3 Things Most People Don’t Know About Gold, Bitcoin, and Money

Guest Post by Nick Giambruno

Bitcoin has been likened to the platypus… which sounds like an odd comparison.

The platypus is a strange duck-billed mammal with webbed feet and a furry body like a beaver. It has characteristics of birds, mammals, and reptiles. Females lay eggs but also nurse their young with milk. Males produce a potent venom.

When Europeans discovered the platypus in Australia in 1798, they wrote letters to folks at home to describe this bizarre new animal. People thought the platypus was a joke or a hoax—because it didn’t fit into the classification of animals at that time.

But it was a real animal.

People just didn’t understand it because it was a new thing that didn’t fit into the established paradigms.

Bitcoin is much the same. It doesn’t fit into the framework of traditional financial analysis metrics.

There is no P/E (price-to-earnings) ratio because Bitcoin has no earnings.

There is no P/B (price-to-book) ratio because Bitcoin has no book value.

Bitcoin has no CEO, no marketing department, and no employees.

Bitcoin is an entirely new asset people are adopting as money because of its superior monetary properties, namely its resistance to inflation.

The monetization of a new global money is genuinely unlike anything anyone alive has ever seen before. There is nothing else comparable.

Like the platypus, Bitcoin is an entirely new animal. That’s why Bitcoin confuses many people, including prominent investment professionals.

It’s not uncommon for it to take years for someone to really get Bitcoin. It requires an understanding of economic incentives, technology, cryptography, financial markets, and other fields.

But, by far, the most important way to understand Bitcoin is first to understand money, which anyone can do.

Fortunately, it no longer takes years to understand Bitcoin. There is a wonderful body of knowledge that connects the dots in a way that wasn’t available in the early years. I believe that anyone who does the homework to really understand Bitcoin will reap significant dividends in the future.

I think Bitcoin has revolutionary implications, as much or more than the printing press, the invention of gunpowder, the Internet, and other historical innovations that overturned established paradigms.

In my writings, I am distilling many years of study into the most concise analysis possible that anyone—regardless of their background—should be able to understand.

I’ll take you down the Bitcoin rabbit hole and show you where I think it goes.

It is essential to start with the basics as a sound foundation and build from there in understanding Bitcoin. Doing it any other way will likely end with confusion or faulty conclusions.

What Is Money?

Although people use money daily, few consider what it actually is or what makes for a good money.

Asking people, “what is money?” is like asking a fish, “what is water?”

The fish probably doesn’t even notice the water unless it becomes polluted or something is wrong.

Money is a good, just like any other in an economy. And it isn’t a complex notion to grasp.

It doesn’t require you to understand convoluted math formulas and complicated theories—as the gatekeepers in academia, media, and government mislead many folks into believing.

Understanding money is intuitive and straightforward.

Money is simply something useful for storing and exchanging value. That’s it.

Think of money as a claim on human time. It’s like stored life or energy.

Unfortunately, today most of humanity thoughtlessly accepts whatever their government gives them as money. However, money does not need to come from the government. That’s a total misnomer that the average person has been hoodwinked into believing.

It would be similar to transporting yourself back in time and asking the average person in the Soviet Union, “Where do shoes come from?”

They would say, “Well, the government makes the shoes. Where else could they come from? Who else could make the shoes?”

It’s the same mentality here regarding money today—except it’s much more widespread.

The truth is money doesn’t need to come from the government any more than shoes do.

People have used stones, glass beads, salt, cattle, seashells, gold, silver, and other commodities as money at different times.

However, for over 2,500 years, gold has been mankind’s most enduring form of money.

Gold didn’t become money by accident or because some politicians decreed it. Instead, it became money because countless individuals throughout history and across many different civilizations subjectively came to the same conclusion: gold is money.

It resulted from a market process of people looking for the best way to store and exchange value.

So, why did they go to gold? What makes gold attractive as money?

Here’s why.

Gold has a set of unique characteristics that make it suitable as money.

Gold is durable, divisible, consistent, convenient, scarce, and most importantly, the “hardest” of all physical commodities.

In other words, gold is “hard to produce” relative to existing stockpiles and the one physical commodity most resistant to inflation of its supply. That’s what gives gold its monetary properties.

Bitcoin shares many of the same attributes of gold that make it attractive as money. That’s why it is often referred to as “digital gold.”

Like gold, Bitcoin does not have counterparty risk, and nobody can arbitrarily inflate the supply.

At this point, some people might say, “wait, Bitcoin doesn’t have intrinsic value or industrial use. It’s more like fiat money. So how can it even be compared to gold?”

Before we go further, it’s important to make three clarifications to address common misunderstandings.

There is No Such Thing as Intrinsic Value

One of the first—and most important—things free-market Austrian economics teaches is that all value is subjective.

There is no such thing as inherent or intrinsic value.

Something only has value because individuals subjectively determine it has value to them.

For example, when people didn’t understand what crude oil was, they’d find it in their backyards and think it was waste. So they’d pay to have it removed from their property.

Later, once people understood the economic potential of crude oil, it was transformed from unwanted waste into a lucrative commodity.

The oil didn’t change; it was still the same oil. What changed was how people valued it.

Marxists differ in that they falsely believe that labor has inherent or intrinsic value. But this ridiculous notion is easily debunked.

The great economist Murray Rothbard explains this by asking people to try to make and sell mud pies—not the chocolate desserts, but pies literally made of dirt.

According to the Marxists, the pies have objective and intrinsic value because of the labor someone put into making them. But good luck getting someone to pay for them voluntarily.

The concept that all value is subjective applies to all goods, including monetary goods like gold and Bitcoin.

Bitcoin is Not Fiat Money

Bitcoin is a free-market form of money.

Over 114 million people worldwide have subjectively determined that Bitcoin has value to them. They voluntarily chose to exchange other forms of value for Bitcoin. They did not choose Bitcoin because legal tender laws or government decrees forced them to, as they do for fiat money.

The Oxford English Dictionary defines fiat money as “inconvertible paper money made legal tender by a government decree.”

Bitcoin is clearly not fiat money.

Industrial Use Doesn’t Make a Good Money

According to the latest annual data from the World Gold Council, total gold demand is broken down into the following uses: jewelry (55%), investment (25%), central banks (12%), and industrial (8%).

According to the latest annual data from The Silver Institute, total silver demand is broken down into the following uses: industrial (51%), jewelry (17%), investment (27%), silverware (4%), and hedging (1%).

Indians, Chinese, and other Asians account for a large portion of global gold jewelry demand. While there isn’t precise data, I estimate that many people also use gold jewelry as a store of value—a monetary use.

Putting it all together, I estimate that monetary uses are responsible for around 86% of gold’s demand. Industrial and non-monetary uses account for a relatively small part (14%).

Silver is the opposite. Industrial and non-monetary uses account for about 73% of its overall demand, with monetary use making up 27%.

Finally, Bitcoin is a purely monetary good; it has no industrial or non-monetary utility.

Some people incorrectly reason that Bitcoin can’t be a good money because it doesn’t have any industrial use or non-monetary utility.

However, that is not needed to make something money. The use of something as money itself is sufficient for it to be money.

The fact that gold has some industrial use doesn’t give it its superior monetary properties.

People value gold as money primarily because it’s the one physical commodity most resistant to inflation—not because it’s used in dentistry, electronics, or other industries.

On the contrary, I’d argue that gold’s relatively small industrial uses do not enhance its monetary characteristics. If they did, then why aren’t metals with more industrial use—like copper or nickel—more desirable as money?

When it comes to money, I’m only interested in its ability to store and exchange value. I’m not interested in something whose value is hostage to the whims of ever-changing industrial conditions.

This is why industrial use is not a monetary benefit but, in fact, a potential detriment.

Here’s the bottom line.

Bitcoin is misunderstood by almost everyone. But that’s actually a huge blessing in disguise.

This information asymmetry gives us a rare chance to make smart speculations before the crowd figures out what is really happening.

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