Bitcoin vs. Gold: Why Bitcoin Won’t Ever Fail

Bitcoin vs. Gold: Why Bitcoin Won’t Ever Fail

Cryptocurrencies
by Julian Lopez-Acosta
122
Ever wondered why cryptocurrencies are valued by younger generations and forward-thinkers? Or maybe the influx of emerging technologies is baffling, and it just doesn’t sit right with you.
Gold nugget vs. Bitcoin

We understand if you’re confused. We’re just like you, trying to navigate the new, digitalized world we live in. It almost feels like crypto adoption rose throughout the pandemic. People were stuck inside, so they had to find ways to live through their virtual screens. This included working from home and, more importantly, embodying the virtual lifestyle.

And if you’re living your day-to-day through a screen, you’re bound to explore virtual worlds. Metaverse initiatives, NFTs, crypto trading, digital art… you name it. As a result, we’ve been placing more value on the intangible rather than the physical.

Naturally, we must adapt to our climate. Going virtual is how we coped with the rapid change imposed through Covid-19.

If you aren’t living under a rock, you’ve probably heard of Bitcoin (BTC). It’s a hot topic, and it gained traction when the pandemic struck. Not only were wealthy individuals buying and holding BTC, but institutions also entered the fray. Instead of holding onto their cash reserves, they began to store their earnings in Bitcoin.

Nayib Bukele: "El Salvador just bought the dip!"

The icing on the cake is when you have the president of El Salvador tweeting about BTC and stamping his badge of approval on the digital currency. It literally feels like we’re living in an alternate reality.

So what do these institutions and developing countries see in BTC?

Well, BTC is often compared to gold as a store of value and medium of exchange. Suppose you neglect the difference between their physical and virtual forms. In that case, they’re both similar commodities that serve the same purpose.

We often find the news cycle frequently bashes on one of these commodities. We can’t even go on YouTube nowadays without seeing a conflicting stream of negativity from crypto bros and the anti-crypto crowd. You’re either a fan of gold, or you find Bitcoin invaluable. There’s no in-between.

With this article, we aim to present the facts of each commodity while trying to remain as objective as possible. We also encourage you to dip your feet into the crypto world.

Let’s get into it.

What’s Bitcoin?

Bitcoin is a digital currency created by the anonymous Satoshi Nakamoto in 2009. That’s right—Bitcoin has been around for more than a decade. Hard to believe, hey?

Bitcoin was a first-mover in the crypto world. It introduced the concept of blockchain technology: a decentralized public ledger via a network of thousands to millions of computers.

The computers (also called “miners”) solve complex mathematical equations to validate transactions on the network. If they’re successful, they are awarded partial amounts of Bitcoin. Such a system encourages validators to continue securing the blockchain while fulfilling the decentralized aspect of the commodity.

The beauty behind Bitcoin lies within its deflationary nature and scarce supply.

As miners get rewards, freshly minted BTC are put into circulation. Now, we know what you’re thinking: Minting new currency increases the total supply, right?

Wrong. Bitcoin’s supply is locked at 21 million. And at this very moment, 19 million BTC has been mined, with 2 million out of circulation. So unlike fiat currency (cash), there isn’t an unlimited amount of BTC that can be printed/minted.

Bitcoin halving events chart

Add on Bitcoin halving events—occurring every four years, where the amount of BTC received per every completed block is essentially cut in half—and you have a scarce commodity with a deflationary mechanic. Here’s a simple diagram explaining how it’s beneficial for the Bitcoin ecosystem:

The reward is halved → half the inflation → lower available supply → higher demand → higher price → miners’ incentive still remains, regardless of smaller rewards, as the value of Bitcoin is increased in the process

In essence, Bitcoin naturally appreciates over time, and it shouldn’t drop in value.

The key attributes of currency

CryptoPunk counting cash

Before we dive into the comparison between both commodities, we have to ask ourselves: What makes a currency useful, and more importantly, why does this matter?

Well, quite simply, if a currency doesn’t uphold any sort of value for the user, then why even bother using it in the first place? You can just resort to currencies that are already established and regulated by our governments.

When talking about user value, we must surface the specific traits that make a currency useful.

Collectively, we’ve concluded that a useful currency has six key attributes: Scarcity, divisibility, portability, durability, verifiability, and fungibility.

Scarcity is an economic term used to measure the worth of things like products, currencies, and commodities. It represents how limited the supply of a particular “thing” is. Generally, the rule of thumb is that the more scarce an item, the higher it will be valued.

For example, a 1/1 painting can auction for upwards of millions of dollars, whereas a 10,000 generative NFT collection will go for a hundred each. Why? It’s human nature to want exclusive and limited items more than items you can find anywhere.

Currencies are valued higher if they can be divisible or split into smaller portions. Let’s say we own $100 of a non-divisible currency called “XOR.” Now, let’s say we want to exchange our 1 XOR for an apple since we’ve been preaching a healthy diet. The apple only costs a dollar, so it’s relatively cheap.

In this example, we wouldn’t be able to purchase a single apple, as we can’t reduce our XOR into fractionalized components. We can’t have 1/100th of an XOR. Thus, the currency has self-imposed barrier as a medium of exchange. Not very useful, is it?

Not only are useful currencies scarce and divisible, but they’re also portable. Users should have the ability to move however much currency they own with ease. This can be applied to transactions, where the currency exchanges hands, or moving the currency from one location to the next for safekeeping.

Durability is another key aspect of a useful currency. Those who utilize the currency for transactions anticipate it will retain its value, which for the most part, is a social construct. Suppose you bought silver to hold your cold-hard cash during a recession. In that case, you’re doing this because you believe silver will keep its value upon the breakthrough of the market downturn.

Of course, commodities can be durable because of their role in manufacturing processes. This doesn’t only give them an intangible or social importance, but it also earns them physical utility for companies and consumers.

Verifiability is last. If we can create the same currency with our own two hands, then why bother purchasing the currency off the market for a much steeper price? As stated here:

Money that is easily duplicated ceases to be THE medium of exchange.

All six aspects don’t have to be met, but they sure help in the mass adoption of said currency.

Bitcoin vs. gold

Now for the fun part: The direct comparison between BTC and gold. Which one’s better, and why do we think Bitcoin won’t ever fail?

Both share one thing in common: They’re seen as stores of value rather than mediums of exchanges.

Traits of money: Bitcoin vs. Gold table

This is because they lack certain aspects that would make them a strong medium of exchange. Currencies (cash) represent gold (though not anymore, now cash is a fiat currency since it isn’t pinned to gold) and Bitcoin is the main comparison for other cryptocurrencies.

On the one hand, gold lacks portability and divisibility. It’s challenging to move the asset from one location to the next due to its weight, physical dimensions, and rarity. It’s also a tedious task to divide it up into smaller pieces.

On the other hand, Bitcoin isn’t as durable as gold. Although the halving mechanics and scarce supply encourage appreciation in value, the price is still volatile.

Part of the volatility originates from the unregulated crypto market. People don’t trust crypto as much as stocks on regulated exchanges like the NYSE or TSX. So if they see a dip, all hell breaks loose.

Bitcoin’s underlying technology is also severely outdated. Proof of Work (the consensus mechanism powering BTC mining) isn’t as efficient as Proof of Stake due to its resource-intensive mechanism. Recently, there’s been a push to “cancel” Bitcoin as a currency due to the role it’s playing in climate change.

So if we’re looking at both commodities purely from a store of value standpoint, gold is less volatile as it’s more durable. Therefore, if you’re hedging against inflation, gold is the move. At least, this is how it should be on paper.

Bitcoin is riskier, but the rewards are much greater. It’s a first-mover in the crypto world, and thus, you’ll never see it disappear. There will always be a social value attached to the currency. We’ve entered a stage in our society where institutions and governments allocate some of their cash into BTC for safekeeping.

Also, established miners won’t ever stop mining BTC. Companies like Bitfarms and Hut 8 Mining Corp have based their entire business model on mining BTC and Ethereum. Even if Proof of Work fades out, the benefit for validating nodes far exceeds the fixed and variable costs of the business.

Bitcoin vs. Gold graph
At the time of writing, Bitcoin has risen by ~600% since its inception. Gold’s only appreciated by ~52%.

The chart above compares the price of Bitcoin and gold. Let’s say you bought BTC at the top of the peak in 2021. You would’ve lost money. But if you bought a couple of years back, say in 2018, you would have scored exponential profits.

What we’re trying to get at here is that gold and Bitcoin are both stores of value, and often, they’re associated with long-term holding. So if we’re just looking at historical data, BTC’s long-term growth surpasses gold by a mile.

Takeaways

If you’re expecting a market downturn and want to store cash in a durable commodity, stick with gold.

If you’re looking for more of a long-term approach, with greater chances of parabolic growth, stick with Bitcoin.

FAQ