Did Bitcoin Kill Gold’s Monetary Utility?

gold and black round coin

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I’ve always loved Harry Browne’s Permanent Portfolio. The concept is so simple and clean – own equivalent ratios of assets that protect you in an “all weather” fashion:

  • 25% stocks for growth/expansions
  • 25% bonds for income/deflations
  • 25% cash/t-bill for liquidity/recessions
  • 25% gold for inflation hedging

This portfolio is a close approximation of a Global Market Portfolio. It’s simple, diverse, and covers all the bases that we might expect to encounter across an economic cycle. It’s also low fee and it’s got a ton of evidence and historical support to reinforce the concepts. My only beefs with the Permanent Portfolio are that this time might truly be different from when Browne created the portfolio in the 1980s mainly because:

  • 0% interest rates mean that 25% of your money in cash/t-bills is way too much for most people.
  • Gold relies on a monetary “faith put” that exposes 25% of your future returns to the risk that this “faith put” recedes or disappears.

I could write 100 pages on this portfolio and its pros and cons, but I want to focus on that last point – the faith put in gold.

The basic argument is that gold has long been viewed as a monetary alternative to fiat money. Gold, at its core, is just another commodity and has real economic utility like other commodities. But gold has trounced other commodities historically. One explanation for this outperformance is that there is excess demand for gold because it’s become an alternative form of “money”. In short, gold has a long history of being a viable decentralized form of money that can serve as an alternative to centralized fiat money.

Enter Cryptocurrencies

One of the corollaries between cryptocurrencies and gold is that, as forms of money, they’re both grounded in the same decentralized concepts that make them useful alternatives to fiat. Gold has obvious impediments to its monetary utility in a modern economy – mainly the fact that it's difficult to transport. Cryptocurrency fixes that. Personally, I find the long-term inflation hedging benefits of crypto to be somewhat less beneficial than many proponents believe. After all, all crypto is endogenous in the sense that it is literally created from nothing and can be borrowed into existence in exactly the same way that modern banks create synthetic “dollars” from nothing when they make loans. A “fractionally reserved” Bitcoin system with endogenous lending could be every bit as inflationary as the current fiat system with the main difference being that there isn’t a government there to pump trillions into the system on a whim. And that’s where the last 18 months and inflation hedging is pretty interesting….

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Disclaimer: The content in this article is provided as general information only and should not be taken as investment advice. Article content shall not be construed as a recommendation ...

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James Grover 1 month ago Member's comment

Hell, no!

Leslie Miriam 1 month ago Member's comment

Why do you say that?

James Grover 1 month ago Member's comment

Oh where to start... let’s begin with the point your article made that crypto is nothing.  So should everyone just start creating currencies out of nothing?  It’s absolute insanity and the only reason it’s done anything at all is because drug dealers and tax evaders can use it.  When that’s stops and it will....the IRS wants their money too....the party will stop.