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In an uncertain world, Bitcoin trumps gold

A surprising “disturbance in the force” that will upend our financial systems

Thomas Frey //January 18, 2017//

In an uncertain world, Bitcoin trumps gold

A surprising “disturbance in the force” that will upend our financial systems

Thomas Frey //January 18, 2017//

(Editor's note: This is the first of two parts.)

In 1984, U.S. Rep. Jack Kemp introduced the “Gold Standard Act of 1984.” At the time, many people found it inconceivable to have anything more stable than gold to serve as the basis for our economy.

More than 32 years later, gold is losing its luster, and the emerging new kid on the block, Bitcoin, would have seemed like science fiction back in 1984.

Today, we are seeing clear signs that Bitcoin is replacing gold as the safe haven currency of choice for key investors in countries all over the world.

When surprises happen, people buy Bitcoin.

In Venezuela, where hyperinflation is causing the bolivar to spiral out of control, the smart money has moved to Bitcoin.

When Greece threatened to leave the European Union in 2015, investors surged into the digital currency.

The same thing happened with the Brexit vote in the European Union, and when Donald Trump defied polls to win the U.S. presidential election. Recent economic surprises in China, India and Philippines that threatened to destabilize those countries’ paper currencies sparked an interest in the digital alternative as well.

In China, Bitcoin use is skyrocketing. Much of the time Bitcoin use is tied to a sense of desperation, and this desperation-driven demand is what’s forcing the value of Bitcoin higher. Over time, its value will be driven more by its usability because a digital global currency is infinitely more usable than cash, gold, diamonds, and even digital national currencies.

Ironically, I’ve often said that for Bitcoin to become widely accepted around the world it would have to learn how to play well with national currencies. Instead, the tables are starting to turn and national currencies are beginning to realize that they have to play well with Bitcoin.

The Limitations of Gold

All forms of currency are based on trust. Not just those that are commonly referred to as fiat money, which means “trust,” but absolutely every form of currency is based on some level of trust.

Gold has typically not been considered fiat money because it’s always been scarce and therefor always valuable. But that may not be true much longer.

Twenty years ago, few would have believed synthetic diamonds would become more plentiful than natural ones. Can synthetic gold be far behind?

Gold is also hard to exchange. It requires physical handling and comes with constant levels of paranoia over purity, theft, and a variety of other slight-of-hand deceptions. In addition, stolen gold, once melted, becomes nearly indistinguishable from non-stolen gold.

Whenever large amounts of gold pass through a system, like customs, it instantly raises red flags and suddenly taxes, tariffs, and watchdog scrutiny kicks in.

Since digital currencies are infinitely more usable than a physical commodity, the governments of China and India have severely constrained citizen's investment in gold. For this reason, people are abandoning it and turning to cryptocurrency as an alternative investment vehicle.

Cryptocurrencies, such as Bitcoin, are far more liquid than gold, and they come with the added benefit of being somewhat anonymous.

Bitcoin – Safe Haven Currency of Choice

Since its introduction in 2009, Bitcoin has been integrating itself into our global culture. Each of these usage nodes represents another hook into the fabric of society, a hook that builds stability as well as a growing user base.

While it’s true that criminals and those skating on the edge of the law prefer to work with Bitcoin, so do many legitimate investors.

Even though Bitcoin is often referred to as an anonymous currency, which it’s not, it would be more accurate to describe it as a “neutral currency,” not favoring any one country.

All Bitcoin transactions are stored publicly and permanently on the network, which means anyone can see the balance and transactions of a particular bitcoin address. Yes, the identity of the user behind an address is typically unknown, but there are ways of uncovering the identity of the person through purchases or related activities.

That said, cryptocurrencies have no geographical or cultural constituency. They operate outside the control of any one nation.

As such, cryptocurrencies do not have an obligation to help a local economy or improve the lives of a particular citizenry. They have a way of automating “authority” out of the equation, which makes central banks very nervous.

The Emergence of Fluid Citizenry and Fluid Economics

We’ve been raised with the notion of a captive citizenry. Everyone belongs to the country they live in. No matter what crazy shenanigans your national leaders might pull, you are obliged to pay taxes to your particular country.

At the same time, crossing country borders has become an increasingly trivial event with many people crossing multiple borders on a daily basis.

Sending money to loved ones back home has become one of the primary functions of Bitcoin. It’s been a painful process until now, but Bitcoin allows families in other countries to access funds instantly (within minutes) with less than 2 percent transaction fee instead of the 10-20 percent banks onerously charge.

The Internet has given us borderless economies and a global marketplace. Over time, drone taxis and other forms of passenger drones will make national borders even less significant as crossing a border becomes as easy as going to the grocery store.

Every year people become more fluid in their ability to travel, but this is a double-edged sword. Along with a fluid citizenry comes a waning loyalty to a particular a particular city or region.

Similar to credit cards making national currencies invisible to the consumer, cryptocurrencies will make wealth transfers invisible to national governments.

As much as governments wish to exert additional authority and control over our lives, cryptocurrencies, along with most of the tech world, are working overtime to break the “big brother” bonds.

Level One Disruptions

Its already clear Bitcoin will be a major disruptor. Here are some of the industries currently dealing with the effect of Bitcoin.

Banking – Bitcoin is already disrupting the banking industry, allowing people to access a form of money that’s not controlled by an agency of the central government. Over the past couple years, several global financial institutions like MasterCard, BNP Paribas, Visa and J.P. Morgan have invested in blockchain startups after realizing Bitcoin could save the industry billions each year by eliminating the middleman.

E-Commerce – There are any number of reasons why a consumer would prefer to use Bitcoin over credit cards or PayPal when making a transaction. A number of cryptocurrency payment processors like CoinBase, BitPay, BIPS and Blockchain Merchant now offer tools to integrate bitcoin e-commerce into a website.

Charities – Humanitarian efforts in countries with nearly worthless currencies have realized that Bitcoin is a valuable tool. A few of the organizations already accepting Bitcoin include the Human Rights Foundation, the American Red Cross, Electronic Frontier Foundation and the United Way.

Music – Bitcoin and blockchain startups have already started to disrupt the $15 billion music industry. By using companies like Ujo Music, Stem, Kashcoin, and PeerTracks fans can directly pay artists for their music, without record labels and producers taking a huge cut.

Gambling – While most governments have restricted online gambling on some level, Bitcoin players are generally free to step into some of the world’s most popular casinos without leaving their home. One of the biggest of these online gaming portals is Dragon’s Tale, a role-playing game that uses Bitcoin instead of chips. Another, SatoshiDice, saw as many as 12,400 bets per day in 2013. A study that year showed that at least half of all Bitcoin transactions were related to gambling.

(Next: Why does Bitcoin have value?)