In Quest for Digital Gold
In Quest for Digital Gold by ALEXGUREVICH – Market Philosopher
How did gold become gold? And, more importantly, why is gold staying gold?
Silver had its run during some periods and in some cultures, but silver has become “tarnished” as a store of value.
Gold meanwhile has survived the rise of fiat and major economies moving away from the gold standard. It has also survived the loss of its utility as a convenient medium of exchange.
Certainly, gold has demand from the jewelry industry and some industrial utility. But this “natural” demand is not even a close match for the existing above-ground supply. Imagine what would happen to the price of gold if all the metal in the vaults (owned by central banks or other hoarders) were to be sold.
And yet the value holds. Significant fluctuations for sure, but in the long run, it remains stable.
I am not an expert on the history of gold. To the best of my understanding, precious metals were chosen as a medium of exchange because they do not oxidize easily and remain in an uncorrupted form. They can also be traded purely by weight and are preferable to gems, which have value heavily dependent on their shape and quality.
Amidst precious metals, however, gold is neither the rarest (platinum and palladium are harder to come by) nor quite common, like silver. Gold has solid but by no means exclusive, industrial or jewelry related demand.
My guess is that over many centuries, the precious metal has hit it’s “golden” mean; it is common enough to be a worldwide currency, but not so common that mining can disrupt its price. It is useful and decorative enough to support some underlying value, but the supply is not so tight that marginal swings in demand would create wild price fluctuations.
My assumption is that through those subtle advantages, gold has simply outlasted its competition. And, as a result, it has gained so much credibility over millennia that its value can no longer be diluted or displaced. Today, gold (XAU = $1,275) is more expensive than platinum (XPT = $915) which is much scarcer and as useful in an industrial sense.
That said, you may have guessed by the title that this post is really not about gold, but about digital assets. Until recently, I was thinking of the dichotomy between the precedence of bitcoin and the advantages of alternative protocols. I am realizing that this dichotomy may be false.
If a universal digital store of value (“digital gold”) is to be established, it doesn’t by any means have to be, and not even likely to be, the universal medium of transactions; a fortiori, it is not likely to be a universal conduit for transactions.