A Brief Monetary History
Good money needs to have a few basic functions to work effectively; it has to be a medium of exchange, unit of account and most importantly a good store of value.
Gold has been considered the best form of money for the best part of the previous 6000 years of monetary history, due to it continually being chosen by the free market as best fulfilling these three functions of a good money.
Lots of different objects and things have been tried as money throughout history, such as seashells, glass beads and the hundreds of paper fiat currencies decreed upon it’s people by control driven emperors, rulers or governments.
Every time a form of money was used that had an inflatable supply, greed inevitably got the best of people and the temptation to increase the money supply to simply enrich oneself, was ultimately a temptation too strong to resist.
Every time the supply of one of these forms of money was increased and followed by the subsequent ravaging inflation and hyperinflation of that currency; the people would lose faith in the currency, as their life savings and purchasing power are significantly devalued.
This ultimately led people to search to store their value in a form of money that physically couldn’t have its supply increased and function as a more effective store of value.
For 6000 years man kind has chosen Gold to be the best store of value because of it’s rarity and scarcity on earth, ensuring that it’s supply only ever rises by 1-2% per year through mining, making it a great store of value.
The game changing invention of the Internet in the 20th century, followed by the rise of Blockchain technology has enabled a new invention.
That invention is what we call Bitcoin, a currency that has absolute scarcity and gives humanity it’s first chance to separate money from governments control.
The inventions of the internet and cryptographic encryption has given birth to bitcoin.
Monetary Properties Compared
Austrian economics dictates that superior forms of money beat out inferior forms of money in the free markets simply because of their ability to perform as effective money.
Lets compare how Bitcoin stacks up against gold in a few of the most important properties that determine the saleability and superiority of “sound money”.
Each Bitcoin is easily divisible into 100 million sub units called a Satoshi.
1 x 10 -8 which is equal to .00000001
Although Gold is able to be melted down and reshaped and is easier to divide than previous primitive forms of money, Gold is still hard to divide, and this difficulty led to it eventually losing it’s role as money.
Banks centralised gold ownership and issued paper receipts for gold in the name of convenience.
Silver was very commonly used alongside gold as a medium of exchange in earlier centuries, as it was far more convenient to be a medium of exchange for smaller everyday purchases and gold was more used for larger purchases and being a long term savings instrument.
Bitcoin can be sent to anyone around the world at a click of the button. Bitcoin is borderless and unstoppable from outside third parties and transactions are nearly instant.
Gold’s lack of portability is also one of it’s inferior qualities which led it to ultimately being centralised in bank vaults and enabling central banks to gain control of the money supply and introduce fiat currencies which can then be transferred around the world for what can be considered a high fee (average of 10% fee).
Gold has unique chemical properties making it impossible to replicate it. However, false Gold scandals do occasionally happen; a recent example was in China where one of the largest Gold jewellers, ‘’Kingold Jewellery’’ was caught using 83 tones of fake gold to gain access to loans.
Gold is expensive and impractical to verify for the everyday person making verifying the purity of gold difficult.
Bitcoin’s immaterial and coding properties make it impossible to replicate or counterfeit. Thousands of Bitcoin nodes distributed across the world are transmitting and verifying transactions instantly. Furthermore, Nodes are constantly checking and updating their copy of the ledger, to ensure the integrity and validity of all the transactions that are included in each block of the Bitcoin blockchain every 10 minutes. Anyone is able to run a node, making bitcoin decentralised and impossible to manipulate.
Price performance and likelihood of future appreciation.
When looking at Gold’s price performance since 1971, where US president Richard Nixon effectively defaulted on US’s debt and closed the Gold window, Gold has undergone 2 major bull markets.
- 1969-1980. 11-year bull market; price $34.90 USD per ounce to $878USD per ounce for a 2515% gain.
- 1999-2011. 12-year bull market; price $250USD per ounce to $1927 USD per ounce for a 671% return. See exhibit A.
Gold rallies in times of economic uncertainty, especially when inflation levels are high and people are losing faith in the purchasing power and value of their fiat currencies.
Gold hit all time highs in every single country around the world in 2020 and looks set to continue it’s bull run as central banks globally engage in quantitative easing (counterfeiting), to competitively devalue their local fiat currencies.
It is possible that we are on the cusp of the 3rd major bull market right now in 2020 as many macroeconomists and central bankers are coming to the realisation that the 300 trillion dollars of global debt is mathematically unable to be ever paid back.
Central banks have created more money in the year of 2020 than the previous 200 years combined, which is a clear sign we are witnessing the unwinding of this 50 year fiat currency experiment that begun in 1971, where for first time in monetary history that every country worldwide removed their pegs to gold and adopted a purely fiat currency monetary standard.
This chart shows for the first time since 1971, the major central banks are accumulating more gold than ever before, which began after the 2008 global financial crisis depicted by the chart below.
With the Russians and Chinese central banks halting their buying of US treasuries in 2013 and 2014 and instead increasing their gold reserves significantly, that was a clear warning sign that countries were preparing for the end of the US dollar’s role as the global reserve currency.
Created in 2009, Bitcoin has been the worlds best performing asset over the previous decade with mind boggling returns of around 9,000,000%.
Bitcoin’s initial price behaviour during it’s first 11 years of history has been very volatile as it goes through price discovery and transitions through different monetary phases.
In history when a superior form of money arises it must transition through many different monetary stages before becoming a global unit of account.
First Bitcoin was considered a speculative collectable, now it’s becoming a medium of exchange for people whose local fiat currencies are hyper-inflating and some corporations are diversifying in part or entirely into Bitcoin, also declaring it the ultimate store of value.
The Bitcoin price during it’s first 11 years consistently exhibited 2-3 year hype cycles that are centered around it’s supply halving, which occurs roughly every 4 years.
For the first 4 years of Bitcoins existence, 50 Bitcoins were given to the miners for successfully adding a new block to the block chain every 10 minutes.
In 2012 this was cut in half down to 25 bitcoins, and again was cut in half in 2016, down to 12.5 bitcoins every 10 minutes.
The chart below shows that each 3-year bull run generally has occurred after the Bitcoin halving, and the reason comes back to first principle economics. As the new supply of Bitcoin’s distributed onto the network is cut in half, while the demand and demand increases remain the same, the price has shown to rise on simple supply vs demand mechanism.
With each cycle we receive decaying returns when compared to the previous cycle which is demonstrated by each of the arrows getting flatter each bull run, as the asset class grows larger and larger. The vertical red lines signify each of Bitcoins supply halving’s which occur roughly every 4 years or 210,000 blocks.
Bitcoin and Gold’s Impact on Society
Secure value plays a crucial role for individuals looking to store their wealth with the aim of retaining their purchasing power into the future.
Every time in history a government or central bank has been irresponsible with their debt levels and monetary policy, it inevitably leads to the collapse of the currency.
Every time a money is used that is corruptible human greed has constantly led bad actors to inflate that money’s supply to enrich themselves and transfer wealth from savers to debtors through the theft that is inflation.
Money printing and inflationary monetary policies significantly benefit the richest people who hold all the assets, and punishes the 99% of the population, and it’s no surprise that since 1971 since the money was corrupted that wealth inequality has exploded.
When a money is corrupted it has many second and third order effects on the societal fabric of the society. It is no coincidence that the poorest and most undeveloped countries worldwide are also countries that live under financial oppression and are forced into using the fiat money that their dictators enforce upon them.
While conversely countries that have had the longest ties to gold such as the UK, US and the western world are far more advanced today and have far increased living standards and economic prosperity.
It seems very plausible that for the 1.7 billion people worldwide who are unbanked and have no access to stores of value now have a chance to store their savings in a reliable store of value with the only prerequisite being access to a smart phone. Theres around 2.8 billion people worldwide living under dictatorial regimes that have strong capital controls making owning US dollars and gold very difficult as their local fiat currency is hyper-inflated away.
It’s interesting to see the countries that are suffering from the most severe levels of inflation are also seeing the highest levels of bitcoin trading volume.
The total estimated supply of Gold currently is around 190,000 metric tons of above ground mined Gold. 80% of this gold has actually been mined in the last 100 years due to the significant advancements we’ve made in technology, making gold mining far more efficient.
Now, that 190,000 metric tonnes is ALL the above ground gold we’ve discovered, and estimates suggest there’s around 50,000 or so metric tonnes still under ground undiscovered, we’re currently mining around 2-3000 metric tonnes per year. This would indicate we may soon be approaching peak gold within the next 15-20 years.
However, a problem with a money that has an inelastic supply, is when the price of gold rises, the miners are incentivised to expend more capital in trying to find more and more of the commodity to sell at the higher price levels.
The Bitcoin supply is 21 million unchangeable, enforced by code and cryptographic encryption.
A deflationary money looks like an obvious solution for a technology abundant, deflationary world. The exponential growth of technologies creates deflationary forces alongside our ageing demographics.
The longer central banks try to enforce an inflationary monetary policy, suited for the 20th century planet, in such a newly transformed deflationary environment; the worse the transition will be.
Bitcoin’s deflationary monetary policy is the solution for transformed deflationary world.
Author: Michael Fitzgerald