The Case Against Gold. Bitcoin Tech Talk Issue #215

We all know the case for gold that goldbugs will tell us. Their arguments are if anything utterly predictable. Gold has been in use for thousands of years. Gold is physical. Gold has uses outside its use as money in electronics, dentistry and aeronautics. Their arguments against Bitcoin are along the same lines. Bitcoin doesn’t have the same thousand-year history as gold. Bitcoin is not physical and doesn’t have use cases outside money.

What’s interesting about all of these arguments is that they’re all about trust. The implication is that something that doesn’t have a long history is harder to trust. Same for something that’s not physical or has a use case outside money. That’s their argument and it’s an argument from human psychology than anything. Older people are more inclined to trust physical things more than digital things, older things than newer things, things with other uses than a single-purpose thing. Yet if we turn this around, goldbugs have a lot more to answer for.

For example, how can gold be trusted without expensive equipment to verify it? How can anyone trust that gold, being physical, won’t be stolen or seized? How can gold be trusted in any trades that aren’t done in person given that someone has to send their side of the trade first? Most importantly, how can it be trusted that the same system that’s come up over the past 900 years won’t happen again?

The reason banks exist is because of precious metals like gold. Gold is hard to secure and hiding it makes it prone to loss or theft. Burying it somewhere and leaving a map is also a good way to getting it stolen or losing it. The best practices that have evolved over the past 900 years or so is to store gold with a third party that can secure it with guards and vaults. That’s essentially what banks started as, warehouses for gold. The centralization of money with a trusted third party is what led to all the evils of fractional reserve banking, central banks and fiat money.

All of the evils of the current monetary system entered through this seemingly innocent desire to secure the wealth that people had stored up. Which brings me to the point of this little rant. Trusted third parties are the real argument against gold. Gold is hard to secure and that leads to trusted third party centralization. That trusted third party then can abuse its power to create money out of thin air. In other words, gold always has the potential to backslide into fiat money. That is the real reason why going back to the gold standard is a futile exercise. The effort is Sisyphean; even if goldbugs were to achieve a hard money gold standard, those in power can roll the stone back down the hill of easy money with much less effort.

The beauty of Bitcoin is that we can each be our own banks. That means that we have sovereignty over our wealth instead of a third party. That third party historically has been the entryway for the cancer of unsound money. And that means that Bitcoin standard can be achieved with much less effort than the gold standard.

Bitcoin

Miners have taken the initiative to signal to the rest of the community their support for Taproot. As there’s no agreement on the activation method, this is a nice data point to have for determining how activation would go. Unless they’re planning to publicly renounce this pledge, I think this will be a good way to figure out the actual activation mechanism. There’s a sense in which many core devs want to set a precedent for soft forks in the future with the activation method on Taproot, but I think that’s too lofty a goal. An ad-hoc activation for each soft fork is probably needed given that each situation will be different.

Richard Myers has a deep analysis of low-bandwidth wallets here. The article is thorough and goes through all the different trade-offs that wallets have to make in a low-bandwidth environment. It goes through the different levels of validation including full node, compact filters (Neutrino) and Electrum light client (SPV) and the bandwidth requirements for each. It’s a very good article on the trade-offs of the various levels of validation and well worth considering for wallet developers.

Bitcoin Dev Kit has a blog post on using descriptors. Descriptors are the different output scripts that can be produced for a wallet, or destinations for the money being received. For a typical single-key wallet, the descriptor is more or less the xpub, which can generate lots of addresses. A descriptor for a multisig wallet is a bit longer and something more complicated than multisig will require some miniscript to describe. The nice thing about descriptors is that they can be the same across multiple wallets, and each wallet can have a subset of the private keys. Essentially, each partial custodian can see what’s going on in the wallet, but each would only have partial control over how to spend it. This is what multisig should be and the fact that keys don’t have to be reused is a big benefit.

Knox Custody has a thorough article on exchanges insuring Bitcoins and how to filter the signal from the noise. The interesting part of insuring Bitcoin is that so much of it is based on the security features of the custody solution for the Bitcoin being stored. Anyway, the main thing I got out of the article is that “Bitcoin insurance” can mean a lot of things and much of it is meaningless marketing drivel and insurance that’s meaningful requires some investigation.

Lightning

LN Clear is a market for instant OTC transfers. This is based on essentially a private invite-only set of participants for large transfers via Lightning. This should make OTC trades a lot more liquid and create better prices for everyone involved as long as the network grows. The nice thing from a regulatory standpoint is that all counterparties on this platform are required to have AML/KYC clearance. Institutions are coming in this next bull run and tools like this will make their onboarding smoother and more pleasant.

ThunderHub is a way to manage your Lightning Node. It has a lot of nice features like rebalancing your channels, LN-URL and multi-path payments. I suspect that software like this will have to become more ubiquitous and robust for a future decentralized web powered by lightning. Only when we’re running our own web nodes can we really be decentralized.

Economics, Engineering, Etc.

Dan Held makes the case that governments can’t kill Bitcoin. The argument boils down to Bitcoin becoming more and more integrated into all corners of society effectively making it very difficult to kill. I agree with him that Bitcoin would be very hard to kill Bitcoin, but I’m a little more pessimistic from the last 8 months. Freedom of speech and natural resistance to being told to shut down seem to be on the wane all over the world and I worry that too many people would go along with whatever the government says. That said, I believe there will always be a strong group of holders, I’m just not sure the group is that large.

Nic Carter has some good news with all the different metrics that show Bitcoin is doing better than at the same price back in 2017. These include how much BTC is held by Grayscale (GBTC), the number of addresses holding $10 or more, BTC value vs the Turkish Lira, options and futures volume and more. All these things tend to be trending up and look great for Bitcoin.

Pantera has a report out about how there’s a big shortage of Bitcoin. Given the current mining output and the amounts being bought by public entities, there’s a significant shortage of supply that’s starting to make a real impact in price. The halving definitely seems to have worked its way through the Bitcoin economy and as a result, price is going up. In other words, Stock-to-flow seems to have some practical predictive power that’s being seen in the markets.

Obi Nwosu has an interesting take on Central-bank Digital Currencies (CBDCs). His argument is that CBDCs are not targeting Bitcoin, per se, but are targeting commercial banks. By having CBDC dollars on deposit at the Central bank instead of a bank, they can essentially cut out the middlemen that are taking enormous profits. In a sense, banks are the ones who should be worried because CBDCs will make it easy for Central Banks to lend directly. This is an insightful observation and one that may consolidate the banking sector way more than we expect.

GoDaddy employees were apparently bribed to switch DNS records for certain crypto-related websites. Apparently, the motivation was to run scams on the various websites for different altcoins and services. We’re finding that any centralized systems or single points of failure are ripe for exploit. This was probably always the case, but now, there are many more ways to monetize it.

Another week, another DeFi exploit or two.

Podcasts

My podcast this week was with Joel Salatin, a sustainable farmer and author. We talked about how commercial food production has corrupted a lot of society, how better food can defray health care costs and what the incentives driving everything are. I’ll be recording this week with senator-elect Cynthia Lummis about politics and Bitcoin, so stay tuned for that release on Thanksgiving.

I was on Tone’s show twice this week. First was on DeFi hacks and the potential ATH, the second was on corporate Bitcoin interest and the Schnorr/Taproot upgrade path.

I did the Bitcoin Matrix podcast. It’s got a good amount of Bitcoin content, but I talked more about life and goals and kids and legacies.

Bitcoin, is in a bull market and you can get others to learn about it from my books.

Fiat delenda est.