Bitcoin versus Gold

There has been much debate between the Bitcoin maximalists and gold bugs about whether or not Bitcoin will ever overtake gold’s use case as a global store of value. For those of you who are just entering this space, it is important to understand why this topic is important. Bitcoin is the newest asset available worldwide for everyone to participate in, while gold is one of the oldest currencies. Bitcoin and gold share many common traits and this brings up a lot of questions about which one is a better store of value or form of money.

Gold

Most people are at least somewhat familiar with gold. It is a chemical element that has been used as a medium of exchange for over 2,500 years. Gold has garnered other uses throughout history within the fashion, industrial, and tech industries. It is mined from the earth and is then processed into gold bars or other useful items, like jewelry and computer pieces.

Bitcoin

Bitcoin was created in 2009 by an individual or group of individuals who went by the pseudonym name, Satoshi Nakamoto. Bitcoin is a digital public banking network that is available for public use. It is peer-to-peer (also known as decentralized) and cannot be controlled by a single entity. In other words, the network does not need permission from a third party and, thus, two individuals can transact directly. All transactions with bitcoin are recorded on a digital ledger that cannot be changed but can be viewed by anyone. 

Bitcoin versus Gold as a Store of Value

After thousands of years, gold is still considered to be the global reserve asset that acts as a hedge against inflation. Most financial planner’s advice individuals to allocate a certain percentage of their net worth toward traditional financial products like stocks and bonds. When considering alternative investments, real estate, gold, and silver are usually where one should begin investing. Gold, in particular, is thought to be a good store of value because it cannot be destroyed, is extremely malleable, and is scarce enough that it retains its value against inflating currencies.

Bitcoin on the other hand, does not have a physical form, but is treated as a store of value or a savings account within the space. Two of the main reasons Bitcoin is treated as a store of value is because it has a fixed supply of 21 million and because of its increased development to ensure the network’s integrity. The case for Bitcoin being a superior store of value when compared to gold will be discussed further in this writing.

Bitcoin versus Gold as a Medium of Exchange

Bitcoin is still a fairly new currency and has the ability to be used as a viable medium of exchange (through the second layer solution of the Bitcoin Lightning network) and as a store of value. Ryan Walker compares gold, bitcoin and fiat currencies (government issued currency that is not pegged to a hard asset) as money in the table below. Aside from an established history, Bitcoin strongly demonstrates every aspect of sound money. 

How to Verify the Amount of Gold versus the Amount of Bitcoin:

Unlike gold and fiat currencies where governments and other entities must verify their legitimacy, bitcoin and their attached transaction history is verified by thousands of computers across the globe. In order to participate in the network, Bitcoin nodes and miners are required to verify all bitcoin that are mined and transacted. If there are any bad actors trying to “cheat” the protocols established by the network, they are ignored. With gold and fiat, everyone must trust the government and other entities to verify that all the gold and fiat in circulation are legitimate and not counterfeit. There is currently no accurate way for the public to know the exact number of ounces of gold or number of fiat notes in circulation.

“No one knows exactly how much gold is held by Central banks, as they are NEVER audited and admit to limitlessly rehypothecating it.”

Source: Andy Hoffman

With Bitcoin, one would simply download the Bitcoin Core software, and then run a command that provides an up-to-date number of how many verified bitcoin are circulating.

How do Gold and Bitcoin Compare in Fungibility?

Fungibility allows for all units of a currency or commodity to be equal to one another. For example, one US dollar printed in 2009 is of equal value to a dollar printed in 2019. Gold and bitcoin also fall under this metric of value. An ounce of gold that is mined in Ecuador will be worth the same as an ounce of gold mined in Australia. Additionally, one bitcoin mined in the US is equal to the same value as a bitcoin mined in China.

Fungibility is less likely to be found in everyday products like bread or shoes. The quality and make of bread and shoes will vary depending on the country where they are manufactured. Prices of products like these will also vary from country to country.

Bitcoin Wins Portability Easily

Portability refers to the rate at which a good or asset can be transported from one location to another. Fiat and gold are limited in their portability due to current shipping methods. However, one would be able to wire fiat from one end of the world to another. This process is slowed down due to transaction fees and bottlenecking which occurs when routed through centralized networks. Essentially, every participating bank takes a percentage of the routed funds in order to fulfill the transaction. Bitcoin is also transferred via electricity regardless of where a computer is located. The biggest difference between wired fiat funds and bitcoin is that bitcoin uses a decentralized network that anyone in the public can use for auditing or verifying transactions. Miners are essentially helping the network stay online by including all new transactions into the new “page” (block) of this decentralized ledger (blockchain). A miner will accept fees just like a bank except the fees will vary based on demand and time of execution. The more you pay a miner, the quicker the transaction will be verified on the network and vice versa. With a fiat wire, your transaction is subject to fees and timing of execution that you have no control over. The average confirmation time for a bitcoin transaction (when the network is not busy) is about 12-15 minutes. The average time it takes for a wire transfer will vary from 1-5 business days.

“Bitcoin is the most efficient system in the history of mankind for channeling energy through time and space.”

Source: Michael Saylor

Gold would be the most difficult to transport due to its weight, while fiat would run into a lot of the same issues if it were to be physically transported. Bitcoin would be the most convenient mode of transacting wealth across the globe.

How Durable is Bitcoin Really?

There are a few different angles we can take to understand the level of durability between gold, Bitcoin, and fiat. Fiat can obviously be burned or destroyed fairly easily. However, when comparing Bitcoin and gold, the argument between which is more durable becomes more nuanced. If we approach this trait from a purely physical perspective, then gold would be the hardest to destroy, while the computer that a person stores their bitcoin keys on would be easier to damage. But access to those particular bitcoin may be recovered if the user is able to properly store their keys in a second location.

Bitcoin is not something one can physically hold or destroy because it is transferred through electricity. Bitcoin is energy. As long as there is a full node storing all of the Bitcoin transactions, it would be incredibly hard to destroy Bitcoin. The only way to turn off the network would be to shut down the entire internet. If this were to happen, everyone would still be able to execute transactions on the Bitcoin network via ham radio or satellite. Hopefully, humanity will never have to face an event where the entire internet or electrical grid is shut down. At that point, all assets would lose value.

“Bitcoin’s core protocol does everything to maximize security so that it can be used as ‘digital gold’, a decentralized store of value”

Source: Tuur Demeester

Gold Nuggets versus Satoshis

Divisibility accounts for how easily an asset or money may be divided into portions for accurate pricing of goods and services. Gold would be the hardest to transact since one would need to shave off or melt down a portion of their gold bars to execute a fair trade with a vendor. In most cases, one would trade their gold for fiat in order to purchase something. Fiat may also run into issues if a vendor does not have exact change for a larger bill. The vendor would need to accept electronic payment options in order for customers to experience the most convenient payment method.

Bitcoin has a fixed supply of 21 million, but each bitcoin may be denominated to the hundred millionth decimal. These fractions of bitcoin are referred to as satoshis and every bitcoin may be divided into 100 million satoshis. A satoshi may also be divided into fractions. Most seasoned Bitcoiners do not make many transactions with their bitcoin but if they choose to, they may use the Bitcoin Lightning Network as a way to execute an instant transaction with a vendor.

Scarcity Protects Assets from Inflation

Bitcoin is the scarcest asset that humanity has ever created and because it can be verified by anyone, it is easy to make that claim. Fiat is abundant and is constantly printed for various reasons, but the number of total fiat notes (for any country) is not verifiable and will continue to grow as long as governments and private banking institutions continue to control the monetary system.

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.”

Source: Alan Greenspan

Gold was the solution for storing one’s wealth to retain purchasing power, but it is hard to verify the total amount that is mined. It is also difficult for most people to verify if the gold they possess is real unless they have special equipment to do so.

“We're going to get to a point where there's going to be 21 million bitcoins and that's it and there's nothing else that anybody can produce. This makes it more gold than gold. Bitcoin improves on gold, Bitcoin's fixed supply means that it is the first liquid commodity or liquid asset ever invented that has a supply that is truly fixed. You can't make more of it.”

Source: Saifedean Ammous

Established History May Not be as Important as We Think

Gold wins this trait by a couple thousand years. As humans innovate, so do the methods of transactions between one another. Gold may still be used as a means for commerce or storing value, but it is becoming more and more apparent that gold is losing its luster as time goes on. Fiat has been around for the last 300 years but the average lifespan for a currency is about 27 years. Bitcoin, on the other hand, has been around since 2009 (about 12 years as of this writing) and is showing no sign of slowing down as it continues to gain value.

If anyone is still skeptical on Bitcoin’s short history, they may want to consider how many hours Bitcoin has traded for. Bitcoin is definitely the youngest asset for our comparison. But if we consider the amount of time Bitcoin has traded for when compared to the NASDAQ, Bitcoin has traded for a longer period of time. The NASDAQ only trades from 9:30AM to 4:00PM on business days while Bitcoin trades 24 hours per day, seven days per week. Bitcoin does not shut down or close and it can continue to operate globally.

“As the digital age has introduced improvements and efficiencies to most aspects of our life, Bitcoin presents a tremendous technological leap forward in the monetary solution to the indirect exchange problem, perhaps as significant as the move from cattle and salt to gold and silver.”

Source: Saifedean Ammous

Nobody Can Stop You from Using Bitcoin

There is always the possibility that a bank or large payment system will exclude certain individuals from using their platform. This may be for any number of reasons and the banks are not obligated (as stated in most of their terms) to identify the reasons why they terminated or froze your account. For gold and fiat, one is able to still participate in the economy (with certain inconveniences) if they are able to obtain and transact with physical gold and dollars. However, this becomes a problem when vendors and businesses only accept digital payments and deny physical cash.

“When you compare gold with bitcoin, gold wins decisively when evaluated on the key characteristics of money: liquidity, safety, utility and tradability on established markets.”

Source: Jeffrey Currie and Michael Hinds, Analysts, Goldman Sachs

This does not solve the possibility of one’s gold or fiat being seized by governments or the companies holding the gold. Bitcoin solves for many of these inconveniences but may face the issue of finding vendors willing to accept bitcoin as a form of payment. More time and education will help solve this issue as well. If one’s seed phrase is stored properly in various locations, then a user will always have access to their bitcoin in any part of the world. Without the full seed phrase, nobody on the planet will be able to control your bitcoin.

Energy Required

Unforgeable costliness refers to the amount of energy needed to create (in the case of gold and bitcoin we will refer to the energy needed to mine) an asset or good. Fiat takes extremely little effort to create, especially in the age of computers. One would simply need to type in the amount of fiat required for an account (which is what the Federal Reserve does). On the other hand, gold and bitcoin take a good amount of effort to mine. The biggest difference between the mining efforts of gold and bitcoin is that gold gets easier and easier to mine, while bitcoin’s mining difficulty is programmed to adjust its difficulty. Innovation in gold mining techniques hurts the price of gold, while the programmed difficulty adjustments in Bitcoin mining cause the weakest miners to capitulate. It becomes more and more expensive to mine bitcoin over time while it becomes cheaper to mine gold.

Open Source Technology Will Dominate

Bitcoin is an open source technology that allows everyone (even if they cannot program) to see the source code. The only barrier to entry for contributing to Bitcoin’s source code is whether or not the current developers see your contribution as beneficial to the future of Bitcoin. This is important to recognize because if the developers merge faulty code, it will make Bitcoin vulnerable to attacks. Fortunately, there needs to be a consensus among everyone who uses Bitcoin to either agree and upgrade their nodes to the updated code, or they may ignore the updated code and continue to participate in the network with the older versions of Bitcoin Core. Fiat systems are the exact opposite of open source and will likely not be upgraded unless forced to by hackers or other extreme cases.

“Gold has worked for thousands of years, but now with the Internet, it works even better.”

Source: Peter Schiff

The internet did make it easier to purchase gold mining company shares, gold ETFs, and other forms of exposure to gold’s price appreciation. However, the internet is unable to transfer the physical gold to someone. The metal itself has not improved. There is no way to improve gold because it is an element. It has not changed for thousands of years and is likely not going to be updated any time soon.

Decentralization Creates Contingencies

The decentralization of Bitcoin’s network adds to its ability to be open source as well as improve its durability. With thousands of full nodes around the world, Bitcoin cannot be controlled through centralized mining because it would be too costly. Additionally, owning more bitcoin than another person does not allow one to have more control over the network than someone else. Gold is somewhat decentralized since there are miners all around the world and many people use jewelry as a store of value. However, the main reason why gold is not considered very decentralized is because it is unknown how much central banks and governments hold. They are not required to report their holdings or perform audits.

“Over time, this free market decentralization allows bitcoin to out-compete various legacy financial systems...”

Source: Brandon Quittem

Gold has been the reserve asset for thousands of years with many issues. It has served its purpose up until the point that Bitcoin was created. The digital asset has certainly had many of its own issues in its infancy stages, but it addresses every issue of verifiability, fungibility, portability, durability, divisibility, scarcity, censorship resistance, unforgeable costliness, being openly programmable, and decentralization. Bitcoin is going to be harder and harder to ignore as more institutions move toward the digital age and choose to use bitcoin as their reserve asset over every other option, since they are not adapting quickly enough.