Digital assets over physical— Is this the new normal?
It is March 15th, 2021. For years I review Kitco and Coindesk frequently through the day to check the cryptocurreny and gold prices. 1000 grams of gold is less valuable than 1 bitcoin as market price today. Could we be heading towards a new normal?
There continues to be predictions about the onrush of another recession, even worse than the 2008 correction. In my years of financial expertise, several was spent in the commodities sector. Let’s take a look below of what we can predict and talk about gold-pegged digital assets.
According to some economists, there are striking trends which similarities between today’s economic climates and those that preceded the previous crisis looking at the monetary policies of the big central banks.
Without a reasonable doubt, there are several effects on the consequences of which will cause us considerable pain in the next several years. Firstly, the artificially low, ongoing interest rates have depressed the number of defaults. Even post 2020- companies which should have been sent into bankruptcy have been kept alive by the subsidy of zero interest rates. These are empty companies- dead but walking and they have been the recipients of large sums of loans which are zombie loans. They will sooner or later fall in a big wave of defaults. Banks theoretically are not prepared to absorb this shock.
Secondly, the flat yield curve has damaged the business model of commercial banking by destroying the interest margins on savings and maturity transformation. The escape route to hand out more credit has only depressed the credit margins too and accelerated the accumulation of bad credit in the form of the above-mentioned walking dead-loans. Various accounting tricks have been used to hide this for years, but the reserves covering the growing gap are now largely consumed, but the problem still bubbles to the surface…
Thirdly, cheap credit has not only created the army of dead companies, but it has also led healthy firms to over-borrow and over-leverage and hide this with creative accounting. When this party comes to an end, we are in for a not-so-pretty awakening. The policy of cheap money creates large-scale capital and resource misallocation in the economy, and this cannot be adjusted without a crisis.
As would be familiar to many by now, Bitcoin began as the first fully functional mode of peer-to-peer (p2p) payments on the blockchain. More importantly, it presented a decentralized system governed using a consensus algorithm, thus ensuring that all transactions on the blockchain are accurately recorded, and no double-spending can occur. With the advent of Bitcoin, we then had a new p2p transactional system that stores information in a public, decentralized and immutable system. This began as the premise for other virtual currencies to emerge in the space that we see today.
However, the huge speculative bubble in virtual currencies has led to immense volatility. A double-edged sword, volatility creates the potential for huge returns in a short period, while also presenting the possibility of having entire fortunes wiped out at the same time.
Gold-backed tokens can serve as a stablecoin variety. However, given that usual stablecoins represent the equivalent of USD 1 in a digital format that is freely tradeable, gold-backed tokens — in stark contrast — veer away from the conventional stablecoin narrative. While a gold-backed token may act like a stablecoin, as gold markets are stable relative to other asset markets, gold itself can be considered to have appreciation value in its own right as an investment asset, making digital gold an attractive option to hold.
The scale and severity of the crisis are directly proportional to the monetary loosening preceding it. The only question of that proportionality is if it is linear or exponential. The resulting deflationary spiral could turn out to be as severe as the 1929 contraction of the world economy. No sector, country, industry or region will stay above the resulting deluge. The deflationary pressure will force the banks to open the floodgates of money printing in a way never seen before and thus trigger a hyper-inflationary scenario in combination with hundreds of thousands of failing companies. This will create a new kind of animal: The super-stagflation.
For these reasons, the so-called “War on Cash” isn’t just a conspiracy theory. It’s an open agenda. It’s being driven by an alignment of interests among bankers, central bankers, politicians, and Silicon Valley moguls who stand to benefit from an all-digital economy, in order to limit the risk of actually falling into the predicted 2020 economic crisis. A cashless society is the end of a long road to monetary ruin that began many decades ago with the abandonment of sound money backed by gold and silver. With fiat currencies, there is heavy centralization of power with governments, especially when they have unbridled power to print money and to unilaterally decide whether to peg or unpeg any currency to gold. When currencies were pegged to gold (Nixon Era), these were problems that could be avoided to a larger extent, since gold has an international value on the marketplace and a limited supply.
Virtual currencies began as alternative methods of payment in contrast to the traditional financial system.
Gold-backed tokens are the bridge between the physical and the virtual currency world by bringing a safe haven store of value on the blockchain. As gold has a value that is readily understood and accepted by all cultures and demographics, barriers to entry to the retail gold market are reduced for the average person, who is now able to hold gold-backed tokens in divisible form. There are a plethora of use cases for both individuals and institutions: Portfolio diversification, wealth preservation, payments, collateralization for lending and other financial products, and numerous other enterprise-level applications.
On a global level, more and more emerging applications will be launched by similar projects in the years to come, including innovative trading platforms, decentralized risk transfer applications built for the insurance industry and digital asset to fiat currency conversion as a key feature of innovative debit accounts that will defy some of the main consequences of the approaching crisis by not being tied to any of the existing banks.
The world of stablecoins, which by usually default are backed by commodities like gold or any other secure asset, is strategically a mediation between fiat currency and crypto, enhancing the anyone’s ability to respond to macroeconomic forces and price fluctuations in global markets. Never before has it been possible to trade against other currencies, store money in safer markets, and even benefit from rallies in crypto, all in one single ecosystem, where the only needed guarantee of overall economic stability and resilience are the transparency and decentralization characteristics of blockchain technology itself.
