The stability of the financial system was shaken this March as US regulators shuttered a trio of banks in less than a week. Silvergate, then Silicon Valley Bank, and Signature — Silicon Valley Bank (SVB) marked the second largest bank failure in US history..Roughly 88% of deposits at SVB were over the $250,000 maximum for Federal Deposit Insurance. The US federal government stepped in swiftly to guarantee all deposits at Silicon Valley Bank and Signature in an effort to prevent panic to reduce potential contagion effects. Regulators have assured that there would not be a “bailout” comparable to those seen during the Great Financial Crisis of 2007-2008, but if this is the start of a similar crisis, similar bailouts will be necessary regardless of what they are branded..Global macro legend, Ray Dalio believes this is indeed the “very classic bubble-bursting part of the short-term debt cycle” and will result in a contagion process that will continue until central banks create more easy money, echoing the response to the Great Financial Crisis and the global economic recession accredited to COVID-19. Dalio expects central banks will need to revert back to lower interest rates to inject more liquidity into the system within the next year..To put it simply, central banks will need to create even more money..The creation of money through Quantitative Easing (QE) has been the most significant contributor to inflation and the rise of living costs for Canadians. The Bank of Canada has marched alongside the US Federal Reserve and other central banks in battling inflation through Quantitative Tightening, raising interest rates aggressively for more than a year now. It appears this approach may not be able to continue much longer without system threatening risks in the banking system..In response to the US bank collapses and similar liquidity concerns at Swiss banking giant, Credit Suisse, the market speculated on a slowing and possible reversal of aggressive Quantitative Tightening. Many investors and savers also reconsidered the risks associated with fractional reserve banking and not holding your own money. The result was both gold and bitcoin rallying to their highest prices of 2023..Gold is knocking on the door of new all time highs in dollars and bitcoin is up more than 65% in the first quarter of 2023..Gold enthusiasts and bitcoiners have long shared concerns regarding fractional reserve banking and the risks of banks not having your money when you need it. It may surprise many Canadians to learn that the reserve requirement for demand deposits (checking accounts) has been 0% since the early nineties..The system survives on the assumption that a large portion of deposits will not withdraw their funds faster than the rate at which the banks can liquidate outstanding loans. The recent bank failures are the most recent examples of when this assumption does not hold true..There is a significant overlap in the monetary characteristics of bitcoin and gold and many investors see the value of saving in both. Many bitcoiners share an appreciation of gold’s history as the most consistent money in human history and even supported a return to the gold standard before discovering and understanding bitcoin..Bitcoin has often been called “digital gold” and some characteristics of bitcoin’s design can even be attributed to gold. The term bitcoin “mining” - the application of work or energy to obtain new bitcoin - provides a direct example..For all that bitcoiners and gold advocates share, the more passionate among them often clash over which of the two assets will perform better in a variety of potential scenarios. Twitter debates between gold celebrity Peter Schiff and his 20 year old son, Spencer provide a humorous example, but this debate is becoming increasingly more relevant for the average citizen..One of the largest and most obvious differences between gold and bitcoin is their physical state. Gold is a naturally occurring element that exists all over the physical world. You can hold it in your hand. You can give it to someone else. It feels real..Bitcoin exists solely as a network of data distributed across the world, much like the internet..Of course, the concept of the internet is real and also immensely valuable. It enables economic activity at a scale that dwarfs anything else in human history. The network of computers that collectively create the internet are of course real, as is the data flowing between them. As much as the internet is integrated into our daily lives, it can still seem temporary, like it could be switched off or taken away..A beautiful, heavy, and shiny bar of gold might feel valuable in your hand, but its value comes from its monetary traits, most notably, its scarcity. If gold was as common and easy to acquire as an ordinary rock, it wouldn’t be worth much. A limited supply and an increased demand leads to a higher price. These laws apply to bitcoin all the same, despite the fact you can’t hold it or feel it..The monetary properties of bitcoin, gold, and fiat (national currency) are nicely compared in the table below from Bitcoin educator Dan Held. A detailed breakdown of each trait comparison can be found at the linked source.. Bitcoin chart .It is by design that bitcoin improves on the monetary traits of both fiat and gold. It was not the first attempt at electronic money for the internet, but it was the first design that adequately satisfied the characteristics necessary to gain traction and survive long enough to reach critical mass..How bitcoin achieves these monetary qualities is technical and complex, but it is getting easier to access and use by the day. We often forget the technical complexities necessary for our phones to work, yet they are an intuitive necessity of our daily lives. The same can be said for any technology that we take for granted..In 2013, buying bitcoin was an inconvenient and even risky endeavour. Today, you can buy and take possession of real bitcoin in 30 seconds from your couch..It would be logical to expect this progress and growth to continue but bitcoin’s novelty and complexity leaves many unconvinced of its long term reliability in an uncertain future. As long as gold and bitcoin maintain the monetary traits that give them value today, they are likely to appreciate against an ever increasing supply of dollars..Gold has long-proven its resilience, maintaining some level of monetary status for thousands of years. Bitcoin has endured a comparably short 14 year lifespan, facing intense adversity, exponential growth, and unparalleled value appreciation in that time..At its core, bitcoin is an idea. As badly as many wish the idea would die, it is proving to be resilient, and even feeding off adversity. Whether this trend would continue in the harshest scenarios we can conjure is a big topic for another article..Disclosure: Bitcoin Well is an advertiser with the Western Standard
The stability of the financial system was shaken this March as US regulators shuttered a trio of banks in less than a week. Silvergate, then Silicon Valley Bank, and Signature — Silicon Valley Bank (SVB) marked the second largest bank failure in US history..Roughly 88% of deposits at SVB were over the $250,000 maximum for Federal Deposit Insurance. The US federal government stepped in swiftly to guarantee all deposits at Silicon Valley Bank and Signature in an effort to prevent panic to reduce potential contagion effects. Regulators have assured that there would not be a “bailout” comparable to those seen during the Great Financial Crisis of 2007-2008, but if this is the start of a similar crisis, similar bailouts will be necessary regardless of what they are branded..Global macro legend, Ray Dalio believes this is indeed the “very classic bubble-bursting part of the short-term debt cycle” and will result in a contagion process that will continue until central banks create more easy money, echoing the response to the Great Financial Crisis and the global economic recession accredited to COVID-19. Dalio expects central banks will need to revert back to lower interest rates to inject more liquidity into the system within the next year..To put it simply, central banks will need to create even more money..The creation of money through Quantitative Easing (QE) has been the most significant contributor to inflation and the rise of living costs for Canadians. The Bank of Canada has marched alongside the US Federal Reserve and other central banks in battling inflation through Quantitative Tightening, raising interest rates aggressively for more than a year now. It appears this approach may not be able to continue much longer without system threatening risks in the banking system..In response to the US bank collapses and similar liquidity concerns at Swiss banking giant, Credit Suisse, the market speculated on a slowing and possible reversal of aggressive Quantitative Tightening. Many investors and savers also reconsidered the risks associated with fractional reserve banking and not holding your own money. The result was both gold and bitcoin rallying to their highest prices of 2023..Gold is knocking on the door of new all time highs in dollars and bitcoin is up more than 65% in the first quarter of 2023..Gold enthusiasts and bitcoiners have long shared concerns regarding fractional reserve banking and the risks of banks not having your money when you need it. It may surprise many Canadians to learn that the reserve requirement for demand deposits (checking accounts) has been 0% since the early nineties..The system survives on the assumption that a large portion of deposits will not withdraw their funds faster than the rate at which the banks can liquidate outstanding loans. The recent bank failures are the most recent examples of when this assumption does not hold true..There is a significant overlap in the monetary characteristics of bitcoin and gold and many investors see the value of saving in both. Many bitcoiners share an appreciation of gold’s history as the most consistent money in human history and even supported a return to the gold standard before discovering and understanding bitcoin..Bitcoin has often been called “digital gold” and some characteristics of bitcoin’s design can even be attributed to gold. The term bitcoin “mining” - the application of work or energy to obtain new bitcoin - provides a direct example..For all that bitcoiners and gold advocates share, the more passionate among them often clash over which of the two assets will perform better in a variety of potential scenarios. Twitter debates between gold celebrity Peter Schiff and his 20 year old son, Spencer provide a humorous example, but this debate is becoming increasingly more relevant for the average citizen..One of the largest and most obvious differences between gold and bitcoin is their physical state. Gold is a naturally occurring element that exists all over the physical world. You can hold it in your hand. You can give it to someone else. It feels real..Bitcoin exists solely as a network of data distributed across the world, much like the internet..Of course, the concept of the internet is real and also immensely valuable. It enables economic activity at a scale that dwarfs anything else in human history. The network of computers that collectively create the internet are of course real, as is the data flowing between them. As much as the internet is integrated into our daily lives, it can still seem temporary, like it could be switched off or taken away..A beautiful, heavy, and shiny bar of gold might feel valuable in your hand, but its value comes from its monetary traits, most notably, its scarcity. If gold was as common and easy to acquire as an ordinary rock, it wouldn’t be worth much. A limited supply and an increased demand leads to a higher price. These laws apply to bitcoin all the same, despite the fact you can’t hold it or feel it..The monetary properties of bitcoin, gold, and fiat (national currency) are nicely compared in the table below from Bitcoin educator Dan Held. A detailed breakdown of each trait comparison can be found at the linked source.. Bitcoin chart .It is by design that bitcoin improves on the monetary traits of both fiat and gold. It was not the first attempt at electronic money for the internet, but it was the first design that adequately satisfied the characteristics necessary to gain traction and survive long enough to reach critical mass..How bitcoin achieves these monetary qualities is technical and complex, but it is getting easier to access and use by the day. We often forget the technical complexities necessary for our phones to work, yet they are an intuitive necessity of our daily lives. The same can be said for any technology that we take for granted..In 2013, buying bitcoin was an inconvenient and even risky endeavour. Today, you can buy and take possession of real bitcoin in 30 seconds from your couch..It would be logical to expect this progress and growth to continue but bitcoin’s novelty and complexity leaves many unconvinced of its long term reliability in an uncertain future. As long as gold and bitcoin maintain the monetary traits that give them value today, they are likely to appreciate against an ever increasing supply of dollars..Gold has long-proven its resilience, maintaining some level of monetary status for thousands of years. Bitcoin has endured a comparably short 14 year lifespan, facing intense adversity, exponential growth, and unparalleled value appreciation in that time..At its core, bitcoin is an idea. As badly as many wish the idea would die, it is proving to be resilient, and even feeding off adversity. Whether this trend would continue in the harshest scenarios we can conjure is a big topic for another article..Disclosure: Bitcoin Well is an advertiser with the Western Standard
