Why Bitcoin is Compared to Gold

Intro

At first thought, it may not be obvious that Bitcoin and gold have much in common. Gold is a physical substance, while Bitcoin is a digital asset. Gold has been a store of value for thousands of years, valued by almost every civilization on earth. Bitcoin has only existed since 2009. Physically and conceptually, Bitcoin and gold seem as though they could not be more different, but in actuality they share quite a bit in common.

Store of Value

While gold has some aesthetic and industrial uses, it’s main purpose is a store of value and Bitcoin’s sole design purpose is serve as a store of value. Both gold and Bitcoin can be used cross-border, even if gold requires physical movement. The lack of dependency upon governments and central banks makes them both very desirable as a means of payment across countries with differing fiat currencies. Since Bitcoin and gold have no central authority, things like poor government decisions and government manipulations of the currency generally have little or no effect on their prices. Even if the gold supply is interrupted in one part of the world, other parts of the world can still produce it. They could even produce more of it in response by increasing investment in gold mines or improving technology, thus limiting or eliminating the effect on the price of gold.

Limited Supply

There is only so much gold in the ground, and likewise there is only so much Bitcoin. The supply of Bitcoin is limited to 21,000,000 btc. Bitcoin’s creator, the mysterious Satori Nakamoto, instituted this artificial scarcity to prevent inflation and continuous dilution of value. This supply of Bitcoin is designed to be exhausted sometime around the year 2140. Gold has experienced a similar degradation in supply as that designed in Bitcoin. The limited supply in both of these allow them to retain value.

Safe Haven

Since they are both alternatives to fiat currency, both Bitcoin and gold are considered safe haven assets. Gold is considered valuable for its beauty, utility and scarcity, while Bitcoin is considered valuable as a trustless, decentralized store of value that no central authority can control with even more scarcity longterm. This makes them both largely immune to the manipulations and economic events that affect fiat currencies. If governments or central banks make poor decisions in their manipulation of the economy, inflation can rise through the roof, devaluing the government’s currency. Bitcoin and gold would still retain their value as they are independent of this government authority. If the government that backs a particular fiat currency or that government’s ability to tax their citizens goes away, the fiat currency will become worthless and will disappear. This is not the case with Bitcoin and gold because they have intrinsic value.

Both are Mined

As odd as it might seem to think about, both gold and Bitcoin must be mined. Gold is found in the ground and physical work must be applied in order to obtain it. Bitcoins exist in the blocks of the Bitcoin blockchain and they too must be mined in order to be obtained. The work applied is processing power as opposed to physical or industrial labor, but energy is expended for a reward — just as with gold. If you’ve ever wondered how Bitcoin is mined, it is done with specialized computer hardware basically solving puzzles. This deliberate and substantial effort required to mine new gold or new Bitcoin, is quite unlike fiat currencies which, by contrast, are created by the stroke of a pen in reaction to pending debt payments or central bank decisions to contract or expand the money supply.

Governments Have Sought to Control Both Bitcoin and Gold

Executive Order 6102 issued by Franklin Roosevelt in 1933 “prohibit[ed] the hoarding of gold coin, gold bullion, and gold certificates within the continental United States by individuals, partnerships, associations and corporations.” In 2018, the SEC announced that cryptocurrency exchanges must register with the government. Governments have sought to control both gold and Bitcoin because it is difficult to tax money that you can’t see. If people move large amounts of cash into investment in Bitcoin or gold, this would mean less investment in the stocks, bonds and economic infrastructure that governments depend on to fuel their economies, the strength of which are reflect in fiat currencies.

Both Gold and Bitcoin Can Be Fractionized

Gold coins have been split into fractions for centuries. The smallest unit of a Bitcoin is a satoshi, which is 1/100000000th (one hundred millionth) of a Bitcoin. This makes both gold and Bitcoin easily able to be split or fractionized in order to represent the exact value that its owner wants. Fiat currencies, while typically fractional up to 1/100th, also feature continual inflation. The U.S. dollar, for example, has risen so much in value that the smallest fraction, $0.01, is almost essentially worthless. Of course, one satoshi is similarly worthless, but this is not due to inflation, but rather the design of Bitcoin to allow for extremely small fractions of Bitcoin. Of course gold is harder to split in extremely small fractions than Bitcoin, but theoretically it’s possible.

Gold and Bitcoin are More Anonymous

Bitcoin is pseudonymous, since your transaction is tied to a cryptographic key that is not your name. Physical gold, in and of itself, has very little in the way of traceability. Although some gold bars may have serial numbers engraved into them, melting these down obviously removes this evidence. This means that both Bitcoin and gold have a much greater anonymity and privacy than fiat currency. Currency bills have serial numbers and banks can use them to trace the bills, as they often do when large amounts of money are stolen. Such money is considered “dirty” money and necessitates a process that is known as “money laundering.”

As you can see, gold and Bitcoin share a great deal of similarities. They both compete with fiat currencies as a store of value and provide near-anonymity when it comes to transactions. Since gold and Bitcoin can’t be as easily controlled or manipulated, governments tend to take an adversarial view to them. Since both are independent of governments and their central banks, they have the potential to outlive fiat currencies.

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