How Does Bitcoin Compare Versus Gold and Fiat Money?
Gold and fiat money are the only two globally acknowledged cash standards, but could Bitcoin join them soon?
Throughout most of history, there has been only two real standards of money: gold and fiat money. Fiat money, for those that don't know, are monies backed by the government that issues it. Gold, or these days, gold standard money, is backed by actual gold.
Technology dealing with the creation of currency hasn't really changed for millennia... until recently, that is. The creation of Bitcoin and other cryptocurrencies has made it possible for people to have a new standard of cash.
But, before you start Bitcoin mining or looking at the best Bitcoin wallets on the market, hold on. Many people are cautious about investing in Bitcoin, and that's rightfully so. You should probably learn about how Bitcoin compares to gold and fiat money before you get in on the craze.
The thing that we can all say about gold and fiat money is that we've seen how they behave over centuries. Yes, we've seen fiat money fluctuate like mad—or just become worthless overnight. Yes, we've seen gold boom during recessions.
But cryptocurrency? Well, we don't really know how the evaluation of digital currency works in the long term. Right now, it looks like a bubble about to burst, but will it? Who knows?
The thing is, neither fiat currency or Bitcoin really have withstood the test of time. Bitcoin's too young to do so, while fiat money loses all value the moment a government collapses. So far, only gold wins that round.
The things that make both gold and fiat money worth something, at least on paper, is the trust they have and the fact that they are backed by major group.
Gold standard currencies are backed by gold, so if you wanted to, you could technically trade it for its value in gold. Fiat money is backed by a guarantee from the government.
Assuming the government is stable and even remotely honest, there's a lot of trust you can place in that. Additionally, that also means that you can use that currency in any place of business located in that country.
Bitcoin and other cryptocurrencies aren't really regulated or backed the way traditional currency is. If you think about it, that's risky. Bitcoin could lose all value, and those who invested in it would have nothing to show for it.
Bitcoin, gold and fiat money are all capable of being used in transactions. However, with gold and Bitcoin, issues tend to crop up. Bitcoin is mainly only used in cyber transactions.
Gold, on the other hand, can't be used for typical transactions unless you're using gold standard currency. For the record, no one uses gold standard currency anymore. All countries really use is their own fiat money, which is bartered on exchanges.
That being said, fiat money is the lingua franca of commerce these days, which is why all exchanges tend to have at least one country's fiat money as their base value at all times.
Both gold and fiat money are somewhat unstable, but at the same time, we can still rely on them for the most part. (Stock market crashes and government changes are a good example of two reasons why I said "for the most part.")
Bitcoin has been getting increasingly volatile, and many are worried that it could end up causing the currency to fail. There's no central bank, it's not legal tender, and it's being traded a lot. That's the definition of volatile.
One of the more interesting things to look at when comparing Bitcoin to gold and fiat money are the market caps. Currently, $86.6 trillion dollars is what is being moved around throughout the world—in all its various forms.
Of that money...
- $66.8 trillion is put into the stock markets.
- $31 trillion is in the form of physical fiat money.
- $8.2 trillion is pure gold.
- $100 billion is in the form of cryptocurrencies.
Cryptocurrencies have the smallest market cap, and fiat money has the largest—excluding stocks. So, while it may be booming, it's still not a global thing. (Food for thought, eh?)
No currency is fully secure. All can be stolen, and even Bitcoin can be traced. The difference in security comes with your definition of security. Bitcoin is harder to steal in a traditional sense, because physical Bitcoins don't exist and banks don't really let you store them.
However, all currencies can potentially be stolen via hacking.
Gold is the gold standard when it comes to trust, but in certain countries, gold and fiat money are equally highly regarded. Most companies do not trust cryptocurrency enough to accept it as payment. So, the range of transactions you can have with it is limited due to its sketchy reputation.
Could that trust increase? Perhaps, in time. However, with Warren Buffett warning people against Bitcoin, it's safe to say it'll be a long, long while—if ever.
Only so much gold is on Earth's crust, which makes it the only standard among the three that has a (somewhat) fixed amount.
Bitcoin does have a fixed amount of coins, but there's no saying that there can't be a tech fix for that issue. Fiat money can be printed indefinitely. So, in this sense, cryptocurrencies like Bitcoin are somewhat like money.
The thing is, Bitcoin's design is flawed—and unless a tech fix comes to repair it, actually doing transactions will become too pricey, too slow, and too much of a headache to be worth it.
So, unlike gold and fiat money, Bitcoin has a major issue in its potentiality that needs to be addressed.
Here's a cool way to compare Bitcoins to gold and fiat money: the imprint they will have on history and archeology.
Clearly, historians will talk about Bitcoins at length and there will be historical records for ages—but what about artifacts? Bitcoin is not paper money.
Will there be Bitcoin coins in the future? Possibly. However, from a historical standpoint, it'll be hard for historians to actually find Bitcoin traces and artifacts in the future.
Gold and fiat money, though, regularly come up in historical digs and auctions. So, that's kind of a cool thought.
When you look at how Bitcoin compares to gold and fiat money, it gives you a lot to think about. Some information suggests it will be a "flash in the pan" type of deal that won't last a while. But, maybe we're wrong. It's hard to tell, but fun to think about, isn't it?