Why is bitcoin better than gold?
(Not investment advice)
Backstory
A few weeks ago I went to a friend's place and started talking about 'stickers'. I talked for maybe half a minute before spotting a confused look on my friend's face. He thought I was talking about real stickers. I was talking about whatsapp stickers (hence 'digital stickers'). This got me thinking, would I rather have digital stickers or real, 'physical' stickers? For me, the answer was of course I'd rather have digital stickers. It is vastly superior for a simple reason: much easier to send to friends (also easier to receive). Imagine having to physically mail a sticker every time you wanted to express yourself through a graphic.
What's that got to do with bitcoin?
Since its inception, bitcoin's story has shifted from being a 'p2p electronic cash system' to a 'digital store of value', aka 'digital gold'. In this article, I'll look to address whether this comparison makes sense; explore the relative advantage each has; before concluding why I prefer bitcoin.
(For a primer on bitcoin, click here).
Bitcoin vs. gold: similarities
- Limited supply (can't or very difficult to create more): this is important because history has shown that it is easy to create more of almost anything, especially if that thing has started increasing in value (see: seashells, tulips, USD).
- Subjective value: both are probably driven more by 'subjective value' (price is what someone else is willing to pay for it) vs. 'intrinsic value' (looking at cost of production and/or other objective calculations or factors, etc to determine price)
- Store of value: both have been sold as 'store of value', ie. a thing that maintains its value overtime, no matter what happens. Other examples of things that people have considered a store of value: fine art, real estate.
Why gold is better
- Thousands of years of history behind it ('Lindy effect') and widely recognized as a store of value by almost everyone, including the world's largest institutions (governments, banks, investment funds, etc)
- Awesome physical properties (shiny, very stable, resistant to chemical change, etc)
- Has some utility: some industrial and as material for luxury products
- Most people still prefer something 'physical' over something 'virtual' or 'digital'
- Probably less subject to market manipulation than BTC due to more regulation and higher market cap
- Likely more environmental than BTC
- Less subject to bitcoin-specific risks
Why bitcoin is better
- Much easier to send and receive (once set up)
- More transparent supply and inflation information (18.3 out of 21 million bitcoin has already been mined; 20 of 21 million coins will be mined by around 2025, with the last million bitcoins left for mining for roughly next 100 years)
- Much easier to switch between self-custody vs. custody by institution
- Potential to be a payment currency
- Technology-based so can improve as technology improves
- Gen Y prefers bitcoin
Valuation
You might buy a Big Mac for $5, but if it was $100, you probably will give it a think first.
Similarly, we have to look at the valuation of things to decide whether it may be a good investment.
Gold's market value is currently ~$11 trillion (190040 tonnes * 35274 tonnes in ounce * $1729 per ounce as of Apr 25, 2020). This is the market value attributable to all the gold that has ever been mined.
Bitcoin's market value is about $140 billion (just over 1% of gold market value).
It's hard to compare the value of something physical vs. something virtual, more so when it is not apple-to-apple.
But if we did and if you think bitcoin could become just as valuable as gold, then the financial upside of bitcoin is about 80x vs gold*.
Conclusion
While gold is awesome and shiny, backed by a long history, it is also clumsy, heavy, and expensive to transport.
How about bitcoin? It is lightweight, it exists on your phone, it takes minutes to travel across the world via the internet.
Both purport to be store of value. One is established. The other is a newcomer with some advantages, some disadvantages, a completely new set of risks, but likely with a higher upside potential than its traditional counterpart.
Which one do you prefer?
***
Note: *keep in mind that gold price has also been increasing in USD terms in the last 50 years: from $35 to $1700 (from Jan 1970 to Apr 2020).
Further reading on opposing view: https://www.businessinsider.com/economist-jim-rickards-bitcoin-versus-gold-price-manipulation-2017-12
***
If you enjoy the contents of the site, please consider supporting it by going to the donate page :)
