Despite being the leading form of money over the past few millennium, gold lost its luster in the 1970’s as governments looked to unchain themselves from the financial responsibility that gold imposed. But the fiat money experiment of the past 4 decades is fast coming to an end, and the search for a new currency continues to rage on. Now with another changing of the guard upon us, can the new digital currency known as Bitcoin take over? To help put things in perspective we compare gold and Bitcoin here to see their similarities, differences, and their possible roles in a post-fiat world. Which, if any, is better suited to displace fiat money?
Fiat money is backed by often corrupt governments, gold and Bitcoin offer an alternative to people not trusting the current system
Similarities of Gold and Bitcoin
Can’t Be Hyperinflated
One of the most obvious similarities between gold and Bitcoin is the cap on the quantity that can be available. Whereas fiat money can be printed into infinity, both gold and Bitcoin have specific restrictions on the amount that can be introduced into the general economy. For Bitcoin, there is a 21 million bitcoin limit imposed into the mathematical algorithm and this number can’t be increased. As for gold, the yearly new supply is limited to around 2,500 tons as the world gold supply dwindles or becomes harder to reach using modern gold mining techniques.
Keynesian economists biggest criticism of gold and perhaps also of Bitcoin, is that they are deflationary in nature, due to the supply limitations mentioned above. While the initial definition of inflation/deflation referred to the money supply (and hence doesn’t really apply to either Bitcoin or gold), the more generally used definition of deflation in modern day lexicon refers to the price levels. But appreciating currencies are not such a bad thing according to Austrian economists like Rothbard, because bad investments and debts can quickly be wiped out, efficient use of money would be a major criteria, and businesses wouldn’t exactly suffer as some claim as any reduction in price could be offset with reduced costs. An alternate cryptocurrency by the name of Peer to Peer Coin (PPCoin) exists that behaves more like gold in its slow expansion and could perhaps be a challenger to Bitcoin in the future.
Gold and bitcoin have no ‘owner’ or central entity keeping it together. In gold’s case it is a part of this earth we inhabit while Bitcoin is an open source software that is maintained by a network open to all and which can survive as long as even just one person remains dedicated to the cause. Attacking or manipulating or threatening or shutting down these decentralized currencies is counter productive to try as any action to stop it is likely to result in more resistance and increase in perceived value.
Minimum Counter Party Risk
The chance that fiat money could lose tremendous value or become nearly worthless has been observed numerous times across history. Reckless government spending, monetary easing to compensate , and the resulting hyper-inflation is an event that has put an end to many forms of money as well as empires throughout history. Gold can only theoretically be debased if a new enormous supply is found (such as Asteroid) or new revolutionary mining technology is discovered. Similarly, Bitcoin can only lose value if some error in the code is found, or it suffers a 51% attack, or its network effect dies down and is replaced by an alternate leading digital currency. These cases are improbable given current circumstances and hold very little counter party risk as control is largely outside the hands of a small group of individuals. The fact that gold and bitcoins are in your possession and are largely safe from external factors is a huge plus both forms of money enjoy.
Difficulty Of Confiscation
While it’s technically not impossible to confiscate gold (already happened) or bitcoins through oppressive methods like threats, scams, viruses and torture – they are well removed from the system and provide a level of safety away from interconnected and highly toxic financial assets and derivatives. The bank deposit confiscation in Cyprus, and the possible spreading to other countries, is another reminder that confiscation is still possible in this day and age.
Anonymity, Privacy, Liberty
Anonymity in how we spend our money and privacy in how much we have is a worry that people are increasingly placing importance on as our current financial situation worsens. Bitcoins allow a bunch of illegal activity to take place, and that can indeed be a negative in certain cases, but it can also be a huge plus from a libertarian perspective. Governments are increasingly cracking down on what individuals can and can’t do with their own money, even if it is of no harm to others, and that takes away freedom and liberty that many are starting to feel should be outside the government’s grasp. With bitcoins, individuals can gamble, buy recreational drugs, make donations to outcast organizations like Wikileaks, and generally spend the money freely without any sort of restrictions. Gold similarly bypasses many organizational and financial structures, as has been observed in Turkey’s gas acquisition from sanction-struck Iran.
It’s difficult to pinpoint at what point in time exactly gold became such a valuable commodity, but historians go as back as the Egyptians and there are legends from all four corners of the world about gold’s slow adoption as the leading form of money in the world. Bitcoin has an even more speculative birth despite just coming into being some 4 years ago. A mysterious person by the name of Satoshi Nakamoto is behind the initial white paper to create Bitcoin and the founder of the idea as well as the leader in its implementation. However before Bitcoin made it to the big time, this mysterious person or group disappeared from the forums where he was frequently spotted making contributions and since has never appeared anywhere. Conspiracies suggest everything from the creator being a secret government organization to a group of people to some famous personality like Max Keiser.
Resource Based Acquisition
While fiat money doesn’t even need paper in most instances to exist with digital numbers on computer screens capable of taking its place, both Bitcoin and gold need to be mined. In gold’s case this means plenty of machinery, labor, research and time. For Bitcoin, while the mining might not be physical in nature, the computing power needed to solve the computing code and keep the Bitcoin ledger or blockchain as its known, takes real world resources to achieve.
Differences Between Bitcoin and Gold
Gold for some reason or another is a shiny substance that has become a preferred choice for jewellery and status showing throughout the world. Gold is also a very unique element that is malleable, ductile, noble and non-corrosive and has industrial uses. Bitcoin doesn’t have real intrinsic value, because even the code that it is based on can be easily replicated, as it is open source and exact duplicates of it, like Bytecoin, already exist.
Bitcoins can be rounded to 8 decimal places, known as a Satoshi, and there is room in the code to increase these decimal places even further. Any amount of value can easily be separated, sent or received which provides immense convenience when used as a currency. Gold is also technically flexible enough to separate into many pieces (like recent gold credit cards that can be breakable into little pieces called gold combibars) – but that is not nearly as convenient as what can be achieved with gold.
Wealth Preservation Aspect
Gold’s 5000 years of history as money and its stellar track record as well as its role in the financial system as a reserve asset gives it long life that is ideal for preserving wealth regardless of the state of the world. We could have World War 3, colossal financial crises, or any external event that you can think of and gold would still be regarded highly. The same can’t be said about Bitcoin as it’s very new, can therefore possibly have better versions, requires internet connectivity for the most part, and hence is not something you would confidently hold for the next 50 years and know for sure that would help your grand kids.
Fluid Currency Aspect
Bitcoin’s greatest strength over competing currencies is its role as a means of exchange. Bitcoins can be sent across the globe to a region with no banking structure at any time of the day for practically free – and that is something that no other major currency can claim to have at this point. Gold is especially cumbersome with on the spot appraisals of the gold authenticity/weight and other factors becoming too complicated to allow trade. Even gold coins have become nearly unusable because of their sheer worth and which is why even silver is often quoted as a better currency than gold.
After comparing the two, it’s easy to see why many gold ‘bugs’ are quick to accept Bitcoin and the benefits that it brings. They both provide safe heaven from those who don’t believe in aristocrats controlling and manipulating the world’s financial backbone known as money. Yet the differences also highlight the different purposes that gold and Bitcoin serve with gold a good wealth preserver (money) while Bitcoin is better as a means of exchange (currency). These differences ensure that they are compatible under one roof, and could very well work together to displace fiat money’s role in world trade and economics. Humans and governments are proving to not be capable of managing money, it’s perhaps time to let more trustworthy things like nature (gold) and math (Bitcoin) have a crack at solving this mess instead of supposed human ingenuity that is susceptible to mistakes, manipulation, corruption, greed, and other selfish human characteristics.