Both Bitcoin and gold are fascinating. Do they actually have anything in common? How should speculators treat these two?
From the BTC camp we already know they neither understand gold, nor Bitcoin. But what about Bitcoin SV (BSV blockchain) and gold?
We caught up with Bitcoin visionary and speculator Daniel Krawisz to explore gold and Bitcoin in depth.
Hi, Daniel! Before we go into the topic “Bitcoin and gold,” kindly let us know: What is gold for you?
Daniel Krawisz: Gold is the 79th element on the periodic table. Economically, gold bullion is not the same as gold coins or bars because those have an issuer who has a reputation to uphold and may provide them with a guarantee of purity. Each form of gold has different risks and therefore different prices.
In our last interview, you said: “Money is about specialization and the division of labor. If you want to be paid in fiat, that means you want to specialize with a different group of people than with the Bitcoiners.” Let us apply this to gold now. If you want to be paid in gold, that means you want to specialize with the group of people that want gold?
Daniel Krawisz: Yes. In Austrian economics, money is defined as the universal medium of exchange. We do not have that in our society. What we have are proto-monies; many different media of exchange that are in competition for the dominant position. Gold and Bitcoin SV are proto-monies.
Money gives us all a shared concept of efficiency. If you spend money and end up with more money, then you have been more efficient than the rest of the economy. If you end up with less, then you have been less efficient. An economy without money has no profit-and-loss system. Mises argued that elimination of the profit-and-loss system results in an economy without planning. This is the reason that socialist economies fail. Under socialism, the market for capital goods is deliberately destroyed and people cannot be entrepreneurs.
With proto-monies, we have competing concepts of efficiency. People are not prevented from being entrepreneurs but there are different choices as to what they consider to be the bottom line. The price of gold to BSV is not constant; some entrepreneurial acts at certain times would therefore be good or bad depending on which concept was used. The entrepreneurs who chose gold would sometimes act at cross purposes to those who chose BSV. You cannot be indifferent because prices change faster than you can react. You have to know which money is good as you earn it.
As an entrepreneur, you want to focus on what you do best because that is how you maximize profits. It’s better to pay someone else for things that you do not do as well if they do it better. When we all use the same medium of exchange, we have a shared interest in each other. When there are competing proto-monies and different entrepreneurs want to be paid in different goods, there are barriers between us. One money is a cooperative game, proto monies is a competitive game with many losers and one winner.
If you want some proto-money, then you are presumably expecting to be able to get rid of it later to buy something else you want. Who that person is depends on the good, since different people will demand different proto-monies depending on their ideas about what other people will demand later. No one is perfectly indifferent between bitcoin and gold, so even if it is the same person, his attitude will be different. Thus, the decision about which money to use is ultimately one about which people are better to work with.
You kind of look down on people who want to own more BTC, as can be seen in our other interview. We get you. But what about people who want more gold—what do you think about “gold bugs”?
Daniel Krawisz: A good thing about gold is that it can be used as money if civilization collapses. Hence gold tends to do well when people fear that civilization is declining. Bitcoin is very bad if civilization collapses and is much better if civilization improves. This is the big difference between Bitcoin and gold from an investment standpoint, I think.
Bitcoin is a driver of civilization. Miners can afford more hashpower by improving civilization and they get more attention when they have more hashpower. Therefore, in the future, the people who know the most about improving civilization will also be the ones with the most attention.
Being a gold bug could mean that you fear the decline of civilization. A gold-backed money would lead to a better civilization than we have now, so it can also mean that you expect things to get better, too. The gold industry does not drive civilization forward as does the Bitcoin industry.
An important difference between gold and Bitcoin is the nature of the network that connects everybody. Both Bitcoin and gold have a network in which there is a rapid convergence of information concerning prices. However, Bitcoin has a lot more than that because there is historical information as well. Bitcoin makes it easy for all entrepreneurs to look at each other by way of this historical information.
Do you see parallels or differences between BTCers and “gold bugs”?
Daniel Krawisz: There are parallels but mostly I see differences. BTC is good for nothing whereas gold for all kinds of real things is good and there are real reasons to think it will go up, not just a bunch of people promoting a belief. However, there is a similarity in that the same scam has been perpetuated with both goods. Fiat money was originally based on gold. People were tricked into accepting new dollars that were not redeemable in gold. This was the same scam that was perpetrated on Bitcoiners when Bitcoin was replaced with Segwit coin, which is what BTC is now.
How would you—for example—convince famous gold advocate Peter Schiff of Bitcoin SV?
Daniel Krawisz: People need to make up their minds. It is wrong to try to convince people that an investment is worth the risk. It is their money, not yours. What I would want in a hypothetical discussion with Peter Schiff is to reveal how he thinks to the audience. I would use the Socratic method to get him to explain his theory of money to me and I bet I could show that he is not familiar enough with the theory to explain it very well.
What is hoarding according to economics? I think most people associate hoarding with greed; however, greed is a character trait and is not sufficient to describe the economic reasons for hoarding. In economic terms, hoarding could be understood as a decision in the market, and that decision is trusting things more than humans (trading/interacting with humans)? What do you think?
Daniel Krawisz: I don’t think a hoarder is anything in economics. A hoarder is someone who “excessively save[s] items that others may view as worthless” according to the American Psychiatric Association.
A hoarder stereotypically saves things like old newspapers and makes their home an uninviting fire hazard. In an economic context, people say that someone is hoarding something because they want to manipulate you or the conversation by making the impression that you are irrational. They want you to feel bad and give up what you are hoarding so that they can have some or they want other people to stop listening to you and listen to them instead.
Economically, we cannot say that keeping old newspapers is inherently a bad idea. People like what they like. That is subjectivism, which is a fundamental idea in Austrian Economics. Subjectivism means that value is in individual peoples’ minds, and we don’t presume to say whether people should or shouldn’t want things. It is your job to know what makes you happy and to optimize based on that, not the economist to tell you what is good for you.
Maybe someone just likes old newspapers. If they think hoarding is a problem, they will go to a psychiatrist for treatment. In either case, the purported hoarder is optimizing based on his own preferences. He is not irrational from the economist’s perspective. From a practical standpoint, perhaps we can say that it is very likely that someone is making himself unhappy with his behavior and that his thinking is disordered. If we do that then we are not speaking as Austrian economists.
Subjective ideas about value are treated as the ultimate causes in Austrian economics. We talk about the nature of prices and of economic growth in terms of these causes. We can talk about the values of higher-order goods, such as machines and media of exchange, in terms of the consumer goods that are ultimately produced or acquired with them. If we can agree that a good is a purely a higher-order good, then we can argue over whether the people buying it are really maximizing profit; but we cannot conclude from economics alone that they are acting irrationally because we do not know for certain what will happen in the future. Thus, we don’t know who is best prepared for it.
In a real-life market, some abstract theory cannot tell you what will happen, as it can with physics. Physics concerns identical particles, but society does not. The market is anti-inductive, which means that engaging with it causes it to learn. In physics, repeated experiments work the same way every time, whereas the market is different every time, just like Heraclitus’s river. Theory can, at best, inform your decisions of how to engage with the market but no investment decision is complete with economic theory alone.
You can’t have an economic theory which says that you know more than the market. You might say that economics is like theology and speculation is more like a religious experience. The market is a collective intelligence that is much smarter than any participant over a long enough time span. We can say some things about it, but we never have enough knowledge to know what it will do in general. Maybe you know more than the market today, but eventually the market will know everything you know.
In a real market, most of the people are probably acting very stupidly and will lose money and it is easy to tell yourself that you are smarter than them. However, the small fraction of people who are behaving intelligently have a disproportionate influence because they will end up with a disproportionate share of the money and they want to stay hidden so as to maintain their advantage as long as possible. People make a big mistake when they think economics is about what most people do.
In a private conversation, you pointed me to the Wikipedia page on the Marxist idea of commodity fetishism. This is exactly the sort of thing I mean when I talk about manipulation. The concept is an insult that says speculators are like primitive people following some ancient religion who worship a totem pole. You just don’t know who is rational and irrational until after-the-fact. Someone smarter than you will appear to be irrational. Marx’s theory is that capitalists are all exploiters. In Austrian economics, profits are the reward for superior planning. In effect, Marx’s theory is that there is no need for planning after Marx. Marx believed he understood the forces of history using his dialectical materialism. He is blind to the collective intelligence and believes himself to be smarter than everyone else put together.
Marx was a classic narcissist. That is how narcissists think. Psychopaths understand this and that is what makes Marxists useful idiots to them. Marx was not a psychopath but every time anyone tries to do Marxism in real life, psychopaths will rapidly take over.
According to the Wikipedia article, “Marx said that fetishism is “the religion of sensuous appetites,” and that the fantasy of the appetites tricks the fetish worshipper into believing that an inanimate object will yield its natural character to gratify the desires of the worshipper.” Marx apparently believed that he knew better than speculators and he thinks acquiring gold is irrational, like a religion. If he really knows what is rational and what isn’t, why did he have to mooch off of Engles rather than get rich himself off the speculators?
Someone who buys up a lot of gold may do so because he is a fetishist or because he is correctly predicting some big economic crash. We do not know for certain until after the fact. There are many reasons to manipulate markets and many reasons to try to deceive each other about what people are doing. Furthermore, it is easy to deceive yourself about other people even if you’re not a narcissist like Marx. Someone who is much smarter than you will appear stupid because you won’t understand why he does anything. You have to give people the benefit of the doubt and say maybe they know something I don’t know.
Everything in Marx is a manipulation to make you not notice that he is saying something very stupid by distracting you with something that makes someone else look stupid. You then become a Marxist because you like telling yourself that you’re smarter than everyone else. This is exactly the way that BTC lures people in as well.
Hoarding is not an idea that makes sense in economics. It is pure manipulation. Instead of complaining about hoarding, you try to hoard first. Get better at predicting the future. In the past I have made jokes about hoarding because I wanted to mock ideas about it. Unfortunately, these jokes were used to lure in BTC maximalists. As an economist, I can say that BTC won’t work and will fail eventually but I don’t know when and maybe it will still go up a lot in the meantime. As a practical man, I think that BTC maximalists are commodity fetishists, but I can’t say for absolute certainty that they aren’t doing the right thing. Maybe they know something I don’t.
Dr. Craig Wright talked about empires hoarding gold (“bullionism”) in this video (time stamped):
I would like to hear your thoughts on hoarding gold from an economic point of view.
Daniel Krawisz: Dr. Wright defines bullionism as “policies to ensure a steady influx of precious metals & to prevent their outflow” and points out in his slide that this makes money into a zero-sum game. Smith discussed this in the Wealth of Nations.
[N]ations have been taught that their interest consisted in beggaring all their neighbours. Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss. Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity. – Adam Smith
People involved in governments had the idea that whoever had the most gold had the best national defense because they could buy the best military. However, gold works the best for buying things if you become interdependent with your neighbors. Smith understood that the best way for nations to get gold was to cooperate and specialize, in other words to find mutual benefit with neighbors.
Typically, governments run out of money before they win wars and they have had to devalue the currency. That is why governments prefer fiat money that can be issued forever at no cost. There is never enough real money to win a war since wars are the opposite of interdependence.
As to Dr. Wright’s views, I cut out some quotes from this talk and will discuss them. This one, I think, represents his overall message:
Money is about what we’re creating. The amounts of goods and services. How productive we are. How efficient we are. What we as a society do to create more.
Yes, this is what everything we are doing is all about. I wish I had understood to say this a lot earlier, but it really took me a long time to understand how people understood the things that I did say. I said I thought it was a good idea to hoard bitcoin because I anticipated the growth of the economy. An economy with better money ought to be easier to grow. Unfortunately, we had a communist takeover instead, similar to what is happening with the whole world right now.
Without a pro-growth mindset, Bitcoin will never be good for anything. Growth is something that is hard to talk about with many people because it is hard for people to imagine new situations that they haven’t experienced before, which is what growth is all about.
Another quote I picked out from the video is:
If I have a certain money base and I have one percent of that then I have, when I spend that money, one percent of the goods that have been created then.
This I do not agree with. The ratio of all money to all goods is not fixed but is its own price. We can have situations where the amount of goods stays the same, but their prices all go up or down in terms of the money. This means that people are valuing money differently. This happens because cash in a portfolio serves a different function than all other goods. Money has to do with new opportunities. Other goods are either consumer goods, which you destroy, or investments, which require commitments to realize the value that you see in them. They are all less liquid than money. Money gets you something new that you don’t know about right now.
Thus, the value of money can change in relation to other goods based on how people expect new opportunities to change in relation to the productivity of capital. It’s better to think of money as having to do with the goods that exist that you don’t know about as opposed to all goods. The less knowledge you have of the economy, the more you want cash. This needs to be understood because the value of Bitcoin is the foundation of all entrepreneurships in the Bitcoin economy.
Yes, we want to grow the economy but before you do that, you need a good idea as to how. Entrepreneurship takes risk because you have to spend money to make money. You do not want to take risk willy-nilly. It’s important to calculate risk so that you can be as certain as possible that you will make money. If you do not have a good enough idea yet, then you can hold bitcoins and grow off the other entrepreneurs who did have good ideas. Holding bitcoins is really the safe thing to do and there’s no shame in it if you don’t know what’s better.
One last quote:
They believe they can sit there and wait. Things will happen. We had money. We were powerful. That’s the problem with bullionism. That’s the problem with hoarding. People start believing in the story rather than the idea of work. They start thinking that goods aren’t as important as a lump of money. Not actually understanding what money is. Money is liquified future goods. It is a call from what you’ve done now on society in the future.
Yes, money is no good without work because without it there won’t be anything to buy, another thing I wish I had known to explain earlier. There is a contradiction with the previous quote because here Dr. Wright says that money is about future goods but in the other he said money is about present goods. Is money a future good or a present good? Mises said that money was a present good. However, it can also be a future good because you can hold it with the idea that it will be worth more in the future. We improve the value of Bitcoin by growing the economy, in other words, we act as a source of new opportunity, which is the value of money. Here is a picture about that:
You recommend seeking to own as much Bitcoins as possible. What is the difference between saving in Bitcoin and hoarding Bitcoins?
Daniel Krawisz: I do not think that we should seek to own as much Bitcoins as possible. I think that it is a good idea to use Bitcoin as our unit of account. In other words, consider whether we have made a profit or a loss based on whether we have more or fewer Bitcoins. That means that we should think of our net worth in terms of Bitcoins. It does not mean that all our funds should be in Bitcoin. Rather, Bitcoin should be our baseline. We should pursue all ethical strategies to increase wealth. We should try to do things that are better than holding Bitcoins. I think that holding Bitcoins is very good, so it may not be easy but that does not mean we shouldn’t try.
I also think that it’s a good idea to save in Bitcoin. All portfolios need a cash balance even though cash does not earn income. That does not mean that your entire portfolio should be Bitcoin. Savings is just your cash balance. Investments, such as hashpower, stocks, and bonds are not savings because they require a commitment on your part in order to gain from them. Savings is “money for a rainy day.” It is something for the unexpected. Investments, on the other hand, require stability and provide income over time. You need both of these things. You need to determine the optimal proportion of income and commitment versus openness to new opportunity.
Neither of these means that you should try to have as many Bitcoins as possible. The game of capitalism is about taking risk to increase net worth. Money is safety. It is like the village. Entrepreneurship is like hunting. Profit is when you come back to safety with meat. Profit is gained from taking successful risks. Unlike a real tribal hunter, an investor can be in the village and out on an expedition at the same time. He can hold cash and own hashpower in his portfolio. The real question is what is the correct proportion? Because Bitcoin is a much better form of cash than we have had previously, I would argue that the correct proportion is different from what was appropriate before and that more cash relative to income-producing assets is warranted. We would expect Bitcoin to become more valuable as the economy grows and it can therefore substitute for investments that are designed to track the overall economy, such as an index fund.
The difference between saving in Bitcoin and hoarding Bitcoins is that one word has good connotations and the other has bad connotations.
What is the difference between hoarding gold and hoarding Bitcoins?
Daniel Krawisz: The difference between one and the other has to do with the difference between price and expected value. As Warren Buffet has said, “price is what you pay, value is what you get.” What do you get from Bitcoins and from gold? Bitcoin is really only good for being money. Gold can be money but it also has other uses. In particular, because gold is physically scarce and durable, people will always use it to store wealth even if they don’t use it as money. Bitcoin will not work like that because it is possible to make clones of it. Bitcoin has to be something people use as cash in order to be valuable.
Would empires start hoarding Bitcoins? If so, what could be different to the historic examples of empires hoarding gold?
Daniel Krawisz: Nations today are deadbeats in a lot of debt. It would be great if nations had savings instead of debt. It would be better still if they could invest strategically. However, that is probably expecting too much.
Let us take the premise that the world will be running on Bitcoin SV. What kind of role would gold play in that kind of world?
Daniel Krawisz: In a Bitcoin SV world, civilization is less likely to collapse. Businesses would be invested in the infrastructure that keeps the whole world running and would therefore have the power to prevent collapse. As I pointed out above, those with the most knowledge would also have the most attention.
There would still be a business cycle, so there would be times when civilization would decline and these would be good times to have gold. The risk will not be as great, so gold will be a smaller fraction of the total wealth of the world as it is today.
We have already talked in length about Bitcoin and speculation, but not in the context of gold. If you had to choose one asset to receive after 30 years from now, what would you go with: 1 oz of gold of 1 Bitcoin SV?
Daniel Krawisz: One BSV. That one is pretty easy.
10 oz of gold or 1 Bitcoin SV, again to be received by you after 30 years from now. Which do you pick?
Daniel Krawisz: That’s more difficult. I would choose 1 oz of gold + .9 BSV. This is an acceptable way to answer the question because the optimal strategy is always a balance between all alternatives and the most difficult and important part is finding that balance.
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