Is Bitcoin the new Gold? Understanding Bitcoin and the history of money
5 min read

Is Bitcoin the new Gold? Understanding Bitcoin and the history of money

Is Bitcoin the new Gold? Understanding Bitcoin and the history of money

Bitcoin fascinates me. A lot has already been written on the matter, so we will use a different angle. This article is the first of a series to explain Bitcoin, why it is so popular, and why you should hold it in your portfolio.

Bitcoin shares similarities with Gold. So before we start, I invite you to read my previous articles on Gold (To Gold or not to Gold, Why is Gold so popular).

In this first post, you will find:

  • A brief history of money and how it inspired the inception of Bitcoin
  • What are the intrinsic features of Bitcoin
  • How these features grant Bitcoin with a tremendous potential future as a store of value

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A brief history of money

Money is an old idea, from cowry shells to precious metals and representative paper. The last major shift happened 50 years ago when the U.S. gold standard was abandoned and signed the modern fiat currency system's birth. Gold is not used as money anymore but as a store of value.

The barter system

Before money, goods or services were directly swapped. Imagine we are two farmers. You have some grain, I have some cows, and we decide to trade. This direct exchange of commodities is known as barter. There is no need for an intermediary with the barter system to determine whether one should be allowed to make a trade or that such a trade is fair.

Barter sounds convenient on paper, yet barter is inefficient. What if you don't want my cows? Or if I don't want your grain?

The barter system suffers from the so-called double coincidence of wants: for a trade to occur, both parties must want the exact item the other person is willing to trade.

Collectibles

Thus, to improve liquidity, we needed money. The first observed proto-money took the form of collectibles. Collectibles solved the double coincidence of wants, improved liquidity, and became the intermediary of most trades.

A collectible can take many forms but always has the same characteristics: a small and homogeneous item (shells or beads). They are durable, easy to store (and hide). They are difficult to forge and easy to appraise in value.

The main properties of collectibles are portability, acceptability, and, to some extent, scarcity.

Metal as money

The next iteration was to use metal as money. The first use of metals as money is believed to begin around 1000 BC, at the advent of the Iron Age. Metals and, in particular, Gold improved upon collectibles. As we've seen, they enhanced:

  • Durability (Metals such as Copper, Silver, or Gold are very durable)
  • Acceptability (Most metals were already used for decoration and jewelry)
  • Scarcity (Limited quantity available on Earth)

Also, they were hard to forge and certifiable with a seal.

More importantly, they bring one significant improvement: Divisibility (Gold is malleable and can be divided "easily").

Paper money

Metal is hard to transport and available in a limited quantity. To satisfy the financial system's needs (i.e., having more control over the gold reserve), we invented paper money. Paper money was first backed by Gold (convertible in a fixed amount of Gold), then independent (to allow money printing).

Paper money lost its main property: scarcity, in the profit of liquidity. It is now called fiat money and not considered a store of value anymore.

Digital money

The Internet revolutionized distribution. The marginal cost of replicating a digital asset is almost zero (e.g., sending this newsletter to thousands of people does not cost much more than dozens). The Internet is the definition of abundance. How can a digital store of value emerge in this context? Many cryptographers and computer scientists took the challenge.

In 1998, 10 years before Bitcoin, Wei Dai introduced B-money, an anonymous, distributed electronic cash system. Wai Day introduced multiple concepts such as (i) publicly announcing the transaction (so that the entire network is aware of every transaction) (ii) the use of Proof of Work to handle money creation (and ensure scarcity).

The same year, Nick Szabo drafted another attempt: Bit Gold. Bit Gold is the closest parent to Bitcoin, a direct precursor to the Bitcoin architecture. Szabo wanted to remove the inefficiencies of traditional financial systems (such as centralization) while preserving Gold's properties.

B-money and Bit Gold were never officially launched. However, they served as an inspiration for Bitcoin. In particular, they were the first attempts to solve the double-spending problem. A digital asset must be usable only once to prevent copying and forgery.

Bitcoin

Satoshi Nakamoto published the white paper called Bitcoin: A Peer-to-Peer Electronic Cash System, describing the Bitcoin blockchain network's functionality.

Bitcoin is a new decentralized monetary asset, akin to Gold. It combines the scarce, money-like nature of Gold with the digital transferability of modern currency. Although it remains relatively nascent, Bitcoin has great potential as a future store of value based on its intrinsic features.

As with any monetary asset, Bitcoin must be scarce, portable, fungible, divisible, durable, and broadly accepted to be useful. Bitcoin rates strongly across most of these dimensions:

  • Scarcity: Bitcoin supply is scarce and asymptotically approaches 21 million coins. In other words, there will exist at most 0.003 Bitcoin per living soul.
  • Portability: Bitcoin is extremely portable, especially relative to Gold. Computers, the cloud, USB sticks, and even your head can hold bitcoins. It can be transported across the globe in minutes. No border.
  • Divisibility: Each Bitcoin can be divided into 100 million smaller units (called "satoshis"). Therefore you can buy a fraction of it.
  • Durability: Unless you unplug the whole network, bitcoin will last forever.

Beyond these classic monetary features, Bitcoin is also:

  • Digital: Bitcoin is cheap to store, easy to transfer and verify. Whereas Gold can require a slow and manual verification process.
  • Programmable: Bitcoin is programmable, which has subtle but far-reaching implications.
  • Decentralized and Censorship-Resistant: The rules of the Bitcoin network (such as its monetary policy) are governed by a decentralized peer-to-peer network. It involves a global user base of consumers, investors, companies, developers, and miners. It is impractical (if not impossible) for a single actor to unilaterally influence the system's rules. This affords Bitcoin holders a special kind of confidence: that Bitcoin cannot be devalued by arbitrary monetary policy decisions, and that they will always be able to hold and transfer their Bitcoin freely.
  • Universal: Bitcoin is a digital bearer asset that anyone can hold and transfer. The same is not true of digital U.S. Dollars (which require a bank account that supports U.S. Dollars) or digital exposure to Gold (which requires a brokerage account).

These features represent a significant improvement over Gold. However, Bitcoin still lacks broad acceptance. For now, it is far less accepted than Gold or U.S. Dollars. However it made impressive strides over the past decade. And, over the past months, gained traction with institutional investors. I am pretty optimistic about the future of Bitcoin as a store of value.


That’s all for today!

Next time we will see what is the future intrinsic value of Bitcoin, or at least an upper and lower bound.

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