How do we assess that something is better than gold?
Here are 6 factors to look at.
Bitcoin vs Gold: Which is Better?
by Luis Buenaventura Pub Sat, Aug 2, 2014
this article is an extract. go here for source.
At the recent Bitcoin 2014 conference in Amsterdam, Xapo.com founder Wences Caceres posed a thought-provoking question: If you wanted to set aside $5,000 for your great-great-grandchildren 100 years from now, how would you do it?
Money has existed in various forms for over 5,000 years, and it’s incredible that the solution to this question isn’t more straightforward. Obviously, keeping it in US Dollars won’t work – 3.5% average annual inflation would shrink its buying power to just over $200 in that time frame. The stock market wouldn’t work, as there aren’t many hundred-year-old corporations with which to invest the money in. You couldn’t buy a meaningful amount of real estate with it either, so land is out of the question.
The irony is that the only thing that might work is the natural resource that started the concept of global currency in the first place: gold. If you bought $5,000 worth of gold today, the chances that it would be worth at least that much 100 years from now are, historically speaking, quite good.
This is perhaps the most amazing thing about Bitcoin: it’s the culmination of 5,000 years’ worth of financial innovation. Humanity has finally come up with something that is, at least on paper, better than good old gold.
But how do we assess that something is better than gold in the first place? Well, sit down, grab a San Mig 3-in-1, and let the listicle commence!
We can’t use things that expire or dissipate easily, which is why most early societies used salt or seashells or stones, as opposed to say, corn kernels or diced wooly mammoth meat.
As pricing became more sophisticated, the need to have smaller denominations forced us to start using metals. These could be melted down and split apart, and were a lot more flexible than stones and seashells, rendering the latter largely obsolete.
Money that you can’t transport is not terribly useful. This is the reason the huge Fei stones from the oft-studied island of Yap never became a global standard, and also happens to be the great Achilles Heel of gold. Being both heavy and voluminous, gold forces its holder to use third-party services like banks to store and secure it. The use of banks for this purpose will inevitably loop us back to paper again, because at some point you’ll stop trucking gold in and out of that vault and instead just trade certificates, which is essentially all that paper money is. In order for money to be “perfect,” it needs to weigh nothing.
Being able to quickly verify money and its various denominations makes commerce possible. There are a couple of ways to quickly verify gold, the most famous of which was discovered by Archimedes while taking a dip in a hot tub. These days, we just check the serial number or, failing that, drop a tiny bit of nitric acid on it.
This is a fancy word for “interchangeability.” If you were to give me a gold coin in exchange for another one that I own of equal weight and size, we can both be entirely assured that our respective net worth has not changed. Fiat currencies are particularly good at fungibility, since every $100 bill is essentially the same as any other, even ones that are worn or damaged.
The final and arguably most important characteristic is that the resource needs to be scarce, which is where precious metals again excel, and is coincidentally how we answer the question we started our journey with.
Only about 2,500 metric tons of gold are dug up every year, adding to a global total of roughly 165,000 metric tons. (That’s about 3.5 Olympic-sized swimming pools of the stuff, if you’re looking to take a Scrooge McDuck-style dive). Gold’s natural scarcity ensures that we can’t easily make more of it whenever we feel like it, thus preserving its value over generations.
Although fiat currencies excel at durability, divisibility, identifiability, and fungibility, they’re patently terrible at maintaining their value. Why? Their scarcity is artificial and can be manipulated by governments. As a consequence, the pesos or dollars in your pocket are worth less and less every year. (Consider that the US dollar has lost over half of its value in the past 30 years, and 96% of its value over the last century.)
Gold has historically been very good at staying valuable. It’s steadily increased its value over the centuries, even as we mine more of it. (This rather involved study establishes gold’s value as having increased 500% from the 13th century to the 19th.)
Gold or Bitcoin?
But Bitcoin is even better. It checks all of the proverbial boxes mentioned above, and only has to prove that it’s a worthy maintainer of value over time in order to supplant gold as a “better standard.” Its digital nature allows it to be durable, divisible, verifiable, and fungible, all without the burden of having to carry bullion in your purse.
Even better, its mathematically-constrained scarcity makes it deflationary by design, just like gold. New bitcoins are generated as people spend BTC and their transactions are added to the global chain, at the rate of 25 BTC for every new batch. This BTC reward halves every 4 years, and over the next 120 years, the reward will get so small that it reduces down to 0.00000001. Since that number is the smallest unit that the Bitcoin protocol recognizes, no new bitcoins will ever be created after that point.
The only area where gold is noticeably better than Bitcoin is in terms of historical proof, in that it’s got 5,000 years’ worth of street cred behind it. It’ll take some time for Bitcoin to prove that it’s a worthy successor, but when it does… well, I look forward to what our finances will look like over the next 5 millennia. – Rappler.com