Bitcoin vs gold vs USD: why cryptocurrency is the future
Wednesday 07 October 2015
USD, gold and bitcoin are three very different ways of storing and transferring value. So which of them has a future?
Today's guest post was written by George Basiladze. George is a finance guy with an in-depth knowledge of financial systems. Along with his business partner, Dmitry, he is a co-founder of Cryptopay.
The necessity of a symbolic means of transferring value, or currency, has long been a feature of our human existence. From early gold coins to the existing fiat currency paradigm, our interactions have been characterised by the exchange of currencies for goods and services for centuries. Repeated global financial issues have brought attention to the failing fiat currency system of fractional reserve banking, with the development of bitcoin and renewed interest in gold seen as responses to these financial crashes.
Read also: Did BitPay screw the pooch?
Gold, widely recognised as a store of value but a surprisingly poor medium of exchange for e-commerce (image: PHGCOM)
Bitcoin is an incredibly powerful technological tool, which provides a system for the decentralised recording of transactions. Unlike gold, bitcoin has no physical counterpart; the bitcoin network simply allows the tracking of value between individual addresses, using an innovative software protocol. Despite the existence of many alternative cryptocurrencies, bitcoin has asserted its dominance and many believe the digital currency is poised to make a significant impact in the coming years. The bitcoin network consists of many independent nodes, which provide a means of verifying the validity of every transaction transmitted on the network. Full nodes running the Bitcoin Core software download and maintain a copy of the blockchain, an up-to-date ledger containing all bitcoin transactions.
This type of network provides a significantly more effective way of moving money around the world than through centralised systems, such as those provided by banks and payment processors. The fees involved with using bitcoin to send funds around the world are low, making cryptocurrency a potentially valuable tool for everything from e-commerce to remittance. Many people treat cryptocurrency as an investment asset, but it has a lot more to offer the world than being a long-term store of value.
Gold is always an interesting asset, and nowadays operates mostly outside of the banking system. This provides an alternative means of distancing one’s assets from the troubled modern banking network. The precious metal reportedly has growing popularity in China, a country which also has an affinity for bitcoin and other cryptocurrencies. Gold is a difficult asset to store and spend, in stark contrast to bitcoin which can be stored at no cost, and with little effort. Scarcity is key to the long-term value of gold; there is a finite amount of the metal on the planet. Bitcoin is built upon the same principle and the cryptocurrency has a fixed capacity of 21 million bitcoins, which will eventually be reached. The loss of bitcoins in forgotten and deleted wallets means the total numbers in circulation will be lower than the 'hard' limit that is coded into the software. This makes bitcoin a similarly attractive long-term investment, despite the drop in its price since the first mainstream awareness and lack of an established track record.
And the dollar?
The US dollar is still treated as a global standard, despite repeated financial crashes ravaging the US economy. Some economists argue that it is the very nature of modern fractional reserve banking which caused all our financial woes, but this is a system which dominates around the world and is unlikely to disappear overnight. Our growing reliance on e-commerce and digital payments has reduced our reliance on cash to the extent that the US dollar exists primarily digitally; most of the currency is not printed and doesn’t physically 'exist' at all. It is interesting to note that finding accurate information regarding the amount of USD in circulation is difficult. The resources provided on the Federal Reserve website only tell us roughly how many billions of notes are in circulation. It is likely that only a small percentage of the currency exists in paper form; modern banking relies on centralised computer systems to track the flow of funds, in a similar way to the bitcoin network. The presentation of bitcoin as a complete outsider to the money we use everyday, is not strictly true; it is a more informed, fully-digitised version of the type of systems used by banking authorities. It is arguably a significantly improved way for us to track the movement of funds, independently of our governments and central banks.
The growing strength of the bitcoin industry will hopefully allow more and more people to interact with the innovative technology. A larger user base will likely bring further stability to the market, bringing an end to the fluctuations which have long characterised the bitcoin economy. 2015 has seen relative stability, with the price consistently remaining above $220 per BTC. The value of bitcoin should not solely be in comparison to fiat currencies; cryptocurrency offers an escape from failing, entirely bank-controlled finance. Bitcoin can empower people at all levels, all over the world. The funding of bitcoin-based enterprise has been impressive over the last year; there are a number of parties with a vested interest in helping bring bitcoin to a wider audience. This will hopefully bring long-term growth to the cryptocurrency, which many believe really is the future of money. People should have ultimate control of their own funds, and bitcoin can and will provide this in time!
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