Bitcoin Facing Gold And Fiat Currencies On 10 Essential Properties Of Money
The best way for you forming your own opinion on Bitcoin.
Qualified as digital gold or gold 2.0, Bitcoin is very often compared to gold due to its scarcity but also because of its process for creating new Bitcoins that is similar to gold mining. Since Bitcoin aims to build a better monetary and financial system for the future, it is also naturally compared frequently with the current monetary and financial system.
I have my opinion on what Bitcoin is and what it can bring to the world in the years to come. I could tell you that Bitcoin will create a fairer world in the future by giving power back to the people. Nevertheless, you could argue that this is only my opinion and that it does not allow you to form a real opinion on Bitcoin and its future.
In a way, you’d be right. You must form your own opinion about Bitcoin in order to have a chance to become aware of its phenomenal potential for the future of humanity. Rather than asking you to take my word for it, I suggest you compare Bitcoin against gold and fiat currencies through 10 essential properties of money.
For each of the 10 properties of money that I will exhibit, I will give you my vision of the winner in this three-way fight. At the end of the article, you will be able to form a better opinion on the advantages and disadvantages of Bitcoin while having the opportunity to further your own research on one or the other of the different properties analyzed.
Property #1: History
In terms of history, gold is logically ahead of fiat currencies and Bitcoin. Gold has been used as a store of value and a medium of exchange for centuries now. The gold standard was widely used in the 19th and early part of the 20th century.
After the Second World War, gold even returned for a time to the centre of the world economy with the Bretton Woods system installed in 1944. The end of the convertibility of gold into U.S. dollar decided by Richard Nixon in 1971 precipitated the end of this system and led to the Jamaica Accords in 1976.
Jamaica Accords officially confirmed the abandonment of the international legal role of gold.
The fiat currencies then took on a major importance from the mid-1970s onwards. Nevertheless, many countries keep large reserves of gold in our time in order to limit their dependence on the U.S. dollar in particular.
Created in 2009 by Satoshi Nakamoto, Bitcoin has a much more recent history since it was born out of a desire to respond to the failures of the current monetary and financial system that were once again exposed during the 2008 financial and banking crisis.
History: Gold > Fiat Currencies > Bitcoin.
Property #2: Decentralization
Satoshi Nakamoto designed the Bitcoin as a fully transparent Peer-to-Peer electronic cash system. Bitcoin is thus totally decentralized and does not require any trusted third-party to operate. As such, Bitcoin differs from fiat currencies whose exchanges are governed by banks or third-party payment systems such as PayPal, Visa or MasterCard.
Bitcoin works thanks to the computing power made available to the network by its users.
Gold is decentralized since it can potentially be exchanged in Peer-to-Peer in absolute terms. Nevertheless, this type of exchange is increasingly controlled by countries, which makes its decentralized nature less obvious and simple than that of Bitcoin.
Finally, fiat currencies are fully centralized and their management is in the hands of the central bankers of the various countries. They arbitrarily decide to create more money without even taking into account the fact that this constant increase in the monetary supply in circulation devalues what people have.
Decentralization: Bitcoin > Gold > Fiat Currencies.
Property #3: Censorship Resistance
After creating the Bitcoin, Satoshi Nakamoto decided to offer it to humanity while remaining anonymous. This simple decision has phenomenal consequences for Bitcoin and its future. Bitcoin has no leader and this makes it much more resistant to censorship.
The authorities of the countries have no one to sue to try to stop the progress of Bitcoin.
In addition, the fully decentralized nature of Bitcoin allows you to enjoy your Bitcoins as you wish. No one will be able to prevent you from making an exchange or transaction in Bitcoins if you want to.
Gold is advantageous compared to fiat currencies but it is increasingly controlled and its physical nature makes it difficult to hide in order to avoid possible seizures.
Finally, fiat currencies are totally in the hands of governments and banks, which can decide at any time to freeze assets in bank accounts or block your transactions in a totally arbitrary manner. Fiat currencies expose people to total censorship by governments.
Censorship Resistance: Bitcoin > Or > Fiat Currencies.
Property #4 : Scarcity
The fiat currencies are totally overtaken by Bitcoin and gold in terms of scarcity. Indeed, governments can create as much money as they want at any time. This arbitrary aspect is problematic and it totally devalues what you have in fiat currency.
1 U.S. dollar in 2019 will not be worth 1 U.S. dollar in 2050.
This potentially infinite growth in the monetary supply in circulation is what makes many Bitcoin advocates say that the current monetary and financial system is flawed and not fixable.
As far as Bitcoin is concerned, everything was clearly defined when it was created by Satoshi Nakamoto. Everyone knows that the maximum number of Bitcoins that can be put into circulation is limited to 21 million. From 2140 onwards, there will be no more new mined Bitcoins.
This limitation on the number of Bitcoins that can be created guarantees users that 1 BTC of 2019 will always be worth 1 BTC of 2050.
The Bitcoin Blockchain protects what you own.
The scarcity of gold is of the same nature as that of Bitcoin. The amount of gold on Earth is known or estimated, and unless new potential gold deposits are discovered, gold remains extremely scarce.
Scarcity: Bitcoin = Gold > Fiat Currencies.
Property #5: Divisibility
Bitcoin is divisible to eight decimal places. The smallest unit in Bitcoin is called a Satoshi. We have the following equivalence:
1 Satoshi = 0.00000001 BTC
This divisibility of Bitcoin makes it particularly suitable for use in micro payments and transactions.
Fiat currencies are divisible to the second decimal place. It’s not as good as Bitcoin but it’s still better than gold. While gold can be divided into smaller quantities by specific processes, it is practically not usable in small quantities with merchants, for example.
Divisibility: Bitcoin > Fiat Currencies > Gold.
Property #6: Security
There is a persistent myth about the security of Bitcoin Blockchain. This myth is fueled by the media and politicians who constantly criticize Bitcoin’s lack of security due to its decentralized nature. This myth is completely unfounded.
Bitcoin has never been hacked since its creation in 2009.
The alleged hacking of the Bitcoin concerned each time trading platforms, which has nothing to do with the Bitcoin Blockchain. Criticizing Bitcoin’s security in relation to the history of Mt. Gox’s hacking would be as stupid as to say that fiat currencies are not safe when banks are hacked or victims of computer intrusion.
I even have the feeling that because of its transparency and open source nature, potential security problems related to Bitcoin are fixed more quickly because its source code is updated more quickly than this of banks that often hide the truth to their customers.
The level of security of gold seems to me to be equivalent to that of fiat currencies with increased security when gold is deposited in the safe of banks that guarantee the amount stored. Nevertheless, you then lose full possession of your gold.
Security: Bitcoin > Gold ≥ Fiat Currencies.
Property #7: Fungibility
The fungibility of a medium of exchange and a means of payment is essential. Indeed, it is essential that an asset you own can be exchanged interchangeably with any other asset of the same type.
Gold is really fungible since one gold bar or one ounce of gold you own is always equivalent to another gold bar or another ounce of gold respectively.
For fiat currencies, this fungibility is not as high. In some jurisdictions, fiat currencies may have been treated differently by some government policies.
Finally, due to the full transparency offered by the Bitcoin Blockchain, it is still possible to trace the entire chain of ownership of a Bitcoin and to know whether it may have been used for illegal activities.
It would therefore become possible to refuse certain Bitcoins during exchanges or payments if there are linked to illegal activities.
Fungibility: Gold > Bitcoin = Fiat Currencies.
Property #8: Portability
Bitcoin can be transferred around the world in just a few minutes with relatively low transaction fees in general. In addition, there is no limit to the amount of Bitcoins you can transfer per transaction or over a given period of time.
The only limit on the amount of what you can transfer on the Bitcoin Blockchain is what you own in Bitcoins on your sending address.
The transfer of fiat currencies is relatively simple but it can take several days and transaction fees remain very high. Banks may also impose limits on you in terms of amount or over a given period of time.
In addition, it is difficult to carry a lot of money in cash when you can very simply carry a very large amount of Bitcoins with you.
Gold can be moved and exchanged in small quantities but if you want to transport large volumes of gold, it becomes very complicated because of its weight.
Portability: Bitcoin > Fiat Currencies > Gold.
Property #9: Durability
Gold has been a store of value for centuries for a good reason: gold is practically indestructible. Indeed, gold resists corrosion while not rusting.
The gold you own today may very well have been passed from hand to hand for several centuries.
Fiat currencies have a durability that is totally linked to the financial institutions in charge of their issuance. We currently have many examples of countries, such as Venezuela, in which governments fail to maintain the value of a fiat currency over time.
Finally, Bitcoin will continue to exist as long as its network remains secure. Its recent history inspires fears in some people, but these fears are simply based on its youth and nothing tangible in my opinion.
Durability: Gold > Bitcoin > Fiat Currencies.
Property #10: Verifiability
In terms of verifiability, the problem with gold is that it is difficult for the uninitiated to know if the gold they want to buy is really gold. Indeed, gold can be faked or secretly supplemented with cheaper metals.
Fiat currencies are more easily identifiable than gold but they can be more easily counterfeited than gold as well.
The source code of the Bitcoin Blockchain guarantees the authenticity of your Bitcoins by relying on cryptographic signatures proving that they belong to a given address.
It is almost impossible to counterfeit a Bitcoin which makes the Bitcoins you own highly secure and easily verifiable on the Bitcoin Blockchain.
Verifiability: Bitcoin > Fiat Currencies > Gold.
The comparison of Bitcoin against gold and fiat currencies that I have just presented to you is based on the 10 essential properties of money. This comparison will have made it possible to highlight in the most objective way possible the advantages and disadvantages of Bitcoin against gold and fiat currencies.
From these elements, I think you will be better able to understand why I am a strong supporter of Bitcoin as an alternative to the current monetary and financial system. On your side, your position may be different, but at least it will be based on really relevant comparison properties.
Finally, if you are still undecided about Bitcoin, you will now be able to further research each of the properties of money that I mentioned to form your own opinion.