Bitcoin vs. Gold: What to own?
This article incorporates part of an article I published in Bitcoin Magazine on the 29th of November 2022, titled „Why Bitcoin Is The Ultimate Wealth Preservation Technology“. I will build on that and go into more detail as the topic is so multifaceted.
Much has been written about the advantages of bitcoin over gold. In order to get a good overview for myself and for the people around me, I decided to write about it as well. I hope to help those around me on their bitcoin journey and that this will prove valuable on your personal bitcoin journey or help your friends and family on theirs.
Bitcoin is notorious for its volatility. We are currently in a bear market. Historically, bitcoin has always returned to and outperformed its all-time high after a sharp correction within 5 years. This presents an opportunity to buy bitcoin at a price that is attractive given its long-term price history.
Both bitcoin and gold compete on their promise of being a store of value. Over the past decade, bitcoin has outperformed gold. Below I will examine why this is the case and show why this will most likely continue to happen.
What makes a good store of value ?
As explained by Vijay Bojapati (2018), when stores of value compete against each other, it is the unique attributes that make a good store of value that allows one to out-compete the other. The characteristics of a good store of value are considered to be durability, portability, divisibility, fungibility and especially scarcity. These properties determine what is used as a store of value. At the dawn of human civilisation, jewellery was used to store value. Jewellery may be scarce, but it’s easily destroyed, not divisible, and certainly not fungible. Gold fulfils these properties much better. Gold has therefore over time replaced jewellery as humankind’s preferred store of value, serving as the most effective one for over 5,000 years. However, since the introduction of Bitcoin in 2009, gold has faced digital disruption. Digitisation optimises almost all value-storing functions.
I will compare bitcoin to gold. Using the five characteristics of a good store of value (durability, portability, divisibility, fungibility and especially scarcity) to show why bitcoin is a superior store of value to gold.
Bitcoin vs Gold
Durability Gold is the undisputed king of durability. Most of the gold that has ever been mined remains in existence today and will likely be available in the future. Bitcoin are fundamentally digital records. Thus it is not their physical manifestation whose durability should be considered, but the durability of the institution that issues them. Bitcoin, having no issuing authority, may be considered durable so long as the network that secures them remains intact. Given that Bitcoin is still in its infancy, it is too early to draw strong conclusions about its durability. However, there are encouraging signs that, despite instances of nation-states attempting to regulate Bitcoin and years of attacks, the network has continued to function, displaying a remarkable degree of “anti-fragility” (Bojapati, 2002). In fact, it is the most reliable computer network ever, with nearly 99.99% uptime. Both of Bitcoin’s downtime events (2010,2013) were early on, and since then, the network has maintained very stable (Tuwiner, 2022).
Portability Bitcoin’s portability is far superior to that of gold, as information can move at the speed of light (thanks to telecommunication) (Breedlove, 2022). Gold has lost its appeal in the digital age. You can’t send gold over the internet. There are all kinds of financial products based on gold. For example ETCs, gold miner ETFs, derivatives etc. however their use does not reflect a good digital use case for gold, but an unsuccessful attempt to keep gold’s store of value function alive for the digital age. For decades, the inability to digitise gold created problems in our monetary system, historically based on gold. With the digitization of money, over time it was no longer comprehensible whether national currencies were actually backed by gold or not. Also, gold is difficult to transport due to its weight, which has created problems for globalised trade. Due to gold’s weakness in terms of portability, our current fiat-based monetary system exists. In a global society, with any physical money (non-digital) 3rd parties are required (to digitise the physical money and allow long-distance payments), ultimately leading to the development of fiat money (Arman The Parman, 2022). Bitcoin is a solution to this problem because it is a digitally native scarce commodity that is easily transportable.
Divisibility Bitcoin is purely digital, so its divisibility is much better compared to gold. Information can be subdivided and recombined almost infinitely at almost zero cost (like numbers) (Breedlove, 2019). A bitcoin can be divided into 100,000,000 units called satoshi. Gold on the other hand is difficult to divide. It requires special tools and carries the risk of losing gold in the process, even if it’s just dust.
Fungibility Gold can be distinguished for example by an engraved logo or coat of arms, but can be melted down and is then fully fungible. With bitcoin, fungibility is “tricky”. Bitcoin is digital information, which is the most objectively discernible substance in the universe (like the written word) (Breedlove, 2019). However, since bitcoin transactions are transparent, governments could ban the use of bitcoin that has been used for activities deemed illegal. This could negatively impact bitcoin’s fungibility and its use as a medium of exchange. When money is not fungible, each unit of the money has a different value and the money has lost its medium of exchange property. Bitcoin is both a digital store of value and money, any disadvantages in its use as money also have a negative impact on its function as a store of value. It’s the same with gold. Gold’s fungibility is superior to that of bitcoin. Gold’s portability disadvantages make it useless as a medium of exchange and digital store of value, making bitcoin superior overall.
Scarcity The most important attribute of a store of value. Gold is relatively scarce. It has an annual inflation rate of around 1.5%. However, the supply is not capped. There are always new discoveries of gold and there is a possibility that we will come across large gold deposits in space (mining.com, 2019). Gold’s supply is not perfectly inelastic. When gold prices rise, there is an incentive to mine gold more intensively, increasing supply. Also, physical gold has been diluted with less precious metals. Furthermore, gold held in online accounts via ETCs (Exchange-traded Commodities) or other financial products is often rehypothecated, a practice whereby banks and brokers use assets posted as collateral by their clients for their own purposes, which negatively affects the price by artificially increasing supply. The supply of bitcoin, on the other hand, is hard-capped, there will never be more than 21,000,000. Bitcoin is disinflationary, meaning there will be less of it over time. Bitcoin’s annual inflation rate is currently around 1.75% and will continue to decrease over time. Mining rewards are halved roughly every 4 years, according to the protocol’s code. In 10 years, its inflation rate will be negligible. The last bitcoin will be mined in 2140. After that, the annual inflation rate of bitcoin will be zero.
Bitcoin exchanges can also artificially increase supply by selling “fake bitcoin” to their users. As explained by Jameson Lopp (2022), the reality is that the vast majority of users are being onboarded through centralised exchanges. They send money to the exchange through a bank and then place an order to buy bitcoin. But what happens when that order is executed by the exchange’s trading engine? An entry in a private database is updated, thus crediting the exchange user with an IOU corresponding to the amount of bitcoin they purchased. An IOU, a phonetic acronym of the words “I owe you,” is a document that acknowledges the existence of a debt (Kenton, 2021). This IOU has none of the properties of bitcoin. It is merely a financial instrument that gives the IOU owner exposure to the bitcoin exchange rate. Scarcity is one of bitcoin’s key properties and fundamental value drivers. If this property is violated, there is a problem. Fortunately, bitcoin is fully audible as information about it is publicly available and verifiable on the blockchain.
Auditability Not a unique selling proposition for a store of value, but important because it provides insight into whether an asset is fit for a fair and transparent financial system. Bitcoin is perfectly auditable to the smallest unit. No one knows how much gold there is in the world, and no one knows how many US dollars there are in the world. As pointed out to me by Sam Abbassi, bitcoin is the first perfectly, publicly, globally, auditable asset. This prevents, for example, rehypothecation risk, which removes enormous risks from the financial system. This makes Ponzi schemes like FTX less likely. The now bankrupt crypto exchange had used assets deposited by its customers for its own purposes and gambled it away by investing in worthless crypto tokens (Tortorelli, Rooney, 2022)
Return Bitcoin’s superiority over gold is also reflected in the price action of both assets, as shown in the Graph below. A $1 investment in bitcoin on October 6, 2009, when bitcoin first had a market price, would be worth around $25,000 at the time of writing. In contrast, a dollar invested in gold at the same time would be worth around $1.60 today. The graph below also shows the amount of bitcoin per ounce of gold. On October 6, 2009, 1 ounce of gold would have gotten you 1,000,000 bitcoin. Today it’ll get you a lousy 0.089 bitcoin, down 99.99%. I see no reason why this trend should not continue. It could even accelerate as more people understand the benefits of bitcoin as a digital store of value.
Bitcoin’s advantage over gold is so great that owning gold no longer makes economic sense. I like to compare it to a car and a horse. Today no one would own a horse to travel long distances. One would always prefer the car. But someone might want to ride a horse because it’s fun or because it’s more beautiful. Likewise, someone may want to wear a gold watch because they like it. But to permanently store value or transport value from A to B, one should use bitcoin. Gold advocates promote the industrial use of gold as one of the underlying value catalysts; However, most of the gold used in the industry is used in jewellery, around 55% of the total supply. But the gold used in jewellery is not used because it is such a good material, but because it is rare and jewellery is used as a store of value, for example in countries like India where gold jewellery is given away at weddings. The industrial application of gold is thus mainly directly related to its function as a store of value. Gold used for technology purposes accounted for only 8.2 percent of global gold demand (stastista.com, 2022).
Overall, bitcoin is a far better store of value than gold, which is currently being demonetised by bitcoin. The slow progression from soft to hard money runs through the evolution of humankind. Shells, glass beads gave way to precious medals that were difficult to make and inflate, and along the medals the soft have given way to the hard. Iron was demonetised thousands of years ago. Copper hundreds of years ago and silver through gold in the 19th century (Ammous, 2021). Back then, both gold and silver were used as currency standards. In the German Empire, for example, gold was used and in England, the pound was linked to silver. Since gold is rarer, the precious metal began to become more valuable than silver and pushed silver out of the market. As Ludwig von Mieses details in his classic “Theory of Money and Credit “(1912). The London silver price fell 60% from 1870 to 1909. The value of silver was bound to fall as its use narrowed. Now gold is being demonetised by bitcoin. This process is similar to gold’s demonisation of silver in the 19th and 20th century.
Another argument in favor of gold made by the Goldbugs is that mankind has been using gold as a store of value for 5,000 years and therefore gold will continue to have value in the future. Horses were first domesticated in around 3500 BC. However, I have seen very few horses on the Autobahn. Just because a technology has been around for a long time doesn’t mean it’s always the best technology to serve its purpose indefinitely. A more advanced technology (bitcoin) performs its function more productively and efficiently. Allowing a clear exposition of the mechanism of the simpler technology (gold) and exposing its weaknesses (Ammous, 2021). Historically, gold has been useful as a downside hedge in a stock portfolio. When stocks fell, gold usually rose. For the first time in history, this did not happen in the 2022 bear market. This finally dealt gold the deathblow.
Conclusion
Bitcoin the better asset to protect and grow wealth over the long term. Therefore, the return on bitcoin will in all likelihood continue to be significantly higher than that of gold in the future. Bitcoin is the best store of value for the digital age. An absolutely scarce digital native bearer asset with no counter-party risk that cannot be inflated and is easily transportable and transferrable on the world’s most powerful computer network. When you bet against bitcoin, you are betting against the internet. The Internet is the base protocol for information. Bitcoin is the base protocol for transferring value on the Internet. As long as one Bitcoin node stays on the internet with the blockchain, there will be bitcoin. A Bitcoin node is any computer that runs a Bitcoin software implementation and stores the entire blockchain (bitcoin database). There are nodes on satellites, college campuses, raspberry pis, and cloud servers worldwide. We’ve effectively created a digital commodity that’s here to stay.
Considering that the Bitcoin network could theoretically store all of the world’s wealth (Global wealth reached a record high of $530 trillion in 2021, according to the Boston Consulting Group), it may well be the most efficient way we humans have found to store value ever. By holding bitcoin your wealth is going to be protected, likely increasing it by 10x,100x, maybe 500x, during this early monetisation process. If you hold out for the next few decades. Bitcoin is vastly superior to gold. It’s the electrified version of that. Bitcoin serves not only as a store of value, but also as an inherently digital money, ultimately defeating gold in the digital age.
Ray Dalio — Founder, Co-CIO, Bridgewater Associates. Total AUM: $138B.
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