There is a tweet doing the rounds in the crypto community at the moment that shows an uncanny relation between the price of gold over the last 43 year and that of Bitcoin since its inception just over 9 years ago. Is this curious chart evidence that Bitcoin is digital gold? Or is it just an amazing coincidence. Let’s take a look at what makes gold valuable, its role in society and how bitcoin compares to it.
Why is gold Valuable?
Mankind’s love of gold enduring is curious. As a chemical, it is quite uninteresting. However, of all the elements in the periodic table, it is the one that cultures throughout the world have used as a currency. Why is this?
Why not osmium or chromium, or gallium, say – or even seaborgium?
Most elements can immediately be dismissed as a potential form of currency. Firstly we can discount all of the noble gasses and halogens. A gas is never going to be much use of a currency.
We can also dismiss the two liquid elements (at room temperature and normal pressure). These are mercury and bromine. They are also poisonous. Not a quality a currency should have. This reasoning also allows us to dismiss arsenic and several other elements.
If we look at left-hand side of the table we can rule out most of the elements there as well.
The alkaline metals and earths are just too reactive. A similar argument applies to another whole class of elements, the radioactive ones. Out go thorium, uranium, and plutonium, along with a whole bestiary of synthetically-created elements – rutherfordium, seaborgium, ununpentium, einsteinium – which only ever exist momentarily as part of a lab experiment, before radioactively decomposing.
Next we can discount the “rare earths”, most of them are actually less rare than gold. They are chemically hard to distinguish from each other, so you would never know what you had in your pocket.
This leaves us with the middle area of the periodic table, the “transition” and “post-transition” metals. This group of 49 elements includes – iron, aluminium, copper, lead, silver.
There are some very tough, durable elements on the left-hand side like titanium.
The problem is they are very hard to smelt. Ancient man lacked the technology to get their furnaces hot enough.
Aluminium is hard to extract, and it’s too flimsy for coinage. Most of the others in the group aren’t stable and will corrode if exposed to water and will oxidize in the air.
Iron, in theory, it looks quite a good choice for currency. It is attractive and polishes up to a lovely sheen. The problem is rust: unless you keep it completely dry it is liable to corrode away. A self-debasing currency is not a good idea and means we can also rule out lead and copper. Cultures have used these for coinage but they have not lasted, literally.
We can rule out lead and copper on the same basis. Both are liable to corrosion. Societies have made both into money but the currencies did not last, literally.
So, what’s left? Of the 118 elements, we are now down to just eight contenders: platinum, palladium, rhodium, iridium, osmium, and ruthenium, along with the old familiars, gold and silver.
These are known as noble metals because they barely react with the other elements. They are also all rare, another important quality for a currency.
Even if iron didn’t rust, it wouldn’t make good currency as its too abundant. You would have to carry some very big coins about.
All the noble metals except silver and gold, you have the opposite problem. They are so rare that you would have to cast some very tiny coins, which you might easily lose. They are also very hard to extract. That leaves just two elements – silver and gold.
Both are scarce but not impossibly rare. Both also have a relatively low melting point and are therefore easy to turn into coins, ingots or jewellery.
Silver tarnishes – it reacts with minute amounts of sulfur in the air. That’s why we place particular value on gold.
So it turns out then, that the reason gold is precious is that it is so chemically uninteresting.
Gold’s relative inertness means you can create an elaborate golden jaguar and be confident that 1,000 years later it can be found in a museum display case in central London, still in pristine condition.
So what can we deduce from our process of elemental elimination?
Firstly, golds price does not represent its intrinsic value. It only has value beyond its industrial uses because society, decide that it does.
The other secret of gold’s success as a currency – gold is unbelievably beautiful. It is processes that occur on a quantum level that gives gold its unique colouration.
It also needs to be stable, portable and non-toxic. It needs to be fairly rare – you might be surprised just how little gold there is in the world. If you were to collect together every known bit of gold and melt it down, it’s estimated that you’d be left with roughly a 20-metre cube.
Why isn’t gold used as currency anymore?
In 1973 Richard Nixon decided to sever the US dollar’s tie to gold.
Ever since, every major currency has been backed by no more than legal “fiat” – the law of the land says you must accept it as payment.
Nixon made his decision for the simple reason that the US was running out of the necessary gold to back all the dollars it had printed. The Vietnam war threatened to bankrupt the United States. It was to become known as the Nixon Shock, the decoupling of U.S. dollar from the gold standard effectively ended the Bretton Woods Agreement. This essentially led to the creation of fiat currencies.
The problem society found with gold is Its supply bears no relation to the needs of society. The supply of gold depends on what can be mined.
The discovery of South America and its vast gold deposits led to an enormous fall in the value of gold – and therefore an enormous increase in the price of everything else.
More recently, the problem has typically been the opposite – the gold supply has been far too rigid. Many countries escaped the Great Depression in the 1930s by untethering their currencies from the Gold Standard. This freed them up to print more money and reinvigorate their economies.
The demand for gold can vary wildly – and with a fixed supply, that can lead to equally wild swings in its price. That is not really the behaviour of a stable store of value.
As Churchill said “out of all the elements, gold makes the worst possible currency.”
How does gold compare to bitcoin?
It has been suggested that Bitcoin is the very first viable replacement for gold. A similar sentiment is shared by the Winklevoss twins, who have said:
“Taking bitcoin in isolation… we believe bitcoin disrupts gold. We think it’s a better gold, if you look at the properties of money. And what makes gold gold? Scarcity. Bitcoin is actually fixed in supply so it’s better than scarce… it’s more portable, its fungible, it’s more durable. It sort of equals a better gold across the board.”
Just like gold, Bitcoin can experience wild swings in value. In the last year, we have seen it peak at $20,000 US dollars per coin. As of the time of writing Bitcoin sits down around 85% from it’s all-time peak.
Some people still see Bitcoin as a currency. Currency is a store of value but has the additional qualities of being portable, durable, divisible and fungible. Most currencies are slowly eroded by inflation whereas both gold and Bitcoin have similar deflationary qualities.
Bitcoin also differs from gold in that it has no practical uses in the manufacturing of electronics or jewelry making. It is highly unlikely that another metal will steal golds crown. It is quite possible that Bitcoin could be dethroned in the event of a superior product being produced or a catastrophic hacking event.
Economic theory states that given a fixed supply an increase in demand will lead to an increase in price. As more merchants start to accept Bitcoin it would be expected that there will be a correlating increase in demand. This is where Bitcoin can be considered different from gold. It is unlikely that we will see more merchants accepting gold for products and services any time soon.
Many see Bitcoin and gold as a perfect hedge against the government and financial systems. With these two stores of value both hedging the dollar gold and Bitcoin are placed in direct competition with each other. There is some evidence to suggest that gold and bitcoin prices have an inverse correlation.
The biggest difference between gold and Bitcoin is that one is physical and the other exists purely digitally. Opinion is split between whether this makes Bitcoin more useful or less useful as a store of value. Bitcoin certainly can be traded with less friction across international markets, but, many are wary of a store of value that does not exist physically, even though most fiat currency only exists digitally.
No one knows how much gold there is on the planet or beyond. With Bitcoin, we know how many coins will eventually be minted and have a good idea which bitcoins have been lost. We also know at what rate new bitcoins will be mined.
Golds legal status sits differently to that of Bitcoin. Bitcoin is not currently considered a commodity. Many people believe that bitcoin sits in a completely new asset class. This case has been made in a whitepaper produced by investment manager ARK Invest and the exchange operator Coinbase that Bitcoin belongs in its own asset class due to the lack of similarity between Bitcoin and other asset classes.
Bitcoin could also be compared to the petrodollar. Its Proof of Work system means that it is in a way backed by the cost of the electricity required to produce it. Oil is currently priced in dollars on the global market and it could be said that Bitcoin can be priced in the cost of units of electricity required to mine it.
The largest economies in the world also have the largest gold reserves with the exception of the United Kingdom. But few of the leading economies are holding Bitcoins in reserve. Or are at least not admitting to it. Some countries have held or are holding bitcoin bit this generally as the result of them being seized as the results of the criminal investigation.
The Bulgarian government is suspected to be sitting upon more than 200,000 bitcoins after a crackdown on organized crime. They have declined to say what their intentions are with regards to them indicating that there is still an ongoing criminal organization.
Sweden has auctioned off seized bitcoin too. Although the Swedish Kronofogden sold off just 0.6BTC worth around $3,200 at the time.
The USA has participated in Bitcoin auctions. In late 2015 they auctioned off 44,000 BTC seized from the silk roads, Ross Ulbricht. This was the last in a series of auctions all of a similar purpose.
One country is thought to actively be hoarding Bitcoin is the government of North Korea. This is seen as a way of them circumventing international sanctions.
So it is clear that Bitcoin is not gold and gold is not Bitcoin. However, this does not mean that Bitcoin cannot replace many of the purposes of gold. Whether or not Bitcoin will lose its crown as the “gold” standard of crypto remains to be seen. For now, Bitcoin is the nearest thing we have to digital gold. It remains to be seen if physical gold will ever lose its lustre for mankind.