Why Bitcoin Is Digital Gold

Why Bitcoin Is Digital Gold

By MoneyWiseAlpha | Money Wise Alpha | 8 Sep 2019


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Figure 1: US President Herbert Hoover Quote

 

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Figure 2: Prominent New York Banker, J.P. Morgan Quote

 

Gold And Silver Have A Long History Of Monetary Use

 

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Figure 3: Ancient Roman Gold and Silver Coins

 

Historically, the most recognized kind of commodity money has been based on bimetallism—gold and silver—in the form of coins (See Figure 3).  Gold and silver are commodities that are durable, portable and readily divisible into smaller amounts. 

 

For over 5,000 years, only gold and silver have maintained their purchasing power.  There have been thousands of different fiat currencies.  These currencies are not backed by gold or silver and they have all gone to zero purchasing power.  It is a 100% failure rate.

 

Why Bitcoin Is Superior To Gold

 

However, using gold as legal tender again has weaknesses in this digital era.  Using cryptocurrencies such as Bitcoin has advantages over using gold as legal tender in the following areas: Divisibility, Malleability, Counterfeit-adversity, and fungibility.  The following summarizes each of these advantages.

 

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Figure 4: Even divisible gold bars are not identical on an atomic level.

 

  • Divisibility: Separating gold into smaller chunks is not very easy at all and keeping the pieces uniform in size is nearly impossible.  Bitcoin is easily divisible down to 100,000,000 perfectly uniform pieces.

 

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Figure 5: Smelting gold

 

  • Malleability: Combining tiny gold pieces into a larger coin or a bar is difficult. In order to do this, you would need a furnace to melt the gold coins and then combine them together.  Bitcoins all conveniently fit into your digital wallet and automatically account for themselves without any extra efforts on your part.

 

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Figure 6: Counterfeit gold bars.

 

 

  • Counterfeit-Adversity: Someone can counterfeit a gold bar or coin by wrapping a layer of gold outside with a thick core of Tungsten. On the other hand, Bitcoin is famously counterfeit-adverse, because we all can have a copy of the distributed ledger and can see everyone else’s’ Bitcoins and can easily tell if someone is lying.

 

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Figure 7: Even standardized gold coins are not exactly equal on the atomic level!

  

  • Fungibility: Last but not least, which some claim is the most important criteria. Fungibility is the quality of the parts being judged equal to all other parts of the same denomination.  Gold can be poor at this because the purity of gold can vary.  How can you tell if one gold coin that looks similar to another gold coin is truly worth that other coin?  You cannot do this without using a lab.  Meanwhile, Bitcoins are all simply ledger entries, so there is nothing different about them even on an atomic level.

 

Fiat Currencies Are Prone To Failure

 

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Figure 8: Fiat currencies don’t stand the test of time.

 

The problem with using traditional fiat currency, both paper and digital, which Keynesians promote is that there is no way to tell how much money is circulating and no one knows if the central bankers will decide to start printing more, which will cause inflation and eventually hyperinflation.  Cryptocurrencies such as Bitcoin, in contrast, are deflationary because there is a fixed amount, thereby increasing its value through time.

 

Cryptography Empowers Cryptocurrencies

 

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Figure 9: How basic cryptography works

 

Cryptocurrencies derive their name from the form of mathematics they used called cryptography.  This allows participants to have a unique address, a wallet, sort of like a bank account but only the individual has access to their wallet.  This wallet is the person’s digital address and can be cryptographically checked for accuracy but cannot be altered or modified.

 

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Figure 10: How a bitcoin transaction is processed

 

Bitcoin is “Digital Gold”

 

Bitcoin is currently the most popular cryptocurrency.  Bitcoin is essentially digital gold.  There is a finite supply of Bitcoin just like gold at 21 million coins.  There is also a predictable rate at which Bitcoin is mined similar to the somewhat predictable rate that gold is mined.  Figure 10 explains how a Bitcoin transaction is processed.  Mining for Bitcoin takes significant electricity and computational power to do.  Therefore, Bitcoin is seen as a real electronic unit of work by some analysts.

 

Four words that define the cryptocurrency paradigm shift and why they are a completely new asset class are “limited supply unlimited demand”.  Most people view digital things as not unique and easily replicable.  Every other digital asset that has existed by its nature has been able to be replicated.  For example, CDs, an artist can instantly have their song in front of millions who listen digitally.  The song can be copied over and over again, thereby allowing for maximum distribution.  These songs can also be copied illegally to the disappointment of the artists and record companies.  However, Bitcoin and other cryptocurrencies are the first digital asset that cannot be copied, allowing them to act as property, something digital can now be limited.  Therefore Bitcoin and other cryptocurrencies are a limited digital commodity similar to a type of “digital gold”.

 

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MoneyWiseAlpha
MoneyWiseAlpha

Greetings, my name is Christian John Sales. I am the author of the Amazon book entitled, “Bitcoin Money: The Top 20 Ways to Make Income with Cryptocurrencies“ (https://amzn.to/30ahkpy. Additionally, I’m the lead blog writer for the Money Wise Alpha Blog.


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