Gold is Better Than Bitcoin (Part 1)

At least for now.

You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.

-George Bernard Shaw (1928).

While scrolling Twitter, I stumbled upon this.

Such debates are usually childish. A well-managed investment portfolio can include both gold and Bitcoin (BTC). Nevertheless, I argue in this series of articles that gold is a better store of value because of its higher market cap and proven track record with over 5,000+ years of history. In particular, I show that gold is a superior monetary asset.

I start with two disclaimers. First of all, nothing I write is trading or financial advice. Speak to a financial advisor who can better assess your personal situation. Don’t listen to some random internet anon.

Second, I do not deny Bitcoin’s value as a speculative asset, and am happy for those who became rich by investing in it. Bitcoin has had a higher net return than gold over its short lifespan. However, speculative investments do not interest me; I am instead concerned about what holds value over time and is used as money.

Without further ado, let us start with what Bitcoiners and goldbugs agree on.

Bitcoin Maxis and Goldbugs

Bitcoin maximalists and goldbugs correctly diagnose the same problem: the fiat money system, which allows governments and central banks to endlessly print currency and transfer wealth from the poor to the elite. The U.S. dollar, for example, has lost 99% of its value since the Federal Reserve’s genesis in 1913. To save in cash under such circumstances is folly.

Because of their inherent weakness, fiat regimes always crash, triggering a monetary reset by which gold becomes the basis for sound money again. This appears to be happening now with the de-dollarization set in motion by the BRICS nations, who are considering a gold-backed reserve currency. Whatever currency emerges as the winner will have to be backed by an asset not readily conjured from thin air.

This is where the Bitcoiners and goldbugs part ways: Bitcoin bros believe that gold is a clunky, inferior store of wealth, and that because the world is going digital, Bitcoin will become the new standard of exchange.

Nothing could be further from the truth.

Bitcoin’s Purported Benefits

Bitcoiners claim that their digital coin is superior to gold for at least five reasons:

1. Fixed supply cap.

2. Blockchain technology.

3. More divisible.

4. Privacy/Anonymity.

5. More portable.

Let us tackle each of these statements in turn.

1. Fixed Supply Cap

Bitcoin has a pre-programmed supply cap of 21 million coins written into its source code; thus, Bitcoin cannot be printed like fiat currency. Bitcoiners contend that it is therefore better than gold, which lacks a hard cap.

While I agree that a limited supply is a good attribute for money to have, this claim betrays ignorance of just how rare gold is. All of the gold ever mined in history only fits into three Olympic-sized swimming pools. Mining gold becomes harder the more gold is extracted, because miners have to drill deeper into the ground. In other words, gold also has a fixed supply on earth, and all of the gold is unlikely to be fully extracted in time to devalue the asset.

Also, a fixed supply is not a sufficient condition for an asset to be money. There has to be a demand as well as a supply for any good. If I pull out all my teeth and sell them on the street tomorrow, then I doubt I would fetch a good price — even though I am selling a limited asset. People should want the good on offer.

2. Blockchain Technology

Of course, no matter how limited the supply is, gold is useless if governments can convincingly lie about how much they hold. In this sense, Bitcoin’s blockchain technology is superior because any malicious change to the BTC ledger can be easily detected and rejected. In a sense, Bitcoin is self-auditing; there is no need for accountants.

However, this claim also falls flat. Accountants routinely audit crypto blockchains using proof-of-reserves protocols. This is of course easier than counting and verifying gold bars, but it is not true that Bitcoin is free from deception. It is possible for an entity like the government to provide their public key for verification, but how likely are they to do that, and how trustworthy is this?

There is a more subtle point: a government which lies about its gold holdings, under a gold standard regime, is in danger of speculative attacks on its currency.

When the U.S. was on a gold standard in the 1950s and 1960s, it printed exccess dollars to pay for social programs and war. France, which suspected that the U.S. lacked the gold to back its currency, started converting its own U.S. dollar holdings into gold. The French called the Americans’ bluff, and forced them to go off the gold standard in 1971.

As a result, the U.S. faced a temporary loss of confidence in its currency, and this set off a chain of events which led to the record-high U.S. inflation of the 1970s and early 1980s, as well as a series of geopolitical crises which resolved in the Petrodollar system.

No nation wants to go through such an ordeal, and this in itself deters them from lying about their reserve assets under management. It is historically rare to see a nation’s gold supply being viciously attacked under a gold standard regime. Yes, the U.S. foolishly opened itself up to such an assault in the 1960s, but there is nothing preventing a country from printing excess cash under a Bitcoin-based monetary regime either.

3. More Divisible

A single Bitcoin can be divided into 100 million smaller units, known as ‘satoshis’ (named after Bitcoin’s founder, Satoshi Nakomoto). Gold, by contrast, is much harder to subdivide. Thus, Bitcoin is apparently a better store of value.

I am not sure what to make of this claim. Are we comparing one Bitcoin to one troy ounce of gold? One tonne of gold? Gold is malleable and divisible already. You can purchase gold in 1g flakes or 100 kg gold bars. Gold can be melted down and turned into a foil. It can plate the palaces of kings and queens.

Ultimately, this does not matter, because both gold and Bitcoin cannot be used easily in daily transactions. Gold is a nuissance to carry around, while Bitcoin’s slow speed and high transaction costs make it hard to use to purchase small items like a cup of coffee. Instead, a monetary authority will issue currency (paper or digital), and peg it to a hard asset like gold, or a digital asset like Bitcoin.

(Technical Note: Bitcoin maxis will counter with “But the Lightning Network!” — this just proves my point, since Lightning is a Layer Two Protocol backed by Bitcoin. In itself, it is not Bitcoin.)

4. Privacy/Anonymity

Another misinformed claim is that Bitcoin is more private and anonymous than gold. Those who advocate this view do not understand Bitcoin’s underlying blockchain technology, which is public by design.

When a man wants to transact in Bitcoin, he must download a digital wallet; he is then assigned a public key for receiving Bitcoin, and a private key for sending it. If he publishes his public key on his blog, for example, then grateful readers can transfer him Bitcoin. However, a stalker can also look up the man’s public key on the blockchain ledger, thus inferring his Bitcoin holdings and past transactions. His financial history is easily uncovered.

There exist software like crypto mixers to mitigate this risk, but the feds are cracking down on these. Bitcoin is not fundamentally private or anonymous. Indeed, whenever you connect to the internet to transact in Bitcoin, you risk having your identity revealed.

Gold, by contrast, is completely offline. You can bury it in your backyard, or hold it in a private vault free from government scrutiny. If you want to exchange it for cash, take it to your trusted local dealer; he probably won’t ask any questions or publicize your business with him.

5. More portable

Bitcoin is more portable than gold. I do not deny that. If you need to flee the country with just the clothes on your back and a few other trinkets, then Bitcoin in cold storage is great. Gold is likely to draw attention, though it might serve as a way to bribe border guards.

Yet I am not sure why this matters on the margin. Gold is still highly portable: you can store $1 million in 16 kg of it. Bitcoin is easier to carry around, but you can always store gold in a jurisdiction like Switzerland or Singapore, where it is likely to be safe, and where liquidity is no issue. There are even gold-backed cryptocurrencies which make gold effectively as portable as Bitcoin.

When it comes to gold’s use as money, portability does not matter at all; under a gold standard, people use paper or digital receipts which are backed by gold. This would be the same under a hypothetical Bitcoin standard, with the only difference being that storage feeds are lower in the latter case. Otherwise, there is no essential difference.

Conclusion

In this article, I have addressed the claims of Bitcoin maxis regarding Bitcoin’s supposed superiority to gold. I believe I have succeeded in demolishing them. If gold were used as a monetary asset, then there would be no need to use Bitcoin. Gold has a limited supply, can be easily audited, is divisible, and is more private than any digital coin.

Naturally, this leads one to ask why gold should be preferred at all. Why is gold better than Bitcoin? The answer to that question will be revealed in the next article. Stay tuned, and thank you for reading.

(I apologize if I lost some of you in the technical jargon — please leave your comments below and I will try to clarify any gaps.)

UPDATE. To read Part 2, click here.