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Author Topic: Understanding gold to understand bitcoin  (Read 1018 times)
d'aniel (OP)
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December 06, 2013, 05:31:12 AM
 #1

BofAML's David Woo recently published a "fair value" for bitcoin which included, "Bottom-line: maximum market capitalization for Bitcoin’s as a store of value = $5bn".  This was based on an assumption that Bitcoin will likely not compete meaningfully with gold as a store of value, because it's so volatile and new.

But I wonder how important gold's current volatility is to its owners.  I've been operating under the assumption that gold's modern role in the economy has largely been a hedge against the tail risk of systemic failure of the financial system, and that this is because it's been safe to assume that in a post-fiat world, gold would be remonetized.  Ben Bernanke stated this in response to Ron Paul asking him whether he thought gold was money, and it seems kind of obviously correct to me.  But if gold were to become remonetized, then its volatility would presumably be significantly less than it is currently.

It seems to me that the existence of Bitcoin brings into serious question the assumption that gold would be king in a post-fiat world, and that bitcoin's current relative volatility is rather meaningless for this question.  This would mean that if you're holding gold as a hedge, then you also need to diversify into bitcoin to "hedge your hedge".  I have no idea what percentage, but can it really be assumed to be zero, as Woo implicitly assumed in his analysis?  Even a single percent would introduce massive error in Woo's analysis.
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Shneebly
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December 06, 2013, 08:01:36 AM
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BofAML's David Woo recently published a "fair value" for bitcoin which included, "Bottom-line: maximum market capitalization for Bitcoin’s as a store of value = $5bn".  This was based on an assumption that Bitcoin will likely not compete meaningfully with gold as a store of value, because it's so volatile and new.

But I wonder how important gold's current volatility is to its owners.  I've been operating under the assumption that gold's modern role in the economy has largely been a hedge against the tail risk of systemic failure of the financial system, and that this is because it's been safe to assume that in a post-fiat world, gold would be remonetized.  Ben Bernanke stated this in response to Ron Paul asking him whether he thought gold was money, and it seems kind of obviously correct to me.  But if gold were to become remonetized, then its volatility would presumably be significantly less than it is currently.

It seems to me that the existence of Bitcoin brings into serious question the assumption that gold would be king in a post-fiat world, and that bitcoin's current relative volatility is rather meaningless for this question.  This would mean that if you're holding gold as a hedge, then you also need to diversify into bitcoin to "hedge your hedge".  I have no idea what percentage, but can it really be assumed to be zero, as Woo implicitly assumed in his analysis?  Even a single percent would introduce massive error in Woo's analysis.

You're completely right, the assumption that people won't save in Bitcoin is just silly.

Bitcoin is volatile because it is growing, and that sure as hell doesn't make it a bad store of value.

And don't forget that the price of Bitcoin is created by individuals buying and selling physical Bitcoin (ironic, yes). When you want to spend your silver, the purchasing power is determined by the nominal silver most "stackers" hate. Combine this with fact that mining Bitcoin is infinity more predictable than metals, the post-growth purchasing power of Bitcoin may be more stable than precious metals.
zimmah
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December 06, 2013, 02:02:46 PM
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Bitcoin is a currency, not a commodity.

BitcoinTraderFX
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December 06, 2013, 05:41:11 PM
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I agree that bitcoin is a currency, but its role is taking the place more as a commodity than a currency. People are using it as a holding vehicle hedged against fiat (and now perhaps gold).

In the same sense the US Dollar was used as a commodity. The Chinese government poured tons of money buying dollars.

The bulk of China’s exchange reserves, which reached a whopping $3.66 trillion by the end of last month, are held in dollars. China is the largest foreign holder of U.S. Treasury bonds with $1.28 trillion, closely followed by Japan at $1.14 trillion.

So there is an example of a currency used as a commodity.

: )

cj

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