Robert Kiyosaki said “Gold is God’s money and Bitcoin is people’s money”. Indeed, Bitcoin is often compared to gold. How similar and dissimilar gold and Bitcoin are?
Bitcoin is a quasi-pure a store of value
Bitcoin was envisioned to be “A purely peer-to-peer version of electronic cash” but failed wide acceptance as the annual average number of transactions per day was only 308,503 compared to 453 million for Visa. It would probably never achieve this status because of its throughput limited to approximatively 7 transactions per second compared to 65,000 for Visa. Therefore, Bitcoin has virtually no practical use except for storing value. They have this in common as industrial use of gold accounts for only 7% of total demand. By comparison, industrial use for silver amounts to more than half of total demand at 55%.
Gold is an historic store of value in many cultures and civilizations
Gold is widely dispersed throughout the Earth and can be found in natural state. On the contrary, silver is geographically concentrated in 4 countries and in ore state that demands processing. Gold’s availability combined with its immutability and easy to work nature contributed to its early adoption in many cultures. Bitcoin is the first cryptocurrency in history. It appeared in 2009, 5 years before Ether.
Bitcoin is the first digital item in limited supply
Interestingly, it is a featured not mentioned in the white paper that makes Bitcoin valuable: its supply limited to 21 million units. Gold may seem not capped as around 2,500-3,000 tons of gold are mined each year. However, the underground reserves are estimated at 57,000 tons making gold in a supply limited to 244,000 tons.
There are currently around 18 million bitcoins compared to 114 million ethers. The situation is similar for the two leading precious metal. According to the USGS, 187,000 metric tons of gold has been produced compared to 1.7 million metric tons of silver. Gold is almost 10 times rarer than silver and Bitcoin is 6 times rarer than Ether whose total number is not capped. Bitcoins are even rarer than gold in terms of supply to stock ratio. This ratio stood at 2.5% in 2020 for gold and 1.8% for Bitcoin.
Bitcoin and gold are immutable, unforgeable and decentralized
As a digital item, Bitcoin is obviously immutable and thanks to blockchain technology is unforgeable. Furthermore, there is no authority behind Bitcoin so it is self-existent like gold. In the recent price surge, investors were attracted to gold and bitcoins partly because of the declining trust in the fiat currencies.
Production processes are different
Bitcoins are generated through the process of “proof of work” i.e. solving a mathematical problem whose difficulty is adjusted to the power of the entire network. On the contrary, gold is extracted through mining whose “difficulty” is not linked to internal factors. Furthermore, the number of new bitcoins is halved approximately every four whereas the gold mining would remain the same.
Can we exploit those similarities?
Gold and Bitcoin share many characteristics like limited uses, scarcity, limited supply, immutability, unforgeability and decentralization. However, they differ in the production processes and dynamics. Can we exploit those findings? Can we for example assess a fundamental value for Bitcoin or draw the drivers of its price?
You may want to read : “Is there a fundamental price for Bitcoin as digital gold?”