Bitcoin is often described as “digital gold.” It’s a handy analogy to describe how bitcoin has become an alternative store of value like gold – an asset whose worth (theoretically) won’t substantially decrease over time.
The best thing about this analogy is that it’s more than a casual comparison. Bitcoin and gold are actually very similar.
Because gold has been around for centuries, it’s hard to imagine a world where gold wasn’t valuable. But that world existed.
Gold didn’t emerge from the ground with a sign saying “Look at me, I’m valuable.” Human beings decided gold was valuable. As civilization evolved, people settled on gold as a form of payment. It could last for centuries without losing its key physical attributes. It was scarce. And it was shiny.
At some point, human beings decided gold was too limited in supply and too cumbersome to be used as a primary form of payment. So gold-backed money became the norm. Then almost 50 years ago, the U.S. severed the dollar’s relationship with gold. Most of the world followed suit. Now money is just money. And gold is just gold. Gold’s supply has no effect or impact on the global economy. And gold remains valuable because human beings say it is.
For an alternative store of value, gold has a little bit of volatility – just like bitcoin. But gold’s volatility is measured in years, not months or days. In 1976, it was trading around $488 per ounce. In 1980, it was trading north of $2,200 per ounce. In 2001, it was trading around $385 per ounce. In 2011, it was trading around $1,970 per ounce. And it’s currently trading around $1,277 per ounce.
Bitcoin is following a similar path to gold. Bitcoin was created in the wake of the 2008 financial disaster. And people decided bitcoin, like gold, was valuable.
People wanted a financial system where you couldn’t keep printing money to get out of debt. They wanted a scarce asset (there are only 21 million bitcoins), but on the internet. They wanted sound money for the digital age, easily transferred around the world and difficult to manipulate.
And much like gold, bitcoin has become an alternate store of value. When people lose faith or confidence in their economy, they move money into bitcoin – much like they do into gold. In Venezuela, people have more confidence in bitcoin than they do the local currency.
The similarities between gold and bitcoin are uncanny. So when gold bugs like Peter Schiff slam crypto, I have to roll my eyes.
Gold and bitcoin are really not that different. The two biggest differences between them are time and portability. Gold has had centuries to burnish its reputation as an asset, but it isn’t portable. Bitcoin has been around for only 10 years, but you can transfer it anywhere in the world quite easily. You can even program it!
And bitcoin is here to stay. It has a growing user base that believes it has intrinsic value. The number of people holding on to bitcoin for the long haul is constantly rising. And its fundamentals are sound.
In 10 years, gold bugs won’t be arguing about whether bitcoin is viable. Instead, they’ll be wondering how much of their portfolio should be in bitcoin.
And if you get in on bitcoin now, you’ll reap the rewards for your early investment.
Senior Managing Editor, Early Investing