Depending how long you have been in this space you probably have heard at least once somebody say that bitcoin will replace traditional FIAT currency, or maybe you have heard somebody refer to bitcoin as gold 2.0. So today I decided to dig a little bit deeper into those ideas and maybe provide better arguments and shed some light into bitcoin and its true resemblance to gold and traditional currencies.
So let’s start with the origins of money to get a little bit more context
A long time ago people traded things they had for things they wanted, but what happened if I didn’t wanted to give my oranges in exchange for your apples? To solve this problem people started trading gold for things they needed, since everybody agreed that gold was valuable nobody had a problem receiving gold for their apples and using that gold to buy the oranges they wanted, but what happened to the people who had a lot of gold or simply wanted to put what they had away and safe from thieves? They started putting their gold in the hands of people with guards and vaults who offered to keep their gold save for a small fee (this is how the first banks made money) and this banks gave them in exchange of their money a piece of paper that they could use to redeem their gold back whenever they wanted (this is how paper money was born).
Now this is where things start to get interesting because it was at this brief point in time that paper money had the benefits of gold but it was also a lot more easy to carry around and use for transactions so it was a better payment method, but then something happened… the banks started printing money without having more gold to back them up, and this is when paper money stopped being a good way to store value (now legally banks can print money when they want making the money already in circulation worth less, since the supply keeps increasing). Nowadays we also have credit cards which allow us to send each other paper money by just telling the banks to move some of the ones we have in our account to someone else’s account (but in reality they are just numbers on a screen since banks don’t actually print all the money in existence in those screens, they just need to have enough for the people who want to make withdrawals for their non-electronic transactions). So as crazy as it sounds today we can buy an apple using a piece of paper that has value despite not being backed by a physical commodity (nor does the material it is made of) simply because it somehow being backed by the same financial institutions that keep printing more of them.
So what have we learned so far?
Gold was once used as a payment method in our society but was replaced by a more efficient, fast and practical way to transfer value that is not backed by a physical commodity that has an increasing supply that makes it lose its value over time making it inefficient as a way to store value. In other words gold and FIAT currency have both pros an cons: gold is a proven store of value but not a medium of exchange and FIAT currency is a good medium of exchange but a poor way to store value.
And what about bitcoin?
What is bitcoin being used for? Is it being used more like gold or as a medium of exchange? Does it have the potencial to be used as both?
The first thing we should consider when comparing bitcoin to gold is which one is better to protect yourself against inflation or as a store of value? I’m not even going to answer this because the answer is to obvious, but a better question should be if you consider bitcoin’s volatility worth the high rewards? (which are a looooot higher than gold’s), another thing we need to consider is the liquidity aspect, not because we are comparing which one is a better payment mechanism but because in case you have your savings in BTC or gold and suddenly decide to buy a house (assuming that the current owner will not accept a payment in btc or gold) you will need to convert your BTC or gold into FIAT and if in order to sell them fast you need to sell them at a lower price than the market value then part of your returns will be lost, therefore the easiest one to sell will have and advantage, so which one is easier and faster to sell? I personally would have to say BTC, not only you can already pay with crypto using debit cards but because it is a lot faster to log into your pc to sell your BTC than it is to drive to a pawn shop to sell your gold, but it is also important to mention that due to bitcoins volatility you can earn more or less depending on when you sell it.
The first thing we need to consider when comparing bitcoin to FIAT is the adoption, if I can’t use bitcoin to pay for stuff then its not a good payment mechanism, so… can I actually pay in bitcoin for stuff in my day-to-day life? Is it more efficient and cheap than FIAT? And when talking about adoption, do we mean worldwide adoption or just within a country? The answer in my opinion is a little bit more complicated than a yes or no but it really depends on mainly 2 factors:
*What part of the world do you live in (Whats your country’s stance on cryptocurrencies? Does the national currency has worldwide adoption? How’s the government’s stability? and more)
*What are you trying to pay (is it really cheaper to pay for something in BTC? What if you wanna buy 1 apple? What if you wanna buy 10,000,000 apples from a guy that lives in a different country? What if the person with the apples doesn’t own a cellphone or a laptop or access to the internet?)
Conclusion
So in conclusion in a period longer than a few months even with bitcoin’s volatility, buying at a peak and then selling right after a price correction you still get better returns than investing in gold, which is also inferior as a payment mechanism and this will become more obvious the more adopted bitcoin becomes, since more adoption equals more demand, and more demand equals an increase in price and makes it easier to spend your btc since now more people accept it as a payment method, wich will result in the use of bitcoin both as a payment mechanism and a store of value.