Web3, Bitcoin and Neo-metallism

on Thursday, February 17, 2022

Evaluating the Bitcoin and Neo-Metallist thesis: Bitcoin is a digital gold, a gold-standard was good monetary policy, and thus that a Bitcoin-standard would be a better gold-standard.


Claim Steel-manned

Bitcoin is a digital gold, a gold standard was a good idea, and thus that a "Bitcoin-standard" – i.e. a new gold-standard built on bitcoin – is a good idea.

The neo-metallist claim is that bitcoin can operate as a new asset class which exhibits similar financial properties to gold. The strong version of this claim asserts that a gold standard was a good idea and hence that that a new gold standard should be built on top of bitcoin.

Bitcoin is a better gold: it shares the features of gold which make it a good choice for a currency (or something to peg a currency to). In addition, Bitcoin has specific features which may make it better than gold e.g.:

  • Bitcoin is digital and so is not subject to the same costs around storage and transportation as gold;
  • Bitcoin is under less state control. Gold supply is mostly controlled by sovereign nations like the U.S., China, Germany, and other European countries.

The gold standard is a good idea: for two reasons. First, because it reduces the scope for governmental or central bank intervention in the money supply. Intervention is bad because it leads to inflation which is harmful to the free market and commerce. In addition, Second, more philosophically, government / central bank intervention in the money supply is inherently undemocratic; the will of the few imposed on the many.

The bitcoin-standard is a good idea: combining points one and two we arrive at the neo-metallist thesis that a new digital gold-standard based on bitcoin will be good for the economy.

Examples of claim being made

Wences Casares in The Case for a Small Allocation to Bitcoin

"If Bitcoin succeeds it will most likely not replace any national currency. It may be a supranational currency that exists on top of all national currencies. If Bitcoin succeeds it may be a global non-political standard of value and settlement." e.g. like the kilo is a global standard measure of weight

Evaluation: False (high confidence)

Summary: both key sub-claims are weak and since both are required the overall claim for a bitcoin-standard is very weak. Bitcoin does not resemble gold as a store of value. The gold-standard was deflationary and dysfunctional especially in times of economic stress and a Bitcoin-based gold standard would be worse.

Bitcoin is a better gold: False

Bitcoin has no consistent track record of being a reliable store of value, it's price movements are extremely volatile and thus is not a reliable place to store value on long time scales. Bitcoin's price behavior is uncorrelated with gold and is largely correlated with the broader stock market making it an unreliable safe haven in times of market volatility since it is directly exposed to the price action of the Nasdaq.

Bitcoin has limited track record of being a store of value and lacks the millenlia of history that gold as a commodity has achieved. Unlike gold it also lacks a use-value for the physical asset which consistently generates demand. Bitcoin also has a upkeep cost in the form of mining which forces the asset to behave like a negative-sum speculative asset instead of a store of value.

The gold standard is a good idea: False (high confidence)

The gold-standard and the notion of sound-money are undesirable foundations for a currency and were subject to extreme shocks and deflationary spirals. As such they were abandoned in the mid 20th century in favour of the central-banks and fiat monetary system.

Full Analysis

What is Neo-Metallism?

The term neo-metallism stems from metallism, a school of thinking which relates to the connection between money and some form of commodity.

Neo-metallism argues that cryptocurrencies, and in particular Bitcoin, can and should be the new gold - it should be used to fix the monetary supply to the value of this new asset. Just as under the gold standard the value of a given unit of currency (e.g. a pound or dollar) was based on a fixed quantity of gold, neo-metallists argue the value of a unit of currency should be based on a fixed amount of Bitcoin.

Gold as Currency

  • Gold has a historical precedent as money across cultures going back millennia.
  • Multiple cultures have independently used it as currency.
  • Its metallurgical properties make it uniquely suited amongst the elements on the periodic table.
    • Its relative abundance (although not excessive abundance) and distribution across the Earth’s crust make it rare enough to hoard and access even for Bronze Age cultures.
    • It is stable at room temperature, doesn’t oxidize, is easily detectable because of its glimmer and unique aesthetics, is malleable without advanced smelting technology and is uniquely distinguishable from other metals.
    • It is probably the ONLY element on the periodic table that has all of these unique characteristics that could even be used for monetary purposes.
    • There is only a finite amount of it produced in supernova events and nuclear reactions: it is thus impossible to counterfeit or “debase” the supply.
  • Advanced economies began stockpiling gold in government reserves and issuing notes against that float in redemption in gold by a government treasury.
  • Gold theoretically acts as a universal numéraire across economic systems allowing interchange and commerce. It is a fixed “measuring stick” for economic value that cannot be changed.
  • It satisfies the definition of money: it can theoretically function as a unit of account, a medium of exchange, and a store of value. The only issue is that it incurs storage costs and is not easily transported because of its density and physicality.

Why the Gold Standard: Fiat Money, Sound Money and the Gold Standard

  • The Austrian school of economics regards gold as a (possibly only) example of "sound money" because it is immune to government intervention in the supply, effectively by the laws of physics. It cannot be “debased” or changed. (Aside: Of course, governments have found ways to "debase" gold-based currencies -- usually by altering the coinage in various ways).
  • Fiat money allows for both variable supply and demand with the goal of maintaining price stability and targeting a desired inflation amount which encourages productive enterprise. Historically, going all the way back to the invention of banking in Florence, there have been examples of mismanaged fiat currencies which have not managed either their supply or demand properly and spun into either deflationary or inflationary spirals and the public lost trust in the notes and their value become illusory.
  • The Austrians assert that government intervention in "business cycles" is unnatural because free market forces will naturally correct supply and demand imbalances and that recessions and manias are both desirable and natural events.
  • The hard monetarist perspective views any intervention in the supply dynamics of currencies as inevitably leading to inflation which is harmful to the free market and commerce.
    • Milton Friedman famously said, "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."
    • Centralized intervention in the markets turns economic influence into political power and financial rewards based on non-public information. This in turn is worse than centrally planned economies as it doesn’t allow for accurate price formation of assets and ultimately leads society into a loss of freedom, tyranny and a state of serfdom.
    • Money should be put in the hands of the free market, not the state.
    • Private money is not only desirable, it is inevitable because hard “commodity-based'' money will inevitably replace soft money. Gresham’s law
    • Cantillon Effect - Inflation is not simply an average rise in prices. Prices do not rise proportionally or simultaneously. This results in arbitrary and unfair benefits to people who have not created any economic value and detriment to others who have not destroyed anything of economic value by destroying savings. Inflationary fiat money is thus a tax on people who sell their labor for wages and don’t hold assets and disincentivizes economic activity, encourages financial speculation, and results in market consolidation.

Steel-Manning the Neo-Metallist Position

The Gold Standard is Good

  • The Managerial Argument
    • Government/CB intervention in the monetary supply amounts to economic mismanagement. These interventions will inevitably lead to inflation and increase the volatility of business cycles (the “natural” upswings and downswings in broad measures of economic activity like output, employment, income, and sales).
    • Inflation is a bad thing: prices will be driven up at different times, distorting relative prices, wages, and rates of return. Artificial distortion can lead to booms in production and consumption which are out of line with future reality, leading in turn to dramatic busts.
  • The Philosophical Argument
    • Intervention is inherently undemocratic, in that it allows a select few individuals to exert undue power over the lives of the rest of a nation (and beyond).
    • This is the argument laid out in Hayek’s famous Road to Serfdom (1944).

Bitcoin is Better

  • Bitcoin is Like Gold
    • Bitcoin serves the three functions of a currency:
      1. It can be a unit of account in that it’s a standard and divisible unit of measurement of market value (i.e. it can be used to signal what something is worth).
      2. It can be a medium of exchange in that we can use it as an intermediary instrument to transact for goods and services.
      3. It can act as a store of value in that it (at least ideally) retains its purchasing power over time, such that we can retrieve the value of our investment at a later date without making a significant loss.
    • Bitcoin shares three other important characteristics with gold:
      1. Scarcity: Bitcoin is artificially scarce, just as gold is naturally scarce. There is a hard limit of 21 million coins baked into Bitcoin’s design. This makes it inherently deflationary, just like gold.
      2. Universality: Bitcoin shares gold’s “universality” due to its prominence in the crypto sphere. Just as gold is the standout element suited to peg currency to, so Bitcoin is the only standout cryptocurrency due to it being the original and most prominent.
      3. Fair initial distribution: The lack of overarching controller or owner means there was a “fair” distribution mechanism for Bitcoin. It rewarded early finders and investors in the same way as natural distribution of gold rewarded those who initially unearthed it.
  • Bitcoin Functions Better Than Gold
    • Bitcoin is digital and so is not subject to the same costs around storage and transportation as gold.
    • Bitcoin is arguably more decentralized. Gold supply is mostly controlled by sovereign nations like the U.S., China, Germany, and other European countries.

Evaluating the Neo-Metallist Position

'The Gold Standard is Good'

  • This position stems from the Austrian school of economics. It is a fringe economic position and not one supported by most economists.
  • The Managerial Argument
    • Moderate inflation is actually positive: it encourages spending which stimulates the economy (this is the crux of Keynesianism).
    • Moderate inflation is far preferable to the alternative of the gold standard, as the gold standard is inherently deflationary.
      • The Quantity Theory of Money states: MV = PY where M = money supply, V = velocity of money in circulation, P = price level and Y = real GDP (i.e. goods and services transacted in the economy). If M remains fixed, as it must under the gold standard, then increases in real GDP will inevitably lead to a fall in the price level.
      • This is problematic because it leads to hoarding. Under deflation prices fall, so it is always rational for me to hoard rather than spend my currency as much as possible, as it will be worth more tomorrow than it is today. This in turn takes yet more money out of the supply, risking deflationary spirals which threaten economic productivity - if no-one wants to buy anything then we can’t fund economically and socially productive activities.
    • While excessive inflation is bad and governments/central banks have made errors in the past, this has been rare. Historically most have quite easily kept inflation under control.
    • The flexibility offered by the ability for governments/central banks to intervene is highly useful, and worth the risk of error. Most obviously, they can stabilise in the face of shocks, for example, a pandemic. This was the reason we switched to fiat currency in the first place.
      • Paper money was issued as an emergency measure in Spain, during the conquest of Granada (1482-1492).
    • The gold standard can also lead to the reverberation of shocks through the global economy. This is because economic shocks in one economy will lead to investors buying up gold as a safe asset. Given that currencies are pegged to gold, this increase in demand in one nation can have significant impacts on the value of currencies the world over.
  • The Philosophical Argument
    • Hayek's claim hasn't been borne out historically. Since leaving metallism most metrics of prosperity have increased, and there have been fewer crises than under the old system. There hasn’t been any evidence of any shift away from democracy or increases of the translation of political power to economic benefit (where such things do happen today, it’s not happening through monetary policy).
    • There are ways to democratize the fiat system without returning to gold e.g. we can increase the democratic accountability of those in control of monetary policy.
      • Central banks can be made more accountable to government, and independent bodies such as the Monetary Policy Committee can have either more democratic election mechanisms or a greater diversity of representation.

'The Bitcoin Standard is Better'

  • 'Bitcoin is Like Gold'
    • Bitcoin cannot function as a medium of exchange. The transaction throughput is so small that it doesn't work as a global system of currency - it can't process transactions fast enough. This is inherent to the proof-of-work process Bitcoin uses to verify its transactions. This incapacity is therefore baked in.
    • Bitcoin does not appear to hold potential as a store of value given its extremely high price variance.
      • Gold, on the other hand, has historical precedent as a store of value in economic insecurity; its price has proven to be better insulated from broader economic dynamics than many other asset types.
      • If Bitcoin were to behave as a store of value it would have to abandon hypervolatility, and there is no easily identifiable economic mechanism for this to happen.
  • 'Bitcoin Functions Better Than Gold'
    • Bitcoin being digital does not mean it is without its costs.
      • The extraction, transport and storage costs associated with gold are outweighed by massive Bitcoin mining costs. The “proof-of-work” mechanism used to validate transactions and undertake mining for Bitcoin requires a huge amount of electricity (costly and environmentally damaging). This verification process creates significant friction around transactions - the system is very slow, particularly when lots of people are using it.
    • Bitcoin, unlike traditional commodities, has a negative price elasticity of demand - demand goes up with price, not down. For this reason, Bitcoin looks like a speculative bubble, which at some point will inevitably crash.
    • States can synthetically stimulate demand for a single, fiat currency by demanding tax in this currency, ensuring the whole system works and that the value of such currency can never drop to zero. In other words, there is a clear mechanism to guard against value bottoming out. The same cannot be said for cryptocurrencies such as Bitcoin.
    • Bitcoin no longer shares gold’s uniqueness.
      • Lots of new “alt coins” - new alternatives to Bitcoin - are being minted, meaning the cryptocurrency market is now crowded with competitors.
      • High numbers of different coins also creates inflationary effects - the very thing stores of value are intended to guard against.
      • Single currency systems were adopted as these are significantly more efficient. A single price in a single currency allows far easier exchange of goods. Having multiple issuers of currency adds friction to trade, as one must convert the value of a given object between currencies before exchange can take place.
      • The history of large issuances of private money isn't good. These systems are subject to fraud and a general breakdown of trust. If any bank can issue its own private bank notes, how does one know which bank is reliable and which isn’t?

A Final Note on Trust

  • In the world of Bitcoin, and blockchain more generally, replacing interpersonal trust with cryptographic verification mechanisms is seen as positive; we no longer need trust: in states, governmental institutions or one another.
  • The problem with trust is that when you get rid of it, it's very hard to get it back. If crypto were to fail we would risk a large-scale general reduction in trust. Even if it were to succeed, it would likely lead to a significantly diminished role for trust at a broader level.
  • At the root of trustless blockchain technologies are assumptions about human nature, which have significant implications for how we approach vital questions of social cooperation.
  • There is evidence that high trust of strangers correlates with positive economic and social outcomes.
  • Aside from its impacts on Bitcoin’s potential as a gold substitute, the issue of trust has serious ramifications for how we govern our societies.



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