Bitcoin vs. Gold: Is Bitcoin Digital Gold?
There is quite a bit of buzz in the media about Bitcoin. More and more people are interested in finding out what Bitcoin is and how cryptocurrencies work. Will it someday replace the U.S. dollar? Everett gives some background about the Bitcoin vs. gold debate and evaluates whether or not Bitcoin is "digital gold" or "gold 2.0" yet.
This is Breaking The Dollar, the podcast that dismantles some of the biggest misconceptions about money. Presented by Gainesville Coins.
This is Everett Milman with Breaking The Dollar, the podcast where we try and deconstruct a lot of the misconceptions surrounding your money of this episode is going to focus on this growing kind of conversation, I don't know if I'd call it a debate completely. But this growing conversation about bitcoin and gold because the two I've been associated a lot with each other lately.
What you'll often times see is people referring to bitcoin as gold, the 2.0 or digital gold or just trying to associate it with the idea behind gold that it's this standard, it's this valuable thing.
And interestingly enough, probably the most out there representation of that I've ever seen was in a British news article, it described Bitcoin as or described gold as the bitcoin of the pharaohs.
So talking about ancient Egypt, and I don't know how many of you are familiar with the word anachronism, but it basically means something that's out of order in history.
There is no concept of bitcoin in ancient Egypt.
So, I just thought that that was funny, but it's more evidence that the two things are associated with one another because they are both considered an alternative form of money.
So we're going to get into why that's the case.
You know, is there a good argument to describe gold and or bitcoin this way and what opportunities or potential is out there.
I observed this debate a lot online on Twitter and even more and more now on the news and they're starting to talk about bitcoin and they're interested in the potential and not many people understand what it is.
So I'll give you a little bit of background about how I know about cryptocurrencies and what the basics are.
But where is this leading, you know, why are we talking about this?
Why is it important that we stay aware, of what's moving and changing with the monetary system?
Because even if we're not aware of it, it affects every single one of us.
So let me give you just a quick reminder about where I come from on this issue.
I work for a precious metals dealer that gives me some obvious kind of experience with precious metals like gold and silver and the history of those metals.
But also, we're very active in cryptocurrencies and I get to see firsthand all the time, sort of the back end or the, the hardware that's hard at work all the time mining these cryptocurrencies, literally stacked on either side of my desk in the office.
So although I'm not, I'm not a cryptocurrency trader or programmer, I work around a lot of people who are involved in that.
You know, one of my managers trades cryptocurrency all the time. He's got expertise in how to hedge that market.
And you know what each cryptocurrencies different calling card is or what makes them different.
So I'm surrounded by this, I'm kind of immersed in it and I've absorbed over the past two or three years, a lot of the kind of basic tenants of what is a cryptocurrency and why are people interested in it?
Why is it making such a big splash?
Now with that being said, I am not, like I said, I'm not a developer. I'm not the seasoned cryptocurrency trader. But I think I probably know enough about it and can explain it to, to a regular audience.
The example I always think of is an artist and an engineer.
So what an artist does is very abstract.
What an engineer does is very logical and straightforward.
But if you were to ask either of them, an expert artist or an expert engineer to explain to you what they do or how they do it, they probably wouldn't be able to communicate that to you very well, in a way that's easily digestible and you can understand it's kind of hard to connect with someone who isn't on the inside of that industry like that.
I see myself as a little bit of the the interlocutor or the person who can translate and explain what that artist or what that engineer is trying to tell you.
Even though I am neither the talented artist or the accomplished engineer that they are.
So that's just sort of my metaphor for how I'm really a regular guy.
I'm not a trained professional cryptocurrency pundits, so to speak, but I have enough experience with it and I'm pretty good at translating what I've learned into something that the average person can take away and hopefully say, okay, now I have a grasp on what is a cryptocurrency or what is bitcoin.
And the same is largely true for for gold and the precious metals, but I think that's maybe a little less daunting or confusing for people because gold has been around for a very long time.
Bitcoin not so much.
Anyway, let's get into briefly what was the background of cryptocurrencies, What are they?
The simplest explanation I can give you is that it is a digital currency. It exists only in the computerized world.
You'll see a lot of times on the news of these cool images of shiny silver coins or even gold coins that they have the bitcoin symbol stamped on them. You know the little "B" that looks like a dollar sign, those are just for show, there is no physical actual bitcoin for you to hold in your hand or for you to cash in.
So it is sort of misleading that we always use those visuals, but you can throw that out of your mind.
Think of it more like your bank account, right?
You can look it up on a digital screen, really it's just numbers on that screen.
I hate to break the news to some of you who may not understand how banking and fractional reserve banking works, but if you, go to the bank, there is not necessarily a nice stack of the exact amount of money that you hold in your account in a little vault somewhere that has your name on it and says this is so and so's account.
It doesn't work that way.
It's literally just a digital representation on the screen.
So bitcoin is kind of like that, but it, it has the added value or the added usefulness that it is a digital ledger.
The best kind of way to phrase it, is it is a distributed digital ledger, which means it doesn't exist in one place that exists everywhere.
Every computer on the bitcoin network has an exact copy of the ledger.
And if you don't kind of follow what that means, it's basically a database. It's just a series of records that records every transaction on that network.
So with bitcoin and a lot of cryptocurrencies, I mean it's kind of built into the name that it is a currency or a coin.
These are transactions of money changing hands, so to speak. It doesn't have to be though. There are some cryptos out there that are literally recording of contracts being made on Ethereum. It's network or blockchain can handle contracts and applications.
So it's not limited purely to transactions and money changing hands.
But that is the main sort of revolutionary value that cryptocurrencies are supposed to bring to society. Obviously you're saving energy and money. If this is all digital, the idea is that it would be kind of seamless so you can do this from anywhere in the world.
You don't have to worry about exchange rates so much and paying fees to get your money from one place to another like you would have to with a Western Union transfer or a bank wire or something like that.
But also, the main underlying idea of cryptocurrencies is that they are trustless decentralized and peer to peer.
So quickly what do those things mean.
Peer to peer means I don't have to have an intermediary like a bank or financial institution to mediate. This transaction is literally between you and I. Peer to peer. Person to person. Nobody in between, you know, making a buck off of our private transaction. That's peer to peer.
Decentralized is a similar concept where there is no central authority that has to check all of this or verify this.
That's perhaps the most difficult concept for people to wrap their mind around because whatever you think of banks, and granted I'm skeptical of banks. I have a sort of a problem with their model and what they do, but you can't deny that there is a service given to us by banks that we trust them to hold our money. We trust them to be an independent intermediary between us and whoever we are spending our money with and the same goes for for credit card issuers and things like that.
The trick with cryptocurrencies is this sort of verification and trust is supposed to come from the users themselves. The people spending and accepting Bitcoin for instance are maintaining the trust and verification themselves and that's done through a consensus process. That's called mining.
I won't get into the finer points of that for now because that's sort of dry computer science and encryption and cryptography that no nobody really cares about.
The best way I can describe it is that this is how emails work.
It's a safe, encrypted way of sending messages over a computer network so that any hacker can't just grab it and see what's going on.
Same sort of process to try and protect your transaction of bitcoin or cryptocurrency. Going from one wallet to another.
So anyway, that was basically a mouthful to say that cryptocurrency is poorly understood by the general public because, it's kind of difficult to explain to someone who already has a kind of a lack of interest or curiosity in how does a bank work, how does money work, etc, etc.
Now that brings us to the interesting point of why is this associated with gold? Why do we talk about Bitcoin as being gold 2.0 or digital gold?
And it's because before for the long expanse of human history, our money has generally been tied to something physical there. There's some physical thing of value out there that we back our money with in order for people to trust that it is worth anything.
One of the great truths of monetary theory is that money is only worth what people are willing to accept it for.
That is kind of an abstract concept in our own minds because we accept money in payment in all sorts of nonphysical forms.
Think about a gift card or think about, like I said earlier with your checking or bank account online. A business that's accepting your debit card transaction is obviously trusting that those numbers on that screen means something and are worth something, and are still going to be worth something tomorrow.
I think we tend to take that for granted. That's not a trivial thing.
If you look around the world, once you get past the dollar and some of the major trusted currencies like the British pound and the euro and the Japanese yen, that is not a foregone conclusion that your money is going to be worth the same next week or next month that it was today.
It's one of the fundamental problems of our monetary system is that it's hard to have a purely fixed value for currency.
Something called purchasing power parity.
That's how we measure how much stuff do you get for your dollar? It's always fluctuating. It's always going up and down and that can be a very difficult thing to wrap your mind around because you have to question why.
Why did $1 that I earned in 1975 why is that $1 not worth the same today?
That seems unfair, doesn't it?
And in some ways it is, but it's a feature, not a bug of what we call the Fiat money system.
You'll hear that phrase. It's kind of a loaded political phrase.
Fiat money merely means money that derives its value from a government decree. The government says this money is valuable because I say so and because I will accept it.
This is the important point because the government will accept it in return for taxes, or will collect taxes in that medium of exchange or in that store of value.
What's important about all of that is Fiat money is the system we have and what we have had for the past 45 years. It's worked relatively well, you must say, but it has some problems that has some serious deficiencies that over time become a bigger and bigger issue.
Inflation. That's the main one that the money we have does not hold its value into the future very well. That's a problem for people who are trying to save for retirement for instance.
So that's kind of where gold enters this equation is that it used to be what we based our money off of. Now it's sort of hidden in the back room and it's not completely gone.
You can't go to the bank or go to the Treasury Department and literally exchange your paper dollars for gold as you used to be able to. For the long expanse of human history, that's kind of how money has worked.
We had common money, like a paper money, a convenient money that we use for day to day things, sort of an IOU, but at the end of the day you could always take your IOUs and get something real.
For them it was just a matter of going down to the bank and then having to lug all this heavy stuff with you away from the bank.
There, are inconveniences to physical money, but gold has that track record and moreover it has that perception. So if you, want to get into the philosophical side of money, it is only worth what we think it is, gold really does take the cake in that regard.
Whatever you want to say about what gold does or what it is we believe it's worth something almost more so than anything else in the world.
This is why in a lot of cases, very large transactions between parties that do not trust each other and the best example I can give you is sort of international treaties and trade arrangements between hostile governments, but that nonetheless really do have have something to gain from trading with each other.
The best historical example I can give you is the United States and Saudi Arabia. We want Saudi Arabia's oil. They didn't necessarily want our dollars though.
There is definitely a historical and intellectual tradition in the Middle East of trusting physical gold and physical silver for hundreds of years in the Middle East. The only way you could get business done is if you had silver coins and in fact a particular silver coin that was minted in Austria called the Maria Teresa Thaler. It was a very trusted coin.
This was still true back when the United States and Saudi Arabia were first establishing their kind of modern trade relationship, the birth of what we now call the petrodollar.
They have the oil and they agreed to only buy and sell oil in dollars, partly because we gave them gold.
We didn't print out a bunch of sheets of green paper with pictures of dead presidents. That doesn't mean anything to them. They don't care or know who our presidents are, but they sure as heck know what gold is. And they value that.
So in that regard, people should acknowledge that part of what makes gold valuable and made it useful as money is that we all agreed upon, even if it was purely abstract and purely in our minds that gold was worth something. No matter where you are, no matter what kind of economy you have, no matter what, your main export or trade item is.
So bitcoin definitely wants to absorb some of that credibility. It puts itself out there or advocates of bitcoin describe it as the new gold, you know, gold 2.0. That it does what gold did but better.
So I think I'm a little bit of an agnostic when it comes to these things. I think we should all be aware of and know about both sides. I think it's totally reasonable and fine for people to both have investments in cryptocurrency and to have, you know, a rainy day fund in gold and silver.
The two things are not incompatible and I that's why I was hesitant to even call it a debate. It's more of a discussion, it's more of both bitcoin and gold kind of proport to do something beneficial as far as as being a financial asset or being a potential form of money, a medium of exchange, a store of value.
But they almost do it in very opposite ways, which is what is interesting is that gold is this physical, tangible thing that is very easy to recognize visually and is very dense and heavy and it just has this physical appeal to it.
Bitcoin is quite the opposite, right? It's got no physical side to it is exists purely in a digital sense.
And not only that, not only that, this is a good opportunity to stop and ask ourselves, because I've been rambling on about how moneys only worth what we say it is and, some of these things that's absolutely true of Bitcoin.
Every day when you look at what the price of Bitcoin is doing, you have to stop and ask yourself why, why do we say bitcoin is worth $4,000 or $8,000 or $20,000 like it was, you have to stop and say, why?
Why is it so valuable? What does it do? And is that even reasonable?
I think right now it is.
I do think that, there's room for cryptocurrency to sort of change the system.
And I talk sometimes about how we're in a transition period of our monetary system changing dramatically.
You know, we've had this experiment with the dollar being the reserve currency for the world, but not being backed up by anything real for 45 to 50 years. And we're now at the point where that system is starting to be challenged and break down.
This is sort of where people get interested in Gold and Bitcoin because they're like, okay, well if things are changing and if the financial system were to kind of get up ended, I'm not saying completely crashed, but have, a major change, how can I protect myself?
What's going to be the next form of money, or what will be worth something in the future if my dollars are not and Gold and Bitcoin are I think very fair, reasonable answers to cite as the top contender or the top challenger.
So it is about challenging the current system.
But if there is a systemic change, which I do think there is, there's a lot of signs that were in this, transition period. If that's the case, then the wise route would be to try and be informed and aware of what's out there. And I think that's the fascinating part of the kind of discussion surrounding Bitcoin, gold money, finance, investments, all of these related ideas.
It's just about arming yourself with as much knowledge as possible and continuing to look at things in a critical way.
Because I do think it is kind of tragic that the average person really doesn't understand some of the fundamentals of money.
And granted you don't have to understand money to make money, right?
Everybody who's good at their job, that's what they get paid for. They don't get paid to know where their money comes from or why it's worth anything. They just accept and trust that it is, which is fine. That being said it's less fine when you're in a kind of a crisis, great change period because like I said earlier, it affects all of our lives, whether we're aware of it or not.
So having some basic understandings of these things and at least knowing what the landscape is, knowing what's out there is what I think will prevent us from experiencing the worst growing pains of a change in system.
So let's take a question from the audience here. I'm sure there are lots of them on this topic because it's so kind of out there.
So we have one from Holly in Sedona, Arizona and Holly asks,
What is Bitcoin mining?
That could certainly be an entire episode of its own because Bitcoin mining and all cryptocurrency mining has a lot of technical aspects to it. But just a broad overview so you can get a grasp of what's going on.
Bitcoin mining uses specialized hardware and software to essentially run calculations on all of the different computers on the bitcoin network. All of the different miners are running these calculations at the same time. Whoever gets it done first, essentially whichever computer is kind of fastest that is trying to solve the algorithm. It's basically a math equation that is sent out.
It does two things. One, when the calculation is completed, the bitcoin network knows that a transaction is verified, and secondly, the miners themselves who ran that calculation are rewarded with a small amount of bitcoin. And this is literally a brand new unit of bitcoin being created.
So it not only maintains the network but it is what actually keeps the system running. That's how a peer to peer decentralized transaction can take place. You have no trusted third party in the middle. It's purely the computers on the network running these algorithms.
And then secondly, that is how bitcoin is distributed. New bitcoin is made, it doesn't come from somewhere else. It's literally a like a bank issuing more dollars.
So the important thing to keep in mind is that bitcoin mining is how you get new bitcoins and it's how you verify transactions.
So next time on the show, we're going to take a little deeper dive into cryptocurrencies and look beyond just bitcoin at all the other things going on with cryptos. So if you don't know a lot about that or you're just interested in the general topic, be sure to check it out.
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The views and opinions expressed on this show are for informational purposes only and should not be used or construed as professional investment advice.
Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.