The Battle of Bitcoin versus Gold

The argument that Bitcoin has the potential to take over from the precious metal gold as a store of value continues to rumble on. Already this year, Goldman Sachs has weighed into the debate with Zach Pandl, Goldman’s co-head of foreign exchange strategy, sending a note to clients this week, saying Bitcoin can take market share from gold over time as a “byproduct” of more adoption, along with the potential from “Bitcoin-specific scaling solutions.”

Pandl also wrote, “Hypothetically, if Bitcoin’s share of the ‘store of value’ market were to rise to 50% over the next five years (with no growth in overall demand for stores of value) its price would increase to just over $100,000, for a compound annualized return of 17-18% (accounting for growth in Bitcoin supply over time).” 

It is estimated that public ownership of gold as an investment stands at around $2.6 trillion, Bitcoin’s market capitalization is currently just under $700 billion, and Pandl said that from these figures he concluded that Bitcoin currently commands an approximate 20% share of the “store of value” (gold and Bitcoin) market.

Bitcoin options

Goldman Sachs has been making quite bullish noises about Bitcoin and cryptocurrencies. In December last year it made a statement saying that the next major development for cryptocurrencies will be more liquid options markets as more traditional financial firms pile into the rapidly growing asset class. Andrei Kazantsev, Goldman’s global head of crypto trading, said, “We are seeing a lot of demand for more derivative-type hedging. The next big step that we are envisioning is the development of options markets.”

In December, open interest in bitcoin options, or the total value of outstanding contracts, stood at about $12 billion as of the latest data from Skew, a subsidiary of Coinbase that tracks data on cryptocurrency derivatives markets. This is a considerable increase over 2020 when the market rarely exceeded $2 billion. Kazantsev says the cryptocurrency derivatives market is still in its infancy, but that Bitcoin options were growing at speed. Essentially, options are a type of financial instrument called a “derivative,” which obtains its value from the price of another asset – in this case, the underlying cryptocurrency. Increasingly investors are using cryptocurrency options to hedge out existing risk or take on additional market exposure.

Bitcoin to $100k

But back to Bitcoin versus gold. It is interesting that in April of 2021, Goldman Sachs doubted Bitcoin could become a store of value, saying it had environmental problems, competition from other cryptocurrencies and “lack of real use.” Back then its top commodities strategist Jeffrey Currie said, “Traditional long-term stores of value such as gold, art, diamonds, wine and collectibles all have value and use beyond being stores of value,” and asserted, that Bitcoin’s lack of real uses and its environmental problems make it “vulnerable to losing store-of-value demand to another, better-designed cryptocurrency.”

It seems that after reinstating its Bitcoin trading desk and reporting huge institutional demand for BTC, the Wall Street giant has changed its tune about Bitcoin’s potential as a store of value and that this could send its value to $100,000.

Money in 2022

This coming year might see many changes in the financial world, especially in money itself. It’s difficult to predict how things might play out, although there have been predictions in the MSM that Bitcoin and crypto generally will crash and burn, but that seems unlikely for those of us that are more immersed in cryptocurrencies than MSM journalists and their readers.

One scenario revolves around central bank digital currencies (CBDCs). Will they be more influential this year as governments look to control digital currencies? Or will the stablecoins, such as Tether, issued by private companies rule the roost? Then there are the decentralised currencies, such as Bitcoin. Will they become the dominant force in finance?

Various factors are driving the debate around money. For example, China is rolling out its Digital Currency Electronic Payments (DCEP) project during the Winter Olympics in February. And the USA is developing regulations targeted at private issuers of stablecoins, whilst adoption of decentralized cryptocurrencies for payments continues to grow around the world.

The Regulations debate

In 2021, the US government debated crypto tax provisions in the infrastructure bill and the approval of a futures-based Bitcoin exchange-traded fund (ETF.) This year it is likely that the U.S. Securities and Exchange Commission will find ways to clarify its position on whether tokens are unregistered securities. At the same time, DeFi tokens may find themselves being included in this debate, which would be unwelcome.

The future of Ethereum

Although Ethereum still dominates DeFi, will its high gas fees for NFTs and other transactions become too expensive? It depends on the success of Ethereum 2.0. There are many big moves to be made before the full 2.0 project can be deemed a success. It has to merge its mainnet with the Beacon chain and that could disrupt token economics for miners and validators. And there are challenging upgrades within Eth 2.0, including sharding. The future of the dominant smart contracts platform depends on these going well.

Crypto and the climate

As climate change continues, crypto needs to shift the conversation away from how bad it is for the environment and towards one about mining-integrated energy systems that create incentives not only for miners to use renewable energy.

Web 3.0

Finally, there will be many discussions about Web 3. Jack Dorsey has been leading at least one discussion about its future, in which people will have greater control over their data and content. So far Web 3 is not really well defined, but there is a need to adjust our systems for managing digital property and for establishing users’ rights in this new era. We can expect this year to bring more clarity on Web 3 might be like and to get a better idea of the projects that will form part of it.

The Bitcoin bounce back

At the end of last week a new Covid variant appeared called Omicron. As a result, the cryptocurrency market experienced a sell-off on Friday 26th. It wasn’t the only market where panic had set in. But by the end of the weekend, we had seen some confidence returning as traders realised that it was likely there would be no return to full lockdowns this time round.

Yesterday, Monday 29th November looked very promising. Digital assets were mostly back in the green, although as Billy Bambrough points out, Bitcoin appeared not to be leading the market in this bounce back. Instead it was noticeable that the assets rebounding most strongly were Ethereum (ETH), Solana (SOL) and Polkadot (DOT) showing higher gains of around 7%, while Bitcoin (BTC) was somewhat lower at +4-5%. But there were still several wins for Bitcoin along the way.

El Salvador buys ‘discounted’ Bitcoin?

As Bitcoin dipped to $53,000 some were ready to buy the dip. Nayib Bukele, El Salvador’s “bitcoin-besotted” president was one of them. He announced to the press that his country had bought another 100 Bitcoins during the dip at the end of last week, adding to El Salvador’s stash of 1,000 BTC. Luckily for Bukele and his country, Bitcoin rallied after he’d made what he referred to as his ‘discounted’ BTC purchase, so he must be happy at least.

However, Bambrough points out that there Bukele’s buy should be noted, because he is “is doubling down on bitcoin in the face of international warnings and condemnation.” What is this about?

Well, last week plans were announced for a $1 billion bitcoin bond. This is supposed to fund an ultra-low tax city. However, it had the effect of sending El Salvador’s dollar-denominated bonds to an all-time low, and gave the country a debt profile that is even worse than that of Lebanon. In fact, it’s the worst in the world now. The Bank of England governor had warned last week that the “country’s decision to adopt Bitcoin as legal tender alongside the US dollar was concerning because people could be caught out by its volatility. He couldn’t believe that a country would choose Bitcoin as a national currency he told Cambridge University student union. He also told the assembled students that the IMF was really not very happy with El Salvador.

Did Microstrategy power the bounce back

But El Salvador’s purchase of 100 BTC was nothing compared to Microstrategy’s announcement that it had acquired 7,002 Bitcoin on Monday at an average price of $59,187 per coin. It’s an announcement that pleased the bitcoin bulls, as did the one from the German stock market operator Deutsche Boerse, which is listing the Invesco Physical Bitcoin, an exchange-traded note (ETN).

And in other good news for Bitcoin supporters: over the past week, the Bitcoin network has transferred or settled an average of $95,142 of value for every $1 worth of fees. This means the network’s value settlement efficiency has been improving steadily recently, with more being settled for lower fees. On-chain analyst, Dylan LeClair, tweeted, “Bitcoin is the most efficient monetary settlement network the world has ever seen.” Despite its recent ups and downs, Bitcoin is here to stay, and it’s still a digital asset with enormous influence, even if a handful of altcoins occasionally deputize as market leaders.

Thinking about crypto as money

There are a number of people in the financial world who make derisory remarks about cryptocurrencies ever becoming accepted as ‘real money’. Their arguments point to its volatility, which they say makes it impossible “for cryptocurrencies to serve what traditional economics describes as the three functions of money: 1) a medium of exchange, 2) a store of value, and 3) a unit of account,” as Michael J. Casey writes at Coindesk.

Casey suggests that this argument doesn’t work if “the three functions framework is based on a flawed, or overly narrow, definition of money.” He points us towards a book by Felix Martin ‘Money: The Unauthorized Biography’, in which the author says that historically people have had a flawed view of money as a “thing”, i.e. a banknote, but he says that it is really “a socially invented governance system for tracking transfers of property and clearing debt in a commonly trusted manner.” Martin believes we have “fetishized” money as something to be owned and accumulated, rather than seeing it as a means to an end.

In Martin’s view a nationally accepted currency, such as the dollar, is merely a tool that makes it easier to carry out transactions “across a community of otherwise untrusting strangers.” Casey says this makes cash similar to a decentralized, peer-to-peer record-keeping device. Still, it is difficult to challenge the dominant thinking about national currencies, which are effectively a system of social organization and control in sovereign states. But is this the only way to think about money?

Cryptocurrrencies do challenge the sovereign state narrative about money, simply because they are “censorship-resistant, geography-agnostic value transfer systems.” They provide rules and a framework of trust for users without needing to draw their authority from governments, although as Casey mentions, crypto users still have to follow the laws of their governments around cryptocurrencies.

Casey also argues that while some see Bitcoin as a replacement for the dollar, there is a bigger picture to consider, and that is the potential of digital assets to dispense with the need for universal common currencies altogether. As he correctly says, we are a long way from that happening. However, if interoperability protocols and transaction processing can be scaled in a properly decentralized manner, allowing cross-chain atomic swaps in mass numbers without having to trust intermediaries, something like a global system of fractionalized digital value exchange could be realised.

According to Casey, central banks in Singapore and the United Arab Emirates are already exploring interoperability solutions for their central bank digital currencies (CBDCs). This is a move that threatens the status of the dollar as the world’s reserve currency. If this happens, crypto could become a universal unit of account. Casey concludes by pointing out that if the dollar’s role is diminished then “the role of bitcoin, ether, NFTs and other digital assets could increase.” And how we think about money will have changed as well.