Crisis of Confidence in Fiat: Gold and Bitcoin Become New Value Anchors

Author: Matt Hougan, Chief Investment Officer of Bitwise

Compiled by: AIMan@Golden Finance

Original title: Bitwise: What is fiat currency and why do people rush to buy gold and BTC

The world is starting to realize the madness of fiat currency experiments.

The legendary writer David Foster Wallace ( David Foster Wallace ) opened his commencement speech at Kenyon College ( in 2005 with a fable:

Two little fish were swimming when they happened to encounter a big fish swimming towards them. The big fish nodded at them and said, "Good morning, kids. How's the water?" After swimming for a while longer, one of the little fish looked at the other and asked, "What is water, anyway?"

Wallace's point is that we often overlook the most important realities, especially when these realities have surrounded our entire lives.

I've been thinking about those fish lately.

Like almost every other financial professional today, I have lived my life in a fiat-based world – a world in which a country's money supply is not based on the accumulation of its reserves, such as gold or silver, but is determined by the government. The United States abandoned the gold standard 54 years ago, in 1971. Assuming that most people start their careers at the age of 21, the youngest person in the financial world today who remembers working in the era of non-French is probably 75 years old.

When most of us were still in school, the adoption of fiat currency was seen as an inevitable progress, much like crawling out of the mud and beginning to walk upright.

In the past, people thought gold was the currency, and we laughed. How cute.

But people seem to be increasingly aware that the fiat currency era we are experiencing may be an exception. Perhaps printing money out of thin air, as we started doing in 1971, is actually a crazy idea. Perhaps sound money requires limitations.

In other words, people started looking around and asking: what exactly is fiat currency?

One of the groups raising this issue is the Financial Times in August, which featured an in-depth article in its weekend "Big Read" discussing "how gold has become a safe haven for the world against uncertainty."

A key piece of text:

For the guardians of the global economy, gold - since the first gold bar was created in Mesopotamia thousands of years ago, it has been used as a means of storing value - seems destined to become irrelevant.

However, gold bars have made a strong comeback, favored not only by speculators who distrust modern paper currencies and so-called "gold bugs," but even by the most conservative investors in the world...

In an era of political fervor, many core assumptions about the global economy are being questioned, and gold has once again become a pillar.

According to the Financial Times, central banks – which had been buying gold regularly before 1971 – are now buying gold aggressively again. As you can see in the chart below, these annual purchases began in the aftermath of the 2008 financial crisis and entered a phase of super-growth in 2020 following Russia's invasion of Ukraine. In other words, these purchases begin when central banks begin to truly abuse fiat currency, and the pace of purchases accelerates once governments begin to seize some fiat currency.

Central banks around the world are pouring record amounts of money into buying gold

Net purchase/sale volume by central bank (in tonnes of gold)

![Ejyne4mk1gYfpIyMQsInW3AJI0myhDTli5XF9Sid.jpeg])https://img-cdn.gateio.im/webp-social/moments-b972002e9379a68bc4a3525c72427c9f.webp "7377021"(

Source: Financial Times, data from Metals Focus, Refinitiv GFMS, and the World Gold Council.

Note: The chart shows the net demand from central banks and other official institutions (including supranational entities like the International Monetary Fund), which is the total purchase amount minus the total sales amount. It does not include the impact of swap transactions and Delta hedging.

Last year, gold surpassed the euro to become the world's second-largest reserve asset after the US dollar. As the US debt approaches $37 trillion and the temptation to devalue the dollar to escape the crisis grows, central bank governors around the world realize that they need to hedge against risks. They want a solution that can:

• Scarcity

• Global

• Governments find it difficult to manipulate

• Able to hold directly in a sovereign manner.

You probably understand what I mean. These qualities apply not only to gold.

They are paying more and more attention to Bitcoin.

Bitcoin: A Weapon Against Fiat Currency Devaluation

Like the government, individual investors are beginning to realize the dangers of printing money recklessly. But interestingly, they mostly hedge money printing through Bitcoin – which is widely considered a digital alternative to gold. Since its launch in January 2024, Bitcoin ETFs have attracted $45 billion in funding, compared to $34 billion in gold-backed ETFs over the same period.

Why is there a difference between the government and the general population? The main reason is capacity: the Bitcoin market is still too small for central bankers at $2 trillion, and its liquidity is not enough to support massive central bank entry and exit. I suspect this will change over time – in fact, the government's demand for Bitcoin will only keep growing. But for now, I think those are two sides of the same deal.

However, whether we are talking about gold or Bitcoin, the basic point is the same: for the past forty years, we have been taught to achieve portfolio diversification through a combination of stocks and bonds. But no matter how you adjust it - 60% stocks/40% bonds or 70%/30%, whatever the ratio - you are still 100% invested in fiat currency.

People realize that swimming in these waters is quite dangerous.