Differences and similarities between Bitcoin and gold as long-term store of value, medium of exchange and unit of account, considering their origins, characteristics and market dynamics.
- Historical roots of gold and Bitcoin
- The properties of gold and Bitcoin as mediums of exchange
- Censorship resistance and volatility
Historical roots
Gold is one of the oldest metals known to man and has a history stretching back thousands of years. However, it was only around 685 BC in Lydia, a region in Asia Minor, that gold was first used in the form of currency. The first coins of Lydia were made of electro, a natural alloy of gold and silver, and were not minted but simply cut from bars of metal. From there and in the following centuries, gold became the most widespread metal as a medium of exchange, unit of account and store of value: in short, as currency. Gold coins were often minted with images of deities or historical figures and were in common use in ancient Greece, ancient Egypt and ancient Rome.
Bitcoin is an open-source protocol with a native digital currency that made its debut on 3 January 2009. It is a misnomer, however, that Bitcoin is only 14 years old. What Satoshi Nakamoto discovered is the result of nearly three decades of research and development in cryptography and distributed systems, largely thanks to the Cypherpunk movement. Just as gold is scarce in nature, Bitcoin was designed not to be created easily. In this respect, Bitcoin is more effective in that it is not only scarce but finite. New gold deposits may be discovered in the future, but there can never be more than 21 million bitcoins.
The properties of gold and Bitcoin as mediums of exchange
Gold has been a globally recognised medium of exchange for millennia. However, its limitations in terms of transportability and the complexities involved in verifying its authenticity made it natural for intermediaries to emerge: banks. Originally, these institutions were gold depositaries. Customers deposited their gold and received credit notes in return, which over time evolved into modern banknotes. These notes were much easier to carry and were an effective form of representing the gold held in the bank.
Bitcoin represents a clear break from this tradition. It is completely digital and therefore eliminates the need for any physical intermediary. It can be sent to anyone, anywhere, instantly and at negligible cost. Bitcoin solves the problems of portability and counterfeiting inherent in gold.
Censorship resistance and volatility
In 1933, Executive Order 6102 in the United States made it illegal for citizens to own gold in significant quantities, forcing the confiscation and forced monetisation of private gold. The event shows that the risk of confiscation and government interference is not a problem exclusive to dictatorships, but can also occur in democratic states.
On the other hand, the distributed nature of Bitcoin makes the enforcement of censorship and confiscation much more complex. In 2021, for example, China issued its latest ban on Bitcoin mining. Despite the enforcement of the law, it is estimated that today roughly 20% of the global hash rate is still in China.
What Bitcoin is still vulnerable to are speculative market attacks. Being a new technology and still in the price discovery phase, the overall liquidity of the entire Bitcoin market is very low compared to an asset universally recognised as a store of value, such as gold. Therefore, the purchasing power of bitcoin is still volatile compared to gold. However, as liquidity and market cap increase over time, bitcoin’s resistance to manipulation is likely to improve, making the digital currency increasingly less volatile.
Both gold and Bitcoin represent real alternatives to the traditional financial system. Gold has the advantage of having a historical track record as a store of value, but suffers from problems such as difficulty in transportation and susceptibility to confiscation. Bitcoin, in contrast, is a fledgling asset but already offers unprecedented censorship resistance due to its distributed design.
