I keep thinking of new ways to think about what value Bitcoin provides. Below is the way I thought about it today. It started while talking with a friend at a coffee shop about money. We discussed the gold standard and he asked how it would be possible to go to a gold standard today. The market capitalization of all the gold in the world today is only about $13.7 trillion and the value of all the money in the world is around $450 trillion. Gold currently costs about $2,000/oz. To fully back the $450 trillion of money with gold the gold would have to significantly appreciate. It would increase it’s monetary premium. In fact some central banks have explicitly said they are buying more gold in case this happens!

In a recent interview the Dutch central bank (DNB) shares it has equalized its gold reserves, relative to GDP, to other countries in the eurozone and outside of Europe. This has been a political decision. If there is a financial crisis the gold price will skyrocket,

This website, gold survival guide, did a calculation of what you’d have to reprice gold to, in US dollars, to get only a 26% backing. They determined that you’d need gold to be worth $33,690/oz. This would be a significant monetary premium on gold over what it is worth today. 

To reach a 26% gold backing, the price of gold would need to increase 17.31 times. ($8.76 trillion or $8,760 billion divided by $506 billion = 17.31).

That is a gold price of $33,690 per troy ounce.

Conclusion: To match the 1934 and 1980 “reset” prices and back US debt by the same percentage of 26%, gold would need to be priced at just under US$33,700 per troy ounce!

Many things that are semi-scarce have a monetary premium. A monetary premium is the premium that the market gives a good that has the ability to perform the functions of a money. Money’s primary function is to serve as a medium of exchange. However, before society will use something as a medium of exchange, the good must first be able to function as a store of value. Therefore, one of the functions of a money is to store value.

Gold is the most commonly thought of thing that has a monetary premium. Houses are a good example of something that people don’t often think of that has a monetary premium. Many houses are bought by speculators to store value. For example:

Chinese homebuyers accounted for nearly one-third of Vancouver’s real estate market during 2015, spending approximately $9.6 billion of the $29 billion of total real estate sales, according to a new study by the National Bank of Canada.

Rich Chinese buyers are willing to use houses, which are not very liquid, to store value outside of China. It is a lot simpler way to get value out of the country. It would look a lot more suspicious if they just shipped hundreds of thousands of dollars out of China and parked it in a bank. But to buy a property is an “acceptable” reason to take money out of the country. People are resourceful and will find ways to store value. 

People want assets that will rise with inflation. They can be willing to pay more than the utility value of the asset to acquire it. Unfortunately, it’s never explicitly stated or even talked about that some things have a monetary premium on top of their utility value. Commodities like corn or oil have very little or usually no monetary premium.Their only value is from the things they can be used to do. They don’t store well. To have a monetary premium a good has to have a long life, like gold or houses. Stocks are another thing that has a monetary premium.

One thing that also has a monetary premium that is not often talked about is money! People like to talk about the fact that Bitcoin has no “intrinsic value”. Do you know what is another thing that has no intrinsic value? US dollars. Think about it. What gives a dollar its value? It is it’s network effects. It is accepted as valuable by others. Gold has a utility value as well as a monetary premium. Some people get confused by gold having a utility value and they think that any money has to have a utility value. But that is not true, as evidenced by the US dollar, the primary money in the world, having no intrinsic value! In fact there is really only 1 major difference between US dollars and bitcoin. US dollars can be created at will by the US government, and are everyday. This reduces the purchasing power of every existing dollar, including the ones you own and worked to earn. 

Bitcoin has a fixed supply. Once you own a fraction of a bitcoin, you own that much of the total bitcoin network. There is no  way for anyone to steal your percentage of the network by creating more bitcoin

I often say, if the government quit printing dollars, we wouldn’t need bitcoin. Every government that has had their own currency in history has always printed and debased that currency until it has lost all value. See the Romans. They literally has physical silver coins. They would periodically recall them, melt them down, dilute the silver percentage and reissue them. Initially they would act like they were the same value of coin, but as people came to realize that new coins had less silver they would require more coins for the same goods. 
So back to the monetary premium. US dollars have no inherent value. Neither does bitcoin. But US dollars have a created monetary premium from their acceptance as a means of payment. There is no reason that bitcoin, or anything else that a group of individuals choose to use as a store of value and means of payment could become that and gain some of the monetary premium that dollars have. In essence we can transfer the monetary premium from dollars to bitcoin, if we choose to. In El Salvador bitcoin is already accepted as a means of payment. Many individuals and businesses around the world have already individually chosen to accept bitcoin as a means of payment.
SInce dollars don’t reliably store value, due to the ability of the government to print more, why wouldn’t people choose to store value in a tool that it is impossible to make more of? That is why I choose to store some of my value in bitcoin. If you are interested in talking about the idea of monetary premium more, or the idea of transferring monetary premium from one good to another, get in touch!