his year at the World Economic Forum there was a fascinating interaction between South Africa’s Reserve Bank governor Lesetja Kganyago and Brian Armstrong, co-founder and CEO of Coinbase.
The context was, of course, the recent rise in the Bitcoin price, which between roughly October and December last year ran up an enormous amount, about 80%. The increase was based largely on the outcome of the US election, since US President Donald Trump had, during the campaign, declared himself definitively pro crypto.
It’s hard to know why Trump changed his position – previously he was pretty uninterested. But be that as it may, Trump’s conversion was just thrilling for Bitcoin holders and for the crypto community in general.
Specifically, what Trump did after winning the election was to revoke previous directives that may have hindered digital asset development, including the prohibition establishing Central Bank Digital Currencies (CBDCs). He also established a working group tasked with proposing a comprehensive federal regulatory framework for digital assets within 180 days.
And interestingly, from a South African point of view, he appointed South African-born David Sacks as “AI and Crypto czar”. Sacks, an old friend of Elon Musk’s, is responsible for developing a legal framework to provide clarity for the cryptocurrency industry, ensuring it can thrive in the US.
This opens the possibility that the US will use Bitcoin as a currency reserve, something incidentally that the US doesn’t really need because the dollar is itself the global reserve currency. But, as it happens, the US currently holds about $11-billion in gold and $34-billion in foreign currency reserves and it has about $166-billion in IMF special drawing rights. There are proposed bills in 18 US states to add Bitcoin to this mix. If they do, some estimates suggest it could lead to an inflow of more than $20-billion into Bitcoin.
Anyway, as the only Reserve Bank representative on the panel, it fell to Kganyago to answer the question: will South Africa hold Bitcoin as a reserve currency? As I noted in my blog, you could tell he wasn’t crazy about the question.
He acknowledged the utility of the technology and pointed to the Reserve Bank’s trial using blockchain technology in South Africa’s payments space, which had been very successful. But he added: “I would have a significant problem with a lobby that says governments should hold this asset or hold that asset without knowing what the strategic intent of the government is.”
There is a history to gold, he said, but “if we now say, okay [to] Bitcoin … then what about platinum? What about coal? Why don’t we hold strategic beef reserves? Why Bitcoin?”
“I would caution against … an industry with a particular interest in a particular product, saying we would like to impose it on society and say society must hold this as a reserve. I would have a fundamental problem with it.”
Armstrong was asked to respond, and it’s worth noting that Coinbase is the most pro-regulation cryptocurrency exchange platform. He said: “I think it’s clear at this point that Bitcoin is a better form of money than gold. It is provably scarce, just like gold, but it’s more portable and divisible, so you can actually use it.”
Bitcoin has been the best-performing asset of the past 10 years, he pointed out, and so as a store of value, “I think it’s going to be important for governments to hold this over time. It might start with being 1% of their reserves, but I think over time it’ll come to be equal to or greater than gold reserves.”
Personally, I would grant that Armstrong won this argument game, set and match. But here is the odd thing: since Armstrong made this point, the boot has been on the other foot – gold has been outperforming Bitcoin. Why is that?
The graph below from longtermtrends shows the Bitcoin:gold ratio; when it goes up, Bitcoin is outperforming gold, and when it goes down, gold is outperforming Bitcoin. Long term, Bitcoin is winning. Short term, gold is holding its own.
I suspect the reason is that it’s not so much about the relationship or the competition between gold and Bitcoin, it’s about the factors that push and pull the two – what should we call them, commodities? – separately.
Gold is rising because of three things: heightened economic uncertainty; large central bank purchases mainly from emerging market central banks in an effort to diversify away from the dollar; and inflation concerns because recent inflation data has exceeded expectations.
Bitcoin is really in profit-taking mode at the moment, as commodities often are after a big rise. You can see there is slightly more volatility in the Bitcoin price recently, which, by the way, is saying something for a, er, commodity that has been massively volatile in the past.
What that means is that the gold/Bitcoin arm wrestling match is yet to be decided. đź’Ą
This post first appeared in the Daily Maverick here. To signup for Daily Maverick newsletters, click here.
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