Bitcoin vs. Gold

Bitcoin vs. Gold

Bitcoin and gold have been compared as inflation hedges for years. While gold is considered by some to be relatively scarce and durable enough to act as an inflation hedge, its value has stagnated in the face of explosive growth in the money supply. Gold is also inadequate as a medium of exchange; it lacks the divisibility, portability, and network effects to be effective for transaction purposes.

Bitcoin was uniquely created to meet consumers’ dual needs for an inflation hedge and a superior medium of exchange to fiat currencies. The finite supply of bitcoin means its value can increase indefinitely, and its verifiability, portability, and divisibility have made it an efficient transaction alternative to fiat currencies.

Absolute Finiteness vs. Relative Scarcity

The bitcoin supply is absolutely finite; there will never be more than 21 million bitcoin. The finite supply of bitcoin protects the asset from the inflationary pressures that fiat currencies with theoretically infinite supplies face.

Gold is relatively scarce; the supply of gold has grown about 1.2% on average per year since 2016. However, the supply of gold can increase if large stores of gold are discovered. This is not only the case on Earth, over the last few years, discussions on mining in space have started to emerge. There is a large amount of gold and other metals which are scarce on Earth to be found in asteroids. The uncertainty about the relative supply of gold reduces its credibility as an inflationary hedge.

Auditability & Verifiability

The authenticity of bitcoin is easily verifiable. The Bitcoin blockchain stores a permanent, open access record of all transactions. This allows anyone to verify the origin of bitcoin, ongoing transactions, and user addresses. By running a Bitcoin node, which costs less than $200, any user can verify the authenticity of every Bitcoin transaction and coin.

The supply of gold is notoriously difficult to audit because it is a decentralized commodity. No checks and balances exist to verify where the gold was produced, how it was produced, or if the gold is real. The technology required to verify the metallic content of gold is expensive and does not scale. Additionally, this equipment can only verify specific bars of gold rather than the total global supply of gold.

Centralization & Vulnerability to Confiscation

The Bitcoin network is decentralized. No government, entity, or individual can control the supply of bitcoin or ban anyone from transacting or buying bitcoin. The decentralized nature of bitcoin also eliminates the potential for a single point of failure in the network. Several national governments, including India, China, Turkey, and Nigeria, have attempted to ban Bitcoin. However, no government has been successful, and in most cases government attempts to ban or confiscate bitcoin have led to increased use of the currency within their borders.

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Gold mining and sale is nearly monopolized by several large multinational corporations. Gold supply can be interrupted by internal corporate disputes, labor rights protests, and national or international conflicts. In addition, there have been many documented labor rights and environmental regulation violations associated with gold mining operations.

Most importantly, there is historical precedent for national governments to successfully confiscate privately held gold. The U.S. government confiscated privately owned gold in 1933 in order to eliminate the gold standard and artificially prop of the value of the dollar during the Great Depression. Gold has been confiscated en masse in many countries across the world, including Communist China, the United Kingdom, and Soviet Russia.

Gold is inherently more susceptible to confiscation due to its physical nature. Gold is heavy and visible, making it more difficult to secure, transport, and hide from would-be expropriators. Thus, a vast majority of gold is held with custodians such as banks. These banks are subject to regulations and legal action, making them easy to coerce.

On the other hand, Bitcoin is not physical, and proving that an individual owns bitcoin is rather difficult. Bitcoin can be easily self-custodied, making mass confiscation extremely inefficient. Bitcoin can only be moved with the correct private key, which a bitcoin owner can hide or deny knowledge of more easily than with gold.

Divisibility & Portability

A single bitcoin is divisible into 100 million satoshis, similar to how a dollar can be broken down into 100 pennies. The divisibility of bitcoin allows it to be used to transact in small amounts at a low value, even as the price of one bitcoin grows. On the other hand, gold is difficult to divide into small, spendable amounts. Often, gold is stored as a bullion worth anywhere between 2,000 and 600,000 dollars. In order to spend gold, an individual would have to melt the bar down, incurring further costs before being able to spend the gold.

One of bitcoin’s most successful improvements upon gold is its portability. Because of its digital nature, bitcoin can be stored in a software wallet or on a flash drive. Using the Lightning Network, a layer atop the blockchain, transactions can occur almost instantaneously, at any time, without delays or fees associated with third-party mediated transactions.

Gold is extremely difficult to move. Its weight and lack of divisibility significantly impact its portability. Gold is most often stored in a personal safe or a safety deposit box at a bank, which comes with non-negligible counterparty risk and costs.

Conclusion

Bitcoin and gold are commonly compared, but Bitcoin has improved upon gold as a hedge against inflation and as a medium of exchange in many ways. The bitcoin supply is absolutely finite, while gold is only relatively scarce. The authenticity and transaction history of bitcoin is easily verifiable by any individual, while auditing the gold supply and authenticating any gold is cost prohibitive and time consuming, if at all possible.

No government has successfully mass confiscated or banned bitcoin, while the U.S. and many other governments have historically seized privately owned gold. Finally, bitcoin offers superior divisibility and portability to any currency, but especially gold.