Bitcoin as digital gold


Recently, we explained why Warren Buffett and Charlie Munger are wrong about bitcoin and gold.

To briefly recap, Warren Buffett and Charlie Munger are biased against gold because gold is a hedge against chaos and a form of crisis insurance in case the financial system goes haywire. Buffett and Munger hold very large stakes in the financial system, so they hate this concept.

And bitcoin is an immutable store of value that sits outside the financial system, much like gold, so it’s natural for Buffett and Munger to dislike bitcoin too.

We also explained how bitcoin, as digital gold, doesn’t have to replace physical gold entirely. It only needs a modest percentage of gold’s market share to see its value rise dramatically.

The key question, then, is whether the bitcoin as digital gold concept is catching on.

Are more people recognising bitcoin as a store of value?

Three big pieces of evidence indicate that the answer is yes.

The first piece of evidence for bitcoin as digital gold…

The first piece of evidence has to do with vaults. It turns out that wealthy investors are now storing billions of dollars’ worth of bitcoin in secured vaults, just like physical gold.

There is a Silicon Valley startup called Xapo that has bitcoin vaults on five separate continents. One of those vaults is deep beneath a Swiss Mountain — just like the traditional vaults that have long held vast stores of physical gold.

But wait a minute, how do you store bitcoin in a Swiss vault?

The actual bitcoins reside on the blockchain. But the cryptographic keys that unlock access to the bitcoins are stored within the physical vaults, via servers disconnected from the internet.

This level of safety is needed because the keys are so valuable. Holding a few thousand dollars’ worth of bitcoin keys on your home computer might be fine. But US$100 million worth of bitcoin? Not so much.

Recent estimates reveal that Xapo has more than US$10 billion worth of investor bitcoin holdings stored in vaults. That is a big vote of confidence from wealthy investors for the digital gold concept.

Here’s the second piece of evidence for bitcoin as digital gold…

The other two pieces of evidence come from Wall Street. The first is a decision from investment bank Goldman Sachs to start a bitcoin trading desk. Goldman has hired a new head of cryptocurrency trading and is exploring the various challenges of trading and storing bitcoin.

Why does a Goldman Sachs trading desk count as evidence for the digital gold thesis? Because of the way investment banks think.

Investment bank trading desks make most of their money from something called flow trading. This is different than normal trading in that money-making opportunities are created by client transactions.

What Goldman and others do is help their clients buy and sell and facilitate transactions for them. Then they watch the flow of what those clients are doing and pick spots to risk their own money based on that information.

An investment bank functions like a middleman: It helps the client make a transaction and takes a small cut for itself in the process. Or it uses the data regarding what its clients are buying and selling to make its own trades.

This sheds light on why Goldman is starting a cryptocurrency operation: because of client demand. Goldman’s decision is a sign that clients are asking, “Can you help me buy bitcoins? Can you help me store them? How can I invest some of my funds in bitcoin?”

Goldman would love to say “Sure, we can help you!” to those client requests, so it can participate in the transaction and make some money as the middleman. It is client demand that is driving Goldman to start the crypto desk. This is more evidence that the store of value thesis is gaining traction.

Our third piece of evidence comes from ICE…

ICE in this case doesn’t stand for “Immigration and Customs Enforcement”, an arm of the U.S. government, but rather Intercontinental Exchange, a publicly traded company with ICE as the trading symbol.

ICE (the exchange, not the government agency) is the parent company of the New York Stock Exchange. And ICE is reportedly thinking about building a bitcoin trading platform.

The ICE approach is unique in that it wants to treat bitcoin as something called a swap, which is a complicated finance term but essentially means bitcoin could be traded as a commodity, like wheat, crude oil or gold.

Once again, the interest from ICE in facilitating bitcoin trading has to come from growing customer demand. ICE would make money off a bitcoin trading platform by taking a small fee on a very large volume of transactions — and the transactions would be created by customer demand.

So as we look at the hard evidence of investor behavior — and big Wall Street entities like Goldman Sachs and ICE, who are driven by customer demand — we can see that the store of value trend for bitcoin is rising.

And that is very good news for our thesis of bitcoin as digital gold.

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