What everybody ought to know about gold and Bitcoin: Part 2 of 3: Bitcoin as a product

An analysis of gold vs Bitcoin as products

“I do think Bitcoin is the first [encrypted money] that has the potential to do something like change the world.”

– Peter Thiel, Co-Founder of Paypal

File:Bitcoin ATM Sign (48206534512).jpg

This article is the second in a three part series that explores gold and Bitcoin in detail as products, including who the customers are for gold and Bitcoin, what jobs gold and Bitcoin do for them, and a perspective on the future markets for gold and Bitcoin.

What everybody ought to know about gold and Bitcoin

Who’s buying Bitcoin? And why are they buying it?

The answers might surprise you.

In our first post in the series, we did an analysis of gold as a product. Bitcoin and gold are similar in many ways. To really understand Bitcoin, you have to understand gold.

Gold and Bitcoin both have a finite supply which must be mined at great expense to obtain. No matter what you do to gold or Bitcoin you cannot destroy it or make it disappear. Gold is imperishable, and every Bitcoin ever mined is permanently recorded in the Bitcoin blockchain and cannot be altered or removed.

Gold and Bitcoin are both a store of value, a medium of exchange and a unit of account. This means both gold and Bitcoin are money.

But not all money is created equal.

In this post, we look at who Bitcoin’s customers are, and what jobs Bitcoin does for them. How does this compare with gold? And finally, is “digital gold” a good way to think about Bitcoin?

Bitcoin customers can be divided into two groups: individuals and professional investors. Let’s look first at individuals.

Individuals as Bitcoin customers

According to the 2019 Statista Global Consumer Survey, the top five countries in terms of cryptocurrency penetration are Turkey, Brazil, Colombia, Argentina, and South Africa.

While the penetration numbers are interesting, it’s more useful to translate penetration numbers into estimated user bases. We’ve done this below using mid-July, 2019 UN population data.

Though the Statista data shows only 18 countries (noticeably missing India), it still represents 3.2 billion people—almost half the world’s population. Here are some important takeaways:

First, there are over 335 million crypto users worldwide. For perspective, Instagram had 30 million users when Facebook bought them for $1B. And Whatsapp had 450 million users when Facebook bought them for $19B.

Second, half of all crypto users are in China. This is four times as many as Brazil, the country with the next largest crypto user base.

Third, despite the lower penetration rate, the US still makes it into the top 5 overall because of its large population.

While this data focuses on cryptocurrency generally and does not specify Bitcoin, given that Bitcoin is two thirds of the market cap of all crypto currencies and it’s common for altcoin owners to also own Bitcoin, these results are likely directionally correct for Bitcoin.

So why do people buy Bitcoin?

There are two main groups of individual’s buying Bitcoin, and they’re buying Bitcoin for very different reasons.

The first group is looking for safety (risk off). They are hoping to future-proof their financial security. The second group is looking for yield. They are hoping for a high-return investment (risk on).

Let’s look at each in turn.

Job to be done: future-proof financial security

In many parts of the world, people look to Bitcoin to preserve wealth and hedge risk—jobs people have traditionally looked to gold for.


Bitcoin and gold are similar in a lot of ways.

Like gold, Bitcoin is not an investment. An investment is putting capital at risk in return for the promise of dividends, interest or appreciation. But since the capital is at risk, it’s possible to get back less than you invested—or nothing at all.

If you buy Bitcoin and lock it in a vault, you are not investing it. You don’t receive interest or dividends. You are simply storing it.

The Bitcoin you store is no one else’s liability or promise of performance, so there is no counter-party risk. If you remove your Bitcoin from storage, there is no risk that you receive less Bitcoin than you started with.

Unlike traditional fiat money, Bitcoin is money that bankers and politicians cannot contract or expand. This is what makes it a hedge against inflation (or deflation)—or portfolio insurance against disaster or failed government policies. 

While gold and Bitcoin are similar, they are not simple substitutes. There are very important differences between them.

Being digital, Bitcoin has some significant advantages over gold, including:

  • Ease of acquisition

  • Divisibility

  • Ease of transfer

  • Being difficult to seize or steal

These advantages are why people choose to buy Bitcoin to future-proof financial security instead of buying gold.

If it were as simple for anyone to buy and sell gold in any quantity at any time using only a cell phone, take actual possession of it, easily conceal it from theft, and instantly move it across national boundaries as it is with Bitcoin, people would probably prefer to buy gold. But gold is not good at these things.

That being said, the physical nature of gold means that it has some significant advantages over Bitcoin. Gold is deeply entrenched into the fabric of the world. There is $1.5 trillion dollars of industrial usage of gold, and individuals own almost $5 trillion of gold in the form of jewelry and adornment. For thousands of years, gold has been used to signal status, show confidence, and to provide connection when given as a gift (e.g. wedding bands). This is not going to change quickly, if ever.

You cannot wear Bitcoin. Or make it into wedding bands.

With Bitcoin, there’s not much more to see than a balance, transactions and a 34 character Bitcoin address like 1XPTgDRhN8RFnzniWCddobD9iKZatrvH4.

So while many people choose to buy Bitcoin to future-proof their financial security, today it is much riskier than gold because Bitcoin has fewer alternative uses to maintain its price support.

Below are three jobs people hire Bitcoin to do related to future-proofing financial security. Others will surely emerge over time.

Protect against financial instability and inflation

In situations of financial instability, it can be desirable to protect wealth outside the existing financial system with the objective of maintaining purchasing power with as little risk as possible. This is often why people seek to hold US dollars or other hard currencies when their local currency has systemic inflation.

But it’s not always possible to get hard currency when you want to. And even hard currencies have all had severe erosion of purchasing power over time.

In 2019, inflation in Argentina hit 53.8%, the highest it’s been in 30 years. Only 4 countries had worse inflation in 2019 than Argentina—Venezuela, Zimbabwe, South Sudan and Sudan. Argentina implemented restrictions on access to foreign currency in an attempt to put the brakes on the financial crisis. By October, Argentinians were allowed a maximum of $100 US dollars per month in cash or $200 US dollars per month in their bank account.

An Argentinian who bought Bitcoin at its 2017 peak would have been better off today than an Argentinian who held Argentinian Pesos in their bank account—despite the 50% drop in the price of Bitcoin.

This example of hyperinflation is not as rare as you might think. There have been 29 hyperinflations over the last 100 years. Venezuela continues to have the world’s worst hyperinflation—and Iran, Turkey and others have all struggled with inflation recently. There was even hyperinflation in the US in 1779 and between 1861 and 1865.

As seen in Argentina, when a country is in the middle of a financial crisis, it is often difficult or impossible to convert local currency to a foreign hard currency. Also, because so many people want gold in a situation like this, gold might not be available either. Especially since increased demand may mean gold must be physically moved into the country. Since Bitcoin can be moved peer-to-peer electronically over the Internet, it doesn’t have this problem.

For someone worried about inflation who is not able to hold traditional hard currencies or gold, the job Bitcoin does is provide an alternative store of value.

Protect against capital controls

Capital controls can take many forms and be implemented for many reasons. Common reasons include preventing capital flight, influencing the foreign exchange rate (i.e. competitiveness of exports), and providing domestic capital at rates lower than would otherwise be available.

The result for individuals is that—even if they are technically free to leave the country—it may be difficult or impossible to take their money with them. This effectively locks many people in place.

Below is a list of countries that currently have foreign exchange controls:

The above list is only 31 countries, but if you sum the populations of these 31 countries, you realize that capital controls impact 3.96 billion people today—more than half the world’s population. Below is the same list ranked by population.

Typical restrictions include banning the use of foreign currency within the country, banning locals from possessing foreign currency, restricting the amount of foreign currency that can be imported or exported, and fixed exchange rates.

Capital controls have a tendency to come and go—and often coincide with financial crises. Greece had capital controls from 2015 to 2019, Iceland had capital controls from 2008 to 2017, and the Republic of Cyprus had capital controls from 2013-2015.

Capital controls are not found only in places with political or financial instability. The UK had capital controls until 1979. China has in place some of the most strict capital controls, including a limit of $50,000 US dollars per year that Chinese citizens can take out of the yuan. In 1933, Franklin D. Roosevelt signed an executive order that forced all US citizens to sell their gold for US dollars. It remained illegal for US citizens to own gold bullion, bars or coins until 1974. Some believe the US may again implement capital restrictions if the US dollar is threatened or if the current political path toward protectionism continues.

For someone worried about being able to move wealth freely, Bitcoin makes it as quick and easy to transfer value as the Internet makes it to transfer information. Bitcoin does this job much better than gold, because gold is heavy and has to be physically moved. Bitcoin, by contrast, can be instantly moved from anywhere to anywhere so long as the participants can access the Internet.

Protect against crime and theft

A question asked in the 2010 - 2014 World Values Survey was how often participants or their family felt unsafe from crime in their own homes. People in Latin America—and to some extent Africa—felt this frequently.

Below is a sampling of scores. 100 is feeling unsafe rarely or never and 1 is feeling unsafe sometimes / often:

  • Germany: 92

  • Japan: 84

  • Turkey: 77

  • USA: 76

  • China: 74

  • India: 63

  • Argentina: 29

  • Chile: 23

  • Brazil: 23

  • South Africa: 21

  • Mexico: 17

  • Peru: 4

  • Rwanda: 3

Countries that scored below 30 in this survey also have very high unbanked populations. According to the World Bank’s 2017 Global Findex Database, 63% of Mexicans, 57% of Peruvians, and 51% of Argentinians are unbanked. These are among the highest unbanked percentages in the world—2x to 3x higher than China, India or South Africa.

For many Latin Americans, this means that not only do they not feel safe in their own homes, but they have to keep their savings in cash because they have no bank account.

If you’ve ever traveled to Mexico or other parts of Latin America and wondered why you saw so many half-finished houses—here’s why. It’s extremely difficult (and expensive) to get a real estate loan in Latin America. So what do you do if you’re saving to buy a home and you don’t have a bank account, but you don’t want to keep your savings in cash since you’re worried about it being stolen or inflated away? You build your house slowly, one brick at a time, over countless years.

It turns out no one is very interested in stealing foundations or cement bricks. And for many currencies in Latin America, the value of cement bricks holds up much better than cash. Plus, there’s no financing cost or risk. Given the choice, people might prefer to finance a home and be able to live in it right away. But given the circumstances, what’s actually happening is not surprising.

For someone who is considering putting their wealth into cement bricks to protect it from theft or inflation, the job Bitcoin does is provide an alternative that is easy to buy, easy to transfer and harder to steal than gold or cash.

Job to be done: be a high-return investment

There’s another type of Bitcoin customer—one who is primarily interested in Bitcoin as a high-risk, high-reward opportunity.

These customers have seen how Bitcoin has appreciated to date, and are hoping for it to continue. This type of customer typically lives in a country with a high average income, like the US, Japan or Europe.

A survey sponsored by Blockchain Capital and conducted by The Harris Poll in April, 2019 shows that 18% of U.S. millenials own Bitcoin. This is an amazing statistic, because only 37% of U.S. millenials are invested in the stock market.

27% of respondents (42% of millenials) said they were likely to buy Bitcoin in the next 5 years, and 33% of respondents (48% of millenials) believe that most people will be using Bitcoin in the next ten years. The younger a respondent was, the more positive they were likely to be on Bitcoin.

A 2019 survey by Finder found that 61% of US cryptocurrency owners want to own it as an investment (the number one reason), followed by 29% who want to use it for transaction payments, 26% who want to store savings outside of traditional banks, and 18% who want to use it to send money overseas. They also found that men were twice as likely to hold crypto as women, and that the average US crypto account value was $5,447, with the median being $360.

Net-net, the typical profile of a Bitcoin owner in the US today is a high income millenial male.

Why do millenials like Bitcoin? It’s had extremely high returns—similar to a venture investment (but without requiring you to be an accredited investor). It trades 24/7—enabling round-the-clock instant gratification. It’s very easy to get started—especially using Robinhood or Coinbase. And it’s much simpler than trading stocks.

Professional investors

When Bitcoin started, its customers were exclusively individuals. But today, professional investors are increasingly Bitcoin customers as well. This category is made up of sophisticated “smart” money making large bets on Bitcoin and other cryptocurrencies.

The job Bitcoin does for these customers is provide the possibility of exceptional investment returns. They are evaluating Bitcoin and crypto networks as if the network were a venture investment, and investing in opportunities they believe have a venture-style upside. This is significantly different from traditional venture investing, where the focus is on investing in a company whose value is determined by the growth, scale and defensibility of recurring cash flows. Fred Wilson at Union Square Ventures and Chris Dixon at Andreessen Horowitz are both well known traditional venture capitalists that have taken deep interest in Bitcoin and cryptocurrency.

A few of the more active funds focused on investing in cryptocurrencies and crypto companies include a16z Crypto, Blockchain Capital, Coinbase Ventures, Digital Currency Group, Galaxy Digital, Pantera Capital, Polychain Capital and Winklevoss Capital.

Funds like the above group are even beginning to attract institutional investors like pension funds and university endowments interested in exposure to Bitcoin as part of a portfolio allocation strategy. The job Bitcoin does for these customers is increase diversification.

In October, 2019, the Police Officer’s Retirement System and the Employees Retirement System—both of Fairfax County, Virginia—invested $55M (1% of their assets) with Morgan Creek Digital, which invests in cryptocurrencies.

The endowments of Harvard, Stanford, MIT, Dartmouth, and University of North Carolina are also reported to have made investments in at least one cryptocurrency fund. Yale’s endowment has invested in two cryptocurrency funds, including a16z Crypto.

Is Bitcoin digital gold?

Thinking about Bitcoin as digital gold is useful if you keep in mind that Bitcoin and gold are not perfect substitutes. There are very important differences between them.

The growth and resilience of Bitcoin is strong validation that what Bitcoin provides is wanted in the world and is not currently being provided by physical gold.

That said, Bitcoin’s status as a risk-off asset like gold remains unproven. Bitcoin still tends to follow the stock market more than it follows gold.

Is digital gold better than physical gold?

For some jobs, digital gold is much better than physical gold. For other jobs, physical gold is much better than digital gold.

Physical gold is not going away. But over time, digital gold will continue to get better while physical gold will remain exactly the same. This is how software works.

Not only is Bitcoin software, but it is also a network—and networks have some very interesting properties. Metcalfe’s law says that the value of a network is proportional to the square of the connected users of the system. While the exact calculation as it applies to Bitcoin is debatable, the key result is that the Bitcoin network has increasing returns. This means that the bigger the network gets, the more value it provides to each individual participant. This positive feedback loop creates a natural monopoly that over time is virtually impossible to compete with.

If this is true, how did we get to where we are today? And what will happen to the markets for gold and Bitcoin over time? Will Bitcoin replace gold? Will another cryptocurrency replace Bitcoin?

We'll answer these questions and more in our next and final post in the series.

What everybody ought to know about gold and Bitcoin

Photo: Ajay Suresh

What everybody ought to know about gold and Bitcoin: Part 1 of 3: Gold as a product

An analysis of gold vs Bitcoin as products

Gold is money. Everything else is credit.

-J.P. Morgan

Last weekend Bitcoin was above $10,000 for the third time in its history. At this price, Bitcoin’s market cap is just over $180 billion. That’s roughly the value of McDonalds Corporation. Or the GDP of Kazhakstan.

Is this just a speculative bubble? Or is something more fundamental happening?

A common explanation is that Bitcoin is “digital gold.”

But what does that really mean?

Is digital gold something good? Is digital gold better than regular gold? Does the world need better gold? Is gold money? Is Bitcoin money? Will software eat gold?

In today’s world, how well do we actually understand gold?

This article is the first in a three part series that explores gold and Bitcoin in detail as products, including who the customers are for gold and Bitcoin, what jobs gold and Bitcoin do for them, and a perspective on the future markets for gold and Bitcoin.

What everybody ought to know about gold and Bitcoin


People have been obsessed with gold for thousands of years. Peter Bernstein writes in The Power of Gold:

Gold has motivated entire societies, torn economies to shreds, determined the fate of kings and emperors, inspired the most beautiful works of art, provoked horrible acts by one people against another, and driven men to endure intense hardship in the hope of finding instant wealth and annihilating uncertainty.

The history of gold shows that people believe it to be a safe haven. Until it is taken seriously. Then—it becomes a curse. Bernstein continues:

Whether it is Jason in search of the Golden Fleece, the Jews dancing around the golden calf, Croesus fingering his golden coins, Crassus murdered by molten gold poured down his throat, Basil Bulgaroctonus with over two hundred thousand pounds of gold, Pizarro surrounded by gold when slain by his henchmen, Sutter whose millstream launched the California gold rush, or modern leaders such as Charles de Gaulle who deluded themselves with a vision of an economy made stable, sure, and superior by the ownership of gold—they all had gold, but the gold had them all…

Nations have scoured the earth for gold in order to control others only to find that gold has controlled their own fate. The gold at the end of the rainbow is ultimate happiness, but the gold at the bottom of the mine emerges from hell. Gold has inspired some of humanity’s greatest achievements and provoked some of its worst crimes.

Understanding the history and fundamentals of gold is important to have perspective on what “digital gold” might be or how you might value it.

Gold itself is neither bad nor good.

So what makes people so obsessed with gold?

Why is gold so special?

Gold’s radiance lasts forever

Gold is chemically inert. Unlike most materials that rust or rot, an object fashioned out of gold 4,000 years ago remains virtually identical today.

Gold can be made into virtually anything

Gold is extremely dense and malleable. You can make an ounce of gold into a wire fifty miles long, or beat it into a sheet covering one hundred square feet.

Gold is imperishable

No matter what you do to gold, you cannot make it disappear or convert it into something else. Almost all gold ever mined is still here—unlike any other element on earth.

Gold has a very limited supply

The World Gold Council estimates that the total above ground stock of gold at the end of 2017 was 190,040 tonnes. Below ground reserves were estimated at 54,000 tonnes.

Gold is extremely hard to get

Every year, global mining adds 2,500 to 3,000 tonnes to the stock of above ground gold. China was the largest producer in 2018, followed by Australia, Russia and the United States (in that order). There are various ways of mining gold. None could be described as easy or good. As Bernstein says:

Finding and producing gold demands immense effort relative to the amount of glittering yellow metal that makes its appearance at the end of the process…

Today, in the great gold mines of South Africa, the shafts reach down as far as 12,000 feet and the temperature reaches 130 F. As one source describes it, "To produce one ounce of fine gold requires 38 man-hours, 1,400 gallons of water, electricity to run a large house for 10 days, 282 to 565 cubic feet of air under straining pressure, and quantities of chemicals including cyanide, acids, lead, borax, and lime." The labour force employed in the South African mines exceeds 400,000 men, about 90 per cent of whom are black.

With this context for what makes gold unique, let’s look at who the customers are for gold and the jobs gold does for them.

Gold as a product

There are four primary customers for gold today:

  • Investors (bars, coins, and financial instruments representing bars and coins)

  • Central banks

  • Individuals (in the form of jewelry and adornment)

  • Industrial Users

According to the World Gold Council, 48% of gold is privately owned as jewelry and adornment, 21% is owned privately for investment, 17% is owned by central banks, and 14% is used in industrial applications. The current value of all gold worldwide is over ten trillion dollars (with a Jan 17, 2020 price of $1,523 per oz). This makes the market for Bitcoin at a price of $10,000 only 5% the size of the market for gold.

Let’s look at the jobs to be done by gold for each customer type.

Investors as customers of gold

Investors own roughly $2.2 trillion (21%) of the world’s gold. Although many investors buy gold, gold is not actually an investment.

An investment is putting capital at risk in return for the promise of dividends, interest or appreciation. But since the capital is at risk, it’s possible to get back less than you invested—or nothing at all.

As J.P. Morgan said, “Gold is money.”

It is very important to understand this.

If you buy gold bars or coins (or paper currency for that matter) and lock it in a vault, you are not investing it. You don’t receive any interest or dividends. You are simply storing it.

The gold bullion you store is no one else’s liability or promise of performance, so there is no counter-party risk. If you remove your gold from storage, there is no risk that you receive less physical gold than you started with.

The difference between storing physical gold and physical paper currency is that the purchasing power of gold has tended to increase over time whereas the purchasing power of paper currency has tended to decrease over time due to inflation.

As an example, if you locked $100 in a vault in 1799 and took it out to spend in 2019, instead of it buying you the $100 worth of goods and services it bought you in 1799, it would only buy you the goods and services that $4.81 would have bought you in 1799. This is a loss in value of more than 95%.

Alternatively, if in 1799 you bought $100 worth of gold, locked it in a vault, and then took it out to spend in 2019, it would buy you far more goods and services than the same amount of gold bought in 1799.

There has been a long term overall upward trend in the purchasing power of gold—particularly after 1971 when the US went off the gold standard and the price of gold was allowed to float. There has been a long term, steady and continuous downward trend in purchasing power of the US dollar—something seen with all fiat money. The above example uses the US consumer price index, but the same results in purchasing power are seen across the board, including with homes, cars, food, oil, etc.

Investors buy gold for the value gold provides as money. Investors use gold to diversify portfolios, hedge risk, and to preserve wealth.

Gold has historically had a negative correlation to stocks and other financial instruments, making it an important portfolio diversifier. If there is a stock market crash and you have a 5% allocation of gold, not only could your gold increase in value, but gold might now represent 10% or more of your portfolio. So you can re-balance your portfolio by selling gold at a high price and buying equities at a very low price.

Unlike fiat money, gold is money that bankers and politicians cannot contract or expand. This makes it a valuable hedge against inflation (or deflation)—effectively portfolio insurance against disaster or failed government policies. Gold can be taken out of storage at any time and converted into an investment that earns a stream of interest or dividends.

Central Banks as customers of gold

Central banks own roughly $1.8 trillion (17%) of the world’s gold.

According to the 2019 Central Bank Gold Reserve Survey, central bank motivations for holding gold differ somewhat between the central banks of advanced economies and emerging/developing economies. Here are the top motivations that were classified as highly relevant or somewhat relevant for each:

Central banks of advanced economies
  • Historical position (legacy of Bretton Woods): 100%

  • Long term store of value: 67%

  • Effective portfolio diversifier: 44%

  • Performance during times of crisis: 44%

Central banks of emerging/developing economies
  • Long term store of value: 83%

  • No default risk: 74%

  • Historical position (legacy of Bretton Woods): 70%

  • Effective portfolio diversifier: 70%

Central banks list gold on their balance sheets along with other official foreign reserve currencies. Why do central banks hold monetary reserves? To balance payments of the country, to influence the foreign exchange rate of its currency, to maintain confidence in financial markets, and to maintain stability and liquidity during times of crisis.

The US dollar is by far the most popular reserve currency of central banks, comprising between 60 and 70 percent of all central bank foreign reserves between 1995 and 2018. The world’s need for dollars has allowed Americans and the US Government to borrow at much lower costs, giving the United States an advantage that’s estimated to be worth $100 billion per year.

That said, central banks hold gold reserves for much the same reason investors do. Gold bullion is no one else’s liability or promise of performance. Gold cannot be expanded or contracted by bankers or politicians, and gold’s purchasing power is relatively stable whereas the purchasing power of even hard currencies has decreased over time due to inflation.

Individuals as customers of gold

Individuals own roughly $4.9 trillion (48%) of the world’s gold as jewelry or adornment. This is twice the amount of gold owned by investors, and three times the amount owned by central banks. You might think that the majority of gold is owned by investors and central banks, but this is not true.

The story of individuals as customers for gold has a long history and is more nuanced than for gold’s other customers. It’s a story of the interaction of gold as money and gold as jewelry and adornment in a mutually reinforcing cycle.

You could argue that the only reason that investors and central banks are customers of gold is because of the millenia old global obsession with gold by individuals, and that the value that individuals collectively put in gold is the root of its value.

What jobs does gold do for individuals?

Store of value

Individuals know that gold has held its value well over the long term. As a store of value, gold does a similar job for individuals as it does for investors. It preserves wealth by hedging against inflation or deflation and provides insurance against disaster.

So what distinguishes an “individual” from an “investor” in our classification? An individual holds their gold in the form of jewelry or adornment, whereas an investor holds their gold in the form of bars, coins or financial instruments.

Exclusivity and belonging

Gold in the form of jewelry is used to signal belonging and exclusivity. Since gold is very expensive, it’s only possible to have if you’re wealthy. Thus, the job gold does for an individual in this situation is signaling converted into status.

The ability to literally wear your money is somewhat unique to gold. You cannot wear your Bitcoin, and people have not made a habit of fashioning clothes or jewelry out of paper money (for obvious reasons).

Using gold as a signal for status varies between cultures—though most do it. It’s interesting to note that 24% of the world’s individually owned gold in the form of jewelry and adornment (22,000 tonnes) is in India.


When given as a gift, the job gold does for an individual is one of connection. One of the most common examples of this is the tradition of gold wedding bands. Buying an expensive and beautiful ring is a demonstration of what one person is willing to give up for another. It is a constant reminder to you of your connection to your spouse—and it is a reminder to your spouse (and all others) of your connection to him or her.

A simple wedding band costs about $1000 and the US has roughly 2 million weddings per year. This is $4B per year in wedding rings. If the US is 4% of the global population and we assume people get married at the same rate everywhere, there are potentially 47 million weddings each year that need wedding rings.

While this job of connection is most obvious in wedding rings, it also holds true with a wide range of jewelry or adornment given as a gift—and sometimes even for jewelry purchased for oneself.


Throughout history, another job gold has done is to signal confidence, power and devotion. Whether it’s Jason and the Golden Fleece, Egyptian pharaohs, the papal altar in St Peter’s Basilica in the Vatican, the gates of Versailles (shown below) or the many ancient and modern buildings worldwide that are literally made of gold, gold has been used to project power and confidence in a way that other materials cannot match.

gold and blue castle

Industrial customers of gold

Many products use gold as a component of the finished product. Gold in industrial products accounts for roughly $1.4 trillion (14%) of the world’s gold.

When gold is used in an industrial application, it is because of a specific need for one of gold’s unique attributes. Gold is too expensive to use if there is any other alternative. The number of industrial applications for gold has been steadily increasing over time. Let’s look at some jobs gold does in industrial applications.


Gold is used for electrical connectors in a wide range of electronics products, including cell phones, computers, tablets and calculators. Gold provides excellent conductivity and is generally resistant to oxidation and corrosion—unlike alternatives. Gold is also used to connect semiconductor devices to their packages and in the connectors of a wide variety of higher end cables, such as audio, video and USB cables.

The amount of gold used in cell phones is very large in aggregate. Trevor Keel, Head of Technology for the World Council estimates that there are 25 milligrams of gold in each cell phone. At $1500 per troy ounce, this is worth about $1.20. When you multiply this by the 1.5 billion smartphones now produced each year (and many not recycled), this adds up to billions and billions of dollars in gold.

Medicine and Dentistry

Gold is used for a wide range of medical applications, including the treatment of cancer and rheumatoid arthritis, rapid diagnostic tests, and HIV/AIDS detection. Gold is also used in some electronic medical equipment, surgical instruments and life-support devices. The use of gold in dentistry has been declining, but it is still used for fillings, bridges, crowns and orthodontic appliances. The first evidence of gold being used in dentistry was by the Etruscans in 700 B.C.


Gold is used in some glasses to reflect solar radiation outward, allowing a building to remain cool in the summer. In winter, the gold treatment on glass reflects internal heat, keeping the building warmer. If you’ve ever wondered why the visor of an astronauts helmet is gold colored—it’s because the visor has a thin film of gold to reflect solar radiation that they may encounter in space.


Gold is used extensively in satellites and space vehicles because it is extremely dependable. There is almost no opportunity for maintenance or repair once these vehicles are in space. Gold is used for circuitry and as a lubricant between mechanical parts. Many external components are also covered with a thin gold film to reflect infrared radiation and keep these components from getting too hot.

Space Telescope, Telescope, Mirror, Scientists, Gold

Gold is biologically inert and safe to eat so long as it is at least 22k. It is tasteless and passes through the digestive process unabsorbed. In the EU, gold is E175 which means it is specifically authorized for use in food as a food coloring.

Gold leaf, flake, or dust is often used in food as decoration, and gold flakes are an ingredient in a number of drinks, including Goldschläger and Goldwasser.

Gold is also used in many other applications beyond just those mentioned here.


Humanity’s passion for gold has been constant for thousands of years, and gold is deeply woven into the fabric of the world. The value of gold is rooted in the interplay of its beauty, scarcity and unique characteristics.

Gold stands alone in its ubiquitous appeal and the fact that the largest customer segment for gold by far is individuals—what the financial services industry calls “retail.”

Gold is far more complicated and entrenched in the world than it might seem.

No one controls gold—and no one can make more of it.

Gold is money—and so much more.

But gold isn’t perfect. Some jobs that gold does could be done better.

We’ll take a look at these in Part 2 where we focus on Bitcoin as a product. Who are Bitcoin’s customers? What jobs does Bitcoin do? How well does digital gold describe Bitcoin? Is digital gold better than physical gold? Do we need better gold? And is Bitcoin money?

What everybody ought to know about gold and Bitcoin

Photos: Steve Webel, FIFTY, Bank of England, Kinnari Kurani, capl@washjeff.edu, Annette Schuman, skeeze, Toukou Sousui

The future of finance is self-driving money

What self-driving money is, and why it's coming to everyone.

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning”

-Henry Ford


We worry about how our children score on science, math and reading, but spend no time in school—or anywhere else—teaching them what money is, how it works, and what the rules of the game are.

Maybe that’s because we ourselves don’t understand money very well.

In 2019, US consumer debt hit record levels. Student loan debt alone is now $1.486 trillion, more than doubling since 2008.

Given these debt levels, it’s not surprising that the US personal savings rate has been falling for 40 years and remains low.

78% of Americans live paycheck to paycheck, and most Americans would struggle to cover an unexpected $400 expense.

Low levels of debt and high levels of saving are key ingredients to financial freedom, resilience and security. But instead of being secure, America is on the verge of a retirement crisis, where 25 million retired Americans will face poverty or near-poverty in retirement by 2050.

How did we get here? Why aren’t we doing better?

Managing Money is Hard

Finance is a skill that needs to be learned, just like any other. If you don’t understand it, you will not make the best decisions—and a boat that is 1 degree off course, will soon be miles away from the target.

Companies of any significant size have what’s called a treasury department. The job of the treasury department is to make sure that the company pays all its bills, make sure the company doesn’t run out of cash, manage risks, manage investments, manage debt and capital raises, and maintain relationships with the financial community.

Individuals and households also have a treasury job to be done. They need to maintain budgets, save and invest for future needs, maintain insurance against the unexpected, finance/re-finance good investments, liquidate bad investments or assets no long needed, and not run out of money, among other things.

In the same way few people have the time, interest and ability to be their own IT manager, even the most financially sophisticated among us struggle to be a fully optimized personal treasury manager.

So why is it that we no longer need to be our own personal IT managers, but we still need to be our own personal treasury managers? How is it that we all have an always connected super-computer in our pockets (no IT manager required)—but still suffer the same financial management problems we did twenty years ago?

Lack of accountability

If you buy a technology product and it’s hard to use or doesn’t work as expected, you know almost immediately. In fact, Amazon reviews and sites like Wirecutter allow you to determine in advance, with high accuracy, how happy you’re likely to be with a product.

If you buy a financial product that’s hard to use or doesn’t work as expected, you might not know for decades—or until it’s an emergency and you actually need it—at which point you’re stuck. There is no option to switch it for another one. You might never know you bought an inferior product.

Technology products are frequently replaced. For example, most people buy a new phone every 2 years or so. This creates a tight feedback loop, where market dynamics and word-of-mouth lavishly reward great products and effectively eliminate inferior products.

Many financial products are only bought once or twice in a lifetime. For example, how many times do you buy a mortgage? Or life insurance? This creates a loose (or non-existent) feedback loop, where market dynamics favor large incumbents with a network of salespeople who tell good stories, with unclear quality or appropriateness of the products they’re selling.

The result is that financial products are not held accountable the same way products in other industries are. And lack of accountability stifles innovation and results in optimizing for the wrong things.

Misaligned Incentives

Unfortunately, what is best for today’s financial services companies is not always what’s best for you, the customer.

For years, the stock brokerage industry was driven largely by commissions on trading. This meant that when you traded more, they made more money. When you traded less, they made less money. But we know empirically that the more you trade, the worse your investment results tend to be. This is partly because of all the fees you pay, and partly because people naturally tend to buy high and sell low—exactly the opposite of what they should be doing.

The good news is that the days of fees for trading appear to be over. But this does not mean that the incentives problem is gone. As it happens, only 6% of Charles Schwab’s Q3 2019 revenue came from commissions. 70% of net revenue came from interest revenue, which includes cash balances in customer’s accounts. Last quarter, 11.4% of client’s assets were in cash, and Charles Schwab earned more than 2% on its interest bearing assets.

Large cash positions in customer accounts are no accident. Schwab’s “intelligent portfolios” default to large cash positions that some have argued are not good for customers. Either way, the fact that the majority of Schwab’s revenue comes from these cash positions creates bad incentives when compared to taking a simple annual fee the way others do.

But this is nothing compared to what banks are doing. The top 4 banks hold more than $5 trillion in deposits.

As of December, 2019, JPMorgan Chase and Wells Fargo offered an average of 0.01% interest on savings and interest checking accounts. Bank of America and Citibank offered 0.03% and 0.04% respectively on savings accounts, and 0.01% on interest checking accounts. With a federal funds rate of 1.75%, these banks are earning billions of dollars per year on your money, without passing anything on to you.

When faced with the prospect of squeezed margins due to lower rates, Jamie Dimon, the CEO of JPMorgan Chase, says the bank can cut costs and charge clients more account fees.

No mention of new or better products. No mention of value or customer benefits. No mention of tools, service or education to help customers win.

More fees.

Fees for making a mistake. Fees for using the wrong ATM. And fees for not having enough money in your account.

Today, bank fees are at record highs. But product benefits are unchanged.

In what other industry is this possible?

Despite the growth of bank fees, issuing loans and collecting interest is still the primary way banks generate income. This includes interest from mortgages, credit cards, and auto, student and small business loans, among others.

Here again we have misaligned incentives. Banks optimize revenue when customers have as much debt as possible. Not so much that they might default, but enough that the bank earns lots of interest income.

The optimal amount of debt a profit maximizing lender’s wants you to have is much, much, much higher than the optimal amount of debt you want to have when planning for your family’s needs and a comfortable retirement.

So if this is the case, who’s looking out for you?

Crisis of trust

As it turns out, if you want someone who’s truly on your side—if you want your own personal treasury manager—this doesn’t exist today. You either have to do it yourself or hire a team of professionals to do it. This might include a Registered Investment Adviser (an RIA—required by law to act as a fiduciary), an accountant, a tax specialist and a lawyer.

The problem is that these people are extremely expensive. A RIA will charge 1% of your assets annually for their standard service, with additional services available at an hourly rate. And a good RIA will also require an asset minimum—maybe $500,000 or more—which is out of reach for most people. Accountants, tax professionals and lawyers all charge high hourly rates which run up quickly.

What do we do when we can’t trust the people selling financial services, and we can’t afford to pay a team of people to make decisions for us?

The answer today is to do as much as you can by yourself. Or just copy what friends and family are doing. But no matter who you are, this is suboptimal.

What you really need is someone who’s actually on your side. Who wins when you do. Someone who really knows you and where you’re going. Someone who can see around corners that you didn’t even know where there. Someone you can understand, who’s making or suggesting course corrections while you sleep.

You need your own personal virtual treasury manager. Who’s cheap.

The good news is—as software eats money—for the first time this might be possible.

The future of finance is self-driving money.

Self-Driving Money

What is self-driving money?

Self-driving money knows who you are and uses the best possible route to take you where you want to go. If traffic is bad or a road is closed, it automatically figures out the next best route. If it can’t get you to where you want to go, it tells you and gives you choices of the next best places it can take you that you might like.

Self-driving money gives you warnings if there’s something on the journey you need to know about. Self-driving money tells you what it’s doing and why, but doesn’t require you to understand how your vehicle actually works. At any moment you can change your destination, and it will recalculate everything. Just as if it were Google Maps.

Self-driving money means peace of mind.

Self-driving money means freedom.

Self-driving money means you can be confident you can provide for those you love.

Managing cash

Self driving money makes sure you know about your bills and don’t miss payments.

Self driving money makes payments in the cheapest way possible.

Self driving money doesn’t let cash sit idle in checking accounts or savings accounts that don’t pay interest.

Self driving money makes sure cash generates as much interest as possible.

Self-driving money makes sure you have multiple banking relationships, and moves money automatically between accounts in response to changes in interest rates or fees.

Self-driving money keeps you up-to-date on your account balances.

Self-driving money tells you about any transaction on any of your accounts.

Self-driving money helps you create budgets and savings goals, and helps you stick to them.

Self-driving money notices if your income has dropped or stopped, and makes suggestions of what you can do.

Self-driving money knows when you have worked and gives you a low cost way to advance your paycheck without going to a payday lender.

Self driving money notices if you get a bonus, and shows you the long term benefits of paying off debt or investing it—even if you ultimately decide to spend it.

Self driving money notices how much you spend on groceries, and can suggest meal services that might save you money and give you more time with your family.

Self-driving money can tell you the financial costs/benefits of moving closer to (or further from) work, or getting a second job.

Managing risk

Self-driving money can tell you what the recommended levels of health, auto and home insurance are for you and what a competitive price is.

Self driving money can tell you why people buy life insurance, and if you’re interested, make sure you get the right amount of coverage for your specific situation at a good price.

Self-driving money can monitor your insurance policies and instantly provide you alternative options if your carrier raises rates.

Self-driving money can notice if you’re self-employed and can tell you why some people buy disability or errors & omissions insurance and present you with competitive offers if you’re interested.

Managing investments

Self driving money can pick the best portfolio allocation for your risk profile and goals.

Self-driving money can automatically invest for you every month.

Self driving money can rebalance your portfolio automatically and change your allocation when your situation or goals change.

Self-driving money can warn you against selling near the bottom or buying near the top.

Self-driving money can automatically diversify or switch your assets between institutions in response to pricing and policy changes.

Self-driving money can transparently stack assets across multiple institutions, so if you are a high net worth individual, you are not limited by any one institution’s FDIC or SIPC insurance limits and there is no inconvenience or negative impact on your portfolio allocation strategy.

Self-driving money can give you access to alternative investments and allow you to maintain a portfolio similar to professional investors if it is appropriate for you.

Managing debt

Self-driving money constantly monitors your loans and mortgages for interest rate changes, and can present you with a refinance opportunity as soon as it might make sense.

Self-driving money monitors your credit card spend and gives you warnings if your spending is increasing or might be compromising your goals.

Self-driving money monitors credit card interest rates and consolidates any revolving balances to make sure you’re paying as little in interest as possible.

Self-driving money tells you why you should never choose variable rate loans when a good fixed rate loan is available.

Self-driving money can present you with ideas and options you might never have considered. Like selling Patch Homes equity in your home in the form of a partnership instead of taking out a home equity line of credit.

Self-driving money can help you through a debt settlement process and avoid bankruptcy if things get out of control.

Managing liquidation

Self-driving money notices when you have bought a new phone, computer or other asset and can suggest ways to sell the old one while it still has value.

Self-driving money knows when your kids have probably outgrown the strollers, bikes, or toys you bought for them, and can suggest ways to sell them.

Self driving money notices if you buy a lot of new clothes, and can suggest you consider reselling (e.g. on Curtsy).

Managing taxes

Self-driving money knows the tax consequences of your decisions, and can make suggestions on how to save.

Self-driving money saves you money.

Self-driving money saves you time.

Self-driving money can even reduce accidents—of the financial kind. 66.5% of personal bankruptcy filings are related to unexpected medical issues, either because of high cost of care or time out of work. With the right savings or insurance, many of these situations could be averted.

Life isn’t fair, but self-driving money gives every person a chance at their best life.

Is this for real?

All these promises might sound like a dream. Something that’s impossible to deliver. Or will cost a fortune to build.

But this is not true.

You can see the first glimpse of this vision becoming reality at Wealthfront. And actually see what they’re doing to make it work under the hood.

Wealthfront’s pricing is simple. They charge an annual advisory fee of 0.25% of all assets under management. For a $10,000 account, this is $25 per year.

Other startups touching pieces of this vision include Digit and Tally.

Everything these companies do is built into software. While expensive to develop, the beauty of software is it can be infinitely replicated. And at scale, the marginal cost of one additional user approaches zero.

This is why companies like Amazon, Google, and Facebook are as large and profitable as they are. Google Search isn’t just for wealthy people. It’s for everyone.

And this is why today’s financial services landscape will dramatically change.

As Bill Gates once said “Most people overestimate what they can do in one year and underestimate what they can do in ten years.

The future

I love the idea of self-driving cars. They have a science fiction mystique that captures your imagination and feels like magic. There is no question that self-driving cars will change the world and make it a better place. Self driving cars are fun and sexy.

By comparison, self-driving money is boring. You can’t wear it or park it in your driveway. And it might take 10 years to show that it works.

Self-driving cars make it cheaper and more pleasant to go to work. But self-driving money gives you freedom, so you don’t have to.

It is not acceptable that so many Americans have no savings and would struggle to cover an unexpected $400 expense. We are all weaker because of this. Money is not a zero sum game, and there is no reason why every American family should not be financially secure.

I’m excited for a future where everyone has the financial superpowers they deserve. Most money is just entries in a database. It’s information. A language we use to communicate value to each other.

Software eats money. And the best software company will win.

Photo by Thought Catalog

Will San Francisco replace New York as financial capital?

Regional distribution of top VC funding to finance startups

New York is a fantastic place. There are many good reasons it became America’s financial capital.

It’s human nature to assume that the future will be much like the past. But if you believe software eats money, you know that financial services is about to go through a transformational change.

What will tomorrow’s financial services landscape look like? It’s comfortable to believe that New York will dominate finance tomorrow, just as it dominates finance today. But is this true?

Let’s look at some data.

If you look at US financial services companies who raised money from Top VCs any time in the last 3 years, here’s what you find:

  • Bay Area: 93 companies with total invested capital of over $12.9B (61.0%)

  • NYC: 36 companies with total invested capital of over $3.6B (17.1%)

  • Los Angeles: 7 companies with total invested capital of over $2.6B (12.4%)

  • Everywhere else: 25 companies with a total invested capital of $2.0B (9.5%)

The Bay Area produced almost three times as many finance startups as NYC, and these companies raised almost four times as much money.

Utah and Massachusetts produced four and five finance startups respectively, but every other region produced at most one or two. California as a whole accounted for 62% of companies and 72% of all funding.

Of the 20 companies that raised the most money, 13 are based in the Bay Area and only 4 are based in New York.

It’s always difficult to predict the future—and you might reasonably ask whether this data is a good signal to draw any conclusions from.

Here are a few reasons this data should give you pause:

  • The Top VCs we use as a filter in our basket are the world’s best software and technology company creators and have funded almost every technology company of any significance for the last 40 years, including Apple, Amazon, Google, Facebook and Netflix.

  • Apple, Amazon, Google, Facebook and Netflix are the respective winners in their markets and, as software companies, have reshaped the industry they participate in (i.e. software eats the world).

  • Apple, Google, Facebook and Netflix are all based in the Bay Area and have brought together, trained, and made wealthy tens of thousands of talented software professionals.

Will San Francisco replace New York as financial capital? Will financial services revenues shift to the Bay Area the same way advertising revenues did?

Only time will tell.

But there is no question that the Bay Area will be a critical player in the future of financial services, if not the dominant one.

Data Source: Crunchbase

Top VCs triple bets on finance startups in 2019

What this signals for investors and the financial services industry

Investment by top VCs in finance startups is exploding, growing exponentially from $500 million in 2012 to more than $7 billion for 2019.

And it’s not just the dollar amount that has increased—the absolute number of fundings has also increased from 54 in 2012 to 120 in 2019.

Is this just part of the overall growth in venture investments?

In short, no. Investment in finance startups is growing twice as fast as top VC fundings as a whole.

In 2010, only 1% of top VC investment dollars went into financial services startups. From 1990 to 2010, the average for finance startups was flat at 1.27% per year.

But from 2011 through 2017, financial services startups claimed an average of 2.71% of top VC investment dollars. Then, in 2018, the number climbed to 4.5%. And in 2019 (as of Nov 19), it increased to 7.6%.

Finance startups are taking an increasing share of top VC startup investments.

Despite the significant increase in top VC investments generally, the share that has been going to financial services startups has more than tripled from its 20 year historical norm.

Is this a blockchain / crypto bubble?

Actually, blockchain / crypto investment among top VCs is down in 2019. And they are currently a relatively small piece of the much larger finance startup ecosystem. As of Nov 19, 2019, $646M has gone into blockchain / crypto investments vs $6.4B that has gone into non-blockchain/crypto finance startups. A 10X difference.

The massive shift by top VCs to investing in finance startups is unusual, and it’s a signal that this group of smart investors believes that there will be large returns in this category.

Why does “smart money” believe that so many of tomorrow’s unicorns will come from the finance category when in the past they rarely did?

What has changed?

Software eats money

Marc Andreessen’s software is eating the world hypothesis is now well known since it’s almost ten years since he published it. However, on a recent podcast, Marc further unpacked it:

  • Any product or service in any field that can become a software product, will become a software product (i.e. if it can become bits, it will becomes bits).

  • Every company in the world that is in any of these markets that this is happening, therefore has to become a software company. 

  • As a consequence, in the long run, in every market that this is happening, the best software company will win.

There are many reasons to believe that financial services is entering a phase where all the products and services it provides will become software.

Banking and lending

The primary business of most banks is lending. Artificial intelligence (AI) and machine learning (ML) will be transformative to the underwriting process in lending, with software replacing many or all of today’s manual components.

Digitization of the lending process can reduce onboarding and ongoing servicing by up to 70%. Fully digital lenders still face a high cost of capital and a marketing cost that is currently a minimum of $250 per loan. However, there is a way that these challenges could be solved.

Checking accounts, savings accounts, and all other non-lending services exist at most banks only to provide a cheap source of capital for lending and as a foot-in-the-door / moat to getting your lending business. You only need to look at the 0% interest rate on savings accounts and high fees for services that are essentially costless to know this is true.

A segment of consumer focused financial services like Digit that might be thought of as self-driving money has emerged to automate the process of saving, investing and paying down debt. This is the opposite of what most banks want today—which is for customers to pay as much in interest as possibly.

Becoming a consumer’s primary banking relationship by offering a self-driving money service they love and also taking deposits dramatically reduces both cost of capital and marketing costs. If the resulting company could grow virally and was a fully digital lender, its products and services would be 100% automated in software. And today’s banks would face the Innovator’s Dilemma.

Wealthfront is a startup putting this strategy into action and beginning to hit escape velocity. Between February and November of 2019, Wealthfront has taken $8B in deposits for its new cash account service, which is essentially the equivalent of a savings account.

Wealth management and advisory

The financial planning and advisory industry generated $57B in revenue in the US in 2019. Unfortunately for most advisors and fund managers, there is strong evidence that they almost universally underperform the market over time—particularly when taking fees into consideration. Wealthfront is an example of how a 10x better service is being provided end-to-end via software at a fraction of the cost. Crunchbase lists more than 150 other startups in the wealth management space with a combined funding of $27B.


The insurance industry is massive. It generates $1.5 trillion in revenue annually in the US and $5 trillion globally. It is also a notoriously difficult business that hasn’t changed much in a long time. For example, there have been no new entrants to the Fortune 500 in the insurance category for 80 years. But similar to other segments of financial services, insurance products are also on their way to becoming software products.

The basics of any insurance business are: acquiring customers, underwriting them, and processing claims. Traditional insurance companies do much of each process manually.

Acquiring new customers is difficult and expensive. The insurance industry in the US employs more than 1 million agents, and GEICO alone spends over $1B annual on advertising. Traditional underwriting is slow, painful and error prone since it’s largely a manual process of self reported forms and back-and-forth exchanges with an agent. The traditional claims process is slow, manual, and rife with fraud.

But it doesn’t have to be this way. New entrants like Lemonade have digitized the insurance process end-to-end and provide an app-based experience with zero paperwork and instant everything. Lemonade is a full-stack insurance company powered by AI and behavioral economics and has raised $480M to date. Another company named Shift is partnering with existing insurance providers to automate claim processing and reduce fraud using AI. Shift has raised $100M to date.

Crunchbase lists over 300 startups in the InsureTech category with a total funding of $4.4B. Whether through selling services to incumbents the way Shift is or through competing directly with them the way Lemonade is, it’s clear that insurance products are becoming software products.


The Internet is now a reliable network that connects all merchants and consumers, who all have highly capable computers in their pockets. Combined with the trust and smart auto-execution that will be provided by blockchain technology, the pieces are falling into place for all payments to be fully digital and encapsulated completely in software.

China, which is far ahead of the US in mobile payments, has already announced a digital currency that is intended to replace M0 (The total of all physical currency including coinage).

What happens next?

The financial services sector is about to go through an exceptional transformation. This will happen without even considering the disruptive impact of Bitcoin and cryptocurrencies.

If the last 20 years was about improving the way information is organized and transferred, the next 20 years is going to be about improving the way value is organized and transferred.

Software eats money. And the world will likely be a better place.

Data Source: Crunchbase


  1. The $14B funding of ANT Financial in 2018 was excluded since it’s an outlier and distorts the data.

  2. Crunchbase classifies Yahoo as being in the finance category. For this analysis, I moved it to non-finance.

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