How Applicable Is the Bimetallism Model to Bitcoin Economics?

How Applicable Is the Bimetallism Model to Bitcoin Economics?

Bimetallism is a monetary system whose standard is based on two metals rather than one. Gold and silver are the traditional choices. It is where an economic unit’s definition lies as the equivalent of the two metals in question.

A Brief on the Bimetallism Model

A fixed exchange rate is created between the two, with the government recognizing both as legal tender. The system allows for the free circulation of both metals, with no restrictions on their coinage or use. It will enable investors to readily exchange all other currencies in circulation for units of both gold and silver.

In the more modern international context, bimetallism refers to the situation where nations set their exchange rates pegged on both metals. The exchange rate is often different per country but creates ease of interchangeability with other currencies in such a system.

How It Is Applicable in Bitcoin

It is quite possible to place Bitcoin on the bimetallism model. It would play a crucial role, especially with the heavily battered prices.

However, some changes may need to be employed to the crypto before it’s possible. They include;

Transform BTC Into a Stablecoin

As the first and most apparent repercussion, an investor may have to change Bitcoin into a stablecoin. Creating an exchange rate between BTC and gold and silver will set a pegged price for the crypto. It will mark the end of the coin’s current price determination, strictly by its demand and supply.

Accumulate Both Metals as Reserves for BTC

The main reason bimetallism was coined and implemented in the 19th century was the ease of acquiring both metals as reserves. The blockchain’s development team will have to hold reserves of both metals in its coffers. It’s the only way to back up the set pegged price.

Benefits of Having Such a System

With the bimetallism model as part of Bitcoin Economics, the crypto stands to benefit from the following;

Greater Price Stability

A defined exchange rate against the two metals will maintain the coin’s value. That will directly solve the drawback of cryptos, which is very high price volatility for a currency.

The price stability will be more pronounced than most other stablecoins since the backing is a pair of reserve assets. Governments’ repetitive Quantitative Easing and money printing have repeatedly eroded fiat money stability.

Immunity From Speculative Actions Due to Intrinsic Value

Specifically, Bitcoin is not fiat money because its value is determined by state decree. It, however, still lacks intrinsic value, something that bites it back in the form of a high effect of speculation on its prices.

With a bimetallism system backing its value and a backing reserve asset, Bitcoin will have intrinsic value. The automatic consequence is an end to the current status quo of excessive speculation on its price.

Increased Adoption Possibilities as Legal Tender or Reserve Asset

One of the critical drawbacks of higher Bitcoin adoption by governments has been its volatility. The few governments that have adopted Bitcoin as legal tender has done so majorly due to a lack of options. Few are opting to keep it as a reserve asset due to the possibility of rapid value erosion.

With more excellent stability due to a bimetallism-based exchange rate, Bitcoin will be a more sound option for both. It offers more immunity to speculative attacks than Fiat money when adopted as legal tender. It will also eliminate the exposure of nations to monetary policies of the handful of countries whose currencies are reserve assets.

The Drawbacks

The drawbacks to such a system include;

Force Bitcoin’s Cooperation With Governments to Maintain the StandardĀ 

Throughout history, there has been no instance where the maintenance of a bimetallism model took place without intergovernmental cooperation. Unilaterally setting a bimetallism standard is practically impossible. 

That’s because it assumes a frozen price ratio between both metals without considering their demand and supply. Bitcoin will have to foster comprehensive intergovernmental cooperation to effect it.

End of Bitcoin’s Appeal as a Tradeable Commodity

Despite the disadvantages of a high price volatility rate, the price fluctuations are a vital attraction to Bitcoin’s investors. It allows them to buy the dip and sell off at higher prices. The capital gains are what have appealed to all institutions and whales inclusive.

Introducing a maintained exchange rate due to bimetallic standards would end such possibilities. That could end up locking out a large portion of investors from the coin.

Possibility of Government Interference

As has been established, maintaining a bimetallism model requires international cooperation with governments. It inadvertently raises the blockchain’s susceptibility to government interference in several ways. The governments may need the crypto to become a new type of International Central Bank Digital Currency before offering to cooperate. 

Possible reasons will be their rigidity in letting a gold to silver fixed ratio be determined by private players. They’ll also be more unwilling to adopt the coin as legal tender or as a reserve asset and let private players erode the abilities of government monetary policies. Such policies are crucial in addressing national macroeconomic issues. It would end the classification of Bitcoin as a cryptocurrency.

Take Away

A bimetallism model of determining a currency’s valuation was implemented centuries ago. It precedes the gold standard, which precedes the current Fiat money system. Investors can expect opposition to its implementation to arise. It would also require massive changes by the Bitcoin development team, such as turning it into a stablecoin and maintaining reserve assets. 

The benefits would be a more stable BTC, less susceptibility to speculators, and more acceptance as legal tender and reserve asset. Nonetheless, it would end BTC’s appeal as a tradeable commodity and force its cooperation with governments and their possible interference. It’s up to the markets and Bitcoin key stakeholders to decide if the cost-benefit ratio is worth it.

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Julius Mutunkei

Julius is a blockchain reporter skilled at synthesizing all crypto-related information to make articulate texts easy for anyone to grasp. With a beginner's level certificate in Financial Analysis, Julius can read, interpret and report crypto findings to help investors exercise the best judgment in their decision-making process. When he is not caught up in the crypto frenzy, Julius likes playing a game of FIFA with his online buddies.