Gold versus Cryptocurrencies — Friendly Fire in the Currency Wars
‘And if a house is divided against itself, that house cannot stand.’
Mark 3:25, KJV
This famous saying has long been wrongly attributed to President Abraham Lincoln since 1858. He warned of a racial divide in the country that would lead to the American Civil War three years later.
Jesus Christ made this statement many centuries before Lincoln, rebuking the Pharisees who accused him falsely of casting out demons in Satan’s name. That was a spiritual war.
Today, we are in a currency war. I wrote about this in yesterday’s article.
Those who believe in a fair and honest financial system are at war against those who use worthless currency to control prices and steal wealth from the people.
Gold and Cryptocurrencies
Gold and cryptocurrencies are meant to be on the same side, but sadly, the enthusiastic supporters on both sides denounce each other. Little love is lost between them.
The crypto mega-rally has done much to divide the two parties.
Rick Rule once said (and I hope I rightly attribute this to him): ‘The bull market leads people to mistake success for brains.’
Gold proponents are saying that cryptos are like digital tulips. Similar to what happened in the 16th century, they believe the price of cryptos will drop to zero once the euphoria dies down.
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Crypto faithfuls mock gold investors for being dinosaurs who are holding onto a dead asset and not getting with the times.
Today, I want to focus on why gold and cryptos are meant to be on the same side of this currency war. They are more similar than many people realise.
In 2014, I bought Peter Bernstein’s The Power of Gold: The History of an Obsession. This book was a delight to read. It covers the lust for gold, the extent to which people went to get it, and how gold built and destroyed empires.
The book also impressed into my mind the history of gold mining.
In ancient times, gold was abundant and easy to find. Put a woollen fleece in a river and the fibres would catch little lumps of gold that flowed downstream. Alluvial gold was abundant as well. Farmers, travellers, and prospectors would regularly find nuggets near the surface in unexplored territories.
Ancient kingdoms also dug deep into the ground to extract gold. Roman armies would divert a river to a hole cut in the hillside to build a mine. They would sift through the ore amidst the waste and debris.
Over time, gold mining became more costly as the easily accessible ore depleted.
Modern technology has allowed companies to extract ore thousands of metres below the surface. Resolute Mining Ltd [ASX:RSG], for example, had spent over US$300 million since 2017 at their Syama mine in Mali to create the first automated mining fleet.
This is a far cry from the days when they sent teams of people down shafts with shovels and picks.
How about cryptos?
Crypto mining is a digital process to generate cryptos. They chose the term ‘mining’ on purpose.
Imitation is the best form of flattery, after all.
Cryptos are a digital sequence containing information of past transactions. The blockchain technology in each crypto is meant to act as a ledger that can automatically update transactions as they occur. The crypto’s algorithm performs this task and verifies the transaction by checking that the parties involved have agreed to it.
Cryptos owe their value to the blockchain technology underpinning it.
Powerful computers use trial and error to map new paths for the blockchain algorithm to record and update transactions. Those running the computers are rewarded with a new ‘coin’ for finding a successful path. The ‘hash rate’ is the speed in which new coins are generated through this process.
The hash rate is high for new cryptos as there are fewer transactions to record, and it reduces as more mining occurs. You need more electricity and time to mine each subsequent coin, too, so more users for a crypto means a higher demand, which leads to a higher price.
The parallels between gold and cryptos become clear if you look at how they are mined. They obey the law of scarcity. Fiat currency is not constrained by scarcity. The next unit of fiat currency is no more expensive to create than the last.
Gold and cryptos satisfy the condition of scarcity, making them preferred over fiat currency. They are both maligned by central banks because they expose the central banks’ fraudulent system.
Central banks are trying to run ahead of the game while gold and crypto investors are busy mocking each other. Many see the meteoric run of cryptos exposing fiat as worthless. Those running the fiat system are worried; they need a way to beat down cryptos like they have with gold.
Now, the central banks want to introduce digital fiat, calling it ‘central bank digital currencies’ (CBDCs). They want to create their own blockchain to replace their existing fiat currency. The difference is that CBDCs will unlikely have a diminishing hash rate. The People’s Bank of China is introducing a digital yuan that has an expiry date to encourage people to spend it or lose it.
Do you think that this expiry date will keep the supply limited and hence obey the law of scarcity? I sure hope not!
The success of cryptos and the prospect of the rising price of gold are a nightmare to central bankers. Gold and crypto supporters should jointly yell from the rooftops about how fiat currency is worthless. This would speed up its demise.
The worst thing to happen in a war next to losing it is shooting at your own allies.
Lock on target.
Have a good weekend!
Editor, The Daily Reckoning Australia
PS: Australian real estate expert, Catherine Cashmore, reveals why she thinks we could see the biggest property boom of our lifetimes — over the next five years. Click here to learn more.