Is Bitcoin the New Digital Gold?

Ever since Satoshi Nakamoto published his white paper in 2008, bitcoin has been compared to gold and has often been referred to as ‘digital gold’. It is well known that the genesis block of bitcoin contained the message, “Chancellor on brink of second bailout for banks”. It was the headline of The Times on 3rd January 2009. This was strong indication that Satoshi Nakamoto (whoever he or she is) understood how excessive money printing by governments have left the financial system deeply leveraged and vulnerable to systemic risks.

Therefore, bitcoin was created as a decentralized alternative form of money that would be outside the control (and manipulation) of central banks as an alternative answer to the systemic risks of t. Unlike fiat currencies which have been inflated many times over, bitcoin has a limited supply of 21 million. No single party controls bitcoin and it can be exchanged peer to peer without the interference and influence from the banks.

Gold, on the other hand, has been the trusted and time-tested store of value for thousands of years. It possesses the characteristics of money: fungible, durable, divisible, limited in supply and a store of value. It is no wonder that nations continue to hold tons of gold as reserves today.

The trust in gold’s value is undeniable. It is interesting to see physical forms of bitcoin represented as gold coins with the bitcoin logo in images on the Internet.

Let us examine in more detail the similarities and differences between gold and bitcoin.

Bitcoin vs. Gold – Similarities

Limited supply – The maximum supply of bitcoin is limited to 21 million – a pre-set in the cryptocurrency’s virtually hack-proof mathematical algorithm. Similarly, the supply of physical gold is limited by its presence in the earth’s crust and mining capabilities – the average increase in the amount of gold mined annually has been roughly 1.7%. Therefore, both bitcoin and physical gold cannot be ‘out of thin air’. On the other hand, the supply of fiat money is unlimited and it is in the hands of governments and central banks who control the ‘printing presses’.

Direct ownership – Both physical gold and bitcoin in essence guarantee full ownership without counterparty risks from intermediaries. With gold, you can own gold bars, coins or jewellery in your home or in a safe deposit box. Bitcoins are kept in digital wallets (e.g. on a flash drive, computer or a mobile phone) or physical wallets (e.g. on a piece of paper) that contain the public and private keys (a long string of alphanumeric characters). Knowledge of the wallet’s private key is equivalent to the ownership of bitcoins in it since it allows the bitcoins to be spent.

Independent of the financial system – Bitcoin and gold will do well when the next financial crisis occurs. Both assets can be held outside of the financial system – storing a gold bar away from a bank and keeping your private key safe. When a repeat of the 2008 Financial Crisis happens, wealth stored in physical gold (stored outside of banks) and bitcoin will not be affected.

Cost to mine – With gold mining, it takes productive effort and energy to mine the yellow metal from the crust of the earth. Bitcoin mining requires electricity to power miners’ computers to run the mining software to perform Proof of Work verification on transactions in the bitcoin network. Miners will need more powerful computers and invest in the equivalent energy cost to be able to verify transactions faster.

Advantages of Bitcoin vs. Gold

As a digital product of the modern age, bitcoin has several advantages over gold:

Bitcoin is borderless – Bitcoins are kept on the blockchain, a digital ledger which is encrypted and cannot be altered once recorded. Blockchain is fully transparent and everyone with an Internet connection can access their bitcoins from anywhere in the world at any time. Gold, on the other hand, is physical and has to be kept in a facility (e.g. in a house, vault or safe deposit box). This means that gold has to belong to a jurisdiction and as such is subjected to its laws and regulations.

Bitcoins can be difficult to confiscate – Although the blockchain is transparent, it also provides a high level of anonymity since only addresses and transactions are registered and these are anonymous. Given that bitcoin is also borderless, it is very difficult for any authority to confiscate bitcoins.

Bitcoin is more divisible – The lightest gold in bullion form readily available in the market is a 1-gram (0.03 troy ounces) gold bar. Each bar is currently valued at about USD 60. Trying to transfer less than USD 60 in gold to another party would be difficult. Bitcoin, being digital, is highly divisible. One bitcoin can be divided into 100 million Satoshi with one Satoshi having the value of 0.00000001 BTC.

Advantages of Gold vs. Bitcoin

Gold is a proven store of value – Gold has a 5,000-year track record as a trusted store of value. Gold coins were used as money as early as 550 B.C. Fiat currencies were once backed by gold. The value of gold remained intact despite numerous occurrences of hyperinflation in fiat currencies throughout history. Even today, central banks continue to hold gold as reserves. Its recognizability and allure is global. Bitcoin by comparison was only created nine years ago.

Gold is physical– Gold in physical form can be touched and seen, making ownership very comforting. Large amounts of physical gold stored in a high security vault can also be very difficult to steal since the metal is dense and heavy. Gold today will continue to be gold tomorrow. Being physical also means that gold cannot be hacked by someone remotely.

Being digital, there is always a risk that someone could crack the cryptographic codes that bitcoin uses and the entire network could be compromised. This is always a possibility with advances in computing.

The safekeeping of bitcoins depends entirely on how the private keys of bitcoin wallets are secured. Anyone who has knowledge of the private key can spend the bitcoins. If the private key is lost, the bitcoins in the wallet are probably lost for good.

How Bitcoin Can Be Stored Securely Like Gold

Today, bitcoin private keys can be stored as securely as gold. Silver Bullion, a Singapore-based wealth protection company, is already storing more than 200 metric tons of precious metals in its 630-ton precious metals vault, The Safe House, on behalf of thousands of owners of gold, silver and platinum. Locating its vault in Singapore, Silver Bullion stores the precious metals of their clients in one of the safest jurisdictions in the world.

Silver Bullion expects to launch its Physical Crypto Storage solution in March 2018. Physical Crypto Storage is an ideal solution for clients intending to hold large amounts of bitcoins for the long term.

Physical Crypto Storage aims to store bitcoin private keys in a physical format within a Class II gold vault at The Safe House so that they can never be susceptible to digital theft. Silver Bullion achieves this by etching the encrypted private key as a QR code onto a durable polycarbonate card using a laser.

Appearing only as encrypted QR codes, the private keys cannot be read without the offline decryption software in Silver Bullion’s vault. The decryption software cannot be activated without a system dictated process that requires authorization from different functional groups within the company. This makes the stealing of encrypted cards useless since they cannot be decrypted outside of the vault.

Requests for withdrawal of bitcoins would require an identity verification procedure, either via video call or in person, to ensure that there is no impersonation of customers’ identities. As it follows the Gregersen-Gono standard, decryption of the encrypted private key for the purpose of withdrawal requires strict adherence to processes built into The Safe House’s offline vault management system and authorization from multiple functional groups within the company. Prioritizing security and reliability over convenience, Physical Crypto Storage ensures that withdrawal requests are authenticated before any bitcoins are transferred from clients’ accounts.

Different but Complementary

Calling bitcoin ‘digital gold’ is a compliment to both bitcoin and gold. The former is compared to gold due to its monetary characteristics, decentralized and immutable nature. The latter is mentioned due to its trusted time-tested store of value. The differences between gold and bitcoin can be complementary. There are times when the physicality of the asset is better while there are situations where being digital is an advantage.

Love it or hate it, cryptocurrencies like bitcoin are likely to gain increased adoption in the future. If we look past the price speculation (which is of no fault of the bitcoin’s underlying technology) and understand this revolutionary technology, we might just find the gold in bitcoin.