Bitcoin v.s Gold: Is Bitcoin Worth More Than Gold?
The first contention that needs to be addressed right out the gate regarding the Bitcoin vs. gold debate is the reason for the comparison itself.
Why is suddenly everyone comparing a precious metal—a physical commodity with a digital asset? How did these two assets even come to belong in the same category?
While there are some very stark and apparent differences between the two, the reality is that Bitcoin and gold are more similar than many would initially presume. The main reason investors are often comparing the two is that many consider both assets bearer instruments and sound money. Theoretically, they’re both competing on the same playing field.
A bearer instrument is one that contains no ownership information and whose physical bearer is presumed to be the asset owner. Typical examples of bearer instruments are bearer bonds, physical cash, and gold coins. If you hold cash or gold coins in your hand, you’re automatically presumed to be the owner — simple as that. Similarly, many consider Bitcoin a bearer instrument, one that isn’t physically held, but rather anyone with the appropriate keys to sign transactions is presumed the owner.
On the other hand, sound money is any currency that retains its purchasing power long-term and isn’t under any government’s or central bank’s direct control. Historically, sound money has always been associated with commodity money. As civilizations progressed, humans have consistently opted for gold, silver, and other precious metals to use as sound money because of their superior intrinsic properties. These resources were naturally more scarce and very costly to forge and reproduce.
Up until 1971, national currencies like the US Dollar and the British Pound were backed by gold, effectively rendering these currencies’ purchasing power independent of policies proposed by governments or elites. Pegging a currency to gold meant that central banks couldn’t simply print more money out of thin air, which is the essence of sound money.
With that said, sound money isn’t necessarily associated with the physical form of an asset but rather its practical attributes. Whether digital or physical, if an asset possesses all the functions of money, holds its value over long periods, is costly to forge or reproduce, and isn’t under any direct government control, it can be argued that it maintains the qualities of sound money.
For hundreds of years, gold was the sound money of choice, and for good reasons. However, today there’s a new kid on the block—a top contender. Though Bitcoin has only been around for slightly over a decade, it’s already establishing itself as a superior digital successor to gold.
But is this really the case? Is Bitcoin really Gold 2.0? When it comes to Bitcoin’s and gold’s soundness as money, how do they compare?
The Three Functions Money
While money has taken many forms through the ages, it has consistently served three primary functions: store of value, unit of account, and a medium of exchange. Assets that can’t satisfactorily fulfill these functions cannot be truly considered money at all.
A Medium of Exchange
Functioning as a medium of exchange means acting as an intermediary between buyers and sellers. Instead of bartering or exchanging goods and services directly, money becomes the primary instrument that facilitates transactions. However, to qualify as a suitable medium of exchange, the instrument in question must be widely accepted as means of payment across different markets.
A Unit of Account
As a unit of account, money is the ruler by which we measure other assets’ relative value. It acts as a common denominator — an accounting tool that dramatically simplifies the calculation of trade-offs necessary for everyday commerce.
A Store of Value
The third essential function of money is that of a store of value. This means that money must be an instrument that can be saved, retrieved, and exchanged in the future without any significant deterioration of its value.
When comparing gold and Bitcoin to fiat currencies across all three dimensions, fiat currencies come on top in two of the three. They’re widely accepted as a medium of exchange and are more stable or less volatile (excluding extreme cases of hyperinflation), making them far better units of account than Bitcoin or gold. On the other hand, fiat currencies are a terrible store of value as they are neither scarce nor costly or challenging to create. Governments can virtually print them at will.
Bitcoin v.s Gold Head-to-Head
Characteristics of Sound Money
Aside from serving the three functions mentioned above, sound money must also possess the following eight characteristics: durability, portability, divisibility, uniformity/fungibility, cognizability, limited supply/scarcity, acceptability, and noncounterfeitability.
Let’s put Bitcoin and gold head to head to see how they compare in each category:
- Durability — Any instrument used as money must survive wear and tear and retain its shape, form, and substance over long periods. In other words, it mustn’t easily decompose, degrade, deteriorate or otherwise change its state given the need to use it in perpetuity. Bitcoin and gold are both great in this regard. Gold doesn’t tarnish or rust, and it is the most corrosion-proof and oxidation-resistant metal on earth. Similarly, Bitcoin is purely digital and represented by data kept on a public ledger maintained by thousands of computer nodes worldwide, making the asset extraordinarily secure and, in this context, durable.
- Portability — Any instrument to be widely accepted as a means of payment must be easily transportable. In the past, gold became the preferred money of choice partly because it was the most convenient way to transport wealth. Relative to its exchange value, it was a very lightweight asset. This meant people could easily purchase highly valuable items or services with something that could fit in their pockets. However, when it comes to portability in today’s Age of Information, Bitcoin reigns supreme. Cross-border Bitcoin transactions are significantly cheaper and faster than gold or fiat transactions. The private keys used to sign these transactions can be carried on a single piece of paper, a USB stick, or even committed to one’s memory.
- Divisibility — For people to use an instrument as the medium of exchange, the instrument must be divisible — and the smaller the divisions, the better. Money must have increments that allow it to serve as payment for battleships, rubber bands, and everything in between. For example, US Dollars are divisible into increments of one penny, which is an increment small enough to accurately measure the value of virtually every good or service available on the market. On the other hand, gold is relatively easily divisible into small enough increments, but it falls short compared to Bitcoin. Bitcoin is divisible up to 8 decimal points, which allows for incredible precision in measuring value and allows for micro-transactions orders of magnitude smaller than those made possible by gold or the US Dollar.
- Homogeneity — Homogeneity, uniformity, and fungibility means that equal units of an instrument used as money must possess the same quality and value. These units must be entirely interchangeable. For example, cows or seashells aren’t very uniform, which is why they’re terrible for making payments. Trying to use a non-fungible instrument for payments beats the very purpose of money as an intermediary medium of exchange. It requires appraising each unit before an actual exchange of goods can occur. On the other hand, gold is very uniform in its pure or raw form, and so is Bitcoin. A gram of gold is a gram of gold, always and everywhere. In the same manner, every satoshi is equal and interchangeable with any and every other satoshi. Nevertheless, in nature, gold is often found with different purity levels, whereas every single mined Bitcoin will always be the same as the next.
- Cognizability: By this, we mean that the instrument used as money must be easily recognized and distinguished from all other substances. As a medium of exchange, money must have certain distinct marks that allow anyone to easily check and verify its authenticity. Gold is relatively easily recognized and distinguished from other metals by its distinctive color, shininess, weight, magnetism, and other attributes that help it satisfy this condition somewhat admirably. However, in this regard, it’s still inferior to Bitcoin. Given its technological nature, interacting with Bitcoin requires a variety of tools and conditions (valid addresses, nodes/miners, and the immutable ledger) that make it virtually impossible to be unaware of its authenticity. Different purities of gold and gold-like substances can be difficult to accurately discern with the naked eye.
- Limited supply: To maintain value, money must be scarce and exceptionally hard or costly to forge and reproduce. Gold is naturally very scarce, comprising approximately 0.00000031% of the Earth’s crust, making it a superior store of value compared to fiat. That said, nobody knows the exact amount of gold circulating in the economy, whereas Bitcoin is provably and absolutely scarce. There will only ever be 21 million bitcoins in existence, and we know the exact amount of bitcoins in circulation at any given moment in time.
- Acceptability — This is the very essence of money. Nobody would offer their goods or services in exchange for an asset that anyone else will not accept. In this sense, gold is generally accepted by all without any hesitation. This is because of its long history as a store of value asset and its intrinsic utility beyond serving as a means of payment. On the other hand, Bitcoin is generally less acceptable than gold. Because it’s a more novel and volatile asset that requires more technical knowledge, it does not enjoy widespread adoption across different generations and those within countries with more restrictive economic laws or lower technology levels. That being said, this could easily change with time.
- Noncounterfeitability: The last characteristic is pretty self-explanatory; money that can easily be forged ceases to be an effective medium of exchange. In this regard, Bitcoin beats gold once again. Bitcoin is a digital asset that cannot be forged or duplicated. However, gold is often imitated or mixed with metals possessing a similar density, such as tungsten.
To summarize, Bitcoin is superior as money to gold in almost every aspect. The only thing gold has going for it at the moment is its long history as the most reliable store of value asset to date.
Bitcoin VS Gold: The Utility & Inherent Value Argument
One of the most frequently repeated arguments for gold is that, unlike Bitcoin, gold is intrinsically valuable because it’s a physical asset with actual utility. Without delving too deep into economic theories of value, this argument would be much stronger if gold was actually used for anything other than jewelry or specific components. Only 7.5% of the circulating gold is used for industrial purposes. As for the remainder, 50% is used for jewelry, 30% is bought as investments, and banks accumulate 15% as reserves.
This data heavily weakens the argument for gold’s utility. It’s primary usage, jewelry, is unable to make a strong case as there are much better materials employable for this purpose. In terms of aesthetics, gold’s visual properties are easily replicable through alternative substances. Similarly, in terms of practicality or durability, stainless steel stands as a far superior option. Considering jewelry’s deeper socio-economic purpose also leads to the undermining of this argument. At its core, the possession of jewelry is essentially a flex — a display of wealth. In other words, gold does not derive its value from its usage as jewelry, but rather people use gold as jewelry because of a pre-existing consensus that gold already has value.
When it comes to its industrial uses, the argument does have some merit. Nevertheless, it’s both disingenuous and fallacious to attribute gold’s current value to a factor that only accounts for 7.5% of its use case. The reality is that the lion’s share of gold’s price derives from the speculative nature of its purpose as a stable store of value and hedge against inflation. In this sense, it is virtually indistinguishable from Bitcoin, and its inherent utility is mostly negligible.
How Does It All Fit Into An Investment Portfolio?
In terms of investing, Bitcoin and gold are entirely different beasts.
Should I Invest in Gold or Bitcoin
While both have recently been forced into the same inflation hedge/safe-heaven asset category, they couldn’t be further apart from a practical investment standpoint.
The first noticeable difference is that gold is generally considered a more conservative investment or a risk-off asset, while Bitcoin still behaves like a typical risk-on asset. This is unsurprising as Bitcoin is a novel technology, barely 11 years old. Gold, on the other hand, has served as money and a store of value for millennia. Consequently, Bitcoin’s market capitalization is ~6% of gold’s, which translates to significantly more volatility, lower liquidity, and higher exposure to outside shocks such as exchange hacks and disruptive regulations.
With all this said, this doesn’t necessarily mean that gold is a better or a safer investment than Bitcoin.
According to a research paper published in the Journal Risk and Financial Management, equally diversified benchmark portfolios — consisting of US equities, US bonds, US real estate, EAFE equities — that substituted gold for Bitcoin achieved the highest risk-adjusted returns.
Or in other words, diversified portfolios that included bitcoin significantly outperformed portfolios that included gold according to risk-adjusted measures such as the Sharpe, Sortino, Omega, and Information ratios.
Bitcoin has a bad reputation amongst some—generally older and more conservative investors because of its novelty. It is an asset that goes against the grain and, over the years, has seen several 50-80% pullbacks. Now, whether that kind of volatility is something you can stomach or not, you must decide. However, in terms of historical performance, Bitcoin remains the best performing asset of the decade by a long shot.