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Bitcoin vs. Gold vs. US Dollar

By Ed Moy,

There have been a lot of comparisons lately between bitcoin and gold, most of it one-sided. Given my unique vantage point, I thought it was time attempt a more balanced view.

Liquidity. The U.S. dollar is the world’s reserve currency and easily the most liquid, though there has been manipulation in foreign exchange markets. Gold comes in second, with a well-established network of regulated exchanges, though also subject to alleged manipulation like the London Fix. Bitcoin is a distant third, with mostly unregulated exchanges.

Time-tested. Gold is the undisputed king of longevity for being in use since the dawn of civilization. The first U.S. dollar was coined in 1794, but the first modern dollar began in the 1970s when it was no longer redeemable for gold, but instead became a fiat currency. Bitcoin was officially introduced in January 2009.

Medium of exchange. The U.S. dollar wins. Virtually everyone accepts the dollar in exchange for goods and services. Gold is far less accepted as a medium of exchange, but some states are figuring out ways that U.S. bullion coins can be used in everyday commerce. Being new, bitcoin has limited acceptability, but more retailers and vendors are using it, making it the fastest-growing medium of exchange to date.

Portability. Bitcoin exists only in cyberspace and thus is the most portable, with the caveat that there needs to be electricity and connectivity. Carrying 1 ounce gold bullion is easier than carrying its cash equivalent is, but eventually both become too bulky in large amounts.

Investment. Gold wins as a long-term investment, but bitcoin wins as a speculative investment. Gold is a tangible asset and is part of many balanced portfolios. Bitcoin’s volatility offers speculators a chance to profit handsomely. Because the U.S. dollar serves as the world’s reserve currency, its value fluctuates within a very small band. Unless someone has huge amounts of capital to invest, the returns are not usually large enough for the individual investor.

Payment systems. Bartering was likely the first payment system and was revolutionized by gold. Gold not only has intrinsic value, but through weights and measures, it standardized currency. The resulting new payment system enabled commerce on a large scale. This payment system evolved into redeemable notes, which eventually morphed into fiat currency, which the U.S. dollar reigns supreme in all forms including the electronic representation of fiat currency, namely credit cards and wire transfers. We are at the earliest stages of a potential revolution in payment systems, mainly one that exists solely in cyberspace. Leading the way are cryptocurrencies, of which bitcoin is the most recognizable.

Financial privacy. Most cash transactions are completely private, but if large sums are withdrawn, financial institutions have to document it and report to the regulators. The same goes for gold. While bitcoin does not have the same reporting requirements, all transactions are recorded on the public ledger, albeit in a pseudonymous way.

Illicit use. The amount of dollars used in illegal transactions dwarfs the amount used with both gold and bitcoin. However, deals that require a lot of physical dollars or gold become less practical because of the bulk involved. That makes bitcoin an ideal candidate for big transactions, except that large transactions could be noticed on the public ledger and traced back to its pseudonymous source. It is too early to tell to what extent bitcoin is being used for illegal activity, but only a few arrests have been made thus far.

Storage. Bitcoin is the clear winner here because it is easily backed up, although electronic dollars comes in a close second. Physical gold comes in last because its storage issues are the most complicated.

Scarcity. Gold is clearly the scarcest because there is only a limited amount and it can only be divided up practically in a finite way. Bitcoin is also scarce because only a limited number can be mined, but each coin can be divided into 8 decimal places. The U.S. dollar picks up the rear . . . can you say quantitative easing?

Stability. Even accounting for inflation and relative to other currencies, the U.S. dollar is less volatile than gold or bitcoin are, losing 97 percent of its purchasing power since 1900. Gold on the other hand has gone from $30 to almost $2,000 and now is about $1,350 in the last 40 years. Bitcoin has ranged from almost zero when it began up to $1,200 and now around $630.

Of course, this is a snapshot in time and given the speed of change, a broadly accepted cryptocurrency can change everything very quickly. But ultimately, it is not about which one is better, but what works best for each individual in each transaction. The future is likely to see a range of currencies co-existing with each other, each competing along a different margin.

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