Bitcoin and other cryptocurrencies have been compared to the modern day version of gold by some. Although there are clear and noticeable distinctions between Bitcoin and gold that merit examination, this statement is valid in some respects.
We think that the general public is not well-versed on the relationship between Bitcoin and gold. Many respondents to our most recent study, How Well Do Americans Understand Money?, were unaware that gold is no longer the primary commodity supporting the U.S. currency. Therefore, it doesn't seem unreasonable to suppose that the typical American knows little about how bitcoin and gold compare to one another. The reason why?
We at Kafka Mining consider ourselves cryptocurrency lovers and that may even be an understatement given that we are a firm at the forefront of Bitcoin extraction. Our responsibility is to comprehend not only the function of cryptocurrencies in the current economic environment, but also what they might be in the future.
We can begin by examining the parallels and differences between Bitcoin and gold, a resource that was once an essential component of the world economy, in order to comprehend Bitcoin's untapped potential.
Like gold, bitcoin is a limited resource
The fact that both gold and bitcoin are fixed in their total amounts, if not exactly in the same way, is one of their more striking similarities. While the amount of gold in circulation increases every time more is mined, it does not increase in a way that significantly affects the asset's price, unlike other events that relate to gold (such as a stock market crash, for example).
Bitcoin is a better illustration of scarcity than gold. The maximum number of Bitcoins that might ever be mined was set at 21 million at the time of the currency's creation in 2009. A definite scarcity created by this hard constraint prevents supply-driven hyperinflation from ever driving the price of Bitcoin down to zero.
Paper money, a type of fiat money, serves as an example of how rare these resources are. Many other national currencies, including the U.S. dollar, were originally in short supply due to their position as commodity currencies. In other words, they were backed by a limited supply, usually gold. A government has to be able to exchange all of the paper money in circulation for its equal in gold at any time in order to have commodity backing. The volume of paper money that could be printed was constrained by this requirement.
The demise of the gold standard, however, has almost eliminated the rarity of paper money. Hyperinflation, fabricated notions of value and wealth, and the ongoing decline in the purchase power of the dollar are the results of this.
This is why proponents of cryptocurrencies believe that Bitcoin is the limited-edition, inherently valuable replacement for fiat money.
One criticism of Bitcoin is that it isn't as practical as the U.S. dollar in all of its incarnations, especially among individuals who haven't really tried to utilise it as a medium of exchange. For instance, it's unlikely that your neighbourhood gas station is ready to accept your Bitcoin in return for gasoline. And while the most of these claims may be accurate as of right now, it is not absurd to imagine a time when the majority of card readers and online retailers will accept Bitcoin debit cards. The idea that Bitcoin might become as widely accepted as the US dollar as a medium of exchange is not just a pipe fantasy.
Gold, which is much less liquid than the highly digitalized systems that support cryptocurrencies, would make it impossible to make the same argument. The U.S. dollar would have been replaced with gold a long time ago if that were the case. Because gold is not a useful tool for buying and selling goods and services, it was used as the commodity basis for national money rather than the actual currency.
Gold bars weigh a lot. They are difficult to deconstruct (like making change for a dollar) or transfer digitally (as you could exchange funds via debit card, or a Bitcoin wallet). Even tolerant businesspeople are hesitant to accept gold as payment unless they receive an amount significantly greater than the worth of the commodity or service they are selling. This is because the price of gold is usually erratic.
Bitcoin on the other hand, is digital. Owners of Bitcoin send digital money every day using comparable channels, just as you can access your dollars digitally (debit card, wire transfer, etc.). A Bitcoin debit card can be used for payment at establishments that have the necessary infrastructure, exactly like a Chase or Bank of America debit card.
This practical, everyday utility is what distinguishes Bitcoin from the constraints of gold, even though it hasn't quite been achieved at scale due to small but genuine adoption barriers. This crucial distinction is the reason why proponents of Bitcoin think that it can eventually replace gold as the world's reserve currency and become a widely-used medium of exchange.
Bitcoin and Gold Are Similar, But Very Different
The value of both gold and bitcoin varies. Both have intrinsic value—gold because of its physical qualities, and bitcoin because of the nodes and people who support it. They both have a certain amount of intrinsic worth that fiat currency, such as US dollars, Euros, and essentially every other national currency in circulation today, does not. They may both be exchanged for paper money.
Bitcoin is similar to gold in some aspects.
However, gold is mainly used as a store of value rather than a useful medium of commerce. Bitcoin's potential to become a widely-used medium of trade is not hindered by the basic limits that gold has, such as weight and indivisibility.
The building blocks are in place for Bitcoin to develop into the medium of trade that its proponents know it can be.
The game is now in your hands, world.
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