When it comes to bitcoin and its function, even crypto enthusiasts are divided. As a rule, these can be roughly divided into three camps: those who see Bitcoin as a store of value, as a medium of exchange, or as both. For some, Bitcoin is a store of value that has even better properties than gold. For others, the comparison between bitcoin and gold is too far-fetched.
We therefore want to take a closer look at the often made comparison between Bitcoin and gold. How much truth is behind the statement that Bitcoin is the digital gold?
In this article, we will provide you with a lot of valuable and helpful information on the subject of Bitcoin vs. Bitcoin within the following discussion. Supplying gold that will put you light years ahead of the average person out there in terms of knowledge.
So let's get into the discussion of bitcoin vs. Jump into gold and start looking at the fundamental question of why we actually think gold is valuable. We want to try again and again to show possible parallels between Bitcoin and gold in order to then discuss them critically. Have fun!
Bitcoin vs. Gold Chapter 1: Why gold is so valuable
With the technological progress of the people, the efficiency in the production of goods also increased, which raised trade and thus the economy to a new level. With the increasing production of goods, the use of various raw materials, including metals in particular, rose sharply.
As a result, many metals were produced and in demand in large quantities. The high demand for metals made them a suitable medium of exchange that was widely accepted as payment for other goods. In addition, the manufacturing process of the metals involved a great deal of effort, so there was no risk of the market being flooded with too much supply and causing the metals to depreciate rapidly.
There was particularly high demand for rarer metals such as gold and silver. The virtual indestructibility of gold made it possible for people to store value and wealth over generations and thereby develop far-reaching planning horizons into the future. Both gold and bitcoin cannot be destroyed, but at most lost.
How Gold Became Money
Due to its exchangeability and physical property of retaining its value over generations, gold already fulfilled 2 of 3 important properties that money must have according to the general understanding: General acceptance as a medium of exchange and the ability to store value.
The foreseeable and natural consequence of the rise of metals was the use of gold, silver and copper coins in everyday commerce. The positive effects of universal means of exchange on the market economy should not be underestimated. The use of these coins enabled the creation of a larger market, which greatly increased the opportunities for specialization and international trade.
Just like bitcoin, gold as a medium of exchange was transnational and not limited to trade within a state.
The Drawback of Gold as a Monetary Good
However, the use of coins also had two major disadvantages. On the one hand, the use of different monetary means caused economic problems due to the fluctuation of their value among each other, which hindered their function as an efficient unit of account. On the other hand, governments and counterfeiters were able to reduce the proportion of valuable metals in the coins in order to put more coins on the market.
The latter is a current and serious dilemma, because such an approach not only depreciates the value of the monetary funds concerned, but also transfers part of their purchasing power to the issuers of such coins. Since nothing in the world is free, no additional wealth is created, only a transfer at the expense of the recipients to the issuers of the coins.
With Bitcoin, counterfeiting gold would be like a so-called double-spending attack, in which BTC are transferred that do not exist at all. However, such an attack is only possible as part of a 51% attack and is extremely unlikely due to the high security of the network.
There Cantillon Effect
The circumstance of the value transfer described above is also known as theCantillon Effectand describes that the beneficiaries of an expansion of the money supply are those who have the opportunity to spend the additional money supply before the market can react to the increased money supply by increasing prices. The profit from money creation is also known as seigniorage and is now used by the monopoly of the central banks to finance them as an institution.
With the 19 In the 19th century and the development of the modern banking system, the use of paper money, the value of which was guaranteed by its redeemability in gold, became increasingly popular. Instead of trading gold directly, its representative substitute, paper money, has replaced it in everyday commerce, eventually leading us to the gold standard.
The gold standard and the problem of centralization
The gold standard allowed international trade to flourish and reach new heights as the major economic powers united on a unified gold-based monetary system. However, the gold standard also had a major downside, and that was increasing centralization of gold stocks in bank vaults.
Since the amount of gold is limited, but people's hunger for more is limitless, this circumstance led to the inevitable. Banks and governments began to issue more paper money than their gold stash could support to fund their rising expenses or to amass more wealth.
The rapidly increasing money supply compared to the only gradual increase in the gold supply resulted in a decline in the value of paper money and a transfer of wealth from the masses to the hands of a few. While banks and governments invested their wealth in gold and other assets, many commoners saved their fortunes in the increasingly debased paper money.
The end of gold as money?
Eventually, the role of gold as a monetary medium officially disappeared and was replaced by a new standard based on state money. The problem with government money is that its purchasing power is based in particular on the ability that the creators of money do not increase the money supply to such an extent that it loses value.
Contrary to the opinion of many, gold still plays an important role as a monetary commodity today. Central banks still hold gold as a reserve to back up the value of their money. In fact, central banks now hold more gold than they did during the time under the gold standard.
The value of gold, just like Bitcoin, lies in its scarcity and predictable inflation rate. Every year, only a certain amount of new gold is flushed into the market, just like Bitcoin.
This brings us to our next topic: the stock-to-flow method, which provides an explanation for why gold and bitcoin are considered more valuable than other goods.
Bitcoin vs. Gold Chapter 2: Scarcity as a driver of value
The relative difficulty of producing new units of a commodity determines how susceptible that commodity is to inflationary behavior.
The ratio between the amount of gold available and the additional amount put into circulation each year is expressed by the stock-to-flow (SF) ratio.
SF = Stock / Flow
The inventory (stock) corresponds to the size of the existing stocks or reserves. The flow reflects the annual production of the good. The higher this value is for a good, the more likely it is that this good will maintain its value or increase against inflationary currencies such as the US dollar or euro.
So, let's look at some SF numbers.
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Gold has the highest SF value at 62. This value indicates that it takes 62 years of production to additionally maintain the current gold stock. Silver ranks second with an SF score of 22. This high SF value makes them monetary goods, but at the same time of varying quality.
Bitcoin currently has an SF value of 25. This puts Bitcoin in the same category of valuable goods as silver and gold, measured by the SF value.
Bitcoin halving as a value driver
Now, one could say that according to the SF ratio, gold is more valuable than gold. In fact, it also has a higher value, but this is where a special feature comes into play that also deserves attention in this consideration, namely Bitcoin Halving.
The Bitcoin halving halves the inflation rate every 4 years. This means that, unlike gold, Bitcoin will get an ever-increasing SF value.
Of course, this will also be true for gold in the future, as soon as the natural gold reserves gradually run out. However, this is not yet the case. With Bitcoin, on the other hand, we already know very well that every 4 years the Bitcoin flow will be reduced by half. Because that's exactly how it's written down in the code.
Bitcoin vs. Gold Chapter 3: Similarities and Differences
Now that we've taken a superficial look at how gold got its value, we can look for the same success factors in Bitcoin. We have already learned an indicator of such a possible cause through the stock-to-flow ratio.
Furthermore, we have already been able to draw some parallels to Bitcoin in the chapter on the history of gold as a monetary good. Now we want to look specifically for further similarities between Bitcoin and gold. In this search, we will also automatically come across the differences between the two assets. This then allows us to critically discuss whether the comparison between Bitcoin and gold is justified. Last but not least, let's get to the core question of the article: Bitcoin vs. Gold – Which is better?
The differences and similarities between gold and Bitcoin are marked, but not limited by the following lists.
Similarities between Bitcoin and gold
- Bitcoin and gold are both long-lived. While gold is subject to very slow physical decay, Bitcoin has no physical form at all.
- Both the supply of gold and bitcoins is limited, giving both assets a relative rarity. While the occurrences of gold are of course limited, the number of Bitcoins ever existing is limited by its protocol to 21 million BTC.
- With both Bitcoin and gold, large proportions of the total amount are in the hands of a few. In the case of gold, it is primarily central banks and banks, while in the case of Bitcoin, it is a handful of individuals and crypto exchanges.
Advantages of Bitcoin over gold
- Unlike gold, we already know that Bitcoin's inflation rate will halve every 4 years. This process repeats until the maximum number of BTC ever existing is reached. This makes Bitcoin's performance more predictable than gold for everyone.
- Gold is not as easily transferable as Bitcoin due to its physical properties. The transfer of a larger amount of gold is inefficient due to its weight and physical scope. Users can transfer Bitcoin from one owner to another almost instantly.
- Bitcoin can be split with high precision. Although gold is divisible, it can't be broken down as easily as Bitcoin: this makes paying for low-value goods difficult and inefficient.
- Bitcoin is becoming increasingly popular as a medium of exchange among merchants due to its growing acceptance as a means of payment. Gold, on the other hand, is no longer used or even accepted as a means of payment in most parts of the world.
Advantages of gold over Bitcoin
- Gold has a high intrinsic value due to its utility as a commodity in all sorts of fields such as space travel to jewelry to medical devices. On the other hand, opinions still differ as to whether Bitcoin has any intrinsic value at all. However, it can also be argued that Bitcoin has intrinsic value due to the effort involved in its production, its scarcity, and its function as a self-sufficient and anonymous currency.
- While Bitcoin is still very young and novel, gold has proven itself as a monetary commodity for thousands of years and has outlasted many other forms of money.
- In order to be able to trade Bitcoin at all, the parties involved in the trade are dependent on technical aids. At least small amounts of gold, on the other hand, can be easily transferred from hand to hand without any further aids.
Bitcoin vs. Gold Chapter 4: Is Bitcoin Like Gold?
Well, at this point we are aware of the advantages and disadvantages as well as the similarities of Bitcoin and gold. But what exactly does that tell us? Is Bitcoin rightly referred to as the digital gold? Is Bitcoin like gold?
There is no doubt that we can see from the few exemplary differences between Bitcoin and gold that they are of course not the same good. Also not about the same. There are notable differences between the two assets. However, the similarities between Bitcoin and gold show that they are similar.
This at least justifies the title of Bitcoin as digital gold.
Like gold, Bitcoin has many noteworthy properties that a store of value requires. It is scarce because its abundance cannot be arbitrarily increased by anyone, while its occurrence is limited. It is also self-sufficient and cross-border.
Bitcoin vs. Gold: Which is better?
Last but not least, we want to put an end to the oft-conducted debate about Bitcoin vs. Taking up gold again, in which different camps try to explain why Bitcoin or gold is better.
It is easy to explain why consensus often cannot be found in these discussions. Quite simply, a crucial preliminary question remains unanswered. In order to find an adequate answer to the question of whether Bitcoin or gold is better, the first question would have to be: Better for what?
Unlike gold, Bitcoin is definitely more transportable and easier to share. However, unlike gold, Bitcoin is still very young. While gold has proven itself as a store of value for thousands of years, Bitcoin is still at the very beginning of its journey, the end of which no one knows yet.
Bitcoin is still in its infancy
So a direct comparison between Bitcoin and gold only really makes sense when Bitcoin has managed to prove itself as a store of value for decades to come.
But its still young age also offers greater potential as an investment for this. The market capitalization of gold is about trillion. This makes it around 50 times larger than Bitcoin's. Should Bitcoin be able to assert itself as digital gold in the future, it will give an outlook on how great the potential of this unique creation could be.