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One of the unlikely outcomes of the COVID-19 pandemic, oil price wars, and subsequent financial crisis has been the idea that Bitcoin and other cryptocurrencies like it should perform similar to gold or other commodities: a “safe haven” that works somewhat counter to how equities perform. This has led to several comparisons between the two, with a less favorable light cast on Bitcoin, which is losing more short-term value.

This comparison isn’t quite valid for a few reasons though. First off, Bitcoin’s value doesn’t reside in an established history of commercial usage due to its anti-corrosive or conductive properties or long-established cultural tradition of how shiny is better. It resides in both the future value of online transactions conducted through its networks, but also in a sense of belief that eventually, there will be a need to delegate financial trust and authority.

It’s more of an ideological argument than a practical one. For economists trained to value assets, you can argue that Bitcoin has more “speculative” value, and a shorter track record than gold itself. However, this is what makes Bitcoin such an interesting technological and economic experiment: it has certainly proven the first plank of its thesis that individuals organizing and cohering together with a set of technologically implemented rules can create value without the stamp of a fiat authority. In contrast, gold has thousands of years of fiat stamping, from the kings and emperors of old, to the bankers of today.

Secondly, as a result, the degree of institutional ties that Bitcoin holds is lower compared to gold, and this affects its volatility as well as how governments regard it. It means, for example, that in Canada (to give you an example that’s top of mind for the author), registered accounts that are used for tax savings cannot be used on Bitcoin and other cryptocurrencies without quite a bit of work.

Meanwhile, gold exposure can be bought with ETF purchases or in other formats quite easily, and still garner government approval. This means that when push comes to shove, it’s likely to expect that dramatic investor losses in gold may be backed by the government and they might be compensated for their losses. In its current state, it would be foolhardy to expect the same of cryptocurrencies.

This has more interesting implications than just adding volatility from a speculative perspective. It also, again, harkens back to the point of cryptocurrencies being a stronger counter-force and more weakly linked to markets than just gold. Gold is an investment in the same financial system, just a counter-cyclical one. Bitcoin is an investment, though not mostly financial, in alternatives to that same system. The latter fares worst from a risk management perspective if one is solely focused on a flight to safety, as the market seems to be these days.

Thirdly, Bitcoin is, even in its earlier days, a more fluid medium of exchange vs. gold, which acts more as a static store of value. Bitcoin gives you access to different cryptocurrencies that are have very few or don’t have any fiat on-ramps. It’s also used in more e-commerce settings and cross-border payments.

While central banks will transfer large amounts of gold as a store of value amongst each other, and some people do accept gold as tender, even in a short amount of time, Bitcoin has proven to be a more useful and viable medium of exchange with potential to grow as commerce shifts more online.

Cryptocurrency companies also tend to do income-sharing in cryptocurrency — say what you will about the bubble-like potential of that, but it does align incentives and it’s not something you often see with gold mines and their employees. Because new cryptocurrency initiatives do not have to be as well-capitalized as mines (even if ICOs might try to make you think otherwise), the potential of new innovation is higher among ecosystems that can draw in talented thinkers and creators.

This leads to the final point of difference: while gold is mined and discovered using a fairly conventional financing model, innovations in cryptocurrency are supported by teams that raise funding, yes, but also by a strong open-source community deeply dedicated to the principles of Bitcoin.

It’s true that Bitcoin on the face of it seems to have some commonalities with gold, especially from a speculator’s lens. Both are positioned as “counter-cycle” to equities and as “safe havens”. When you scratch the surface, however, you find that those shallow commonalities mask deep, fundamental differences — which should nuance any comparison.

(Excerpt) Read more Here | 2020-03-16 14:53:07

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