For those looking for a comprehensive overview of Bitcoin and surrounding issues, this recently-released report by Goldman Sachs is a pretty decent place to start. The report is a compilation of essays and interviews with proponents and skeptics from the fields of economics, finance and technology, including University of Chicago Law School’s Eric Posner (son of Richard Posner) and Coinbase co-founder Fred Ehrsam.
Most of the pieces presented rational arguments, but one in particular prompted me to pen a response. Goldman Sachs partner and head of Commodities Research, Jeff Currie, writes in a report entitled “Bullion bests bitcoin, not Bitcoin” that, as a commodity, Bitcoin is unlikely to replace gold because it doesn’t solve any economic problems that gold doesn’t already solve.
The replacement of an old commodity with a new commodity typically occurred precisely because the new commodity solved an economic problem that the old commodity could not. For example, coal replaced wood when fuel was needed for steam engines. So the question is: is there an economic problem with gold as a store of value that bitcoin solves?
Currie concludes, in short, no.
He attempts to answer the question of whether Bitcoin makes a worthy challenger to gold by comparing them on the basis of stability, storage and portability, coming to the conclusion that “on net, we find that bitcoin is easier to store and transport and is potentially more difficult to counterfeit, but it is not nearly as stable.”
I wholeheartedly agree with Currie’s notion that that a competing product or technology generally needs to be better than its predecessor by a significant factor to overcome switching costs. There are issues with his analysis on the factors he identified, but my biggest issue with his analysis is that he simply simply failed to observe two of the most important attributes of Bitcoin that make it a formidable challenger to gold: (a) accessibility and (b) utility.
Like the internet itself, Bitcoin is a democratic technology accessible to all. It is “accessible” in the sense that, accounting for certain limits imposed by the current banking system, it is possible for anyone in the world who has access to the internet to own Bitcoin. It is also “accessible” in the sense that it is easy, and becoming easier, for ordinary consumers to purchase and store Bitcoin and use it as a value store.
Currie also glosses over one of the most critical attributes of Bitcoin, that it is inherently “useful” as a digital payments solution. How Bitcoin will be used as a payments system is a question that is deserving of another essay in itself, but clearly there is tremendous potential in a technology that allows for one person to securely transmit payment instantly anywhere through the internet.
Currie’s report highlights a recurring issue I see with Bitcoin analysis — experts are too eager to jump to conclusions. As a concept and developing technology, Bitcoin is complex and multi-faceted. Attempting to predict its future or compare it to existing commodities or technologies is difficult, much like someone in 1993 trying to predict the future of the internet. Instead, I argue that it’s much more useful for the discourse to continue on identifying and exploring Bitcoins strengths and weaknesses.