Many view Bitcoin as the currency of the future. Some also view it as a hedge against inflation, as gold has traditionally been seen. Is it fair to compare Bitcoin with gold? Or is this comparison based on faulty premises that simply do not hold up?
How Bitcoin is Similar to Gold
In the backdrop of fiat currency, Bitcoin and gold seem like very similar assets with regard to supply. The supply of gold is limited by the immense capital and effort that is required to procure it. Bitcoin, like gold, is also limited in supply by the emission schedule set out by Bitcoin. Both the supply of gold and the supply of Bitcoin is limited. Bitcoin and gold both attract the attention of speculators looking to avoid the inflation that is constantly associated with fiat currency. This attention is often expressed in the term “safe haven,” which has historically been attached to gold and has recently been affixed to Bitcoin. This interest is due to the fact that there is nothing limiting the supply of fiat currency except the whims of the central bankers who run the various national currencies.
If you like this article, read and find out how Bitcoin protects you from Inflation: Is Bitcoin A Safe Haven in Times of Crisis? By Aaron Koenig.
How Does Bitcoin Differ from Gold?
Gold is famously useful for all kinds of applications. It is a conductor of electricity and it is soft and easy to work with. It has various applications in industry, computers, electronics, medicine, and jewelry. By contrast, Bitcoin is not useful for any of these things. This is a fact that has led many pundits and financial experts to declare Bitcoin useless. However, Bitcoin does have one utility—as a store of value. This is the only utility that Bitcoin has ever claimed, so it is curious that so much fuss is made about how useless it is.
It is true that gold and Bitcoin both have a limited supply. However, no one can really know when the last ounce of gold will be mined. We do know, however, with clockwork precision, that the last Bitcoin will be mined in the year 2140.
The supply of Bitcoin is regular and constant. The supply of gold experiences interruptions in its supply for various reasons. This reduction in supply does nothing to hurt gold’s utility as a store of value, as its price often goes up in such cases. But there are also times when the supply of gold increases faster than normal, not as fast as fiat currency mind you, but enough to demonstrate that there is a variation in the supply of gold. This glut in the output of gold can lead to a decrease in the value of gold. Bitcoin, on the other hand, will experience a regular schedule of supply. With no work stoppages or mine depletions like those which affect the gold mining industry, the supply of Bitcoin will continue on at the defined rate for many decades, decreasing only at regular and predefined intervals. There will be very little, if any, variation in the output and this understanding is largely priced into the market.
Is Bitcoin the New Gold Standard?
This stability in the supply of Bitcoin makes it seem like a great replacement for gold as a currency. So, is Bitcoin the new gold standard? Well, there is a reason why the gold standard was abandoned. This reason was that it could be so easily manipulated. In the last decades of the gold standard, the amount of gold that could be redeemed with U.S. dollars was continually decreased. The amount of gold that the U.S. government held in reserve simply was no match for the amount of debt that the country was racking up. This is not a knock against gold. It is simply an indictment of fiat currency. In the 1970s, the gold standard was finally abandoned completely. Now central banks are free to print as much money as they like with no standard or backing at all other than their own decrees. So, the central banks have ruined this metaphor and we will have to find a new one.
Bitcoin is not a new gold standard. It is a new gold. Bitcoin does one thing—it stores value. Gold has many applications, but these many applications cause it to be taken out of circulation. Furthermore, the volatility in the supply of gold make for a great speculative asset, but not a great currency. There is even more variation in the supply of fiat currency, creating so much volatility that many can make a living through speculative trades of one currency against another. Bitcoin’s limited and regular supply makes it a great currency and that’s why devices like the Census Note, a highly-secure cold hardware wallet, are the future of money.
Bitcoin is similar to gold in many ways. While Bitcoin lacks the number of applications that gold enjoys, it has many advantages over gold in one area that gold has always held high regard—as a store of value. The irregularity of the supply of gold is in contrast to Bitcoin, which has a very strict emission schedule. This regular supply of new bitcoins makes it a better currency than gold or fiat currency.