“Digital gold” is a useful hedge against governments and banks

The original intended use case of cryptocurrency was to replace traditional “currency” in everyday payments. To be useful, currencies need to be integrated into the flow of everyday life (e.g. paying at a coffee shop).

Both gold and “digital gold” are the opposite — they are rarely-transacted forms of insurance against rare disasters. Banking collapses, wars, governments confiscating property, etc.

Before this starts sounding too ZeroHedge in predicting imminent disaster, it’s worth noting that there doesn’t need to be disaster, only a risk of disaster, for insurance to be valuable.

Post-2008, governments around the world, especially in Europe and China, are heavily indebted and, despite the modest economic recovery post-2008, baseline global growth is slowing. Global inequality is also increasing.

Rising debt and inequality historically have lead to instability. Greece’s role in the Eurozone crisis provides a small example, while Xi Jinping’s recent consolidation of power in China could be viewed as a response to rising risk.

Why is “digital gold” better than actual gold?

There are two types of gold — physical gold and “paper” gold.

“Digital gold” in the form of a cryptocurrency, is easier to move than physical gold, and less dependent on the financial system than “paper” gold.

Physical gold is as it sounds, physical bars of gold. Small amounts can be stored in jewelry, and larger amounts can be stored as bars in vaults. Physical gold is difficult to transport, store in large quantities, and transact in for large amounts — requiring special storage, transportation and market contacts.

For the everyday person, running to a jewelry store to buy gold may currently be more accessible than buying BTC, but given how much more convenient transacting digitally is as opposed to in person (think in-store vs. Amazon), there should be long-term value in the digital alternative. For the large scale asset owners, storing BTC should also be easier than storing physical gold.

“Paper” gold (e.g. gold ETFs or ownership rights to stored gold) is dependent upon existing financial players for their value. “Paper gold” is a reasonable complementary option to digital and physical gold, but serves a somewhat different purpose in hedging against moderate risks.