To explore whether bitcoin is better than gold, we first need to understand the characteristics people look for when they consider using anything as money.
What makes good money?
Not just for greedy hoarders, money serves a unique purpose. It allows people to easily trade with each other. Barter, or direct exchange, is limiting. Money plays a middleman role so that individuals can indirectly exchange goods. This in turn has many positive effects, such as allowing people to better specialize their labor, leading to economic growth.
Throughout history, many goods served as money. Early forms included seashells, grain, and beads. In most places, gold and silver emerged as winners, subsequently serving as money for thousands of years.
Looking back at the origins of money and observing why some succeeded while others failed allows us to ascertain the qualities of sound money.
Fundamentally, money is a technological discovery that solves a problem that has always plagued humanity: How can we move value across space and time?
To explain money’s origins, Carl Menger, a prominent 19th-century economist, came up with the idea of salability. As Saifedean Ammous explains in The Bitcoin Standard,
Menger…came up with an understanding of the key property that leads to a good being adopted freely as money on the market, and that is salability – the ease with which a good can be sold on the market whenever its holder desires, with the least loss in its price.
Although any good can be used as money, all goods are not equally salable. Certain goods that are more salable make better money, and people tend to prefer them when they are offered as part of a transaction.
Diving deeper: Why Is gold good money?
Salable money must be divisible, portable, durable, verifiable, fungible, and scarce.
Like many other inventions, the invention of money has improved over time. Thousands of years ago, people figured out how to extract and refine rare metals from the earth. It was discovered that one of these metals, gold, exhibited many strong qualities of money. Let's go through them one by one.
Gold is highly divisible. In theory, it is divisible to the atomic level. In practice, gold has been crafted into a vast number of weights and values to serve different purposes.
Gold is relatively easy to transport. Although it is heavy and can be costly to move, it is much easier to transport gold than to transport other stores of wealth, like fine artwork or palaces.
Gold is very durable. Physical gold does not rust or decay and is impossible to destroy. All the gold that has ever been discovered is still around today.
Verifying the authenticity of gold can be tricky. Its density and weight make it difficult to imitate, but it can be done.
Gold is fungible, meaning that one piece is interchangeable with another. When you have a gold coin with some certain amount of gold content, you don’t really care which gold coin you have.
Gold’s scarcity is key to understanding what sets it apart from other forms of money. Gold is rare in the earth’s crust, and tends to be harder to extract from the earth than other metals, such as copper or silver. Because finding and mining gold is so costly, the supply of gold has only grown about 2% each year over the course of history.
This is what has allowed it to function as a store of wealth. When demand for gold increases, extraction costs limit suppliers from producing so much more gold that it ceases being scarce. Therefore, people who have gold see the price value of the gold rise. Gold holders are rewarded by seeing their wealth increase along with increased demand for gold. When others observe this, they are drawn to holding gold as well. Eventually, people learn that gold can be used to store wealth over long periods of time, even generations.
This leads to another important monetary quality of gold – its long history. Human civilizations across the entire planet have gravitated towards using gold as money over the course of thousands of years. Its long history assures people, through their intuitive understanding of the Lindy effect, that gold is likely to continue serving as money far into the future.
Gold is good, but bitcoin is better
Similar to how gold was a technological advancement over other forms of money, bitcoin is an improvement on gold. As Chris Kuiper and Jack Neuruter of Fidelity Digital Assets describe in their report, Bitcoin First,
Bitcoin’s first technological breakthrough was not as a superior payment technology but as a superior form of money. As a monetary good, bitcoin is unique.
Let's look at bitcoin's monetary qualities.
Like gold, bitcoin is divisible. Today, each bitcoin can be divided up into 100 million units known as satoshis. However, bitcoin is digital, so in the future, its software could be upgraded to allow for division into ever smaller fractional units.
Bitcoin is much more portable than gold. Unlike gold, which is difficult to lug around, bitcoin is digital, making it just as easy to move between neighbors as it is to move across the planet.
Bitcoin is highly durable. It can be lost by being sent to an address that nobody can access, but it is impossible to destroy. Since every bitcoin node in the world contains the complete ledger of all bitcoin transactions, only a civilization-ending catastrophe could destroy every copy, after which stores of wealth would not matter anyway.
Bitcoin is verifiable with mathematical certainty. This means that humans have not yet invented a computer that can counterfeit bitcoin. Computers powerful enough to create fake bitcoin are still decades or centuries away. However, even if and when that day arrives, it will be possible to transition the bitcoin protocol to another cryptographic algorithm that will preserve verifiability.
Bitcoin is fungible in the sense that all transactions look the same on the bitcoin blockchain. However, because the blockchain is public, it is possible to trace the history of transactions and see how bitcoin has been passed around. This reduces fungibility, because it would be possible for miners to “blacklist” certain coins based on their history. New privacy enhancements for bitcoin, such as Taproot and the Lightning Network, are helping mitigate this issue.
Bitcoin is scarce, as it is the first money with a truly finite supply. Today, each time a bitcoin miner finds a block, new coins are minted. However, this process will complete when the total supply of bitcoin reaches about 21 million, which is estimated to take place in a little over a century. After that, bitcoin mining will cease. Bitcoin’s fixed supply schedule makes it absolutely scarce and ensures that unexpected supply increases will never dilute the bitcoin people hold.
It is true that gold’s supply has been remarkably predictable throughout history. However, as we transition to becoming a spacefaring species, that may change. In contrast, bitcoin’s supply is perfectly mathematically predictable and fixed.
Gold has been around much longer than bitcoin, and is more widely recognized. Bitcoin's meteoric rise is unprecedented, but we have to give gold its due on this one.
Given these facts, it’s pretty clear that bitcoin improves upon gold’s divisibility, portability, durability, verifiability, and scarcity. However, there’s another role that money plays: censorship resistance. In fact, this quality of money was only recently discovered. Before modern surveillance technology combined with digital payment technology to enable comprehensive transaction censorship, the censorship resistance of any particular type of money went unobserved.
Bitcoin is censorship resistant
Modern, centralized institutions can limit transactions and impose capital controls, and these capabilities provide immense power. This power can be and is used for both good and ill. It is a fact that power corrupts, and there are countless examples of regular people all over the world being subject to unfair restrictions on their ability to use money. As Vijay Boyapati elaborates in The Bullish Case for Bitcoin,
A new attribute, which has become increasingly important in our modern, digital society with pervasive surveillance, is censorship-resistance. That is, how difficult is it for an external party such as a corporation or state to prevent the owner of the good from keeping and using it. Goods that are censorship-resistant are ideal to those living under regimes that are trying to enforce capital controls or to outlaw various forms of peaceful trade.
For transactions between people that are located close together, gold is more censorship resistant than digital payment methods like Venmo or Paypal. However, gold is not useful at all for payments among people who meet on the internet. Moreover, gold can be confiscated or seized.
In contrast, bitcoin is very censorship resistant. Although bitcoin transactions are not hidden, as they are recorded on a public blockchain, bitcoin allows for permissionless transactions. Individuals and institutions can move value across digital networks without approval by intermediaries like governments or traditional financial institutions. Anyone with internet access can transact using bitcoin.
In recent years, the number of rules and regulations that censor certain transactions, even ethical and legal ones, has dramatically increased. As governments become increasingly interventionist, people’s natural rights to freedom and prosperity are threatened.
Money is technology. Bitcoin is an upgrade.
In the thousands of years since money was invented, as people have experimented with many different objects and systems, certain qualities have emerged as being markers of good money. These qualities were selected naturally over time through the preferences of individuals and groups.
Both gold and bitcoin are better stores of wealth than pieces of paper printed in a government office building. All other things being equal, we would not expect anyone to freely choose to use money that is paper, limitless in supply, and controlled by a single entity – even if that entity maintains we can trust its “full faith and credit.”
But is bitcoin better than gold? Yes. In the modern economy, where portability of value across the internet is a key use case for money, and censorship resistance is an increasing concern, bitcoin wins out over chunks of rare yellow metal dug out of the ground.
Like gold before it, which upgraded money from its predecessors, bitcoin is an upgrade to the technology of money. It improves upon gold because it is more divisible, portable, durable, verifiable, scarce, and censorship resistant than gold. Just as it is unsurprising when a superior technology displaces its predecessor, all signs point to bitcoin continuing to be adopted as money by all who are free to choose.