Is Bitcoin digital gold or not? Why is the digital currency compared with gold?

When we think of gold, we think of it as one of the oldest assets of humanity. However, gold still plays a vital role in the modern economy and has several useful functions. But there are new payment methods that can replace traditional payment methods.

Cryptocurrencies are digital currencies that strive for a decentralized approach to transactions in order to eliminate additional fees. When we think of such cryptocurrencies, we usually think of Bitcoin, the first and largest cryptocurrency in the world.

So how do Bitcoin and gold compare today?

In the modern world, many people call Bitcoin digital gold. Many investors and even governments have recently switched their attention from gold to BTC, using the latter as a security asset. So is Bitcoin really a digital version of gold?

To answer this question, we need to go through both of these assets and understand what they have in common, as well as their differences. Perhaps you will start looking at Bitcoin differently than before, so let’s start with a brief information about gold.

Gold

Gold has been used as a means of payment for a very long time. This ancient asset was highly valued because of its brilliant color, which was then used for aesthetic purposes on precious stones, jewelry, etc. But with the development of technology, gold began to be used for other purposes.

First, gold is considered a vital component of the country’s economy. To illustrate this, the dollar (like the USSR rubles) used to be based on gold. Because of this, the United States and the USSR sought to have more gold so that they would have a better economy.

But gold has other qualities that can be useful to people. Since gold is a metal, it conducts electricity. In fact, gold is a much better conductor of electricity than other metals such as copper, silver, etc. However, due to the limited amount of gold, not many institutions use gold in technological aspects. Because of this, gold is still the determining factor of the country’s economy.

But why do people attach so much importance to such assets as gold, if other elements may be equally important? This leads us to the paradox of value. For example, water is one of the most important components of our life, but it is much less valuable than gold, although it is more important. There are several reasons why this value paradox exists.

First of all, we value things that are harder to get. Gold mining is a very complex process. This is due not only to high technological costs, but also to the risk to the lives of many miners. Moreover, even the earth can be damaged during gold mining.

Secondly, there is much less gold than water. It is unknown how much gold remains to be mined. According to The Minted, about $ 8.6 trillion worth of gold has already been mined.

A limited amount plays a huge role in determining the value of gold. Ultimately, the value of each asset depends on the factors of supply and demand. The demand for gold is high because many people want to buy it to make jewelry, governments use it to prevent market inflation, and research institutions can use it for technological reasons.

Gold is also inversely proportional to interest rates. If the price of gold is higher, interest rates are usually lower. If the price of gold is lower, then interest rates are usually higher. So, gold is a cure for economic downturns.

Fiat currencies

If gold was not practical enough to be used as a payment method, then perhaps fiat currencies could be the solution.

Fiat currencies are modern means of exchange. They are produced through legitimate trades, such as dollar bills, coins, etc. These legal auctions can be used to buy almost anything. However, there are some problems with the fiats.

First of all, they are controlled by the state. The government decides on the issue of delivery, which ultimately affects its cost compared to other fiat currencies.

Secondly, paper currencies are easy to counterfeit. There are numerous cases when people produced counterfeit money, which caused indirect damage to the country’s economy.

The fact that fiat currencies are controlled by the government makes them centralized. Such centralization may mean an additional fee for their exchange. Centralization also means that you have less control over your own money. But there is also a solution to this problem: cryptocurrencies.

Bitcoin

Bitcoin is the world’s first successful cryptocurrency. Its main goal is to decentralize, eliminating the need for a third party, such as banks and governments.

Thanks to the use of blockchain technology, the Bitcoin network consists of thousands of computer nodes that work together and do not rely on a single object. These nodes are trying to solve complex mathematical problems in order to confirm the transaction. If the nodes reach a consensus after the transaction, then the block of information associated with the transaction is added to the chain of other blocks, forming a so-called block chain.

In blockchain technology, the nodes responsible for confirming the transaction are awarded additional BTC tokens as a reward for the technological costs associated with the process. This process is known as mining, and the nodes responsible for it are known as miners. Technically, the nodes compete with each other when mining. The more powerful the computing power of the miner, the higher the probability of successful BTC mining.

As the Bitcoin network grows, mining becomes much more difficult. A block of transactions in the Bitcoin network is confirmed every 10 minutes. The current reward for the block is 6.25 BTC. This amount is halved approximately every four years. In 2024, the reward for mining is planned to be 3,125 BTC.

Halving of  BTC. Source: Investopedia

The halving process is designed to avoid asset inflation. According to Coinmarketrate.com currently, Bitcoin has 18.8 million BTC in circulation and a limited amount of 21 million BTC. The full supply is expected to be reached in 2140.

Bitcoin and Gold: what is their ratio?

• Similarities

The increased complexity of mining, as well as the limited supply, make Bitcoin similar to gold in some aspects. Moreover, like gold, BTC cannot be forged. Blockchain technology suggests that hackers need to control 51% of the network if they want to manipulate data in the blockchain. Although it may seem possible, it is technically unattainable, because it would be insanely expensive.

As for the price, both gold and BTC are highly dependent on external factors, such as government decisions, the cost of fiat currencies, availability, etc.

If the government bans cryptocurrency, it can negatively affect the price of BTC. The same can be said if the government takes a negative position on gold. This is directly related to the availability factor. People in some countries do not have access to Bitcoins and other cryptocurrencies, because the latter are prohibited. For example, Bolivia, Denmark, Turkey, India and many other countries no longer support the idea of cryptocurrencies.

But some countries have bought Bitcoin as a means to improve their economies. For example, the Bulgarian government has more than 200,000 BTC. An increase in the price of BTC can have a very favorable effect on the state of this country. If BTC reaches the price of $100,000, the Bulgarian government can have a BTC worth at least $20,000,000,000.

Liquidity is another factor that makes them very similar. Both gold and BTC have liquidity and are efficient in terms of exchange.

Last but not least, both gold and Bitcoin have been linked to environmental issues. It is clear that gold mining requires the destruction of some of the natural habitats in the world. Moreover, natural resources (for example, water) can be polluted during the extraction process. Let’s not forget that human lives are also under threat. It is this complexity of mining that gives gold great value.

Bitcoin, on the other hand, is a Proof-of-Work cryptocurrency, which means that the computing power of a node determines the probability of a reward for mining. Since the nodes compete with each other during mining, a lot of energy is spent. Such high energy consumption is becoming a problem for the whole world, as miners leave carbon traces that are potentially harmful to the environment. To solve this problem, many miners are looking for ways to switch to renewable energy sources.

But there are several significant differences between these two assets.

• Differences

Volatility is the biggest difference between Bitcoin and gold. The price of BTC can change in a matter of minutes, and this change can be significant. However, gold is more stable compared to the crypto.

Over the past five years, the price of BTC could change by more than 10,000%, while gold has not even doubled its value in five years.

The price of gold per kilogram over the past five years. Source: BullionVault

Another difference between them is security. The only way to make you vulnerable to the theft of your BTC tokens is if a hacker gets hold of your private keys, or if a hacker manages to control 51% of the network.

The latter is technically impossible on a large network such as Bitcoin. The theft of your private keys will be impossible only if you store them in secure crypto-wallets, such as WallBTC or SpaceBot.

On the other hand, gold is physical. It can be stolen, especially since it is usually controlled by the central authorities. There were many cases of gold theft. However, such cases are rare, and gold is still safe.

Finally, transparency is another factor that differs from each other.

Bitcoin transactions are anonymous, only wallet addresses are publicly available, but no one can recognize the person behind the address. This anonymity is what distinguishes Bitcoin from other payment methods.

However, gold is usually registered when it is used for transactions. Both Bitcoin and gold can be tracked, but bitcoin addresses remain anonymous, and gold does not.

Conclusion

Whether Bitcoin is digital gold depends on how you feel about it. However, most people are gradually switching from gold to BTC, since the latter has proven to be quite effective and safe.

Moreover, this is only the beginning of cryptocurrencies. Bitcoin can easily rise in price even higher, despite the fact that it is already the largest cryptocurrency on the market.