The Difference Between Gold and Bitcoin

To find the critical difference between gold and Bitcoin, we first have to understand why gold has been synonymous with wealth and status since the ancient era. Used both as money and ornament, the precious metal owes this status to its rarity and permanence against the ravages of time.

Among the rare noble metals, gold ranks as one of the rarest:

  • Copper at 25th abundance rating.
  • Silver at 65th abundance rating.
  • Gold at 72nd abundance rating.
  • Osmium at 78th abundance rating, which is the rarest.

Due to such scarcity and resilient physical property, gold became a natural currency. Up until modern times, kingdoms and nations used the metal as a vehicle of value for trade. One that cannot be counterfeited or manufactured, but mined. In the United States, the gold standard was abandoned only recently, in 1971, causing the money supply to be drastically increased.

Because of the economic law of supply and demand, when something is rare, its demand increases.  There is only so much gold in the Earth’s crust that could ever be mined. Moreover, it is difficult and costly to detect gold, mine it, and process it.

As the governments abandoned the gold standard, the demand for a deflationary currency outside the central control rose. However, not until the development of blockchain technology could this be accomplished, manifested in the form of a decentralised cryptocurrency — Bitcoin.

Just as there is a finite pool of gold in Earth’s crust, there will only ever be 21 million Bitcoins in circulation. Also, the cryptocurrency’s halving protocol ensures its deflationary nature because mining BTC yields diminishing returns every four years. Within the overview of all cryptocurrencies, Bitcoin remains by far the dominant one, just as gold tops other precious metals.

Divergence of Bitcoin with Gold
As you can see from the Fed’s Federal Reserve’s balance sheet, detaching currency from gold has severe consequences. Governments can then increase their money supplies whenever they need to increase their spending. Of course, the more you increase the supply of something, you lessen its value. We name such drastic currency devaluation — hyperinflation.

This happened many times before:

  • Chile in 1973.
  • Argentina in the 1980s.
  • Nicaragua in the 1980s.
  • Yugoslavia in 1989.
  • Zimbabwe in the 2000s.
  • Venezuela in 2016.

In the wake of the pandemic, we will likely see more unprecedented money printing and hyperinflation. This is why Bitcoin was coded to mimic the deflationary nature of gold, following the 2008 Financial Crisis. It is, in fact, becoming digital gold, recognised by even the world’s largest banks, such as JPMorgan Chase.

So, if both gold and Bitcoin share scarcity as their core feature, is one better than the other as a store of value? To answer that question, we should form a Bitcoin perspective in terms of its dependency. As a virtual commodity connecting chains of data blocks — blockchain — Bitcoin is reliant on the internet to exist. In turn, the internet relies on computers and electricity.

On the other hand, gold is its own thing, not reliant on any infrastructure to exist. It “simply” has to be mined and processed. One is tempted to say this makes Bitcoin highly vulnerable, but is that a valid concern?

After all, if we arrive at the point when the internet/electricity is compromised, the entire modern civilisation would collapse as well. From foody supply and transportation to banking and governance, losing the infrastructure that powers Bitcoin would render gold irrelevant just as much.

In contrast, Bitcoin’s lack of physicality is exactly its core feature that makes it advantageous compared to gold. This Bitcoin vs gold chart, tracking $1 invested in the cryptocurrency and the precious metal over 11.2 years, demonstrates this advantage accurately:

Key Differences Between Gold and Bitcoin
While gold has to forever contend with the baggage of physicality, such as transportation and security costs, Bitcoin offers maximum flexibility:

  • Bitcoin is decentralised, while gold is tightly controlled by governments.
  • Bitcoin is secure by employing free cryptographic math, instead of employing security guards.
  • Bitcoin is fungible and divisible, unlike gold, which can only be divided into parts varying in weight.
  • Bitcoin is resistant to seizure and censorship, while gold can be easily seized/leveraged.
  • Bitcoin is instantly portable and borderless, while gold is cumbersome and costly to transport.
  • Bitcoin is eminently durable, as long as there are a couple of nodes running, among 50,000.
  • Bitcoin is more verifiable than gold, while also providing a greater degree of privacy.

As you can see, existing only in the virtual realm confers many advantages over gold, all the while retaining gold’s scarcity, i.e., serving as a deflationary store of value. History had already given us the best possible scenario in which we could test the difference between gold and Bitcoin.

Failed Experiment for Internet Gold
At the onset of the internet, in 1996, Gold & Silver Reserve Inc. (G&SR) developed e-gold. Powered by the internet, e-gold consisted of web-based accounts with which one could instantly trade value in gold grams with other e-gold accounts. A sound idea that had much potential.

Unfortunately, e-gold’s fate was sealed due to the nature of gold — its physicality. Despite reaching 5 million e-gold accounts by 2009, its very popularity caused the government to shut it down. This can never happen with Bitcoin, as there is no external commodity placing it outside the internet, and no central authority overseeing it.

As a result, institutional investors are becoming more comfortable in allocating up to 10% of their total assets to Bitcoin. We have seen this occur with Square, Guggenheim Fund, MassMutual, Mode Global Holdings, MicroStrategy, and many others in 2020.

Bitcoin’s price is reacting to this wave of institutional adoption, as you can see from this historical price chart:

While Bitcoin surpassed the $40k price, gold never reached beyond $2,067 on August 7, 2020. Nonetheless, gold has a much greater liquidity pool, with a $9 trillion market cap compared to Bitcoin’s $622 billion. However, considering that the cryptocurrency is only 11 years old, this is a remarkable accomplishment. With the younger generations more comfortable with digital assets, Bitcoin is poised to supplant gold completely.

Risk Warning:
Margin trading carries a high level of risk to your capital and you should only trade with money you can afford to lose. Margin trading may not be suitable for all traders, so please ensure that you fully understand the risks involved, and seek independent advice if necessary.

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