Bitcoin vs Gold

The bitcoin vs gold debate rages on with investment circles unable to deny exponential patterns of growth which characterize Satoshi Nakamoto’s bitcoin payment system. Gold has been used as a form of currency and trade for thousands of years and has a reliable track record for preservation of wealth. However, as the newcomer onto the scene, bitcoin may be the kind of financial and technological breakthrough to challenge gold as the monetary kingpin once-and-for-all.

Early on in its life cycle, prescient investors began questioning the legitimacy of bitcoin value and debating how such a commodity could command a market price. What differentiated bitcoin from a mere collectible and what made it similar to precious metal assets?

Among many circles, especially gold bugs and older-generation investors, bitcoin was not considered a valid investment up until very recently.

In order to properly analyse the value proposition of bitcoin vs gold, we must clarify which attributes of gold are valuable and prop them up against the promise of bitcoin. When we measure the implications of today’s economic environment, it is clear to see why bitcoin is being considered the ‘gold of the 21st century’, or as some pundits have advocated, a ‘digital gold’.

Bitcoin vs Gold

Gold has perceived value because it is scarce, quasi-indestructible, and serves an industrial purpose. Bitcoin inherits all of these attributes then enhances the characteristics of portability and divisibility. Both are exceedingly durable and cannot be counterfeit. The main advantage for bitcoin over gold as a commodity is that bitcoin is highly portable, while gold must be insured, stored, guarded, and verified that the integrity of the substance has remained intact and not mixed with other filler metals.

If you are moving precious metals across borders, you must declare it. However, no amount of border authorities or cash sniffing dogs can detect if you hold bitcoin, as ownership can be distilled down to memorizing a private key.

If you are attempting to buy something with gold, it usually needs to be exchanged for currency first. Bitcoin payments need only a smartphone to transact.

One of the main reasons to add gold to an investor’s portfolio today is as a hedge against economics disaster, that of collapse or hyperinflation. Outside the gold-bug crowd, and among the current generation, gold as a valid form of transaction is something of a stretch of the imagination. In such a disastrous event, would people be exchanging pieces of gold if internet connectivity were still available?

At the blurring rate of current technological advancement, does considering a shiny metal to be valuable seem like an increasing or decreasing trend?

Gold may have been reliable in the 20th century, but among a generation of digital natives who are connected psychologically to their mobile devices, bitcoin will increasingly be the method of choice for commerce. This is the information age, and in it, information represents the most valuable form of commodity. Bitcoin is financial information stored on a collective, distributed computing network. Gold comes nowhere near to competing with this network of trust.

In terms of commodity fungibility, having one unit exactly similar to all others is important. With bitcoin, this is guaranteed by cryptographic algorithms, yet every transaction carries the entirety of its history. With gold, this is not so simple. Metals can carry dilutions and value estimates can differ depending on the mint which issued the coin or bar. We also know that the benchmark used by investors and central bankers to determine the value of precious metals has been (and continues to be) heavily manipulated.

With bitcoin, network integrity can be cryptographically proven, representing an asset which has transcended physicality and operates within the cyber domain. It’s very possible to send millions of USD worth of bitcoin within seconds and only the sender and receiver are aware of the identities involved. Physical actors cannot exert control over the portability of this commodity, and therefore, ‘digital gold’ represents bitcoin accurately.

Gold is a store of value which relies on tradition to support its value base along with a few minor industrial purposes. When you take away this perceived tradition of value you are left with a few manufacturing uses and nothing more. Tradition has built an idea in the consumers’ mind that gold holds tremendous value.

It could be argued that the valuations behind precious metals are artificially high due to a market perception which has vastly underestimated the quantity of these metals. Despite what a merchant may tell you, we have no clear idea on the supply of gold. We have barely begun to explore the depths of the ocean let alone mine deeper than a scratch in the Earth’s crust. Who is to say how much gold and precious minerals near-Earth asteroids contain? It’s possible that gold’s perceived scarcity may prove to be illusory in 20-30 years when businesses or government are mining rocks in space.

The fact that bitcoin is instantly transferable across the globe with the ability to be divided ad infinitum, is why it holds a tremendous advantage over precious metals.

Bitcoin, and other developments in cryptocurrency, will challenge precious metals as history’s de-facto store of wealth.

  • Robert Miller

    27 12 2014

    Gold and bitcoin are perfectly complementary, especially if you want to get out of the banking system

  • Luke Parker

    27 12 2014

    I used to own gold, but after a lot of study on the subject, I couldn’t find one single trait, not even one, that gold had an advantage over bitcoin on.

    Fiat at least is more liquid and can be better secured than bitcoin can for the time being; but of all the other criteria that makes money good, bitcoin was specifically designed to be the best at them all. Here’s a full run-down of them all:

  • J Bradley Hall

    28 12 2014

    The entire BTC ecosystem is circa US$5 billion. Gold trades US$240 billion per day and is the deepest and most liquid asset class on the planet. Gold has been the most trusted store of value for 6000 years. BTC has been in existence for 6 years and in the last year alone, the price is down 70%. It is by default not viable as a store of value. In terms of destructability, the evidence of BTC’s existence can be erased in a nano-second. A solar flare will not destroy gold. Central banks hold reserves in gold for a reason, it underpins the entire financial system. It is the only asset that is no one else’s liability. To suggest that BTC has intrinsic value is simply naive or misleading. 99.9999% of the planets commerce excludes BTC. BTC is a claim check with nothing to claim. Gold is money.

    • Travis Patron

      29 12 2014

      An interesting comment and welcomed counter-perspective Bradley. Gold has certainly held its own over the last few thousand years. It is widely seen as a viable store of value, that I cannot deny. Is bitcoin as valid a store of value? Currently, the comparison is not even close as the price is too volatile, yet as bitcoin stabilizes it increasingly becomes useful as a tool of commerce and store of value.

      You are correct bitcoin lost 70% of its value this year. As it did in 2013, again in 2011, and will likely do at least one more time. That’s the kind of situation you deal with in an entirely unregulated and experimental market, unlike gold.

      An interesting perspective to consider: Gold is money as a thing. Bitcoin is money as a system. The technological functions of that system allow us to do things with money we never previous have been able to do so. Therein lies the intrinsic value. Can bitcoin and gold coexist? Is it a zero-sum game? Bitcoin representing money as a system rather than a thing, coupled with the fact it is digital by nature, lead me to believe bitcoin will eventually replace gold.

    • Joep Meloen

      11 02 2015

      Nice cherry picking numbers!
      My 2012 analog gold is WAY down while my 2013 digital gold is WAY up.

      The only thing which keep analog gold from crashing faster is a few billion analog people in the east which still value gold above bitcoin.
      A Solar flare will also fry everything else besides bitcoin. If it happens tomorrow, you’d much better have FIAT cash instead of gold. There is no place to buy bread and water with gold currently but there are millions of sheep where you can dump your FIAT cash in exchange for goods.

      Gold is a store of value for relatively foreseeable pandemic events. For every other problem bitcoin has a solution.
      Sometimes I almost think that traditional gold bugs want the world to collapse with death and destruction so that their gold coins will be worth millions and trillions.
      No, I rather motivate free global trade with bitcoin and help the world to become a better place instead…

  • Ingold wetrust

    22 01 2017

    People don’t be fooled by bitcoin. Bitcoin is just a distraction from money. Real money is GOLD and SILVER nothing else. But don’t take my word. Listen to very smart people who run the central banks who say “gold is money…..everything else is credit.”

    Look how many times paper currencies around the world have fallen to zero value.

    • Travis Patron

      22 01 2017

      Gold is money as a THING. Bitcoin is money as a NETWORK – something magnitudes more intelligent than shiny metal, and poised to challenge gold as a store of value.