The following is a summary of our recent FS Insider podcast, "Trace Mayer on Why Bitcoin Is Now More Valuable Than Gold," which can be accessed on our site here or on iTunes here.
Bitcoin has entered a parabolic phase, blowing past the price of gold and hitting new all-time highs on a daily basis.
Trace Mayer, host of the Bitcoin Knowledge Podcast and a leading expert on bitcoin, recently discussed cryptocurrencies as an asset class, why bitcoin is better than gold or fiat money, bitcoin's "seven network effects," and much, much more on our podcast last week.
Here's Trace on the biggest and most explosive driver for bitcoin that no one is yet talking about. If this gets going, Trace believed bitcoin could reach as high as $10,000 in a few years:
7 Network Effects Driving Bitcoin
Mayer has been bullish on bitcoin since it was trading around $0.25 (today it hit a high of $2,791), and he sees more upside potential for the cryptocurrency over the long-term.
“Merchants accept it because speculators hold it,” Mayer said. “Consumers use it because merchants accept it. Miners secure it...(and) developers then want to work on the most secure, most valuable blockchain.”
As developers build out the usefulness of the protocol, more applications arise. Next, we get financialization, he added.
The SEC earlier this year denied a proposal for a Bitcoin ETF, arguing that because there are no regulated bitcoin exchanges, the ETF couldn’t be allowed.
However, the SEC left the door open in a 40-page opinion it produced regarding its decision, Mayer stated. In a few years from now, he added, we’ll probably see an ETF approved.
“That lays the groundwork for financialization,” Mayer said. “That’s the sixth network effect, where you get futures, options, swaps and derivatives. … Ultimately, you get the seventh network effect, which is (Bitcoin’s use as a) settlement currency. That’s where it really starts competing with gold and the US dollar.”
Mathematical Tangibility
Though speculation is likely driving the recent run-up, Mayer sees a long-term place for Bitcoin (or a similar technology) in the world markets. Ultimately, we have to know how to value this digital cryptocurrency. It isn’t easy to come up with an intrinsic or fair market value for these cryptocurrencies, Mayer stated.
This leads to a common criticism of Bitcoin, in that, unlike gold, it isn’t physical. However, the first thing we need to understand about bitcoin is its relationship with math, Mayer stated.
The idea of what is tangible goes right to our concept of reality, he noted. Math is a real thing, even though it isn’t corporal.
“When we talk about tangibility, we're talking about things that are real, as opposed to things that are imaginary,” he said. Bitcoin is tangible, Trace argues, because it was created from and governed by concrete, mathematical rules.
“If someone wants to argue that Bitcoin is not real … we can set up cryptographic and mathematical proofs just like we can set up chemical law proofs … and come to a justified true hypothesis or justified knowledge about what is real,” he said. “What this requires is … a greater ability to abstract … which is a higher order thinking process. It’s actually one of the things that distinguish humans from lower order lifeforms.”
Triple-Entry Bookkeeping
Double-entry bookkeeping was invented hundreds of years ago by merchants in Venice and revolutionized trade, accounting, and finance. But bitcoin and "blockchain tech" allow for something even greater—a triple entry—which, Trace says, “is going to lead to a whole explosion in terms of innovation and security in how we’re managing and allocating capital,” Mayer said.
In traditional double-entry bookkeeping, credits and debits are held on accounting ledgers and aren’t necessarily held at the same value. At the end of the day, the books may not balance globally.
Triple-entry bookkeeping, however, retains debits and credits but adds simultaneous verification for each transaction recorded by the blockchain.
“That confirmation is the triple entry,” Mayer said.
Just as the advent of double entry bookkeeping changed world finance, Mayer argues that triple entry bookkeeping will have similar effects in world markets, enabling innovation and changing the entire financial landscape, even if Bitcoin isn’t the vehicle that leads to this change.
Why Bitcoin Is More Important Than Gold
Bitcoin is likely to create fundamental shifts in financial transactions and markets, Mayer noted. Markets have been dealing with central banks and economic planning attempts to remove volatility from markets for 120 years or more. All this does is establish price controls, Mayer noted.
In theory, Bitcoin should allow the pricing mechanism to break out of this economic censorship because Bitcoin is inherently a censorship-resistant tool.
If that happens, and we’re able to liberate the pricing mechanism of money through interest rates, we’re entering uncharted territory, he said.
While some suggest we should return to a gold standard to solve this issue, the shiny metal isn’t really suited to the task.
“Bitcoin is both limited in amount, like gold, but also extensible, like fiat currency,” Mayer noted. “It should follow that bitcoin will be able to outcompete both of those because it has the best characteristics of both, and it doesn’t have the costs that each have. … Bitcoin has all of the pros, and none of the cons.”
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