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Last year, when the price of Bitcoin in US Dollar terms surged, it coincided with the beginnings of a huge correction in the price of gold. Once the price of 1 Bitcoin surpassed the price of 1oz of gold there was an inevitable rash of articles comparing the two. Was Bitcoin the new gold? Would interest in the virtual currency spell the end for the yellow metal? Was it a sign that the end of the world was near? Subsequent events have proven that none of that was the case. Bitcoin and gold both continued to see price volatility, but both seem to have settled down this year, leaving open the question as to which those looking for an alternative to fiat currency should hold.
As usual in matters Bitcoin, that particular argument last year included a lot of exaggerated claims by adherents and misinformed statements by detractors. It quickly degenerated into a war of words in which, as is the way of any war, truth was the first casualty. Of course, as is also usual in matters Bitcoin, in reality not that many people were aware of the debate and even less cared. Those who were suspicious or distrustful of fiat currencies argued it out amongst themselves, while the rest of us got on with making and spending government issued pieces of paper.
That there was a minor storm in a teacup, however, should not obscure the fact that the debate raised some important points; there are many similarities, but also many differences, between gold and Bitcoin. The similarities are often intentional and it is no surprise that a digital currency should, at least in some ways, be modeled on a commodity that has been a store of value for centuries.
Like gold, Bitcoin is inherently deflationary as a limited supply (21 Million) exists, or rather has the potential to be mined, and, over time, as mining becomes more difficult, the rate of supply will decrease. This is cited by some as a big negative for Bitcoin, but that deflationary nature and limited supply doesn’t really seem to have hurt gold too much. If Bitcoin were to completely replace fiat currencies as a method of payment for transactions globally I can see how the inbuilt inability to expand supply to keep up with global growth could be a problem, but only the most fanatical proponents of peer-to-peer currency can truly imagine such a situation. The rest of us see Bitcoin as an add-on to, rather than a replacement for, conventional currency; again, much like gold is today.
A more cogent argument against virtual currencies is the much simpler one of “Why bother?” If gold already acts as an alternative, deflationary store of value with limited supply and has done so for a few thousand years, why create another one at all? The answer, a common one in the digital age, is convenience. Physical gold is heavy and bulky and, despite its history, difficult to transact; payment for goods and services almost always involves the holder converting back to fiat currency. Aside from the physical properties, you could say the same about Bitcoin, but there are a couple of fundamental differences that make it more convenient.
Firstly, in an increasing number of cases, the merchant that you are dealing with will take Bitcoin directly as payment. The fact that they will, in the current scenario, then immediately exchange the digital asset that represents Bitcoin for one that represents a fiat currency is of little concern to the user. For the holder, spending gold directly is at best inconvenient if not actually impossible, which brings us to the second difference... speed.
Analyzing, verifying and weighing gold takes time whereas digital transactions can be processed almost immediately. That this process is done within the peer-to-peer network and between computers results in another benefit that Bitcoin users are well aware of: reduced cost. If you keep some of your wealth in gold, then spending it often leads to you paying fees to the financial institutions twice; first on the gold to fiat currency transaction, then on the buyer to seller transaction in that currency. Little wonder then that the world’s major banks are all in the gold business but very few have embraced digital currency.
These benefits alone are enough to convince me that, as we move forward, Bitcoin represents a more practical solution than gold for those who wish to hold at least some of their wealth in something other than government-issued currency. That doesn’t mean, however that it will replace gold any time soon; people will always place value in something that they can see and hold. Those who fear inflation don’t have to choose between the two, they can just hold both.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
