Will crypto be the next gold standard?

09 Aug, 2018
by Arthur Sillers
Analysis
Will crypto be the next gold standard?

According to financial blog Philosophy of Metrics cryptocurrency will 'swallow' the current gold market within the next year.

The author posits that gold, as a source of global capital liquidity, is being phased out and notes that cryptocurrency is at a good position to take its place. The author cites a number of countries which have stopped using gold as a standard of currency, including the United States, China, and Russia.

Gold is a good way to back up currency because of the large amount of social and, to a lesser extent, intrinsic value in the precious metal, accounted mainly for the difficulty in mining it. Gold is deflationary by nature, which is one of the reasons it is suboptimal for use as a currency backer. It is for this reason, and simply because Nations will almost certainly not be "interested in turning back the clocks on technology," that the gold standard is likely a thing of the past.

Without the gold standard backing many different national currencies, Nations find it more difficult to quickly liquidate assets and trade with each other. The author posits that crypto is a perfect vehicle for transnational trade because it is a way to create liquid assets which also are quite susceptible for international transfer.

The author supports this thesis by mentioning that a number of countries are developing crypto architecture of their own, and the price and volume of gold trading has stagnated while respectively crypto is exploding.

If the role of gold as a vehicle for monetary liquidity is imminent, there are notable takeaways. The first is that coins like Bitcoin, which have a cap on the total number that can be in circulation are, like gold, deflationary by nature. This means that Bitcoin, though the most popular cryptocurrency, is not going to be the model that a theoretical international crypto architecture is built on. The author in fact mentions that "Bitcoin's throne will soon be usurped by the digital asset XRP," presumably, though not explicitly, for this reason.

Secondly, if cryptocurrencies are to become the next international liquid capital standard, there will be a huge explosion in the crypto market. The author theorizes that "a new bull market will take off with massive institutional investment" in September, and that by the end of 2019 "Capital will be sucked out of the gold market and into the exploding crypto market."

This analysis is contingent on a lot of factors, namely that liquidity currently mostly comes from stocks and bonds, and for traders to turn to crypto in a big way, it will require that crypto in general improve itself enough to compete. While in theory, digital currencies offer convenience and transparency that stocks and bonds do not, the current fluctuation in value of the current crypto market will have to stabilize before investors will be ready to dive in headfirst.

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