Most people know that their hard-earned money loses value over time. The reason is simple and sobering: The money we use for payments is not backed by gold or anything else anymore; it is based solely on trust. And the governments just print the money out of thin air. What will serve you better: Fiat money, gold or Bitcoin?
The answer is really not just black and white. It depends on the time frame, what you want to use these assets for, how you intend to store them or transfer them and many other things.
Comparing Gold, Fiat, and Bitcoin
Comparing gold, fiat money, and Bitcoin, is a bit like comparing the past, present and a future of money.
Usually, three main functions of money are stressed: (1) a medium of exchange; (2) a unit of account; and (3) a store of value. But other features of money are also important, depending on your goals, needs and preferences. Let’s have a look at these features, starting with the three main ones and continuing with some more details.
The ranking at the end of each part tries to be as objective as possible. Still, you might adjust it according to your situation and needs.
Medium of Exchange
Gold: Gold (and silver) was used as a medium of exchange for centuries when it was traded for goods and services. Later, gold was used for payments more conveniently in the form of banknotes that served as gold (or silver) certificates. A return to this gold standard would be quite difficult and wouldn’t seem to be viable. The fact is, that at this time, gold is not used as a medium of exchange any more in everyday lives.
Fiat: Fiat currencies are primarily designed as a medium of exchange, either as cash (physical banknotes and coins) or for electronic payments with credit or debit cards, with smartphones, with online banking, etc.
Bitcoin: Bitcoin is primarily designed as a peer-to-peer payment system, as a medium of exchange. The downsides: It takes about ten minutes to verify a transaction (this is to change to instant payments once lightning network is implemented). Furthermore, not everybody uses Bitcoin and knows how to use it.
Ranking: #1: Fiat; #2: Bitcoin; #3: Gold
Unit of Account
Gold: Gold doesn’t provide an easy way to serve as a unit of account – to compare prices, value products, make calculations, keep records, etc. How many stores do you know that accept gold as payment?
Fiat: Fiat money serves very well as a unit of account. It is used to determine the value of commodities and assets in the market. It is very convenient to make calculations, value products, goods and services, keep records, compare prices, measure wealth, profits, losses, debts, income, etc.
Bitcoin: The way Bitcoin is designed, it can potentially serve very well as a unit of account. But at the time being, it doesn’t. While more and more sellers accept Bitcoin and other cryptocurrencies, hardly any state their prices in BTC at this time. The prices are still denominated in USD, Euros or other fiat currencies.
Ranking: #1: Fiat; #2: Bitcoin; #3: Gold
Store of Value
Gold: Although its price can vary over time, gold is known to retain a very high purchasing power because this shiny yellow metal has intrinsic value. It serves as a safe haven at times of dramatic changes and upheavals.
Fiat: Since fiat money doesn’t have any intrinsic value, its purchasing power can drop all the way to zero, which was witnessed by people in countries with inflation of hyperinflation, such as Argentina, Venezuela, and Zimbabwe. Thus, fiat money cannot be taken as a store of value.
Bitcoin: Since Bitcoin cannot be printed out of thin air, has a finite amount of units (21,000,000) and has to be mined, many argue that it has an intrinsic value like gold. It can also be used to transfer value and hold value. But the history of Bitcoin is too short to say whether it can be really used as a safe-haven asset.
Ranking: #1: Gold; #2: Bitcoin; #3: Fiat
Established History
Gold: Gold has been used for thousands of years; it is a well established, traditional asset.
Fiat: Fiat money started to be used as a global means of payment only after 1971 when the US President Nixon untied the US dollar from gold. Thus, fiat money (money not backed by gold, silver or anything else with intrinsic value) is still a relatively young experiment.
Bitcoin: The blockchain was unleashed in 2009. Thus, its adoption is relatively low. Many people still don’t use Bitcoin and many still don’t know much about its advantages.
Ranking: #1: Gold; #2: Fiat; #3: Bitcoin
Investment Instrument
Gold: If you want to profit from gold, you can do so in several ways: you can buy physical gold bullion, you can invest in gold shares of a mutual fund or ETF (exchange-traded fund) that follows the price of gold, or you can choose to trade options and futures. The fact is that you really own your gold only with physical gold pieces which are not as easy to buy and sell at a profit as it might seem, because of the spread between the buy and sell prices.
Fiat: Fiat money can be used to invest in many ways. For example, you can buy shares, bonds, invest in commodities, options, real estate, you can trade currency pairs in FX markets, etc.
Bitcoin: Some of those who bought or mined Bitcoin at its beginning have become millionaires. Some people hold (or “hodl”) Bitcoin, expecting it first to return to its all-time-high price of almost $20,000 (December 2017) and to further grow in value. Traders make use of the current volatility of Bitcoin, trading it at crypto exchanges.
Ranking: Depending on the time frame, your goals, and expectations, all three can be used as investment instruments.
Verifiable
Gold: It is not easy to tell a counterfeit gold piece from a genuine one. Fake pieces might be made of tungsten skillfully plated with some gold. Such a well-made counterfeit will have the same weight as the genuine piece. Counterfeiting is usually not profitable with small pieces (several grams). More subtle ways include gold pieces with lower purity than stated (e.g. 97% instead of 99.999%). Unless you are sure you have certified gold bullion, the only way to make sure you have genuine gold is to perform an assay, which takes some time and will incur some expenses.
Fiat: The probability that you will encounter forged money is very low. Still, the history is full of stories of counterfeit banknotes. The current banknotes employ security features, such as watermarks, special typography, micro-lettering, security threads, etc. Despite all these special features, banknotes are still forged.
Bitcoin: It is impossible to counterfeit Bitcoin because of its technology that uses a transparent public ledger where all transactions are recorded in an immutable way.
Ranking: #1: Bitcoin; #2: Fiat; #3: Gold
Fungible (Mutually Interchangeable)
Gold: In theory, gold is always gold, thus a gram of gold is interchangeable for any other gram of gold – as long as the purity of the pieces is the same. If the purity is different, you have to employ ratios to calculate the differences, which is not ideal, but it is still workable.
Fiat: Unless counterfeited, the banknotes and coins are perfectly fungible. $100 bill can be used the same way as any other $100 bill.
Bitcoin: Bitcoin is fungible in a perfect and transparent manner.
Ranking: #1: Bitcoin; #2: Fiat; #3: Gold
Liquid
Gold: High liquidity means that there are many parties buying and selling the same asset which can be sold or exchanged fast. “Paper gold” (shares of a mutual fund or ETF, options and futures) is highly liquid. Because of the spread between the buy and sell prices of physical gold, you might sell it easily but at a loss, thus the proper timing is quite important.
Fiat: As long as your currency is valid and viewed as valuable and acceptable, you can sell it or exchange it for other assets very fast. In case of high inflation or hyperinflation, the market might prefer other assets over your devaluing fiat money.
Bitcoin: Bitcoin can be sold or exchanged for other assets in a matter of seconds if the other party knows it and accepts it. The downside is that many people still don’t know about Bitcoin and don’t know how to use it.
Ranking: Depending on the time frame, your goals, and expectations, all three can be liquid.
Portable
Gold: You can put an ounce of gold easily into your purse. But if you want to carry more gold, you have to count with its weight. You might also have to declare it at the airport or when crossing international borders, and there might be strict limits as to how much gold you can transport.
Fiat: With cash (banknotes), there might be limits at airports. But with your credit or debit cards and bank accounts, there are usually no limits at all.
Bitcoin: Using a digital format, Bitcoin is perfectly portable, with any amount. You just need a wallet: a hardware wallet with the size of a match-box, or software wallet on your smartphone. Alternatively, you can use a paper wallet with your private keys or you can just commit these to your memory. As long as the internet works, you will always be able to use your Bitcoins.
Ranking: #1: Bitcoin; #2: Fiat; #3: Gold
Durable
Gold: Gold has stood the test of time as being very durable if stored well, taking into account that gold is a soft metal which should be protected from abrasion.
Fiat: Paper banknotes can be damaged quite easily. Your bank will usually replace the damaged banknote if you present more than half of it, mostly for free, sometimes for a fee.
Bitcoin: As long as Bitcoin exists, you own it, provided you keep your private keys. If you back your private keys up and store them well, you can be sure that you will always have your Bitcoins.
Ranking: #1: Bitcoin; #2: Gold; #3: Fiat
Divisible
Gold: Gold is not easily divisible. You cannot go to a shop and just shave off a flake from your larger gold piece to pay with this gold shaving. That’s the reason why silver and copper coins were used throughout history to pay for low-value items. Some refineries make CombiBars – a bar of pure gold (999.9) from which you can easily break off 1 gram pieces: 20×1 g; 50×1 g; 100×1 g. Still, it’s a question to what extent the people would trust it and use it in real-life situations.
Fiat: Fiat is divisible depending on the way the government currency is set up. For example, US dollars and Euros are divisible down to 1 cent.
Bitcoin: Bitcoin is perfectly divisible, down to 8 decimals, with the smallest unit being 1 Satoshi = 0.00000001 Bitcoin (which equals USD 0.0001 as of July 2020).
Ranking: #1: Bitcoin; #2: Fiat; #3: Gold
Scarce
Gold: All the gold in the world amounts to about 190,000 metric tons (with estimates varying by as much as 20%). Theoretically, this is a final number. But it is known that untold tons of gold are dispersed, for example, in the oceans, which would be extremely costly and ineffective to extract at this time. But with new technology, this can change dramatically.
Fiat: After the USA decoupled the US dollar from gold in 1971, fiat money started ruling the world. Fiat money is printed by the governments “out of thin air” (known as quantitative easing), thus, it is inflationary by its very design.
Bitcoin: Only 21,000,000 Bitcoins will ever be mined and be in existence. Thus, Bitcoin is scarce and deflationary currency.
Ranking: #1: Bitcoin; #2: Gold; #3: Fiat
Anonymous (Censorship Resistant)
Gold: You can own gold anonymously and privately, although governments can come up with laws limiting the ownership of gold. For example, the US President Roosvelt ordered the Americans to sell their gold by his Executive Order 6102 from April 5, 1933.
Fiat: The cash can be owned privately as long as it is taken as legal tender in a given country. After a monetary reform, such cash might turn into worthless pieces of paper. The money on your bank account is under the full custody of your bank and of the state.
Bitcoin: Bitcoin is private, anonymous (or more precisely pseudo-anonymous) and highly resistant to censorship. For even higher anonymity and privacy, you can use other cryptocurrencies (e.g. Monero, Zcash, Komodo, Verge).
Ranking: #1: Bitcoin; #2: Gold; #3: Fiat
Decentralized
Gold: Theoretically, anybody can own some physical gold. But how many people do you know who have at least an ounce of gold? In real life, gold is being hoarded more and more by the central banks (e.g. USA, Germany, Italy, France, Russia, China).
Fiat: Being issued and governed by the central bank, fiat money is centralized by its very nature.
Bitcoin: Due to its technology, Bitcoin is absolutely decentralized, using a peer-to-peer system that doesn’t need any central authority or intermediary.
Ranking: #1: Bitcoin; #2: Gold; #3: Fiat
What Will You Choose: Gold, Fiat or Bitcoin?
So, what is the best: Bitcoin, gold or fiat? As we have seen, this matter is really not just black and white. We have covered many aspects of money. Some of them could be more important to you than others. It depends on who you are and what you need. It depends on the time frame, what you want to use these assets for, how you intend to store them or transfer them and many other things. If you have been deciding only between fiat money and gold, so far, hopefully you could see some qualities of Bitcoin here. All in all, it seems that Bitcoin as the most recent contender has a lot to offer and it might make sense to own it as part, or even a substantial part, of your portfolio.
