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Currency Peg to Gold

Continuing on this theme of the role governments will play in the future of Bitcoin, let’s discuss another tool at their disposal. If governments agree to peg a reserve fiat currency to the gold standard, it could affectively put a dent in Bitcoin’s biggest use case as savings tool or inflation hedge.

A brief history of the Gold Standard

The gold standard started in 1834 and was formally abolished in 1971 by US President Richard Nixon. Much like bitcoin, gold grows at a small pace every year. If government fiat currencies are pegged to gold, in theory, it keeps government overspending and inflation in check. Governments cannot have more fiat currency circulating than the gold they have in reserve. This type of monetary system reduces spending on warfare because governments cannot simply print and borrow to fund massive campaigns. It also keeps the wealth gap smaller because poorer people tend not to have access to financial assets other than cash. In an inflationary environment people with cash tend to keep it in anything other than cash. Therefore, the people with enough savings and access to financial markets tend to park their cash in other financial assets and, over time, start to separate themselves from people staying mostly in cash. This increases the wealth gap over the span of decades.

Going back to a Gold Standard might not work

Going back to the gold standard now would create a massive deflationary event with some inflated assets losing 90% of their value. It would cause a lot of short term pain in order to have sustainable prosperity and growth in the future. This is why we believe the chances of this happening are very low. There is too much inertia in the direction of a fiat world pegged to nothing. Couple this with the fact that politicians need to weigh the prospects of getting reelected in the next election cycle versus actually helping their citizens in the long run. Under most circumstances, politicians tend to pick the option that helps them get reelected in the short term.

Furthermore, gold also has the issue of centralization. Because gold is it digital by nature, we need to trust third parties such as banks and government institutions to hold it for us and keep track of all transactions between the users. Without centralized storage and tracking, the usage of a gold-backed system wouldn’t scale. This centralization creates many problems. Firstly, citizens are at the whim of their governments. Since it is being stored with a third party, it can be confiscated at any time. Another potential issue is fraud. Gold can be diluted and mixed in with other metals to artificially increase the supply and allow for more money printing.

Although possible, we do not believe going back to a gold standard is a viable option at this point. The only way forward is an eventual shift to a Bitcoin Standard in which Bitcoin acts as the base financial layer for the entire world. This will be a decades long process but we do believe the world is headed in that direction. We hope you come along for the ride!