In a world of scarce resources, clichés seem to abound. There is too many of them, and one of the most prominent ones when it comes to cryptocurrency refers to Bitcoin as the digital equivalent of gold. Nevertheless, when the price of this so called ‘digital gold’ quadruples that of its physical equivalent per unit – if a troy ounce could ever be equated to 1BTC – then it is time to call the cliché into question. The truth is that gold prices cannot keep up with gold because the comparison is profoundly flawed. When we Equate Bitcoin to Gold, we can Explain it to a Broader AudienceThere is no doubt that both assets bear some resemblance. That is enough to create a cliché and then use it to explain a complex digital asset to a broader audience. The following are some of the characteristics that gold and bitcoin share. These are the characteristics upon which the cliché was built:
- Both assets are scarce. Some of their value derives from scarcity.
- Gold was the earliest for of a globally accepted medium of exchange, as much as bitcoin is the first globally accepted medium of exchange that is internet-based.
- Neither are issued by a central bank.
- Extraction of both requires mining, albeit bitcoin mining is a radically different procedure.
- Even if mining for gold and mining for bitcoin are fundamentally different activities, they both require sizeable amounts of energy, and both become more difficult as the resource becomes scarcer and/or its price increases.
- Mining on both progressed from an ‘artisanal’ phase into one controlled by several large corporations.
- Economies based on either asset are by default deflationary in nature.
- Both can be used to hedge against an economic downturn like the 2008-09 collapse.
However, Bitcoin and Gold Should not be Compared!There might be more similarities between both assets, but as we run out of similarities to write on that list, we start stumbling upon the differences between them. The following is a brief list of different features that put gold and Bitcoin in radically different categories:
- Storing, transacting and transporting gold is cumbersome while doing the same with bitcoin is extremely practical.
- The scarcity of bitcoin is known – 21 million coins – whereas the scarcity of gold is unknown – estimates vary between 155,000 tonnes and 2.5 million tonnes.
- Given that we know how many coins there will be, miner rewards are also known and fixed according to an algorithm. With gold there might be a sudden discovery that can throw prices off.
- Mining on asteroids or on other planets, could dramatically increase the supply of gold. Bitcoin’s supply cannot be changed.
- Gold can be controlled by governments and its markets often are, whereas Bitcoin cannot be controlled by governments.
- Various industrial processes require the use of gold – the production of electronics is a good example. No economic process requires Bitcoin – besides hedging against the economic policies of governments and monetary policies of central banks.
- Bitcoin is digital, and it relies on an innovative technology to operate. This technology has the potential to revolutionize accounting, as well as many other fields of knowledge. Gold is physical and is a chemical element which can be used in a variety of forms, but is not revolutionary.