Bitcoin

Bitcoin as "Digital Gold"

Part VIII of The Value of Financial Products and Assets

Bitcoin as "Digital Gold"
Photo by Jen Titus / Unsplash

Part VIII of The Value of Financial Products and Assets

Previous Parts

In Part III - The Value of Gold, we illustrated some of the main features that make gold valuable. How does what we outlined in Part III compare with bitcoin; “digital gold”?

Industrial Use Case

The first point mentioned in Part III is that gold has industrial and technological use cases. It is a metal used as a component in developing technological products, machinery, and medicines. As for bitcoin, it was founded as a technology meant to be a payment system, but as mentioned in Part VI - Bitcoin as an Innovative Payment System, bitcoin has not achieved its payment use case and is in fact inefficient as a payment system compared to other payment infrastructure. Moreover, we portrayed how Bitcoin as "Digital Capital" (an innovative asset exclusively focused for the purpose of capital preservation and accumulation) is vulnerable and lacking robust properties that qualify it to be an innovative asset for such a use case. So, from what has been discussed so far in the previous parts, bitcoin has failed as an “industrial” or “technological” use case that adds value or contributes to a better life, especially since there are more effective payment systems and store-of-values that are available and in use.

To expand on the above point, imagine that while gold serves as the best material for developing CPUs and motherboards, we decide to use another metal that is less effective as a CPU or motherboard component for the sake of using it. In this case, gold is obviously more valuable for developing CPUs and motherboards than the other metal that does a poor job in its function as an essential component in CPUs and motherboards. This will result in a lesser quality CPU and motherboard that does not serve us as efficiently and productively as a CPU and motherboard with gold as a component. Relating this analogy to bitcoin, we can see that bitcoin’s innovative technological use cases are similar to the lesser quality metal, and so relying on it as a payment system or an asset for capital preservation results in a poor-quality payment system compared to other payment technologies and a more vulnerable store-of-value or asset for capital preservation.

With that line of reasoning, bitcoin doesn't compare with gold in terms of industrial use.

Aesthetics

The second point discussed regarding the value of gold is that its physical features and aesthetic appeal make it valuable in and of itself. Beauty and aesthetics are attributes that we value and appreciate, and gold is a material that we see beauty in, and is used as a material for decorative items and art. Bitcoin, on the other hand, is a digital and abstract asset. There is no physical or tangible aspect to bitcoin itself other than the large mining rigs.

As mentioned in Part III, when I gift someone a bracelet of gold, or any form of physical gold, the value is in the object gifted in and of itself. The value of gold and of the golden bracelet or gift is not only linked to its price in the market or what it can be exchanged for, but it is a stand-alone asset that is valuable for what it is in and of itself. As for bitcoin, can one wear bitcoin? Can one display it? Would someone see value in bitcoin by just seeing the digits of bitcoin on a screen?

Bitcoin is either held in a USB or some sort of physical disc drive (known as a cold wallet), online in a digital wallet (hot wallet), or in custody of an exchange or other intermediary. What makes bitcoin valuable in these hardware or software wallets is only the price of bitcoin against USD, which is driven by trading activity. In contrast to gold, bitcoin’s value is purely rooted in its market price. If bitcoin is worth a few cents, then there is no value in it as an asset, but if it is worth tens of thousands of dollars, then the value is the amount it is worth and the amount of money in USD that one can make by selling it. It is always measured against the dollar and that is what makes it and gives it its value. Gold, on the other hand, even if its price goes down, will still be appreciated as a piece of gold since it is an item that we value in and of itself detached from its dollar price due to its physical and aesthetic features.

Nevertheless, one can argue that the beauty of bitcoin is in its code and decentralized design, regardless of its efficiency or productive use case. That approach of looking at bitcoin is very niche and only a handful of computer scientists or techies might see the beauty in that. To be fair, if the code and computer design is what is of appeal, then the hobbyists who appreciate its design have every right to collect and invest in bitcoin; however, its narrative is being pushed for social, economic, and political ambitions, as opposed to a niche asset or technological design. To elaborate further, the watch collector does not try to convince others that investing in watches is the best way to allocate capital and does not appeal for validation by government and centralized institutions to drive the price of the collected watches higher.

In any case, reverting to the tangibility and physical aesthetics – has there ever been a piece of code that is collected for its beauty and ingenuity separate from its usefulness as code?

It is also worth noting that gold is one of the most durable and corrosion resistant metals out there. This fact also contributes to gold being used as a decorative item and for jewelry. In the previous part, we mentioned how Saylor positioned bitcoin as being an immortal asset that can sustain the test of time. However, as mentioned in the previously, bitcoin's survival is contingent on multiple things including technology infrastructure, natural resources, and ongoing demand. From that perspective, bitcoin is not a durable and "immortal" asset as gold is.

Overall, bitcoin’s abstractness does not provide any physical, tangible, or long lasting beauty, and it does not hold any aesthetic appeal or purpose that we value.

Social Construct and Power Relations

The third point we raised is that while gold has instrumental or intrinsic value, there is no doubt that social construct plays a significant role around the acceptance of gold as a valuable item and impacts how we perceive it. To reiterate, while gold somewhat organically became an accepted valuable asset through human interactions, as mentioned in Part III, powerful figures and groups played a role in constructing the importance of gold, which led it to become an asset utilized for applying austerity measures and for the maintenance and management of power dynamics. The social construct and political role of gold gives it its symbolic power and status.

This socially constructed value reflecting power, status, wealth, and prestige can be argued to be a common theme between gold and bitcoin, or more accurately, what bitcoin is heading towards.

As mentioned in Part III, the supply of gold has been, to a certain extent, scarce by control. While gold is somewhat naturally scarce, the management of its supply also makes it artificially scarce. That socially produced artificial scarcity of gold is leveraged for the maintenance of power dynamics and achieving certain equilibriums as Schoenberger points out. Furthermore, it allows figures of authority who want to apply austerity measures the means to do so, as was the economic regime during the Gold Standard.

Bitcoin’s foundation as an investable asset is built on artificial scarcity. It is this scarcity that drives its value, according to many of its proponents. This artificial scarcity is a vital feature of bitcoin that is at the core of its narrative as being a sort of digital gold. The artificial scarcity around bitcoin, however, makes it a perfect potential asset for the management of economic/political power, relational dynamics, and the application of austerity measures, similar to how gold was used.

Nevertheless, the narrative around bitcoin's artificial scarcity and its pure market driven dynamics has not resulted in widespread acceptance of bitcoin as a legitimate asset organically. So, the best way to achieve that social construction of the value of bitcoin and to validate and legitimize its value has been to play politics. Just as political figures and authorities contributed to the social construct of the value of gold, bitcoin supporters are leveraging political tactics to enable bitcoin to become what gold has achieved as a symbol of power and status for political and economic reasons. It is a seizure of economic and political power by constructing a new narrative that aims to make bitcoin a “valuable” asset and a reserve asset. This development of a new power-based and austerity focused asset will result in a new asset class that allows for a change (or maintenance) of power dynamics and an asset to act as a tool to maintain power relations between economic and political players, just as gold did. As for individuals and groups, getting political and institutional validation will only support the bets they made on bitcoin. The holders of bitcoin will become the new powerful and influential elites, just as the holders of gold were the powerful and elite in hierarchical societies, especially during the Gold Standard years. Given its artificial scarcity and global reach, bitcoin will be an asset that can be used to maintain such power dynamics and relationships between individuals, institutions, and nations.

The immense lobbying by the crypto industry and the spectacular gains that bitcoin price reached after getting the politicians they favor in office is a case in point to how bitcoin is an asset class representing power dynamics and relation. The price milestone that bitcoin reached was only linked to the fact that government officials in favor of bitcoin and who preach bitcoin as a potential reserve asset came to office, regardless of any technical, technological, or mainstream development or acceptance by bitcoin as an asset.

Again, this power play is purely based on the artificial scarcity of bitcoin and the social construct, or rather, manufactured consent, and acceptance of it as a valuable asset. Scarcity along with governmental and institutional validation empowers the holders of bitcoin and allows for certain "equilibriums" to be reached, especially if bitcoin becomes accepted as a reserve asset for example.

Bitcoin is “digital gold” due to a movement enabling a social construct from the top-down around its value. It aims to be similar to gold in the way that gold was a social, economic, and political asset representing power and acting as an asset for the management of power relations and austerity. Bitcoin is now an asset that is enabled by political and institutional validation, and it is being leveraged as a political and social asset for power, status, and economic control. This is definitely ironic given that bitcoin’s foundation was based on a stance against centralized governments and institutions.

The main point here is that there is one main similarity between gold and bitcoin as an asset class. That similarity is the attempted social construct of the value of the asset, and the social, political, and economic motivation behind it. To be clear, gold was and, to a certain extent, still is an asset class that represents power, prestige, and wealth, but not officially an asset for power relations and the application of austerity policies since we moved away from the Gold Standard. Bitcoin is aiming to become what gold was during the Gold Standard and is fighting to achieve that status.

Notable Distinctions

While the social construct of an asset for social, economic, and political power relations is a common theme between gold and bitcoin, there exists some notable difference.

One notable distinction is that gold at least has an element of natural scarcity to it; it is a scarce natural resource that we need to find and mine in nature. On the other hand, bitcoin is completely artificially scarce – it is only the code and trust in the code and the overseers (developers and miners) of bitcoin which maintain and enable its scarcity.

While figures of authority had a role in socially constructing gold as a powerful asset, gold, nonetheless, grew to have value and status through a history of spontaneous human interactions, agreement, and competition according to Taleb. Bitcoin, on the other hand, was imposed through a white paper by an anonymous individual or group as a theoretical, experimental project, as opposed to being socially constructed based on some inherent and intrinsic features and organic human interaction. To be clear, bitcoin has had a fair share of spontaneity and growth due to human activity after its release, but for the most part, it was a niche asset adopted by a few due to its ideological representation, as well as greed and speculation. Overall bitcoin was not accepted by most. It actually was, and to a certain extent, still is viewed negatively by many. This leads us to conclude that bitcoin’s social construct is mostly forced, contrary to being socially constructed by the community as a whole, or having foundations in wide spread acceptance. This is especially the case as we see with all the lobbying and political force to manufacture consent and validate it as an asset.

Furthermore, bitcoin aims to achieve status of power and wealth purely by its dollar value. Gold may be an asset that was socially constructed as a symbol of power and status, but, contrary to bitcoin, it can be displayed and is valuable in and of itself regardless of its dollar price, as mentioned above. Crowns and other luxury items made of gold represent the power and status of royalty and political figures, for example, and are valuable in and of themselves detached from the dollar price connected to them. While bitcoin aims to be a socially constructed asset class of value, its value is still linked to and attributed to the dollar. When the dollar was pegged to gold during the gold standard, there was a fixed price to gold that was determined by governments, and the currency being backed by gold established trust in the currency due to the tangible asset it was backed by. Bitcoin works in the opposite way, trust in bitcoin grows due to the dollar value, or fiat currency, it is equated to and exchanged for. Moreover, bitcoin, even if we make it a reserve asset and revert to a Bitcoin Standard, has no fixed price – at least for now to be fair. What is being highlighted here, is that the social construct of bitcoin is not growing bitcoin as a powerful asset in and of itself, but we are linking the money, or dollar amount attributed to it, to power. The real powerful asset reflected by bitcoin is the dollar, not bitcoin. The dollar amount of bitcoin, however, is volatile, as mentioned multiple times in this series, so the power status of bitcoin’s power is vulnerable to the whims of the market and speculation since the dollar, or fiat money, is the symbol of power behind bitcoin. Of course, the goal by hardcore bitcoin advocates is to make bitcoin the unit of account, but again, the way things are and are progressing towards, are not bitcoin as a unit-of-account, but bitcoin as an asset that holds value due to the dollar amount tagged to it.

Recap

From all of what has been discussed, we found the common theme between gold and bitcoin to be the utilization of the asset for social, economic and political ends; i.e. an asset for austerity policies and for the management of power relations and dynamics between nations, different parties, and interest groups. That said, there aren’t any similarity in the inherent features of both gold and bitcoin.

Nonetheless, since we are focusing on intrinsic and/or instrumental value, does an asset that is used for power management/relations and austerity measures have instrumental value? We’ll touch on that question briefly in the following final part of this essay series.

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