The Breakdown - Is Asteroid Mining Really Our Best Argument for Bitcoin Over Gold?

Episode Date: August 16, 2020

Earlier this week, the Winklevoss brothers introduced Barstool Sports founder Dave Portnoy to bitcoin.  One of the notable parts of the recap video was a discussion of how Elon Musk was set to destroy the value of gold on Earth by mining gold from asteroids.  While much meme fun was had, on this week’s Long Reads Sunday NLW has chosen a selection that looks at how fiat beat out gold and how gold beat out silver to provide some – ahem – more immediately relevant lessons on how to explain the benefits of bitcoin.  Read:Projection and ThrownessPart III — Bitcoin’s 10x Advantage Over Gold Might Not Lie Where You Think By David Lawant 

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, BitStamp, and Nexo.io. And produced and distributed by CoinDes. What's going on, guys? It is Sunday, August 16th, which means it's time for Long Reads Sunday. And for this article, I got to tee it up a little bit. So about a week ago, Dave Portnoy, aka El Presente, aka the founder of Barstool Sports, aka the head of Davy Day Trader Global Global,

invited the Winklevoss brothers to come explain Bitcoin to him and said that if he did, he would hear it and he would probably get involved. Well, that happened and yesterday they released the nine and a half minute video or so about their conversation. One part of that conversation had to do with gold and why Bitcoin was better than gold, and the specific argument that came up was asteroid mining. And the idea that Elon is going to go mine gold from asteroids, meaning that the supply on Earth would be rendered irrelevant,

and it would crater the price. Let's listen to the clip so you guys have that context. Yeah, and if Elon Musk might, you know, push it and all of a sudden... Right. We're like buttons. He's only a run for president. Yeah. Maybe you guys will push it.

And now become Bitcoin billionaires on the Dave coin. Yeah. And if he mines all the gold and the asteroids above Earth, then all of a sudden, does that like a real statement? Yeah. I think he will. And like the next. So all of a sudden, wait, what?

He's going to mine all the gold in the asteroids. So there's billions of dollars of gold floating on asteroids around this planet. And Elon's going to get up there and start mining gold. And then it's going to. Frank, you hear this? Ball from this stuff. What are we talking about? I don't know if you're serious.

No, being totally serious. Yeah, that's why gold is a problem because the supply isn't fixed like Bitcoin. But so when people say gold or Bitcoin, like, that's the reason. Gold's for boomers. You don't understand that. But Bitcoin, Elon can't change the supply of Bitcoin. It's the only fixed asset in the galaxy. Are you guys crazy?

I don't lose my mind talking about that. And the thing is, the dollar is turning into toilet paper. So if you leave your value there, like what is your option? You have you have to have a hard asset, hard money, and it's either gold or Bitcoin, but Elon Musk is going to destroy gold. You have to, I don't like, I mean, the things you're saying from someone who was like, I always thought of a big brain, but I mean, you guys, I thought half the things you're saying to me almost seem like a joke, like Elon Musk is going to go into the space. Smash gold is going to rain plentiful like sand. I mean, that can't happen. What the fuck?

Okay, so to be clear, this creates some pretty epic meme fodder. Portnoy, just the next day, posted a video, a redone video from Armageddon of the astronauts getting ready to go, try to blow up the asteroid that was hurtling towards Earth in that movie. But with his face and the Winklewase's face and Elon Musk's face on the astronaut. So I'm not denying that there is some pretty good meme potential here. But I also think it brings up a question of how well we're able to explain the benefits of Bitcoin compared to other types of money and compared to other sort of safe haven types of money like gold. For that reason, I thought it would be fun to pull up an older article. This is from August of 2019.

So about a year ago, it's from a series called Projection and Thronus. and basically I'll just read the introduction to the series to give you a sense of it. TLDR, this is a multi-part series about the many ways in which Bitcoin is such a unique, interdisciplinary, and intertemporal technology. The third part touches on an overlooked advantage of Bitcoin over traditional forms of commodity money, including gold. So this piece we're reading today is part three of Projection and Throneus. Bitcoin's 10x advantage over gold might not lie where you think.

the long and winding road from metallic coins to paper banknotes. Contrary to what some think, fiat money was not implemented suddenly in 1971 when Nixon closed the gold window, or in 1974 when the IMF changed the SDR composition from gold to a basket of fiat currencies. Jim Rickards showed in his book The Road to Ruin that the classical gold standard was actually killed in stages, starting with the Austro-Hungarian ultimatum to Serbia and the outbreak of World War I in 1914. The next five paragraphs summarize his argument. Right after the start of World War I, nations were aware that gold reserves were a determinant factor of victory and suspended redemptions in specie. The two exceptions for different reasons were the U.S. and the U.K.

However, that's exactly when gold coin circulations were replaced by 400-ounce bars, the gold delivery standard until today. This change gradually disincentivized people to hold and transact money in species. A 400-ounce gold bar today is worth about $500,000, and to use banknotes instead. With the end of World War I in 1918, the new habit of holding banknotes instead of gold coins was ingrained not only in the UK but throughout Europe, and increasingly in the U.S. gold could still be privately owned, but it was buried out of sight and out of mind. Another major boost to monetary base centralization was FDR's famous 1934 Order 6102 that required U.S. citizens to surrender private gold to the government. Fort Knox was built three years later. In stages between 1914 and 1934,

U.S. gold went from private hands to bank hands to central banks to the Treasury. This paralleled the process that took place in the United Kingdom and other developed economies. Governments made gold disappear. At the outbreak of World War II, gold convertibility, to the extent that remained, was again suspended. The only major gold dealer at that point was the bank for international settlements. The BIS acted as a broker of Nazi gold, including gold, including gold, taken from Jews and other Holocaust victims. By the end of World War II, gold did not circulate as currency anymore. The Bretton Woods Agreement of 1944 introduced the gold exchange standard, meaning it applied to nation states but not to its citizens. It should be clear by now that it was

only a matter of time until the implementation of a full Fiat monetary system, which came in 1971 when Nixon closed the gold window. The growing influence of Milton Friedman and his idea of elastic money as a remedy that could have avoided the Great Depression provided the intellectual justification politicians needed for the implementation of the monetary system we have had until today. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is Crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases. What's more? With crypto.com's MCO Visa card, you can get up to 10% back on things like food and grocery shopping.

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of silver under the perspective of monetary-based centralization in his monumental The Ethics of Moni production. Many bitcoins believe that gold won the battle against silver due to its higher stock-to-flow ratio. According to Hulzmann, this view is misguided. There is plenty of evidence that the demonetization of silver was not a free market process, but one heavily engineered by governments. Mises seemed to be more or less in accord with this view when he discussed the matter in his theory of money and credit. And while some thus regarded gold as nothing less than the embodiment of the very principle of evil, all the more enthusiastically did the other extalt the glistering yellow metal which a line was worthy to be the money of right and mighty nations. It did not seem as if men

were disputing about the distribution of economic goods. Rather, it was as if the precious metals were contending among themselves and against paper for the lordship of the market. All the same, it would be difficult to claim that these Olympic struggles were engendered by anything but the question of altering the purchasing power of money. Here I'll summarize Hulsmann's argument. Until the 1860s, only the U.S. and some major parts of the UK Empire had been on what we today call the classical gold standard. Things changed with the German victory in the Franco-Prussian war of 1870 to 1871. Germany obtained an indemnity in gold and used that to institute a monetary policy similar to Britons. The Prussian Central Bank, later rebranded the Reichs Bank in a marketing coup,

was instituted four years later. Why did the Germans institute a gold standard and not a silver standard or the bimetallic systems that were floating around? One factor is that gold had better externalities. Britain, the world's financial center, was on gold, and the major silver countries, Austria and Russia, had suspended silver payments at the time of German victory. Gold at that time provided more advantages from an international division of labor standpoint, but Hulzman points out to another reason as well. Moreover, one should not neglect that silver, the only serious competitor for gold among the commodity monies, has one grave disadvantage from the point of view of a government bent on inflationary finance.

Because of its bulkiness, the use of silver entails higher transportation costs, which make it less suitable than gold for fractional reserve banks trying to quash systematic bankruns through cooperation. Virtually all Western countries followed suit. By the early 1880s, all countries of the West and their colonies had adopted the British monetary model. The silver lining of the classical gold standard was that it demonstrated how a world monetary system can emerge without central coordination. There was no conference, no treaty. The countries adopted it independently of each other. However, this was done at the discretion of national governments, not at its citizens. The classical gold standard was brought by the coercive elimination of the alternative monies and it paved the way for government intervention.

in the monetary system. It ignited the age of national central banks and private fractional reserve banks taking control of the monetary system. This does not look like a bulwark for the liberty movement. We have to stress these facts because many advocates of the free market believe the classical gold standard was something like the paradise of monetary systems. This reputation is undeserved. The classical gold standard differed only in degree, not in essence, from its successors, all of which have been widely and deservedly criticized in the literature on our subject. In some, Hulzman states that the lethal hit that World War I brought to the classical gold standard only anticipated its death from its own cancer. This is not a silverbug argument, but an argument

against coercive centralization of the monetary base. Earlier in this same book, Hulzman defines what fiat money is, one that artificially circulates more than the unhampered market would set. This definition also applies to gold in the classical gold standard. Bitcoin's 10x improvement over gold might not lie where you think it does. So now we understand that the institution of the fiat system was just the culmination of a process that was going on for about 100 years before Nixon's order in 1971. Citizens were coerced to trade silver coins for gold coins, then gold coins for gold bars stored in private banks, and finally to gold bars stored with the government.

Without this fiat money would be a lot harder, maybe even impossible, to implement. How was this process so swiftly accepted by the population? In my opinion, the centralization of the monetary base that led people to trade in IOUs instead of in specie actually brought some advantages to commerce and trade. As Nick Sable points out, metallic money is hard to assay slash validate and is also relatively hard to transport. As economic activity expands with respect to the number of transactions into geographical footprint, dealing with physical money becomes impractical. IOUs were a boon to commerce and trade from this standpoint, despite all the additional trust it required and all the monetary base centralization

it entailed. Metallic money does not scale well in response to more commerce and trade activity. Fiat money actually beats gold there. Bitcoin fixes this. Bitcoin makes the cost of transportation and validation negligible without adding any counterparty risk to the system. This monetary evolution cannot be overstated. At this point, I also hope that the importance of these properties for a sustainable sound money in the internet age is clear. Metallic money did not. survive the age of globalization in nation states because it did not scale well. Bitcoin optimizes for that while still sustaining the highest stock-to-flow ratio of any monetary asset. That's its 10x improvement right there. Bitcoin's harder monetary policy compared to gold is usually cited as the

main factor that will make it succeed. This is certainly an advantage and a precondition for it to be sound money in the first place. However, the question of whether this improvement is enough for Bitcoin to leapfrog gold's massive Lindy effect is a valid one, that is a that has been bothering me for a while. Answering this with the possibility of gold mining in space might be a bit far-fetched at this point. The catalyst for Bitcoin's extremely high stock-to-flow ratio is how well it scales with commerce and trade activity.