Among common features of all fiat currencies is that they all lose their purchasing power over time due to inflation, policies, backing, economic conditions, etc. Under normal economic conditions loss of value is not that significant in a short period of time that it may not be noticeable. This fact has become obvious in post-pandemic era. Many countries have experiences high inflations and noticeable purchasing power loss of their fiat currencies. Even stronger currencies like USD went through the same experience. Countries like Turkey, Venezuela, Argentina, and others went through high inflations and their currencies experienced drastic fall in value.
In one of his recent interviews, Michael Saylor, shared an advice or solution countries like Turkey can utilize to make their currencies stronger. This is not the first time Saylor used Turkey as example. He had suggested bitcoin could help Turkey's finances in the past. This time however, his advice involves selling gold reserves. If we ask Saylor everybody should be invested in bitcoin. She doesn't hesitate in giving financial advice of buying bitcoin regardless what people do and where they are. Unlike others though, Saylor himself and his company are heavily invested. He doesn't just tell people to buy bitcoin so his bitcoins appreciate in value. He truly believe in this idea and technology.
In this interview titled The digital transformation of property, Saylor outlines the reasons why Turkey should sell their gold reserves and use the money to buy bitcoin instead. It is a simple idea, but Saylor manages to present it in an interesting and thought-provoking way. Feel free to watch the interview yourself. First couple minutes summarize the his advice to Turkey to make Turkish Lira stronger. This advice can is not just for Turkey, but any country who has significant amounts of gold reserves. I am not completely sure that it is a good idea, but I do think it is an interesting one and worth exploring.
First he identifies three problems Turkey has:
- Turkey runs deficit of $20 to $40 billion.
- Turkish Lira is crashing.
- Turkey has $50 billion worth of gold.
Now, why would having so much gold be a problem? It seems it is a good problem to have for any country. The more gold, the better. No?
Saylor explain that gold loses power over time and is not appreciating. He believes there is no way gold is going to go up in value by a factor of a hundred. He concludes that time of gold is ending and calls it a dead rock.
As a solution, he suggests Turkey could turn the third problem into a long term solution. According to him, if Turkey sold $50 billion gold and bought $50 billion in bitcoin, bitcoin would appreciate in value by the factor of three, four, five, or six.
Now this action by Turkey would make everybody else think about their financial situations as well, and realize that gold will continue losing power and slowly other countries would join in selling gold and buying bitcoin. First few billions, then hundreds of billions, then trillions of dollars of gold would be sold and converted to bitcoin. Following this thought, he concludes 12 trillion dollars of gold's capital would get demonetized down to two trillion dollars, which is the utility value of gold in jewelry.
If this were to happens bitcoin would explode from 500 billion market cap to trillions, to ten trillion, and even to twenty trillion dollars. This would put Turkey's initial bitcoin investment into $250 billion valuation. And since bitcoin would continue to appreciate in value at the rate of 10 or 20 percent a year, Turkey would generate $50 billion of asset gains annually. And this would help Turkey to offset its deficit and still be in profit.
This would also lead Turkish Lira to become stronger currency, because it would be backed by bitcoin. If things would unfold the way Salor hypothesizes, this indeed could be Turkey's solutions for three problems Saylor outlined. It seems rational as well. However, things don't necessarily work out they way Saylor explains. Making such drastic moves and taking huge risks with people's is not an easy decision to make, and most likely it is not one person's decision to make. This probably would involve long public and legal debates within the country, and also in the international arena.
But Saylor makes a very good point, when he says gold reserves that Turkey has are not backing the Turkish Lira the way they should. It does seem like having so much gold doesn't necessarily help making the currency stronger. And if Saylor is right and gold is in decline, waiting longer wouldn't be in Turkey's benefit.
Overall, what Saylor is suggesting is the same thing that has been discussed since bitcoin started, that bitcoin is the new gold and eventually gold's value would pour into bitcoin. There are really good arguments for bitcoin and against gold, and I do tend side with arguments on bitcoin's side. At the same time it is still too early for people to give up gold and reassign its value to something like bitcoin.
For ideas like what Saylor is suggesting to become a reality in Turkey or any other country, first the government would need to be convinced of bitcoin. Then massive public education campaigns would have to happed to educate people about gold vs bitcoin, pros and cons. Then all the legal aspects would need to be considered to structure such transition, and pass some legislature to make it happen. Even after all this work is done, Turkey would have to confront international partners like countries, organizations and banks to seek their approval. Because such changes may backfire and Turkey may face international resistance, especially from the likes of World Bank, IMF, European Bank, etc. We all have seen how international bankers and central banks reacted to El Salvador's adoption of bitcoin as legal tender.
It is one thing to adop bitcoin as legal tender. Moving from gold reserves to bitcoin reserves would have bigger impact in the international stage. Saylor is right, if Turkey indeed converted $50 billion of gold into $50 billion of bitcion, that would make many countries to rethink their monetary policies, and definitely consider getting rid of gold. Nobody would want to be the last in that race, as financial penalty would be huge.
I doubt Turkey would make such moves, not anytime soon. I think we will see more institutional involvement first. Slowly bitcoins recognition is growing, and it is becoming accessible for institutions as well. Once regulatory frameworks reach some clarity in most countries, even more institutional money will pout into bitcoin. By that time, governmental entities will become more friendly to bitcoin as well and perhaps that will be the time for some countries publicly go all in with bitcoin. Until then, they will probably accumulate as much as they can in secret.
Another great thought experiment by Michael Sayor and great optimism about bitcoin's future. I do share his thoughts as well. They probably won't happen exactly as he described, but eventually bitcoin will replace gold. What do you think? Let me know in the comments