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9 Things Bitcoin & Gold Have in Common
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Last Updated on: 1st March 2014, 06:46 pm
At first glance, you might think that gold and Bitcoin couldn’t be any more fundamentally different…
Bitcoin is a digital currency, like a bank balance on your computer that never takes the physical form of money. As a digital currency, it simply transfers from one person’s virtual wallet to the next, with a few strokes of the keyboard or with a couple of taps on an Iphone.
Bitcoin was invented just 4 years ago as the world’s first cryptocurrency, and even though there have been many copycats since, it remains the king of the newest generation of electronic currencies.
In contrast, gold has been used as currency for at least four-thousand years and is a time-tested medium of exchange. Gold is physical attractive, if not mesmerizing.
Over the centuries gold has typically been the currency of choice for fiscally prudent governments who wish to govern with a stable form of money. Even though nearly every country has unhinged their money from the prudent restraints that gold mandates, they still hoard tons and tons of gold.
So there you have it…
Bitcoin is a nebulous serious of electronically stored digits that represents money. It’s new, untested and has never been used by any government as an official form of money.
Gold is the battle-tested granddaddy of all currencies. It’s attractive and you can touch it, and it’s hoarded by nearly every government in the world and has been used as legal tender.
So what could gold and Bitcoin possibly have in common?
Actually, a lot more than you’d think.
If you dig a bit deeper, you’ll find that these two currencies have many surprising parallels…
A good part of the demand for both Bitcoin and gold is derived from the fact that people value privacy and anonymity. Everyone knows how much Warren Buffett’s is worth, because all they have to do is look up his stock holdings.
But for a gold investor like Jim Rogers, it’s impossible to tell how much money he has – all we know is what he tells us (which is that he loves gold). Likewise, Bitcoin investors do not have to disclose their holdings to anyone, and it’s this strict confidentiality that attracts investors who value privacy.
2) No One’s Liability
When you own a dollar bill, what do you really own? You own a promise from the U.S. government to make good on the note. Dollar bills read “This Note is Legal Tender for All Debts, Public and Private”.
And since we’ve been off the gold standard for 40 years, the government backs it not with gold, but with the “full faith and credit” of the U.S. government. It’s a liability of the government, and only as good as their ability to maintain sound money. When they fail to do that, you lose money.
With gold and Bitcoin, there’s no one making the guarantee — there's no need for one because the value is self-evident. Many pundits belittle Bitcoin because it’s not backed by any government, but neither is gold.
Let's get this straight — no government backing is a benefit, not a drawback. There are centuries of human history that prove government-guaranteed currencies eventually fail, each and every time. When's the last time gold's gone to zero?
3) Slow-Growing Supply
There are currently over 12 million Bitcoins in circulation, and the digital currency is programmed to top out at 21 million Bitcoins in the next 20 years, or about 3% growth per year. In a similar fashion, the amount of gold that’s mined each year increases the supply by about 2% each year.
The moderate but steady growth in gold has proven to keep up with long term demand and keep prices of goods and services stable in terms of gold. The model for Bitcoin is right in line with gold, by design.
4) Little Government Intervention (Because they can’t)
Governments and their central banks have always attempted to manipulate gold prices by direct and indirect means, although not very successfully. The ultimate goal of most governments is to detach the country’s currency from gold so that money can be created out of thin air and spent like a drunken sailor. But they also want to suppress the price of gold so that any currency weakness can remain undetected.
Fed Chairman Volcker obsessed about the price of gold, and knew that gold is always the canary in the coal mine when it comes to warning signs that a currency is in crisis.
It would be naïve to think that governments will leave Bitcoin alone either. At this point there’s only regulation of the money flows into and out of Bitcoin because it’s the part that’s most easily controlled, but don’t rule out hacking attempts and trading manipulation by governments in an attempt to discredit the upstart currency.
In the end, neither gold nor Bitcoin can be totally controlled by any government like they do with Dollars, Yen, or Euros. Bitcoin and gold represent a bastion of independence from oppressive and irresponsible government regimes who strive for more and more control over their people.
5) The Fed Hates Them Both
To the Federal Reserve, anything that provides competition to their world monopoly on money is a threat. Federal Reserve Chairmen and board members were never so prominent as they’ve been since we ditched the gold standard, because our current fiat system gives them so much power. Because Bitcoin is a fiat currency without a master, you can be sure that the Fed is looking for ways to tame it.
6) Both Will Survive the Dollar
Ever heard of a Kuan?
It’s the oldest surviving paper currency issued by Ming Dynesty in the 14th century. This paper currency was quickly rendered worthless by inflation and the Chinese went back to gold for the next 400 years.
Gold was the standard for money long before the Kuan, and has been used long after it disappeared from circulation. Just like the Kuan, the dollar will eventually be bested by gold too.
As long as Bitcoin can function without any further human intervention beyond those who created it, Bitcoin can and will outlast the dollar as well.
7) Inflation Protection
The more money there is in circulation, the higher the value of gold and bitcoin. In light of the dollar printing spree the Fed’s been on the last few years, it’s not a coincidence that gold soared to an all-time high of $1,940 and Bitcoin skyrocketed 12,600%, from a price of $6 to $816 in 2013.
8) Protected from Confiscation
Throughout history, governments have attempted to confiscate gold from their people, but the enforcement of such an act is difficult and necessitates force. When President Roosevelt declared Executive Order 6102 that outlawed gold ownership or trade in the U.S. and required people to turn in their gold to reserve banks, it’s safe to say that not everyone did. There’s only one case where a person was jailed for failing to do so.
When it comes to Bitcoin, it would be nearly impossible to confiscate a large amount of the digital currency since it's hard to tell who actually owns it.
9) Crisis Protection
It’s no coincidence that Bitcoin has become popular in Argentina, Greece, Cypress and other countries that destroy the value of their own currencies. With Bitcoin people in crisis can get their money out of the local currency that in many cases is getting devalued every day, and send and store the money quickly and discreetly outside of the government’s capital controls.
Gold had served that same function for thousands of years, and still does, but Bitcoin might actually do it better as long as the value stays relatively stable.