Bitcoin vs gold is a common debate topic in recent times. Is the 10-year-old tech phenomenon fast catching up to gold’s 5,000-year historical track record and head start?
As precious metals investors ourselves, we believe that gold and silver have a place in our portfolio alongside with our bitcoin and cryptocurrencies.
Now, whenever you pit a relatively new form of money like bitcoin against a tried and tested form of money like gold, gold is always going emerge the safer bet and hedge against a financial crisis. And because we’re talking about money, safe is always good. Safer is even better.
However, if you’re looking to capitalise on the upcoming crash instead of just surviving it, we think that having a small exposure in bitcoin is one way to go.
For this discussion on bitcoin vs gold to make sense and be applicable, the reader would need to have some prior knowledge about bitcoin and with that, faith or trust in it as a safe store of value. Without understanding of how bitcoin or the blockchain works at its core, the idea of bitcoin as an alternative to gold is lost and all discussion regarding the two would be pointless.
Like it or not, bitcoin IS money. It is already used to pay for goods and services around the world, even though its use rises and dwindles depending on sentiments about its risks and volatility. You could say the same about gold, spread across a few thousand years.
In a recent interview in 2020, billionaire and venture capitalist Chamath Palihapitiya reiterated his stand back in 2013 that “everybody should probably have 1% of their assets in bitcoin specifically”. It is a fantastic hedge if the other 99% into traditional investments should fail. We agree with his view on bitcoin as a binary investment, in his words, “either zero or it’s millions”. For us, that means buy early and HODL on. Buy with only money that you can afford to lose. Forget about the noise that happens in between. Stash your bitcoin under the proverbial mattress.
Bitcoin is Virtual and Has No Intrinsic Value
One of bitcoin’s most vocal opponents Peter Schiff, believes that bitcoin is only valuable based on what the next idiot is willing to pay for it, and his argument is based on the premise that bitcoin has neither physical properties nor intrinsic value. But what is intrinsic value when it comes to money?
Intrinsic value is defined as essential value belonging naturally. Intrinsic can be both virtual and tangible. Gold’s physical properties are its intrinsic value.
On the other hand, an example of virtual intrinsic value is, “access to the arts is intrinsic to a high quality of life“, or “a harmonious home is intrinsic to the happiness and well-being of a family unit“. Harmony is an intrinsic value that is virtual and non-tangible. If harmony could be traded from one person to another, it could be used as a form of money. For some, harmony could even be more valuable than money or gold. But as far as form of money goes, harmony is neither divisible nor transferable.
Does gold have intrinsic value? Yes, as long as people still want gold and like to use it as jewellery, as history of humanity has shown. Gold is also corrosion-proof and highly fungible, and has stood the test of time. Outside of that and a minor industrial demand, gold practically sits around just being gold.
One cannot deny the beauty of the yellow glitter of gold, but we believe the idea of gold as money and a store of value today stems from the precedence set by previous civilisations which used gold for such purposes. If the Anunnakis had not come to our planet to mine for gold 400,000 years ago, if the Egyptians had not believed gold to be the flesh of the sun god Ra and adorned themselves and the tombs of the pharaohs in gold, and if ancient Romans and past civilisations had not treasured their gold as such, would gold be as precious by today’s standard? What if they had a different belief system and wanted something else, like an equally corrosion-resistant metal which is ten times rarer, and is more robust and not prone to deformation over time, like platinum? As it turned out, gold was the selected standard then and it remains the selected standard today.
Don’t get us wrong. We love our gold and would choose it over platinum, but the question on our mind is, did we choose gold to represent money and a store of value solely because of the belief in its intrinsic property that makes it so, or was it because we adopted the belief and precedence set by ancient civilisations. Maybe it is both.
“In times of crisis, gold will always serve as a great store of wealth. We suggest that you buy and keep some. That, and silver, especially when silver is undervalued at the moment.”
Beyond that, the benefits of bitcoin become apparent. Bitcoin’s intrinsic value is in its use cases and what it can do over traditional forms of money. It is a store of wealth, a payment method, and an immutable and secure ledger of payments all rolled into one. Gold only has the first two and not the third.
For the interest of this discussion, we are going to close one eye over bitcoin’s intrinsic value in the amount of computational labour expended in the process of mining. We’ll come to the topic on trust in its creation and transference shortly.
To think that money has to have tangible intrinsic value is a fallacy in this modern age of borderless economy. We have been paying for goods and services for decades using paper money which holds no intrinsic value other than the cotton-linen sheet it is printed on and faith in the government that issues them. We have been conducting international trade and commerce for decades based on virtual numbers of ones and zeroes shifting in account balances. It would appear that tangible intrinsic value is less important when it comes to monetary transactions. Ignoring digital gold and gold accounts for now (because seriously, how many people and businesses have one, and how easy is it to be eligible and go out and register one), let’s first look at why physical gold is not suitable as a means of payment when transacting for goods and services.
Gold Has Physical Properties and Intrinsic Value
Firstly, as divisible as gold is, it is hardly divisible in its actual form. If an ounce of gold is $1,500 today, a gram of gold is about 50 cents. What if one was paying for an item that costs less than 50 cents? What if one was paying for a larger purchase and needed to receive $23.80 in change? As a workaround, goods and services may ultimately be priced around weights of gold rather than by dollar and cent value.
Secondly, gold is bulky and difficult to move around. As a store of wealth, lugging around your wealth in physical bullion is both a hassle and risky. You can store your physical gold in a storage vault facility in a safe country or underground, but that’s not having your gold on you. Not having your gold on you may be less risky, but it presents a different level of risk nonetheless. Some people fear that gold confiscation by the government could still happen, as the U.S. government once did nearly 100 years ago via Executive Order 6102, although that fear can be dismissed as no longer a concern today. Can it?
Thirdly, fake gold exists and it is up to both parties of a transaction to have it assayed and authenticated, especially with large transactions. And the larger the transaction, the more troublesome it gets to authenticate. Even today, we see the unscrupulous practice of inserting a metal similar in density to gold (such as tungsten) into a thick layer of gold coating, which is not as easy to spot without proper testing methods. Will fake gold become more prevalent like counterfeit cash if it supersedes fiat currencies as a standard of money? Maybe.
As it turns out, the physical aspect of gold that makes it have tangible intrinsic value is also its weakness – that it can be faked.
Finally, as much as gold is desirable by virtue and even more so in a financial collapse, people may to a lesser extent be hesitant to receive it as a form of payment, simply because it is harder to use as a commodity of transactional value. For that reason, someone may prefer bitcoin instead. Let’s use an example with the three challenges discussed above.
If you’re buying a house from someone, as much as both buyer and seller may love gold as a store of wealth, the seller may first need to assay that the gold he is receiving from you is pure and genuine (authenticity). Next, he’ll be wondering how he is going to store the few kilobars safely (safe store of wealth), and after that, wonder how he is going to break that down for the car he is going to buy (divisible payment method). Forget about using those gold bars or coins for a cup of coffee later that evening. Hopefully, there will be exchange facilities at such a time to break gold down into smaller practicable denominations. Copper, nickel…anyone?
For large transactions, two parties of a transaction could rely on gold accounts to transfer gold value digitally from one person to another, if both parties prefer to transact in gold rather than bitcoin. But as stated earlier, for this discussion, we’ll consider just the physical forms of gold.
Bitcoin is Trustless
By comparison, bitcoin is highly divisible to 8 decimal places, making micropayments and change in the smallest denomination possible.
Being completely virtual, bitcoin is highly portable and easy to transfer. Sending bitcoin to a person next to you is as easy as sending it to someone living on the other side of the globe. It is instant and cheap. Doing that with gold with the person next to you is difficult and risky enough. Doing that with someone halfway across the world is next to impossible. Or slow and costly.
Being completely virtual and on a decentralised network also means that bitcoin is not subject to confiscation by force (not the case for gold, and in less upright nations or governments, jewellery as well), unless you allow it to. Your entire wealth in bitcoin exists on a set of private keys on the blockchain, which is represented by your seed phrase. If your seed phrase is kept hidden or better yet, memorised, the only way your wealth can be stolen is by tapping the inner depths of your brain and memory.
This is one of the major advantages bitcoin has over gold. This is something you would have to worry with gold, whether they are stored at home or abroad, whether they are in bullion form or jewellery, whether they are stored in physical form or digitally, or whether they are stored inside or outside the banking system.
Bitcoin is trustless, meaning it doesn’t require trust or an intermediary party to say it is real. Mathematics, cryptography and the mining process guarantee it to be real and authentic. A bitcoin on the blockchain in your wallet is a real bitcoin. There is no fake bitcoin or the need to test if it is real.
On the other hand, gold is trustless as well, meaning gold is gold. We don’t need to convince you that gold is valuable as long as it is genuine. However, gold requires authentication. And authentication requires trust that the assayer is trustworthy. This is not difficult to accomplish, but it is an additional one-step process that otherwise doesn’t exist or is required in a bitcoin transaction.
This is another major advantage that bitcoin has over gold, and one area Peter Schiff fails to understand by any measure in his arguments, owing to a lack of understanding of blockchain and distributed ledger technologies.
Hence, to quote our earlier example, if you were buying a house from someone, you could pay him in bitcoin, because with bitcoin, the seller does not need to know if your bitcoin is genuine or fake (authenticity verified by virtue of the mining process during the transaction), he does not need to worry about how he is going to store 10 or 100 bitcoins safely (safe store of wealth), he does not need to figure out how he is going to break that down to buy a car (divisible payment method)…or that cup of coffee later that evening.
If the car dealer doesn’t accept bitcoin, there are multiple exchanges online where he can convert a portion of his newly received bitcoin into cash. This is no longer hypothetical. People have been buying cars and real estate by paying directly in bitcoin for years now. We have yet to see that with gold, and we believe it’s mainly because of the points we discussed earlier above.
Bitcoin is Volatile
One could argue that bitcoin is too volatile. The bitcoin the seller receives for his house sold today could be worth less tomorrow. The same can be said with gold. Although gold price is less volatile, some gold bugs expect the price of gold to increase to $5,000 or even $10,000 per ounce in the foreseeable future. Why would a buyer pay for a house in gold, if the value of the gold he is handing over is going to be higher next week or next month? If you have a workaround for gold, you could apply the same workaround for bitcoin.
For those who transact in bitcoin, the issue of volatility is definitely going to be an issue at this point, simply because there are too few bitcoin users around the world (only over 10 million users) compared to paper money and credit (USD, VISA, Paypal etc), and because bitcoin hasn’t been around long enough (only 10+ years) compared to gold (eternity). If gold and fiat currencies were in the hands of a few, and if gold had just been discovered 10 years ago, we believe they too would be behaving in the same way as bitcoin, or worse.
The Rising Price of Bitcoin
Nevertheless, although we have seen bitcoin adoption to have grown relatively linearly in the last decade, we foresee that once people understand bitcoin for what it truly is, adoption will be at an exponential rate. It would almost be an explosive adoption and some bitcoin exchanges could be closed from overwhelming response as they did in 2017. A few billion people’s wallet would start filling up with bitcoin as the price continues to climb. Once the dust settles, bitcoin could be worth more than gold if it isn’t already, and be as “quietly volatile” as the forex market, making it a more suitable form of money than it is today.
Ten years may be a long time for a new phenomenon to linger in tech space, but like the internet and email that came before it, it is not a long time for gaining the adoption and acceptance by the mainstream public – especially when bitcoin and blockchain technologies are not concepts most people could easily grasp in a matter of hours.
In the past, the idea of 21 million bitcoin was taken as insufficient to run the entire world’s economy. The same was said about gold. Someone famous once remarked, the problem with insufficient gold is easily solved by a higher price of gold. One can extrapolate that to bitcoin and see quite easily how bitcoin can be worth a lot more than what is seen today. A $1 million bitcoin could be possible, making its smallest denomination of one satoshi (0.00000001 BTC) to be equivalent to one cent ($0.01).
“How much is that cup of coffee?”
“That would be 500 satoshis, sir.”
By such a time, the average person would probably not be buying bitcoin by the unit (1 BTC), but rather in the sub-unit (0.0001 BTC). It’s not unlike gold. 50 years ago, one could possibly afford to buy a kilogram (unit) of gold. Adjusted for inflation, it would still be expensive at today’s prices, but not crazily expensive. These days, most can only afford to buy gold in the troy ounces or grams (sub-unit), and even that is already beyond the affordability of the average person.
In other words, if you cannot afford to buy 1 kg of gold, buy a gram or 0.001 kg of gold. If you cannot afford to buy 1 BTC, buy 0.001 BTC.
Some have argued that bitcoin will not work because it is not scalable and cannot meet the transactions per second demand of credit card facilities and traditional banking. This is similar to saying that GPS will never be for civilian use before the advent of smartphones, or that streaming movies and downloadable games in the early 2000s will never work because the internet was too slow and only capable of kbps speeds then, and downloading them would take a million years. Scalability in bitcoin is largely due to its block size, but we believe it is an issue deliberately left to be resolved at a more suitable time. There is a right timing for everything, including an increase in the block size to go with the adoption rate.
But since we’re pitting gold against bitcoin, what then has gold brought to the table as far as scalability is concerned? Would gold-backed cryptocurrencies be feasible? It could be, but the same issues surround its trustworthiness. Is it as unhackable and decentralised as bitcoin? Are all the gold bullion in storage backing it genuine and assayed as such? Is the amount of gold in storage accurate as audited? Unlike bitcoin which relies fully on the universal laws of mathematics and is thus trustless, a gold-back cryptocurrency still relies heavily on the honesty of men, which as history has shown, can be totally unreliable as long as men are prone to greed. And even if they are not corrupt, mathematical laws trump human capabilities when it comes to oversight and elimination of error.
Other arguments include a dystopian scenario where the electricity grids and internet connectivity are down, and bitcoin would fail to work in such situations, making gold a more transactable form of money. The reality is bitcoin can be operated from a smartphone which is in the hands of nearly every individual in developed and developing nations. In the absence of electricity supply, the smartphone could be charged by solar-charged battery packs. The internet can be provided by satellites when it becomes available, or without the internet as made possible by Blockstream satellites.
But seriously, without the sun, electricity or the internet, we have far greater things to worry about than a failing form of money.
Too Much Electricity? Not Really…
Another fact opponents of bitcoin like to highlight is that bitcoin mining uses far too much electricity. That is true for now, and for a good reason. Proof-of-Works in the case of bitcoin mining is intentionally designed to be resource-intensive in order to keep the network secure. As a result, hacking the bitcoin network requires a higher proportion of computational power and thus electricity, and if bitcoin is to serve as a form of money that it is already doing, this is more than just a necessity. One wouldn’t complain about spending too much on armoured security to transport gold from one location to another.
“If bitcoin were cheap to run today, it would be hacked many times over by tomorrow.”
But is it really consuming too much electricity? To view it from another perspective, in a hypothetical scenario where bitcoin were to replace all forms of fiat monetary transaction that exist in the world today, the cost of electricity in the mining process that validates all bitcoin transactions around the world would be far less than what it would take to own or rent (capital costs) and power up (operating costs) every single bank office and building in the world, and pay for the salaries of every banking staff from the teller right up to the CEO and stakeholders.
Most people miss this comparison.
Does that mean that more people, especially in the banking and finance sector will end up being unemployed? Quite likely. If anything, the bitcoin phenomenon could just very well be a prelude and a small glimpse into the future of artificial intelligence (AI) and universal basic income (UBI).
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However, the cost of mining gold does not cover the cost of sending gold across the globe, and in the case of bitcoin mining, the electricity used to mine and create bitcoin also covers the validation of all bitcoin transactions around the world. Let that sink in for a moment.
Let’s put it in another way: Take the costs involved in producing all the gold bullion in the world from mining (excavators, machinery, fuel, power, labour) to refinery (building, facilities, minting, electricity, labour) and retail distribution (dealer’s premium, profits, delivery) and add to that the cost of transferring all gold transactions around the world (air freight, packaging, insurance, assay by receiving party). Now, calculate the same for bitcoin mining (ASIC mining hardware, mining farm, electricity) and bitcoin transfers across the globe (only transfer fee and not electricity, because the electricity spent in creating bitcoin is the same electricity used to validate transactions on the bitcoin network). Compare the two total costs and guess which is higher?
Most people are unaware that the electricity consumed to create bitcoin also powers the network that makes international transactions possible 24/7/365.
However, we foresee that with renewable energy and newer technologies, the bitcoin network could be powered at much lower costs as time goes by, without compromising on its security. We are just not there yet. High computational power will always be in place by design to keep the network secure. The high costs to meet that will hopefully be lowered. Iron Man-style nuclear fusion arc reactors perhaps?
Bitcoin and Gold as a Hedge
We think that it could be a good idea for investors to place a small percentage of their investible funds into bitcoin as a means of diversification, as what some people like James Rickards, Michael Maloney and Robert Kiyosaki (who were all earlier skeptics of bitcoin) have recently suggested. Investible fund is investment money set aside that does not include your home or money reserved for daily essentials and survival.
The golden rule still applies: Always only invest with money you can afford to lose.
For many people, bitcoin is easier to procure than gold bullion, and if they needed a way to protect their wealth, they could pick the path of less resistance, instead of not having made any move or decision at all. Both gold and bitcoin have their advantages and disadvantages. One is tried and tested, the other is simply more practical. Invest proportionately according to your risk aversion.
We believe that to dismiss bitcoin as a hedge or insurance against failing fiat currencies in these trying times could possibly lead to missing out one of the greatest forms of wealth transfer during the next financial crash, which is expected by many experts to be worse than the Great Depression. The asymmetric risk/reward offered by bitcoin should not be overlooked.
Will gold outlive bitcoin? Most definitely.
Will bitcoin outperform gold in a crisis? Quite likely.
Will you live long enough to witness the end of bitcoin? Maybe, maybe not.
As such, if you have some bitcoin, buy some gold (and silver). If you already have some gold, buy some bitcoin. You would be in a far better position owning both rather than just one or the other.