Bitcoin is often compared to gold in terms of its value and use case. However, there are several key differences in the characteristics of the two.
Why is Bitcoin compared to gold?
Gold is a physical, tangible commodity with a long history of being used as a medium of exchange and store of value. In contrast, Bitcoin is a digital currency that is not physical in nature. It is a consensus network that enables a new payment system and a completely digital money. Bitcoin is often referred to as “digital gold” because of the many properties it shares with the precious metal.
Store of value
Gold and Bitcoin are similar in that they are both “stores of value” that can also be used as a medium of exchange. Both gold and Bitcoin have intrinsic value and can be used as a hedge against currency devaluation.
Gold and Bitcoin are scarce commodities which are limited in supply. Gold production is constrained by the supply of physical gold on the planet, while Bitcoin is limited by the laws of mathematics. Both Bitcoin and gold have a limited supply that cannot be arbitrarily increased by a central party.
Gold and Bitcoin are fungible. Each unit is worth the same as every other unit. This means that one bitcoin is interchangeable with another bitcoin, or that one ounce of gold is interchangeable with another ounce of gold.
Gold and Bitcoin are divisible which is important for their use as a means of exchange. Gold can be divided down to a hundredth of a gram, while Bitcoin can be divided down to eight decimal places.
Differences between gold and Bitcoin
The main difference between gold and Bitcoin is that gold is a tangible, physical object, while Bitcoin is completely digital. Because of this, Bitcoin is arguably more portable and easier to store than gold, since it is entirely digital and exists purely in cyberspace.
Gold cannot be sent through an electronic medium, while Bitcoin can. Gold must be physically transported and handled to be exchanged, while Bitcoin can be transferred electronically and securely by anyone with an internet connection.
Bitcoin is a much newer technology than gold. Bitcoin was first introduced in 2009, while gold has been used as a medium of exchange and store of value for thousands of years.
Bitcoin has a fixed supply of 21 million bitcoin that will ever be created, while gold has no fixed supply. Gold is a scarce commodity that is mined out of the ground, however it is considered to have “pseudo-fixed” supply, since the amount of gold that can be mined out of the earth is not fixed. As technology improves, it becomes easier to find new sources of gold and mine deeper than before.
Bitcoin is a much more liquid asset than gold. The liquidity of an asset is a measure of how quickly an asset can be turned into cash. Bitcoin is much more liquid than gold because it can be sold and exchanged quickly with little cost. Gold is an illiquid asset since it cannot be sold quickly or easily and generally has a large bid-ask spread.
Bitcoin is also easier to verify than gold. Gold is physical and must be inspected physically to ensure that it is legitimate. Bitcoin is purely digital and can be easily verified online.
Which is better, gold or Bitcoin?
Overall, Bitcoin and gold are very similar assets. Both are scarce commodities that are used as a store of value and are also used to exchange value. They can both be used as hedges against inflation, and are both fungible and divisible.
Gold is a tangible, physical object that must be physically inspected to determine its legitimacy. Bitcoin, on the other hand, is entirely digital and can be verified by anyone with an internet connection.
Bitcoin is a newer technology than gold, and is still in the early stages of development. Many people believe that Bitcoin will eventually replace gold as the preferred store of value.
You can see how the value of gold stacks up to Bitcoin over time with the Bitcoin vs. Gold Inflation Index.