Bitcoin vs. Gold: A Comparison

Bitcoin vs Gold

Bitcoin and gold are both widely regarded as having value, but in what sense, and how can the two be compared? This is an important question which goes back to the fundamentals of money and the development of assets which can be traded or used to purchase goods or store value.

Money may be defined as a means of exchange—an intermediary between the buyer and seller which has a determined value. This usually takes the form of bank notes or coins and, increasingly, digital money. But this has not always been the case. For thousands of years, precious metals, such as gold, were regarded as having monetary value and were widely used as money.

Bitcoin

Bitcoin, which only appeared on the market in 2009, is a newcomer and is rapidly filling the place that was once occupied by precious metals. In fact, Bitcoin, which reached an all-time high of nearly $20,000 USD in December 2017 (at the same time, gold was at about $1,260 USD per ounce), is now regarded by many as the new ‘digital gold’, as well as a store of value and ‘sound money’ — but how does Bitcoin compare to gold?

Gold

Gold (Au) is a precious metal that has been used in jewelry, coinage, and other arts for thousands of years. It is regarded as valuable for several reasons. First of all, gold is extremely rare. There are only about 186,700 tonnes of gold above ground (as of 2015), with 50% of it being consumed in the jewelry industry, 40% in investments, and 10% in industry.

According to the basic law of supply and demand, if something is high in demand and low in supply, its value will be quite high. As demand increases, the price of gold increases; as demand wanes, the price declines.

Three main factors, rarity, durability and beauty, give gold an enduring value which few other items can compete with. While land also has enduring value, it cannot be moved or exchanged without representing ownership in the form of a verbal or written agreement. Gold can be owned or exchanged by simply possessing the physical gold and exchanging it from hand-to-hand.

Bitcoin, in contrast, does not have any physical form or shape and is not composed of any physical elements. This leads to the common accusation that Bitcoin has no essential, inherent, or intrinsic value. Gold can be touched, carried, moved, or shaped, whereas Bitcoin exists in digital form. In that sense, it seems very ethereal or intangible. It is easy to see, therefore, how the simplistic argument could be made that Bitcoin has no intrinsic value. However, we must go back to the question of what value actually is and how prices are determined.

As mentioned earlier, price is determined by the law of supply and demand. As John Locke puts it:

The price of any commodity rises or falls, by the proportion of the number of buyers and sellers.

This depends, of course, on the supply of the commodity. The amount of gold in the world is extremely limited, as are the number of Bitcoins.

Bitcoin, as conceived by its anonymous creator, Satoshi Nakamoto, has a maximum supply of 21 million Bitcoins. That is the total number of Bitcoins which can ever be created. In contrast, the total available supply of gold beneath the earth is still unknown, and gold may, in the future, be extracted from asteroids or other extraterrestrial sources. Potentially, therefore, the supply of gold could always increase, though it will likely remain rare for the foreseeable future.

Another factor in Bitcoin is its fungibility, i.e. the interchangeability of an asset with other individual goods or with assets of the same type. One Bitcoin, for example, can be broken down into 100 million parts, each called a Satoshi, and it can be transmitted, received, or used to purchase any goods whatsoever, anywhere on the planet. It can be traded for any other cryptocurrency, and it can be exchanged for its equivalent value in fiat currencies, e.g. USD, GBP or EUR, without much difficulty.

Gold, also, can be bought, sold or traded, but with greater difficulty. Gold is a metal and thus heavy. A bar of gold cannot easily be broken down into more manageable parts, although gold coins can be used and traded for money or goods. Still, however, both gold and Bitcoin are not widely accepted as methods of payment in most shops and markets worldwide, so both must usually be converted to government-backed currencies before making a purchase.

With gold, the number of vendors accepting it as a method of payment is not set to increase. With Bitcoin, however, the number of vendors accepting the currency is likely to increase over time, making Bitcoin a much more accessible and more fungible method of payment.

In terms of intrinsic value, more specifically, the economist David Ricardo argued that “the value of a commodity… depends on the relative quantity of labor which is necessary for its production.” According to this argument, both Bitcoin and gold can be said to have intrinsic value, because both are created or discovered using a great quantity of energy and/or labor.

Bitcoin is ‘mined’ by a distributed network of nodes spread across the planet. As new Bitcoin transactions are generated, they are bundled together into blocks, which are processed by the miners. When the cryptographic puzzle is unlocked by processing and verifying the transactions, a certain amount of Bitcoin is released as a reward. This Bitcoin block reward is halved roughly every four years, resulting in greater and greater mining difficulty, until the final 21 millionth Bitcoin is released sometime around the year 2140.

One Bitcoin takes roughly 100 – 500 megawatts of electricity to mine, not to mention the actual computing power involved, with Bitcoin’s network hashrate standing at about 9.9TH/s (as of February 2018) and growing. Due to the time, energy, and manpower involved in producing gold and Bitcoin, they can both be said to have intrinsic value – at least according to Ricardo’s definition.

In Conclusion

Both Bitcoin and gold can be described as highly-valuable commodities or assets, and both are likely to have enduring value in the decades (or perhaps centuries) to come. Bitcoin, however, has significant advantages over gold, e.g. its fungibility, pre-determined supply, and increasing availability as a payment option. Its utility and value, furthermore, are likely to increase over time as Bitcoin adoption continues to grow, mining difficulty continues to increase and demand to rise—and Bitcoin adoption will no doubt accelerate with greater institutional adoption.

Bitcoin, therefore, while incredibly volatile at present, is likely to continue to rise in price relative to gold and represents a significant technological advance over precious metals and other physical commodities.

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