Bitcoin and Gold — Is it the right comparison?
During the current pandemic, Bitcoin is often compared to gold but it is very different from it, five major differences and their implications
Even before the current COVID-19 pandemic and the resulting financial recession, many commentators put Bitcoin in the same basket with gold. The reason for this is their shared reputation as safe heaven assets and their supposedly anti-cyclic behavior to the equity markets.
People use to call Bitcoin the digital gold and to be honest, I used this comparison myself in the past. To explain the world’s first cryptocurrency to newbies as both assets have a limited supply and share the process of “mining” that generates more of the asset.
But I concluded that there is a major problem with this comparison. Besides the above-mentioned similarities that are not entirely true (you will see after reading this post) they are quite different. Bitcoin should not be compared to gold. In this blog post, I want to share several points about why Bitcoin is different from gold and its implications especially in times of crisis.
Most people do not have their gold with themself rather with their bank or are invested indirectly in it. Depending on the crisis it would be very hard to access your gold. Or in the case that a government would decide to seize all gold held at banks one would be helpless. Bitcoin on the other hand is in most cases with the owner and not an intermediary. Even if your coins would be with an exchange it would be still digital, which makes a transfer a lot easier than with a physical object like gold.
Further, investing in gold requires trusting the financial system, while investing in Bitcoin does not. As Roger Huang wrote in his Forbes article:
“Gold is an investment in the same financial system, just a counter-cyclical one. Bitcoin is an investment, though not mostly financial, in alternatives to that same system.”
Unless you have your gold with yourself it always requests the trust in the intermediaries that hold it for you and the financial system, while with Bitcoin you only have to trust the protocol and your memory.
Use as a Medium of Exchange
Gold and Bitcoin were similar in their beginnings that both started primarily to be a medium of exchange. While gold was used to create coins, Bitcoin was used primarily to pay on the dark web in its beginnings. Gold’s use nowadays is very static and primarily as a store of value, Bitcoin is less static compared to gold. Not many people pay any of their daily expenses with gold. This is different from Bitcoin.
Bitcoin is accepted as a payment option by thousands of merchants such as Domino’s Pizza, Norwegian Airlines, or Microsoft to name some prominent examples.
The implication is that even though gold is longer around is easier respectively more merchants accept Bitcoin in exchange for services and products than with gold. This is primarily due to the digital nature of Bitcoin which makes it easier and also cheaper for companies to accept than gold.
Both assets are often compared because they share a similar characteristic. Their supply is (supposedly) finite. Bitcoin’s maximum supply which is hardcoded into the Bitcoin blockchain is 21 million. The number of available Bitcoins is even smaller as based on different estimates between 2–3 million Bitcoins are lost. The reasons for this vary from forgotten private keys to mistakingly sending bitcoins to a dead address (be aware of typos!). So the number of available Bitcoins is more around 17–18 million.
According to Thomson Reuters GFMS, the world gold supply is 171,300 tonnes. But there is a difference mentioned also in the latest essay of the Winklevoss twins. With bitcoin, we know that there will be never more than the programmed 21 million coins. Even if Satoshi Nakamoto its infamous creator wanted to he could not change this number. This is not the case with gold. Even though the supply of gold may be limited on earth we are in an infinite universe and there are over 600,000 asteroids that could contain gold according to scientists.
Elon Musk is already planning to mine gold on Mars and asteroids and send it back to earth.
Even though this sounds science fiction at the moment this could become a reality in the future. So bottom line while Bitcoins supply is really limited (even smaller than intended) there is potentially a multitude of gold flying around our planet we may even in our lifetimes be able to mine, increasing its supply.
Commercial Track Record
When we are comparing two assets with each other it is important to compare how long they have been around. The difference between gold and Bitcoin is quite big. Bitcoin’s whitepaper, the first document it was mentioned in and indirectly also the underlying blockchain, was released in 2008. The genesis block of Bitcoin was created in 2009. So, Bitcoin is 11 years old. This is nothing compared to gold. According to onlygold.com: “The first use of gold as money occurred around 700 B.C. when Lydian merchants produced the first coins.” So, humans have been using gold over 2700 years.
While gold has an established track record of 2700 years of commercial use Bitcoin does not (yet).
If we compare the market caps of gold and Bitocin we see golds head start. While Bitcoin’s market cap is USD 212 billion, gold’s market cap is around USD 9 trillion. Interestingly, gold is being used 270 times longer than Bitcoin while its market cap is “only” 42 times higher. It would be very interesting to see what Bitcoins market cap is in 2689 years.
This huge difference in commercial use makes comparison meaningless as it takes time for ecosystems, service providers, and awareness to develop for an asset. Even though it has become much easier to be exposed to Bitcoin, investing in gold is still more accessible and nearly all financial service providers offer it while Bitcoin is more and more becoming part of their offer.
Another major differentiator between Bitcoin and gold is their transportability. This is important as both assets represent value and especially in times of crisis and turmoil it is advantageous to be able to easily move once assets from one place to the other.
The standard gold bar held as gold reserves by central banks, you see in movies, weights 12.4 kg or 438.9-ounces.
A Bitcoin on the other hand weights nothing as it is digital. Imagine in times of a crisis it would be very difficult to move your gold as it is heavy. With Bitcoin, knowing your seed phrase by heart is enough to access all your Bitcoins.
To conclude while one can understand why Bitcoin and gold are being compared this comparison is not sustainable as they are different in major aspects such as age, use, or total supply. Bitcoin is not the digital version of gold rather an asset class for itself having unique characteristics with their respective implications during a crisis.
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