Is Bitcoin a Legitimate Alternative Currency to Gold?

By Tony Davis – Atlanta Gold & Coin Buyers….
Matthew Lynn from Market Watch published an article today entitled  “What is the biggest long-term threat to the price of gold?” http://www.marketwatch.com/story/the-real-threat-to-gold-is-digital-2013-07-17  In it, he attempts to make the case that Bitcoins are a legitimate threat to overtake gold as the favored alternative currency.  While he brings up some interesting points as to why Bitcoins have emerged as a popular alternative currency and why they are likely to continue to gain traction, in this writer’s opinion, he falls short of making his case that Bitcoins can unseat gold as the preferred alternative currency.

To properly evaluate Bitcoins as an alternative currency, we need to view it from the perspective of sound money.  Aristotle, who is probably best known for his contributions to society in the areas of physics and astronomy, also defined the characteristics of good money.  He was of the opinion that sound money has four characteristics  http://seekingalpha.com/article/295877-aristotle-s-money-criteria-support-gold-precious-metals, which are durability, portability, divisibility and intrinsically valuable.  Considering that the components of sound money have been defined for us by one of the great thinkers of our time, we’re going to evaluate the dollar, gold and Bitcoins in terms of how they stack up to determine which of the currencies best fits the definition of sound money.

Durability

For money to be durable, it should endure or stand the test of tiem.  In other words, it shouldn’t fade, tear, corrode or lose any of its properties.  The three currencies highlighted above perform differently as it respects their durability.

• Dollar – As noted by Enchantedlearning.com, the lifespan of a dollar bill is approximately 18 – 22 months, and as such, doesn’t meet the criteria of being durable.
• Bitcoins – Bitcoins are a digit, which means that as long as computers are available and access to the internet is available, Bitcoins can be traded.  However, in the event of a widespread power outage, Bitcoins won’t serve as valid currency.  While Bitcoins are more durable than dollar bills, they don’t quite cut the mustard when it comes to durability.
• Gold – Gold is one of the most durable substances known to man.  It doesn’t fade or corrode, and nearly all of the gold that has been mined since the beginning of time is still above ground and available.   As such, it appears as though gold is more durable than the other two currencies noted above.

Portability

Portability is one of the key ingredients to having sound money.  Large, heavy and common place objects or substances, which have a low value relative to their weight, such as steel, do not fit the definition of portability.  Ideally, portable items can be transported on your person without issue.  As we’ll see below, all three currencies perform well in this category:

• Dollar – Nearly every adult carries dollar bills on a daily basis.  They’re thin, lightweight and are easy to transport, making them well suited for portability.
• Bitcoins – Because Bitcoins aren’t tangible items, their portability isn’t a factor.  However, Bitcoins can only be accessed through a computer and internet connection.  This means that as long as you have access to an internet connection and a device that can be used to transfer the digits, then Bitcoins can be considered portable.
• Gold – While gold isn’t quite as portable as dollars or Bitcoins, it has a relatively high value relative to its weight.  At the time of this writing, gold is approximately $1,300 a troy ounce.  A pound of gold is slightly less than 14 ½ troy ounces, and is worth nearly $19,000.  Gold can be worn or carried with relative ease, making it fairly portable.

Divisibility

Something that is divisible should be fairly easy to separate, and ideally recombine, if necessary.  Divisibility is oftentimes associated with the term fungible, which is defined by Dictionary.com  as “being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind.”  Let’s see how the three currencies we’ve been evaluating stack up as it respects their divisibility.

• Dollar – While a dollar that is separated or torn in half has no value, a dollar bill can be viewed as being divisible from larger currencies, such as $50 or $100 bills.  Because the value of a dollar is relatively small, we’ll give dollars a passing grade in this category.
• Bitcoins – The divisibility of Bitcoins is one of the features that makes them attractive among alternative currency advocates.  Items of any value can be purchased with full or fractional shares of Bitcoins.  From our perspective, Bitcoins excels in this category.
• Gold – Gold is also fairly divisible and is actually more fungible than the other currencies we’ve been evaluating.  Small portions of gold can be separated from gold jewelry or gold ingots and reattached.  While one gram gold wafers or bars are typically among the smallest fractional pieces traded, it’s possible to reduce the size even further.  Gold performs well in terms of its divisibility.

Intrinsic

According to Dictionary.com, intrinsic is “belonging to a thing by its very nature.”  In other words, it’s an item to which most individuals attribute a value, or something that has widely accepted value throughout our culture.  We’ll evaluate each of the currencies below in terms of their intrinsic value.

• Dollar – In 1971, President Nixon took the U.S off the gold standard.  Since that time, the dollar has been considered a fiat currency.  In other words, it is not backed or supported by anything tangible.  Rather, it is only good to the extent that the government states that it is and that people accept it as currency.  As such, the dollar has no intrinsic value.
• Bitcoins – Bitcoins are traded like stocks on the stock market, and only have value to the extent that individuals believe the digits have value, which should be reflected in the stock price.  Since Bitcoins aren’t tangible, as mentioned above, they don’t have much intrinsic value and therefore perform poorly in this category.
• Gold – Gold has been accepted as money for thousands of years.  It’s finite, difficult to mine, and is widely accepted as a valuable metal.  As such, gold carries with it a substantial amount of intrinsic value and is one of the best examples one can find of an intrinsically valuable item.

In summary, while Bitcoins are a welcome alternative to dollars, with seemingly plenty of upside potential and widespread use, they fall short of gold when evaluated in terms of sound money, and therefore, are unlikely to unseat gold as the preferred alternative currency.  While plenty of items have served as money over time, gold is the only currency that has endured.  Unless or until an alternative currency can fulfill the four characteristics of sound money, it’s unlikely to replace the world’s most popular yellow metal as the preferred alternative currency.

Tony Davis is the owner of Atlanta Gold & Coin Buyers, a full service Atlanta based coin and bullion dealer specializing in buying, selling and appraising coins and coin collections of all types and sizes.  Visit his website at www.atlantagoldandcoin.com for additional information on the products, services and educational resources offered by his company. Tony can be reached at [email protected] or at 404-236-9744.