On Bitcoin, Libra and Gold

Bitcoin has been touted as an alternative currency for years now. In this environment of huge US dollar’s M0 supply increase, it makes sense to try to get out of a devaluing dollar and into bitcoin. Right? Probably yes, although there seems to be a ceiling for how high and what kind of transactions can be done with bitcoin.

This ceiling was reached in 1934 by gold, when the US government passed the Gold Reserve Act. Roosevelt pushed for this act in which gold possession was outlawed for every American and every gold debt clause was revoked. That resulted in effectively devaluing the creditors claims and forcing them to use dollars.

The Gold Reserve Act outlawed most private possession of gold, forcing individuals to sell it to the Treasury, after which it was stored in United States Bullion Depository at Fort Knox and other locations. The act also changed the nominal price of gold from $20.67 per troy ounce to $35. This price change incentivized foreign investors to export their gold to the United States, while simultaneously devaluing the U.S. dollar in an attempt to spark inflation. […] The increase in the money supply lowered real interest rates which increased investment in durable goods.

Gold Reserve Act – Wikipedia

Here we have 1934, a time of great political upheaval and economic stresses, when the Gilded Age’s barons were still powerful. Still, the government was able to confiscate every piece of gold and break the resistance to dollar.

I think about that when I think of bitcoin. There are however some limitations to bitcoin. Mortgages cannot yet be based on bitcoin1. If you lend $100.000 and the dollar devalues 10%, you still only have a claim on $100.000. There’s no bitcoin debt clause, like there was with gold. That meant that creditors could choose to be payed in gold, if they thought that the dollar devalued. In fact, bitcoin doesn’t replace paper currencies, given that it’s still pretty unusual to consume something and paying in bitcoin2.

That means that the US dollar is not in risk of losing its status of being the monetary backbone of the economy. That risk existed with gold, because one could circumvent the dollar.

Facebook’s libra also has this issue. Despite a pretty stubborn drive to get libra running, there’s already been plenty of signals that this shouldn’t be pursued for risking the dollar.

PayPal on October 4 was the first major partner to withdraw from the organization. The exits, combined with intense scrutiny from lawmakers, represent a huge blow to the initiative and leave its future uncertain.

Business Insider

It is of course easier to control Facebook with all its entanglements in the US financial system than bitcoin with a decentralized government. Easier to punch the giant than the million ants. Not impossible though and all those bitcoin servers are accessible to the US government just like your webcam.

I think bitcoin is doomed if it succeeds and becomes a menace to the dollar. There is however still a lot of space for bitcoin to grow and keep itself acceptable to the Fed. On its peak at the end of 2017, Bitcoin’s total market capitalization was $230mM. US dollar’s M0 supply was about 60x bigger than bitcoin back in 2017. For comparison, gold’s current market cap is about 1,8x smaller than the US dollar’s M0. Just as long as there are no steps towards a bitcoin parallel financial system, it might just keep climbing.

I’d hate to end a bitcoin text without writing that its perception as an asset baffles me.


1If there is, please tell me which bank is doing it.

2Are cars bought with bitcoin? Plane tickets? Cinema tickets? Prescription drugs?

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