Scarcity, the idea that some one thing is finite, has been thus far not applicable to the digital realm. Until the arrival of bitcoin, nearly anything that was of digital nature could be duplicated without recourse. Due to the ease of reproducing computer code, the problem of double-spending was the unsolved mystery of viable digital money. However, the innovation of the blockchain ledger has added a potent economic function to the equation of online exchange: digital scarcity.
The Introduction of Digital Scarcity
Beyond the realm of money supply, bitcoin has enabled everything from informational products, media, art, and more to be delivered in a manner where ownership is mathematically verified. Because digital ownership can now be determined, it proliferates a scarce quantity of goods. Digital scarcity marks the emergence of a new cohort of potential business models.
“Bitcoin is a remarkable cryptographic achievement and the ability to create something that is not duplicable in the digital world has enormous value.”
– Eric Schmidt, CEO of Google
The attribute of scarcity in bitcoin is not necessarily derived from the actual file information itself, but the method in which the information is stored. The difficulty in reworking the cryptographic proof-of-work which has hashed and timestamped the property with the creator’s digital signature represents the construct of scarcity. The difficulty of reworking this cryptographic chain then, is directly correlated with the difficulty of duplication (double-spending), as more hash power would be required to retroactively alter the information’s assigned ownership. Information hashed at the very beginning of the blockchain for example (such as the genesis block), could be viewed as nearly unforgeable in comparison to information hashed in the last 10 minute block because it would take magnitudes more computational power to rework that section of the chain.
The Digital Economy’s Missing Layer
Scarcity is a fundamental layer of any economic system. Without scarcity, there be no need for money. In a perfectly abundant world, resources would be limitless and money would serve no need because exchange would be entirely unnecessary.
Bitcoin introducing digital scarcity represents a milestone in the development of a totally digital economy, one which has the capacity to stand independent of national economies. In the years ahead, it is likely we will see new business models arise from the potent characteristic of digital scarcity.
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.
The need for money comes from the idea that we live on a planet with finite resources. Human desire is not limited, yet resources vary by scarcity and availability. Therefore, it is necessary to have a medium to exchange those resources which are not perfectly abundant. This medium must be generally accepted to be useful as money.
A unit of exchange is necessary to allocate scarce resources among a population with theoretically limitless desire. Money itself is neither good nor evil, but rather a necessary tool in a properly functioning economy.
Money is a unit which can be used as a:
Medium of Exchange
Store of Value
Unit of Account
Aristotle, the Greek philosopher, defined the characteristics of a valid currency comprising of four core aspects:
Durability
Money must remain in the same state it was originally created in. It cannot change or be destroyed by the forces which use it.
Portability
Money must be able to be moved easily.
Divisibility
Money must be able to be divided into smaller units.
Fungibility
All units of money in circulation must be identical.
Trust that the money supply will be accepted makes up the most important factor when it comes to its survival. When this trust erodes, the tender is in danger of being debased. There are many reasons why money loses its trust among its user base. Money could then be described as a collective agreement.
When there are enough people who settle on what holds their trust, that which they agree upon becomes secondary. History has provided us of countless examples of this being true. Whether it be cigarettes among a prison society, animals among farmers, precious metals among kings, and now computer code, money remains a collective agreement established by its user base.
Money is a proxy for labour. Think of money as a bearer instrument with which you can redeem services from society. It is essentially stored labour product, and therefore, can be seen as stored energy.
The entire money supply, and the financial system it operates within, is a vast network of information on who owns and owes what to whom.
