Is Bitcoin Ready To Retire Gold?

Investors and even central banks have their eye on Bitcoin as a safe haven and hedge, but gold’s global economic shoes are hard to fill.

By Walter Donway, The Daily Economy at American Institute For Economic Research

Gold has won the competition — a plebiscite as long-running as established civilizations — to be crowned mankind’s universal choice as a store of value and medium of exchange — as real money. Now, in less than two decades, a potential competitor has arisen: Bitcoin, with the arguable potential to rival and even supersede gold.

MicroStrategy​ CEO Michael J. Saylor asserts that Bitcoin will “displace gold as a non-governmental store of value” and describes it as “the apex property of the human race.” To be as emphatic as possible, he added: “Bitcoin is digital gold. It’s a million times better than gold, and there’s no reason why anybody wouldn’t want to use it as a store of value over time.”

And in an abrupt policy shift, President Donald Trump, until recently a vocal skeptic of cryptocurrencies, signed an executive order setting up a US Bitcoin reserve. It will comprise some 200,000 bitcoins confiscated in various criminal proceedings, positioning it as a “digital Fort Knox” — a move toward anointing Bitcoin a strategic asset.

For good measure, the Kingdom of Bhutan has embraced Bitcoin, which it will “mine” using its plentiful hydroelectric resources. In effect, Bhutan will turn waterpower into digital gold, doing the alchemists one better, and become one of the first nations to adopt Bitcoin at the national level. Both developments underscore a growing recognition of Bitcoin’s potential role as a store of value akin to gold.

El Salvador President Nayib Bukele’s government argued for making Bitcoin legal tender, implying it could function as a medium of exchange and “bring financial inclusion, investment, tourism, innovation, and economic development to our country.”

Tyler Winklevoss, co-founder of Gemini Exchange, says: “We believe Bitcoin disrupts gold. We think it’s a better gold if you look at the properties of money. And what makes gold gold? Scarcity. Bitcoin is actually fixed in supply, so it’s better than scarce… It’s more portable, it’s more fungible, it’s more durable. It sort of equals a better gold across the board.”

For thousands of years, gold has been civilization’s symbol of beauty and luxury, wealth, power and glory, and reliability. Its distinctive properties — durability, divisibility, portability, and intrinsic value — have won history’s perdurable vote of confidence. Notable is gold’s natural scarcity in contrast to paper currency and government-created bank deposits, which can be multiplied without limit, their value printed on the bill. Long before modern banking systems, merchants and rulers alike trusted in the weight of gold for exchange and a means of transferring wealth across borders.

Does Bitcoin measure up to this historical role?

Gold’s Career: A Few Highlights

The first gold coins, as far as we know, were minted by the Lydian civilization around 600 BCE. Gold and silver, of course, were currency, plain and simple, in ancient Egypt, Persia, Greece, and Rome, among other empires. During the late Middle Ages, gold became indispensable to commerce, particularly in the vast network of trade fairs that connected Europe’s growing economies. These fairs, held in cities such as Champagne and Bruges, served as hubs where merchants from across the continent settled debts and negotiated long-distance trade agreements. Gold and silver coins were primary instruments of settlement.

Florentine silk merchants trading with Flemish cloth producers did not rely on local currencies, prone to debasement by monarchs desperate to pay for their wars. Instead, they would carry gold florins or Venetian ducats, much more broadly recognized and accepted units of gold. The bullion trade underpinned medieval finance, with leading merchant banking families such as the Medici ensuring that gold moved safely between regions through bills of exchange. While these early forms of banking instruments reduced the need for physical transfer, ultimately, settlements still required access to gold.

In the early modern period, the influx of gold and silver into Spain and Portugal from Latin America fueled a historically rare inflation (increase in the money supply) but also global commerce, reinforcing bullion’s significance in trade networks stretching from Europe to China. By the late seventeenth century, gold had become the foundation of European monetary systems. The Bank of England, established in 1694, went far toward formalizing the gold standard, anchoring its currency to gold reserves — although parliament fought over early schemes for paper money and fractional reserves.

The United States, already formally on a bimetallic (gold and silver) standard, switched to gold de facto in 1834 and de jure in 1900 when Congress passed the Gold Standard Act. The system ensured that every dollar in circulation was backed by a fixed amount of gold, reinforcing confidence in the currency. The gold standard of the nineteenth century further institutionalized the metal’s reputation as a stabilizing force in finance. As economist Milton Friedman noted, inflation was virtually nonexistent during this time because gold’s supply increased only gradually, preventing the excessive creation of money. This framework dominated global trade and economic policy until World War I, when the demands of war led many nations to abandon the gold standard in favor of fiat money.

It was only in the twentieth century, however, that governments severed the link between money and gold. In 1933, President Franklin D. Roosevelt ended the direct convertibility of dollars to gold for US citizens. The Bretton Woods system established after World War II maintained an indirect gold standard, with the US dollar pegged to gold and other major currencies pegged to the dollar. This system lasted until 1971, when President Richard Nixon closed the “gold exchange window,” severing the last official tie between the US dollar and gold. Since then, the United States (and much of the world) has relied on fiat currencies, backed only by government decree, and inflation has become permanent, rampant, and in the long term, ruinous. Despite this shift, gold remained a critical asset for central banks and investors, underscoring its enduring importance as a store of value.

Estimates suggest that some 244,000 metric tons of gold have been mined throughout history, with a significant portion of extraction in the twentieth and twenty-first centuries, driven by advances in mining technology and increased demand. This surge in production underscores gold’s continued relevance in modern economies.​ President Trump has vowed to visit Fort Knox, however, to see if the gold really is there — a response to persistent rumors to the contrary.

Enter Bitcoin: 2009

Bitcoin appeared on the scene rather mysteriously 2009, introduced in a white paper by the pseudonymous Satoshi Nakamoto (an individual or group). Bitcoin was intended to be a decentralized digital currency — an alternative to traditional fiat [“legal tender” as declared by law] currencies. It features a fixed supply cap of 21 million “coins” and a “distributed ledger,” the blockchain, that records all transactions in a seemingly secure, transparent, and immutable manner. Unlike centralized financial systems, where banks act as intermediaries, Bitcoin transactions are verified by a network of decentralized nodes (individual computer users) using a consensus mechanism known as proof-of-work (PoW). This process involves “miners” — participants who use a rather huge amount of computational power to solve complex cryptographic puzzles and thus validate by consensus new “blocks” of transactions. Once a block (defined unit of transactions) is verified, it is added to the blockchain.

The permanent limit on the supply of Bitcoins is governed by its protocol, which dictates that 21 million Bitcoins are all that will ever exist. This fixed supply is maintained through a process called halving, which reduces the reward for mining new bitcoins roughly every four years, slowing the rate of new issuance. This scarcity is a fundamental characteristic that proponents argue makes Bitcoin similar to gold in its deflationary nature.

Bitcoin’s market capitalization has reached significant heights, peaking at an all-time high surpassing $1.8 trillion. The second-largest cryptocurrency, Ethereum, achieved an all-time-high market capitalization of approximately $228 billion. Ethereum does not have a fixed maximum supply, allowing for continuous issuance of new tokens. Binance Coin, the third-largest cryptocurrency, reached a market capitalization exceeding $90 billion in 2021. It has an initial maximum supply of 200 million tokens, with a deflationary mechanism that periodically burns tokens to reduce the total supply, aiming to eventually reach 100 million tokens. Question: Is Bitcoin the contender to displace gold, or are the cryptocurrencies the contender? With no cap on supply, Ethereum does not seem to fill the bill.

Broader Uses

It is important to understand that Bitcoin, which has sold for as much as $109,000, is not a “coin” or a “bill.” It is not a currency, although it is a payment system. It cannot exist or be used outside of cyberspace. A Bitcoin “wallet” is a computer application. This is utterly unlike gold or any other currency; Bitcoin’s virtues in fact are not those of a currency. Its virtues are those of a computer program, its applications, and a network.

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Although initially conceived as a peer-to-peer electronic cash system (immediately useful, for example, to cannabis businesses whose accounts banks would not accept), Bitcoin and the blockchain now support a range of applications across industries. It is used in finance for cross-border transactions, remittances, and as a hedge against inflation in economies experiencing currency instability. Blockchain technology enables decentralized finance (DeFi) platforms that enable lending, borrowing, and trading without traditional financial intermediaries.

In supply-chain management, companies use blockchain to monitor the provenance of goods, guarding authenticity against counterfeiting. Luxury brands use blockchain to combat such counterfeiting and food suppliers use it to track contamination sources. An early user, the pharmaceutical industry, seized upon blockchain to improve the tracing of drugs to guard against counterfeit medicines and ensure regulatory compliance.

Bitcoin remains the best-known application of the blockchain, but the underlying technology has unlocked a multitude of possibilities, many still in early stages of adoption. Its role in shaping the future of digital transactions is undeniable. Bitcoin’s market capitalization has experienced remarkable growth, surpassing $1 trillion during peak periods. Why?​

Investors view Bitcoin as a hedge, safeguarding against government inflation, which was gold’s traditional role. Bitcoin has been adopted by corporations and financial institutions, which in adding Bitcoin to their portfolios, lend it legitimacy. MicroStrategy, for example, has invested billions in Bitcoin, reflecting a strategic shift towards digital assets. Bitcoin’s underlying blockchain technology has a strong technological appeal, offering transparency and security, and attracting those interested in financial innovation.​

Thus, Bitcoin proponents argue that the cryptocurrency fulfills a function similar to gold’s, today — a borderless, decentralized asset immune to government manipulation. Gold’s historical dominance, however, was about far more than scarcity. It was about trust, liquidity, and physical permanence. Unlike Bitcoin, which relies on digital consensus mechanisms and cryptographic integrity, gold’s value is self-evident and tangible.

Distinguishing Bitcoin from Blockchain

Bitcoin’s value as “money” rests on its acceptance and use. Its worth depends on collective belief. Bitcoin’s rise from an obscure concept to a widely accepted financial asset could not, then, be immediate or automatic.

The Bitcoin white paper by Nakamoto introduced a then-radical idea: a decentralized, “trustless” monetary system. Early adopters, particularly cryptographers and programmers, mined Bitcoin primarily to test the system. The first known Bitcoin transaction on May 22, 2010, was payment of 10,000 BTC for two pizzas (worth $41 then, and almost a billion dollars now) — a real-world use case!

The Dark Web and fringe markets then entered the picture. Bitcoin found a niche “use case” in marketplaces like Silk Road, where users valued its pseudonymity. This period also tried out Bitcoin’s ability to facilitate transactions outside of traditional banking controls. And some companies highly invested in technology like Overstock, Tesla (briefly), and even some governments recognized Bitcoin as a valid asset. Then, major companies such as MicroStrategy and Tesla (again) started holding Bitcoin in their corporate treasuries. Bitcoin futures and exchange-traded funds have since made it easier for mainstream investors to buy in.

In truth, much of Bitcoin’s value is not as money, per se, but as a system able, for example, to customize programs such as making irrevocable payments that are escrowed until certain conditions or deliverables are met. Even better, judging that conditions have been met is entirely digital and automatic. These fall into the category of secure, irreversible transactions that don’t require third-party trust. Ethereum in particular is associated with these “smart contracts,” while Bitcoin has limited programmability through such features as multi-signature wallets and timeclocks, payments not released until certain conditions are met (reaching a future agreed date, obtaining multiple signatures, or verifying the completion of a real-world event/project/deliverable).

These desirable features are not of the cryptocurrency itself; some, for example, are substitutes for legal services — programmable escrow and automated inheritance transfers. These do not speak to Bitcoin as a currency, just as banks, checking accounts, and mortgages are not features of gold, even if gold stands behind them to ensure their stable value.

A True Successor To Gold?

Bitcoin has relatively rapidly carved out an impressive niche as a speculation, but not as a store of value, an inflation hedge. It lacks the universal acceptance gold has enjoyed throughout history. In times of crisis, investors still flock to gold as a safe-haven asset, just as medieval merchants did when facing uncertain trade conditions. Let’s look at some specifics:

1. Gold has inherent or intrinsic value because of its physical properties and their uses, including applications in various industries. It is used in jewelry, electronics, dentistry, and industrial applications. In contrast, lacking physical form, Bitcoin’s value is derived from its acceptance, its network, and its online applications.​ It has no physical applications, no real-world uses, and no value as gauged by any independent marketplace.
   
   To encapsulate: gold established its marketability in virtually every time and place. It has high unit value (as does every luxury good) so wealth is easy to transport. Thus, it gradually became chosen as the best of all commodities to trade for anything, knowing it kept its value and always could be used to buy anything else. Crypto has none of these characteristics. No demand but as a medium of exchange, and network of payment. Just its role as “money” in cyberspace. Otherwise, no one wants it. Will that no longer matter in our digital, technological future? It has mattered through all history as much in WWII as in ancient Rome.

2. Both assets are reckoned “scarce,” but gold’s scarcity is natural. Mining it is arduous and costly, so supply grows at a slow and stable rate, while Bitcoin’s scarcity is algorithmically enforced. Unlike gold, which has no substitute, Bitcoin competes with thousands of other digital currencies. There is no guarantee that another cryptocurrency won’t surpass it in the future. We have not reached Bitcoin mining’s closure point, as yet, to see if other Bitcoins really can never be created, legally or illegally — and what will be the role of dozens of other cryptocurrencies such as Ethereum, which has no cap on supply?​

3. Gold has historically exhibited price stability, maintaining its value during eras of inflation. Bitcoin, while gaining acceptance, remains highly volatile, which can impact its effectiveness as a medium of exchange.​ But crucially, have we observed that volatility long enough to know if it negatively correlates with fiat-money inflation, the acid test of “real money”?

4. Gold is universally accepted, whereas Bitcoin’s regulatory status varies globally, influencing its adoption and integration into traditional financial systems. Bitcoin requires internet access and computing power to function, making it vulnerable to technological failures or government-imposed restrictions. Gold ever and always was a nation’s “war chest” — can Bitcoin fill that role?

5. Gold’s market appeal remains what it has been for millennia. Gold sales correlate strongly with Chinese New Year holidays, Diwali in India, and Western Christmas. That and widespread use in technology (especially printed circuit boards, connectors, and switch contacts) give it the intrinsic value that, throughout history, won its selection as a store of value and a medium of exchange. Capital inflow into Bitcoin is driven by investors seeking to diversify portfolios with intangible assets uncorrelated with other markets; by the appeal of innovative aspects of the blockchain to many tech-savvy investors; and by its potential for rocketing returns in a speculative investment with market volatility.​

6. An often-overlooked strength of gold is highlighted by contrast with Bitcoin. Gold is almost universally understood. The farmer in India and the banker in New York grasp gold’s value. Bitcoin, by contrast, remains esoteric. Understanding blockchain technology, cryptographic security, and private key management is far from intuitive. Any writer about Bitcoin and the blockchain, and I am no exception, knows even as he writes that his readers do not understand either. Excuse me, what is a “block”? What do you mean “mining” for Bitcoins — is that supposed to make it sound like gold? If the concept of “money” becomes hopelessly esoteric to the voter, then the power of his rulers becomes unlimited.

Toward A World Digital Currency System?

Today, governments are exploring or implementing central bank digital currencies (CBDCs), shifting toward digital financial systems. As of March 2024, central banks in 134 countries, accounting for 98 percent of the world’s GDP, are at various stages of evaluating or launching national digital currencies. The People’s Bank of China has been at the forefront with its digital yuan (e-CNY), conducting extensive pilots and reporting transactions totaling approximately $987 billion. The European Central Bank (ECB), not to be left behind by the world’s leading totalitarian dictatorship, has initiated a multi-year digital euro pilot, aiming to enhance the euro’s role as a global reserve currency.

The United States has shown interest in participating in cross-border CBDC initiatives like the mBridge project. ​Perhaps with a vestige of knowledge from days bygone, the Bank of England has expressed skepticism about launching a digital pound (“Britcoin“) before 2030, citing the privacy of users and costs of the technology. Projects like mBridge involve multiple central banks, including from Hong Kong, Thailand, the UAE, and China, collaborating to enhance cross-border payments using CBDCs. ​

The trend is indescribably perilous. Given how politicians deal with money — taxing, borrowing, spending — should money itself become a mystery to most citizens, never in their hands, existing forever in a world of cyberspace?

Even now, many hardcore advocates of gold (not long ago mocked as “goldbugs”) believe that to fulfill its role gold must be in their physical possession (home). By contrast, how many people (and I include those with significant speculations in crypto) could confidently explain what makes Bitcoin a “safe haven”?

If “digital gold” at least superficially shares certain qualities with gold, it remains unproven; in fact, it has not even demonstrated the theoretical potential to supersede gold. Its fixed supply, independence of government, and decentralization appear to offer an alternative to inflation-prone fiat currencies, but its lack of independent value, volatility, reliance on advanced technology, and family of competing cryptocurrencies raise questions about its long-term viability as “honest money.”

Gold remains the ultimate store of value, as it has been for millennia.

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For more on gold vs. bitcoin

• My comprehensive thoughts on bitcoin in a 2 hour-long interview with What Bitcoin Did in 2024

• Peter Schiff vs. Larry Lepard bitcoin debate I hosted in 2024

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