08 Oct '13

Bitcoins Are Not Like Gold

Anyone who bought gold with USD $10,000 2 years ago would have a pile of metal worth around USD $6,900 today.

However, if you were a freakin’ genius who bought USD $10,000 worth of bitcoin when the exchange rate was $4.20 in Sept 2011, today you’d have USD $326,190 worth of bitcoin.

While this comparison might be a little unfair to our glistening yellow friend, it’s the cold hard truth in recent times.

In explaining Bitcoin to newbies, many use the analogy that “bitcoins are like gold”. Yes, gold is a store of value like bitcoin. Yes, gold is scarce like bitcoin. But that’s where the likeness ends. Bosses can’t pay employees in gold or buy a beer with gold. It’s impractical and simply doesn’t happen.

But paying employees and buying beers does happen with Bitcoin.

"Gold is not a currency. Bitcoin is."
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Satoshi Nakamoto put the gold analogy to the world in his bitcoin whitepaper saying:

"The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation." - Satoshi Nakamoto
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I don’t believe Satoshi meant that bitcoins are like gold, anymore than a car is like a horse.

His words are merely an explanation to help the uninitiated understand the bitcoin mining process, but the analogy doesn’t carry over to bitcoin as a currency, a store of value or as a payment facilitator.

While I don’t blame Satoshi for making the comparison (for the subject of mining, gold is a good analogy), even the people and governments heavily invested in gold don’t really understand it’s value in our modern world.

Federal Reserve Boss Admits He Doesn’t Understand Gold

Ben Bernanke

Federal Reserve boss Ben Bernanke, who holds economics degrees from Harvard College and the Massachusetts Institute of Technology and is the world’s most-powerful central banker, says he doesn’t understand gold prices.

"Nobody really understands gold prices and I don’t pretend to really understand them either." - Ben Bernanke
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This is the man who led the Federal Reserve through the biggest financial disaster since the Great Depression.

Gold prices reached a record peak of $US1921.15 an ounce in September 2011 and has slumped 31 per cent since then. Many pundits scream that gold still makes a sound investment.

Governments continue to buy up gold while some investors were losing faith in the metal as a store of value. The value of exchange-traded products dropped by $US60.4 billion, or 43% this year according to data compiled by Bloomberg.

"Bitcoin is an alternative to gold as an investment vehicle and store of value."
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Billionaire investor George Soros sold his holdings in the biggest gold-backed ETP this year and mining companies wrote down the values of their assets by at least $US26 billion.

Warren Buffett, the fourth-richest person in the Bloomberg Billionaires Index and the world’s most successful investor, has said the metal has no utility because it moves to vaults once mined.

While countries from the US to the UK adopted a gold standard by the 19th century to limit inflation, no central bank or government institution links currencies directly to the metal anymore.