Real money is subjective no matter how you look at it. Whether you are a crypto nut or a gold bug there’s always someone who’s going to disagree with you on what the best form of money is. Money is anything that the vast majority of people believe in and can be used as a medium of exchange for goods and services.
Money, therefore, is confidence. But confidence is fragile: it’s easy to lose and almost impossible to win back. Throughout history, countless things have been accepted as a medium of exchange: feathers, shells, beads, you name it. Before being replaced by successors, all these commodities were once the monetary standard of civilizations, governments, and ancient tribes.
Gold is the latest commodity to be used as money and many perceive it to be the ultimate form — especially by Austrian Economists while not so much by Keynesians. There’s speculation within the financial community that the failure of the current fiat system is approaching, and many expect the precious metal to play a major role in the next monetary standard whatever that may look like. The main contender to gold’s revival is Bitcoin which continues to rise in popularity due to mainstream coverage fueling one of the biggest speculative bubbles in history — before it burst in late December 2018.
Recently, Bitcoin has been given the moniker “digital gold” by many crypto companies and evangelists who are marketing it as an alternative to the shiny metal. But does it hold up to scrutiny? As it turns out, the popular cryptocurrency has some work to do before it lives up to that title.
Is Bitcoin a Safe Haven?
Throughout history, gold has been the ultimate safe haven: a place of refuge and security for vast sums of money. Produced during the collision of neutron stars its invulnerability provides a perfect store of value. Bitcoin, however, has a few flaws.
Due to its digital nature, it’s destructible. Once your wallet is wiped, hacked, lost, or stolen, there’s no guarantee you’re getting your money back. And it’s even possible to be the victim of a victimless crime: ask James Howell who lost a small fortune forfeiting over $80 million by forgetting his password.
The most important property of a safe haven is its ability to protect your wealth during financial crises such as the bursting of the tech and subprime bubbles. Because everyone is too optimistic, safe havens are cheap by the time things start to turn bad causing them to appreciate dramatically in a crisis-style environment.
But Bitcoin is already expensive costing $7,000 per coin while gold only costs $1,500 per (troy) ounce. Why overpay by almost five times to protect your wealth while you also know that gold performs well during periods of financial difficulty? This is the question that highlights a problem with the “digital gold” moniker: it’s clear that Bitcoin, in its current state, isn’t a safe-haven while gold ticks all the boxes.
The Issue of Evolution
What makes gold an incredible store of value is there’s only one type in the entire universe, so for Bitcoin to become gold’s digital counterpart there can only be one cryptocurrency.
Except with around 5,000 cryptocurrencies now in circulation, it’s only a matter of time before a competitor overtakes Bitcoin’s dominance. As the successive cryptocurrency gains the biggest market share, it will slowly cause Bitcoin to weaken and eventually become a novelty currency like the Zimbabwean dollar. But the vicious cycle of evolution will continue as another cryptocurrency is likely to supplant Bitcoin’s successor.
Gold, on the other hand, can’t be replicated, modified, or destroyed and has been used as money successfully multiple times throughout millennia. The reason why the precious metal isn’t used today isn’t due to its fundamentals but the poor monetary policy decisions and interventionism we see in modern monetary theory that, over history, has resulted in the fall of several civilizations — including the Roman Empire.
Because there’s no successor to gold but thousands of potential replacements for Bitcoin, we can’t really count that as a positive for the cryptocurrency being named digital gold.
The Lack of Usability
Imagine you’re at the checkout and your shopping basket has $50 worth of essentials for the week ahead. You open your Bitcoin wallet and try to pay but the payment processor declines your payment. The reason why wasn’t because you lacked the funds, it was because during the 10-second transaction a big swing in the price of Bitcoin caused the value of your money to depreciate enough so you couldn’t complete the payment. With significant price moves being a daily occurrence in Bitcoin markets, the cryptocurrency fails to gain usability outside the crypto world.
Meanwhile, gold’s value is tied to the physical supply that increases on average 2% each year resulting in a stable price. In the past, there have also been big moves in the price of gold — such as Nixon decoupling the precious metal from the U.S dollar — but they’re a rarity, allowing gold to be utilized as a money-backed currency.
It’s uncommon knowledge nowadays that gold is one of the most commonly used metals. It’s used in jewelry to increase the overall value and rarity of a particular piece. In the electronics industry, every sophisticated device including several parts of a computer contains tiny fragments acting as a reliable conductor of electricity, and it’s even used to treat medical conditions such as rheumatoid arthritis.
Unfortunately, the same can’t be said for Bitcoin. Although it’s the best medium of exchange out there, it has no other use at this time.
The Bullish Case for Bitcoin
In the future, crypto fans are hoping for Bitcoin to become the new global reserve currency replacing the U.S dollar. Regardless of the negative fundamentals, there’s speculation that the price of cryptocurrencies will skyrocket in a financial crisis as they are denominated in fiat currency terms. The theory states that investors will rush to exchange their fiat currencies into Bitcoin causing a huge price rise as governments begin to utilize them around the world.
But they are forgetting one thing: in such an event fiat currencies lose all their value and become worthless. As confidence shatters there’s nothing of real value backing the currency as insolvency of a government isn’t a viable medium of exchange. The very thing you are trying to convert your profits into will have no value.
Recently, a particular type of altcoin has been establishing itself: crypto-currencies backed by gold. Bitcoin may be a great medium of exchange but it’s yet to be a great currency and let alone money in its current form. So for the world’s most popular cryptocurrency to earn the prestigious title of digital gold, it has to combine the revolutionary elements: distributed ledger, accessibility, and connectedness with the backing of the precious metal itself — an unstoppable force that will change the monetary world forever.