How would a bitcoin economy react to coronavirus? For now, we don’t know. However, we can turn to a proxy for insight: gold.

Bitcoin’s (BTC) “digital gold” narrative has stuck well, namely because of the cryptocurrency’s low issuance supply schedule and a hard cap of 21 million bitcoins. In turn, theory on how a gold-based economy would react to an external shock such as the current global pandemic lends itself into a look at a future bitcoin economy.

As CoinDesk reported Monday, both bitcoin and gold rose on news of the U.S. Federal Reserve extending an indeterminate amount of aid to the private market. From a supply perspective, both assets sit still while the Fed feverishly tries to outpace COVID-19.

“The Federal Reserve will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions,” the central bank said Monday.

With such a policy’s incumbent inflation concerns – where infinite supply depresses the value of the U.S. dollar – what would an alternative world look like? What would the macroeconomic story be in a world where bitcoin or gold was dominant as a means of exchange?

Gold during down times

For one, the value of a gold-based money would not artificially inflate, Mark Thornton, Austrian economist at the Ludwig von Mises Institute, told CoinDesk. (However, mainstream economists hold concerns that central bankers would have far fewer levers to pull in times of financial collapse.)

Like any market, gold’s value is determined jointly by supply and demand but has natural limits to the amount supplied in a given year. On average, the amount of gold mined per year hovers around 2 percent of gold’s total known supply.

Indeed, the price of gold has gone up in recent years mostly because gold is priced in dollar terms, Thornton said. As the amount of dollars on the market increases, so does gold’s price.

Additionally, gold – a safe-haven asset – acts as a hedge on inflation in financial crisis environments such as now. In the long run, bitcoin proponents such as Messari co-founder Dan McArdle believe BTC’s conservative features will bring it long-term value similar to that of gold.

For Austrian economists like Thornton, gold’s value comes down to economic theory first posited in “Principles of Economics” (1871) by Austrian school founder Carl Menger. To briefly summarize, Menger said everyone determines value subjectively while a society creates a price one can buy or sell on the open market.

Gold’s value is readily demonstrated by its continued use as a store of value, particularly during recessions or financial crises.

“The supply schedule for gold is relatively stable. The quantity of gold supplied is a response to the demand for gold and its price,” Thornton said.

A gold-based economy

But how would a gold-based economy differ from our current economy? A stable medium of exchange would force people to be more responsible with the money they have, Roy Sebag, co-founder of precious metal custodian Goldmoney, told CoinDesk in an email.

This responsibility would lead to two outcomes: A stable money supply would make it difficult to stack up large corporate debts, limiting the dangers of a 2008-style financial crisis. But it would also help distribute wealth across the economy more efficiently than current systems do, Sebag said.

First, Sebag said a fiat-based system that is known to inflate the currency to protect against business failings leads to companies taking out too much debt. (Think of commercial airlines buying back stock in heady times as opposed to investing in their services, what some might consider a moral hazard.) Sebag says his point can be readily seen on Capitol Hill today – where Congress is weighing a multitrillion-dollar stimulus package with protections for firms such as Boeing.

“Under a gold monetary standard, leveraging a balance sheet in any circumstance is a risky proposition,” Sebag said.

Instead, failures would be allowed to happen – but they would not become this colossal in the first place. “Failure happens often and resilience becomes the integral ingredient in defining prosperity,” Sebag said of what a gold-based system would look like.

Second, if people were able to plan financially on long time horizons, then retirees would not be put in a precarious position every time the economy blows the top. Sebag goes as far as to claim the elderly would boost the economy during a recession as opposed to being crushed by it.

Indeed, the Dow Jones Industrial Average has lost over 30 percent since its peak in February 2019. Many people’s retirement plans are underwater.

A gold economy, Sebag said, would allow people to plan for the future with a key metric: the interest rate.

Historically, Sebag said the natural interest rate – meaning the cost of future money when not set by a government – sat around 5 percent. Compare this to the rate-by-decree coming out of the Federal Reserve and periodic percentage drops: It’s hard to plan for the future when you don’t know what your assets will be worth in six months.

Two extremes

A bitcoin economy is laughably far off from a mainstream perspective – even more so than a gold-based economy. Bitcoin’s market cap sits below $200 billion while the Dow hit as high as $8 trillion in December 2019. Gold’s current market cap is around $9 trillion.

Yet, a savings-based money like gold or bitcoin becomes more attractive as the Fed and Washington lawmakers push toward fiscal extremes.