Table of Contents
- Differences and Similarities between Gold and Bitcoin
- The Author missed Something!!
- Criticism of the good currency model
Bitcoin and Gold are unique assets available to investors and traders around the world. Gold has historically been the world’s reserve currency and from ancient times it has retained its value and is considered “timeless” by conventional economists. In short, Gold is expected to retain its importance no matter how hard anyone tries to promote its alternative. It is a scarce metal and is only mined in limited quantities which helps it retain its prices.
However, Bitcoin according to some is a worthy challenger to Gold in a tussle to become the main backup or reserve currency of the future. It is more secure, has faster transactions, is even scarcer than Gold and the creation of new Bitcoins is a slow and energy-intensive process that is only profitable if you have the resources for it. Now on paper Bitcoin and Gold have some similarities but also have some stark differences as well.
The article titled “Bitcoin vs. Gold, or Bitcoin vs. Gold-Backed Cryptocurrencies?” starts with the comparison between Gold and Bitcoin. The article acknowledges that the comparison itself is not a fair apple-apple one as the two have very contrasting origins and behavioural patterns. Still, the comparison has to be made since both are now being compared to each other and cryptocurrency buffs are talking about replacing Gold with Bitcoin eventually due to its scarcity model. The article is basically a critique of a report published by Grayscale Investments that compared Bitcoin to Gold. It explained the former’s superiority over the latter with the help of simple infographics and then presents its own conclusion for a favourable comparison for the future involving gold-backed cryptocurrencies.
1. Differences and Similarities between Gold and Bitcoin
When it comes to differences, the article points out many: Gold has been around since ancient times and its use as a premier currency alongside Silver has been well documented but Bitcoin is only 11 years old. Bitcoin is only digital while Gold has to have a physical form and it is not easily divisible into smaller units for transactions while Bitcoin is and so on.
But, at the same time, there are some incredible similarities as well: Bitcoin is in limited supply and is at the top of the respective trading market just like Gold is at the top of the Bullion market by a huge margin. Both are decentralized and no government can claim a monopoly over their supply and demand. While some governments like China have a huge storage of both Bitcoin and Gold, they hardly own a fraction of the total amount of Bitcoin in circulation and thus cannot claim monopoly. Gold and Bitcoin are also often invested for longer periods and they are universally verifiable, durable and fungible (convertible to other currencies).
So, the article concludes that despite several important similarities, the differences are still too big for a fair comparison. It asks “how can we compare a digital currency to a physical one” and then answers it on its own.
2. The Author missed Something!!
According to the author, the way forward is to eventually digitize gold through blockchain and thus create gold-backed digital currencies or gold-based stablecoins for this purpose. What is interesting is that the article didn’t do the comparison the other way around. What if there was a physical-only form of Bitcoin i.e. a cold stored transactory wallet that can be universally exchanged and traded physically to demonstrate the effectiveness of the cryptocurrency? That is an interesting thought but it is not discussed anywhere within the article.
3. Criticism of the good currency model
The article also includes further criticism on Grayscale’s definitions of “good money” that the original Grayscale report used to identify the behaviour of a model currency.
The author defends the idea that Gold is more unique in its scarcity as it has no direct competitors but Bitcoin does in the shape of top five or seven cryptocurrencies in the world right now.
The author says that many of these currencies have much in common with Bitcoin and can theoretically replace it. While the author’s critique is valid on paper, it is well known that Bitcoin is the only universally trusted cryptocurrency in the world. It is the safest and the most stubborn cryptocurrency very much like Gold that resists any fundamental changes in the system. Other cryptocurrencies are much smaller and do not currently or have ever posed a challenge to the singular dominance of Bitcoin. So, the author is not accurate here.
The author continues and criticises the idea that Bitcoin has achieved global recognition but Grayscale failed to mention Gold’s recognition. That is a very valid argument. Bitcoin is still a niche market. It is not yet universally accepted even though it is traded and its value is determined in almost every country. Gold, however, is ready cash if one wants to sell anywhere. It can be verified globally and can be liquidated very easily into fiat. Bitcoin still has a lot to catch up on that. Gold also doesn’t depend on technology only for its existence although that will become true if eventually Gold is digitized.
The author concludes the article with a push for gold-backed cryptocurrencies. While the world is moving towards them, it is also necessary to point out issues with the idea. Stablecoins need to have the backup amount of Gold locked in one place. If anyone can access that in any way, the integrity of the stablecoin system is compromised. This has happened with USDT and other US Dollar stablecoins in some capacity as they had liquidity issues.
So, nobody currently has an unadulterated system where the asset backing a stablecoin stays in its place and can be liquidated at will. This will mean some form of centralization which will invalidate the very existence and decentralization of the yellow metal itself. So, the author may not be accurate here. Food for thought!