other hand, the inflation that occurred after 2020 was not due to an increased money supply meeting demand, but rather was caused by supply chain disruptions from the COVID-19 shock and cost-push inflation due to the Russia-Ukraine war.
The key factor directly linked to inflation is productivity:
the economy creates added value, and costs are also consumed.
If we can produce a lot of added value with low costs (= high productivity), the government’s finances remain strong.
On the other hand, if productivity decreases, government debt increases along with fiscal deficits, and to cover this, the supply of new money also increases.
The fundamental reason why Venezuela’s currency lost its value due to hyperinflation is because of the poor structure of economic added value and a governance system that hoards wealth.
The oversupply of money is just a symptom. Therefore, creating more added value (which money follows) is what will make your savings more prosperous, and the means for that are (Web3) functional coins (alternative coins).
The COVID-19 shock was an unavoidable pandemic. If it resulted in a large-scale deficit, isn’t it something that we all share responsibility for? Even if the oversupply of money due to the COVID-19 shock led to a decrease in the real value of your savings, complaining about it would be a selfish thought.
Functional coins will prevent the oversupply of money.
A long time ago, I believed that the U.S. economy was efficient.
If there was a failure in any part of the economy, only the people who invested in that area would suffer, and the market forces would restore balance.
I also remember the expression from Iacocca's autobiography: "The bankruptcy of a company is a healthy catharsis of capitalism." But over time, as financial institutions grew larger, the U.S. lost its efficiency.
And it's not just the U.S.; global financial institutions became intertwined, and a failure in one place would spread, ultimately paralyzing the financial system.
This is why financial institutions like AIG had to be saved, and in the process, money was oversupplied.
Ultimately, instead of financial institutions acting as intermediaries, we will move into an era where investors make decisions themselves (with the help of AI robo-advisors). In this case, if an investor makes a mistake, only the individual will suffer, and the entire market will not be affected (which is why diversification is important for investors).
If functional coins create the infrastructure for this direct finance (DeFi), the oversupply of money to save failing financial institutions will disappear. In other words, the evolution of functional coins will reduce the demand for Bitcoin.
It’s similar, but that doesn’t mean it’s the same… Bitcoin has some similarities to gold. However, what I question is its intrinsic value. Like gold, the reason why people must hold it is unclear.
Over the past 15 years, the U.S. Federal Reserve’s oversupply of dollars seemed to align with the intrinsic value of Bitcoin. But as time goes on, such an environment could change.
Right now, it may seem like gold, but it may not be gold. It even feels somewhat similar to a cult-like belief.
There are people in the market, like myself, who question the value of Bitcoin, as well as those who believe in it as digital gold. I hope that these differing views will lead to a more complete understanding and judgment of Bitcoin.
