Transport and Velocity: Could Bitcoin be a Replacement for Gold?

Gold has been used as a store of value for eons, thanks to its beauty and almost magical ability to never tarnish. Furthermore, despite radical shifts in human values over the past 100 years, its worth still has not diminished – even soaring to over $1,000 an ounce in recent times.

Now, though, there is a new, digital challenger on the scene that, when its price chart is compared with that of gold, bears some striking similarities

It’s no wonder, then, that companies like Netagio now allow people to trade bitcoin for precious metals like gold – it is a sign that investors want the ability to trade BTC seamlessly with other investment vehicles.

In a sense, bitcoin could be considered an upgrade from gold. Some even consider it as gold with transformational, information-like properties.

Long-term run-up of gold versus the short-term run-up of BTC. Source: MyBankTracker

Digital gold with a twist

George Gilder, author of the forthcoming book Bitcoin and Gold: The Information Theory of Money, is impressed with bitcoin and has developed a well-thought argument for bitcoin as a sort of ‘next-generation gold’.

That’s because bitcoin builds upon the properties of gold and has spawned an information-based variation, he said.

Gilder told CoinDesk:

“Satoshi [Nakamoto] was right with bitcoin. That’s what amazes me. Satoshi arrived at a foundation for the value of bitcoin that’s valid.”

Gilder sees economic uncertainty as advantageous to bitcoin, a fact evidenced by the increasing interest in bitcoin observed in Argentina and other countries hampered by volatile fiat currencies.

The decline of the Argentine peso versus the US dollar from 2013 to 2014. Source: exchange-rates.org

As an example, Gilder believes that increased government control of money, such as capital controls or quantitative easing, means more uneasiness in terms of economic sentiment.

“The more money [governments] print, the more uncertain the people become,” said Gilder. “Bitcoin is based on the understanding that the money supply doesn’t really matter.”

Adrian Ash, the head of research at BullionVault, a gold storage company, pointed out:

“Digital gold currencies have been tried and failed many times in the last 20 years. They came to nothing thanks both to state resistance, but also to lack of adoption.”

However, it’s safe to say that bitcoin has progressed further than its failed predecessors. That may be, though, because previous electronic money alternatives like E-gold were backed by gold, and not by cryptographic keys. As a result, bitcoin might be the first to offer a substantial alternative that would appeal to gold enthusiasts.

Role as a currency

Another characteristic of bitcoin that makes it seem like an upgrade over gold is its protocol that allows value to be moved quickly around the globe. Regardless of how supportive gold enthusiasts are of their favorite store of value, there’s no denying it has limited appeal to mainstream consumers.

Bitcoin adoption by the average person remains a hurdle to overcome to ensure success, but the digital currency’s combination of novel innovations might allow it to complement existing methods of exchange.

“[The] chicken-and-egg situation [of adoption] might be resolved by bitcoin’s most exciting aspect – zero-cost exchange of value,” said Ash.

Along with adoption as a means of exchange, bitcoin could become a very useful currency, commodity and recording mechanism via its block chain. According to Gilder, the problem of velocity, or how much people spend a thing of value, is what will ultimately make bitcoin a success. Or a failure.

Gilder said:

“Velocity is what determines value. Not just printing money. Satoshi [Nakamoto] has an absolute 21 million bitcoin limit. Bitcoin is determined by velocity, by turnover rate governed by the people holding the coins.”

Bitcoin might be an iteration of gold – a 2.0 version. People can hold stores of it, as well as spend it – a property that gold cannot compete with.

“It’s important to note that gold isn’t used as currency anywhere today,” said Ash.

Given that even Ash concedes this point, bitcoin’s long-term success may lie in adoption. In other words, whether bitcoin is able to triumph and replace gold will lie with its peer-to-peer network, and just how large this base of bitcoin believers becomes in the years ahead.

Bitcoin believers

It’s hard to tell how many bitcoin users there really are. New bitcoin products and services are seemingly announced every day, and Mary Meeker’s presentation of bitcoin’s growth via the use of a chart showing the number of wallets in use (see below) shows there is traction.

While wallet use is growing, it’s not a one-to-one correlation – or even if many of the newly created wallets actually have bitcoin in them. It does show increased awareness overall, however.

Source: CoinDesk

However, it can be argued that gold investors will have to see the promise of bitcoin over the precious metal not only as a store of value, but also as a spending and transactional innovation.

The rise of consumer services continues, and energy focused on that particular sector of the bitcoin economy is notable.

For instance, in Canada, there are a number of options for people to buy or sell bitcoin. Not only do residents of Canada have access to an established exchange for the Canadian dollar, there are storefronts and even bitcoin ATMs available in most major cities.

Access to bitcoin for gold investors is the best way to prove the value of bitcoin to this subset of the market, and this is especially true in the US market.

In a poll conducted by Harris Interactive in December 2013, when bitcoin prices were at their all-time pinnacle, the majority of people still didn’t even know what bitcoin was. And, likely because of this, they indicated that they would much rather invest in gold over bitcoin.

Harris poll question: Would you rather invest in gold or bitcoin? Source: CoinDesk

The key to bitcoin as a new form of gold is to improve upon the precious metal. And that means making the most of its transport and currency capabilities.

For this to happen, an increase in awareness is needed  – and some proponents of gold already understand this fact.

Companies like the UK’s GoldMoney have been offering bitcoin as a storage option along with gold for some time. Furthermore. investment broker and author Peter Schiff, while making waves about his insistence that bitcoin could become worthless, is still nevertheless accepting it at his company, Euro Pacific Precious Metals – a fact that should make gold investors take the digital currency a little more seriously.

Gold information image via Shutterstock