Gold or Bitcoin - what is money?

Gold or Bitcoin - what is money?

29 October 2019 from Anna Svahn

During history, money has taken different forms. We have used salt, cattle and shells. Today, it is perhaps precious metals that we primarily associate history and money with, and the reason for this is that gold, in particular, possesses certain properties that are required to function as money.

How come we ended up using just gold as money and what will it look like in the future? If we start by backing the band to how the development of how central banks worked historically and what role they had and what it was developed for, then we must go back to the 18th century.

From the beginning, around the 18th century, central banks were created to do part of the government's job. It was not then about keeping the valuation of shares up, or evening out fluctuations in economic cycles (a concept that at that time did not exist yet). Central banks would simply ensure that there were financial means to carry out the work the government was doing, and perhaps even more centrally, create an opportunity to bear the costs associated with war.

If we turn around at 200 years, until when the Fed started in 1913, the idea was to smooth out so-called interest rates , thus stabilizing the price of money and making the US dollar more resilient by adding liquidity when needed. 

Historically, gold has been the asset that investors are fleeing as confidence in central banks diminishes. But now there is a contender, Bitcoin. The debate over whether to choose Bitcoin or gold is increasingly widespread today. If you only look at the attributes for which properties are desirable to be considered as "sound money", both options meet the requirements.

By "sound", or "hard" money, we mean that the value because of it is a limited, so-called "scarce" , access is and will be relatively stable. It is also the limitation that makes the asset itself sustainable over time. In addition to the fact that it should not be possible to make as much money as possible (hint fiat), money should also be divisible, removable, recognizable and durable.

Gold and Bitcoin both meet the requirements to function as "sound money", and if we go back to price stability which can be affected by how the "scarce" supply itself, we can again compare gold and bitcoin with fiat currencies. 

One way to measure how limited an asset is is to look at what is called stock to flow. By "stock" we mean the current asset and "flow" refers to the amount created over a period of time. We estimate that there are 190,040 tonnes of gold excavated today (2017-12). Each year, an additional 2500 - 3000 tonnes of gold is excavated, which means that the inflation rate for gold falls somewhere between 1.3 - 1.5 percent or that s tock to flow is 69: 1. Proponents of Bitcoin often make use of the argument that in five years, Bitcoin will have higher stock to flow than gold. But that an asset is scarce does not automatically mean that it will take over the gold's place as "real" money.

There are advantages and disadvantages to both the "digital gold" and the physical and today no one knows whether it is gold that is also true in the future. 

 @Anna Svahn

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01/03/2021 18:06:12


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