Bitcoin or gold?
“We have proposed a system for electronic transactions without relying on trust.” With this fairly mundane comment in 2008, the person or persons known as Satoshi Nakamoto (the jury is still out) introduced bitcoin to the world. Since then, bitcoin has attracted widespread attention and interest—and numerous critics. Ironically, some of its most vocal detractors, such as Austrian economist Frank Shostak and financial commentator Peter Schiff, are champions of gold.
As fiat currencies (money that exists solely due to the force of law, by fiat) further decline in value, will investors increasingly embrace a crypto-currency such as bitcoin, or will they revert to the historically tried-and-true precious metals? Will it be bitcoin or gold?
As the values of bitcoin and gold are primarily contingent on their future acceptance as money, answering the question requires a more basic inquiry: What is money? Money is a medium of exchange and thus presupposes the ability to act as a store of value. More than 2,000 years ago, Aristotle noted the primary qualities exhibited by money are portability, durability, homogeneity, and divisibility.
Money should also, at least before becoming accepted, possess “alternative value.” This term is unfortunately sometimes referred to as “intrinsic” value, but because nothing possesses value without demand, nothing is intrinsically valuable. Gold (and to a lesser extent silver) possesses these qualities and was therefore used as money until quite recently (1971). Bitcoin critics who are proponents of gold cite its lack of alternative value as a fatal flaw.
It is true that, unlike gold or silver, bitcoin cannot be used for non-monetary purposes. Perhaps this is not a weakness, however, but instead a strength. As bitcoin lacks physical form, it lacks alternative value, but therein lies its unique attribute relative to gold – there is nothing to transmit physically. In the characteristic of portability, it easily exceeds gold’s virtues.
Does this mean bitcoin is no different from any fiat money that can be transferred with a computer keystroke? No, because its use derives from general acceptance, not mandate. And unlike the experience of all fiat currencies throughout time, bitcoin is limited in quantity (it is designed so only 21 million bitcoins can ever be “mined” into existence). Nakamoto remarked that in creating bitcoin he had removed trust. But it’s more accurate to say he removed faith and fortified trust, for just as gold and silver use nature (their elemental physical characteristics) as an objective standard, so bitcoin utilizes math (cryptography).
What is amazing is that Bitcoin’s greatest weakness is also its greatest asset: the lack of alternative value. Unlike cigarettes in prison, you cannot smoke it (back when you could smoke in prison, not it is cans of mackerel which you can, if you dare, eat.) Unlike gold, you cannot use it for one of its many other purposes. But that is the beauty of it: there is nothing physical to transmit. Truly a remarkable invention. Truly revolutionary. Is it a newer version of fiat? Obviously not. Fixed quantities cannot be fiat.
I have no idea why Bitcoin cannot exist side-by-side with gold. For millennia, gold and silver coexisted as money – and yet they are fairly similar in many respects. Bitcoin is so unique, so complementary, that I really believe it will take its rightful place as money.
The question of what ultimately may be the future of money may be “bitcoin or gold?” but perhaps the answer should be bitcoin and gold. For millennia, gold and silver coexisted as money, so why not bitcoin as well? Bitcoin is unique in the history of money, and is so complementary to gold that one day in the future, it – or some other cryptocurrency (assuming they survive government regulation and financial repression) – may become more than today’s speculative investment.