Bitcoin Is No Substitute for Gold

With Bitcoin making the news last week when the Securities and Exchange Commission (SEC) finally approved exchange traded funds, it’s a good time to review the topic again.

Bitcoin still offers the potential to serve as a form of honest money and to end-run the central bankers and politicians who have abused the fiat system so badly.

Yet some proponents still market the crypto asset as “digital gold.”

That combined with the dramatic rally in bitcoin prices over the past year means there are plenty of interested investors.

There are good reasons to own bitcoin, but they are not the same reasons to own physical gold.

The notion of bitcoin as “digital gold” is dangerous and misleading.

First, the comparison with gold is nonsense. Bitcoin is not a reliable store of value nor is it a solid safe-haven asset.

Bitcoin is not proven or permanent. It is better to think of bitcoin as a promising technology.

If it succeeds in gaining widespread adoption and use, it will help solve some massive problems with world monetary systems. That hasn’t happened yet and there is no certainty it will.

Additionally, bitcoin will flourish just so long as it remains the most popular, useful, and secure cryptocurrency. Bitcoin is certainly the frontrunner. It has a bigger network effect and an advantage in terms of “brand” awareness versus other tokens, many of which have failed or been exposed as outright frauds.

Ask anyone who can remember the social media pioneer MySpace whether those advantages meant the technology company would remain permanently on top.

Bitcoin’s fortunes are tied to a community of volunteer developers working to improve and update the protocol. Humans are making judgments about the direction development should take, and it is therefore possible they will get it wrong.

Take, for example, the controversial decision to implement the Lightning Network.

Several years ago, there was a split in the community over the question of how best to scale up the ability for bitcoin to process more transactions per second, when severe speed limitations and costs became apparent during periods of high volume.

A majority decided to abandon trying to scale on the bitcoin blockchain itself and instead pursue a technology called Lighting Network.

While progress has been made in developing this second layer solution, there are plenty of problems remaining. Among them is the fact that Lightning is nowhere near as decentralized or secure as the bitcoin network itself.

Bitcoin is an innovative technology with both the potential to change the world AND the potential to fail and become worthless. Investors should buy it because they understand the project and believe it will succeed, not because it is “digital gold.”

Gold is a completely different animal. It is not a technology, and its value isn’t dependent on innovation, electricity, and an internet connection. There are no developers behind it.

Physical gold is scarce, durable, and beautiful and therefore valuable. These properties have made it useful as a safe haven and as a store of value for thousands of years. There is no substitute.

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