Table of Contents
- Bitcoin offers superior portability and divisibility to gold, while combating the inflation concerns of fiat currency.
- Investors in a Bitcoin ETF do not own any of the underlying asset and are subject to market hour trading restrictions.
- Central bank digital currencies have no incentive to replicate the decentralization, scarcity, and trustlessness of Bitcoin.
Since Bitcoin was created, imitation cryptocurrencies have emerged as competitors. Bitcoin’s reliability and immutability, among other unique properties, have made alternative coins unable to compete. Bitcoin’s sound monetary policy has allowed Bitcoin to emerge as a superior alternative to fiat currencies and other long-term stores of value, like gold.
Bitcoin vs. Bitcoin ETFs
As a means of capitalizing on Bitcoin’s growing network effect and popularity with traditional financial institutions and individual investors, many financial services companies have made plans to offer a Bitcoin ETF.
The first North American Bitcoin ETF was launched in Canada earlier this year, and the Brazil Securities and Exchange Commission recently approved QR Capital’s Bitcoin ETF proposal. Several U.S. trusts have also signaled a desire to give U.S. markets exposure to bitcoin through a Bitcoin ETF.
A Bitcoin ETF is an investment vehicle that tracks the performance of bitcoin, and allows traders and investors to gain exposure to bitcoin without owning any of the underlying asset. One of the supposed benefits of a Bitcoin ETF for investors is the ability to diversify their portfolio.
However, there are several drawbacks to Bitcoin ETFs compared to owning bitcoin. ETFs incur management fees and are only traded during market hours. In addition, the value of the ETF can differ from the value of the asset it is based upon. The potential difference between native asset value and ETF premium adds additional risk of losses or gains for investors that otherwise would not have occurred if they owned bitcoin directly.
Finally, Bitcoin was created to be independent of traditional financial and monetary authorities. Investing in a Bitcoin ETF removes the investor from accessing the possibilities of privacy, autonomy, and trustless peer-to-peer transacting.
Bitcoin vs. Gold
Gold has been the dominant store of value for thousands of years. Critics and proponents of Bitcoin often compare the two as a method of portfolio diversification, inflationary hedge, and as currency.
Bitcoin has several advantages over gold as a store of value. Firstly, Bitcoin is more accessible to the entire socioeconomic strata. Gold is expensive to purchase and store for most of the world’s citizens. On the other hand, bitcoin can be purchased by anyone with an internet-connected device and wallet. In addition, gold production is highly unethical in certain regions of the world; there is a consistent pattern of human and labor rights violations associated with gold mining. Bitcoin mining is ethical; it captures stranded energy and miners' trend towards using renewable, equitable energy sources.
The price and demand for bitcoin is not influenced by international relations and politics to the same extent as gold. Central banks, particularly Russia and China, have been systematically buying gold to increase their gold reserves relative to their foreign currency reserves. Increasing central bank gold reserves reduces a country’s exposure to foreign monetary policies.
Fiat currencies are the dominant form of money utilized around the world. Centralized governments use fiat currency to control monetary policy in their political borders, and therefore exercise significant influence over the economic well-being of their populations. The U.S. dollar is the most widely used currency in the world, carrying a significant network effect not only within U.S. borders, but around the globe. As a result, the U.S. government can exert influence over international politics and finance.
Bitcoin has the potential to replace the U.S. dollar as a global currency because it is decentralized and operates independently of any government. As a digitally native currency, Bitcoin is more easily portable across borders and between populations than fiat currency. The Bitcoin market can include anyone who is connected to the internet.
Central Bank Digital Currency (CBDCs)
As Bitcoin has grown in popularity, numerous governments have stated plans to issue a digital currency from their central bank. By issuing their own digital currency, central banks hope to retain control over populations by reducing their use of private digital currencies. A central bank digital currency would allow governments to track and censor transactions and savings of citizens, while continuing to exert significant control through monetary policy.
Central bank digital currencies (CBDCs) will fail for exactly the same reason fiat currencies are failing: they lack scarcity. The monetary policy of a central bank digital currency will be exactly the same as current fiat currencies. Furthermore, central banks have no incentive to issue digital currency that has the privacy, trustlessness, and peer-to-peer transaction capabilities of Bitcoin. Central bank digital currencies could, if they are technically well-designed, allow them to more easily disperse government funds. However, the necessary infrastructure to develop a central bank digital currency means that these projects are not likely to be launched in the near future.