While almost everyone understands the power of gold, digital currency is an enigma for many. Digital or cryptocurrencies such as Bitcoin are looking to replace physical money by allowing every transaction to be electronic. Simply put, it transfers money from one person or organization to another through a “virtual wallet,” all through a computer or electronic device.
The History and Stability
Gold has been used as currency since around 600 BC, when King Alyattes first minted gold coins in modern-day Turkey. Its beauty is mesmerizing, and its application goes beyond just currency. Both historically and in modern times, gold has been used for jewelry and to beautify monuments. It was even used to cap off the Great Pyramid of Giza. Evidence shows that it has been treasured and kept as a beautiful, valuable asset since the fifth millennium BC. Governments to this day use gold to back paper money, making it a stable investment.
In contrast, only 12 years ago, Bitcoin was created, making it the world’s first cryptocurrency. Although there are now other similar currencies trying to compete, Bitcoin has become synonymous with cryptocurrency. Bitcoin’s creation revolved around the idea of decentralization– or taking authority away from a centralized government and allowing regulation to come from the creators themselves. This idea has grown and Bitcoin has now been legitimized by being accepted at major businesses. However, changing markets and pending legislation against cryptocurrencies loom, making it a volatile investment, but one that has the potential for a big payoff.
One reason the demand for both gold and Bitcoin is high is that it can be held privately without government interference. Gold is often stored and traded secretly, and for investors like Jim Rodgers, investing in gold is essential when the trust of the government is lacking. He claims to keep gold under his bed and silver in his closet– and while this might seem unlikely, there are more and more people who feel it is a safer way to hold on to their funds than traditional investing and banking. Investors looking for privacy and strict confidentiality are attracted to Bitcoin for this very reason. It is considered an asset for taxation but is not disclosed publicly.
Liability of Government-Backing and Intervention
While it may seem that government backing of currency would be a benefit on the surface, the truth remains that it is actually a liability. History has proven that government-backed currencies fail. Governments, such as the United States, have used gold to back their paper money, but because a government can simply print more money, it devalues the currency.
Government policies and central banks have often attempted to manipulate gold prices by both direct and indirect means. Chairman of the Board of Governors for the Federal Reserve System, Paul Volcker, was well aware that the price of gold could be a critical warning sign that a currency is in crisis and would often obsess over the price of gold. Although most governments desire to detach their money from gold, something the United States did many years ago. In June of 1933, the United States went off of the gold standard with Congress passing a law that debts could no longer be paid with gold. A dollar bill reads “This Note Is Legal Tender for All Debts, Public, and Private” it is now backed with the “full faith and credit of the government” as opposed to the actual gold held.
Bitcoin is similar in this way since the currency is not government-backed. This does not mean that Bitcoin will remain unregulated. There are currently cases in the court system dealing with cryptocurrency regulation, and cases such as SEC v. Ripple will be important for investors to monitor. Trading manipulation and hacking by governments to discredit cryptocurrency and disrupt business should not be minimized.
There are currently 12 million Bitcoins in circulation, with an expected total of 21 million produced in the next 20 years. This equates to a 3% growth each year, which is only slightly more than the 2% yearly increase in the supply of gold. This moderate but steady growth has proven to keep prices stable while keeping up with long-term demand. Bitcoin has been designed with this model of gold in mind and should provide the same stability for years to come.
Like gold, Bitcoin represents financial freedom from oppressive government regimes who strive to control their populace. Government institutions like the Federal Reserve see this as competition and a threat to their monopoly on money. Because eliminating the gold standard brought the Federal Reserve and its board members power, they have been hesitant to return to a system they do not fully control. This is a similar problem with Bitcoin– it does not have a single master, which makes it independent from the government system.
Surviving the Dollar
Both gold and Bitcoin can outlive paper currency. The oldest surviving paper money was issued by the Ming Dynasty in the 14th century but was quickly rendered useless. This was due to hyperinflation, which caused the Chinese to return from the Kuan to the gold standard, which dominated for another 400 years. History often repeats itself, and the dollar will likely be bested by gold and cryptocurrency as well. As long as currency such as Bitcoin can function without government intervention, it will last.
The US dollar is consistently devalued because of the government’s choice to simply print more money. This causes the price of other currencies like gold and Bitcoin to rise drastically. In 2013, for example, gold rose to an all-time high of $1,040, and Bitcoin gained 12,600%.
Another reason Bitcoin and gold will survive the dollar is that they are protected from government confiscation. Although the US government has attempted to confiscate gold under President Franklin Roosevelt, the initiative, Executive Order 6102, failed. People simply hid and protected their gold supply. Only one person was apprehended for noncompliance. Because bitcoin is not reported, it is hard for the government to track, making it nearly impossible to confiscate large amounts.
Bitcoin has become increasingly popular in countries where the value of the government-backed currency has been destroyed. Countries such as Argentina, Greece, and Cypress are seeing Bitcoin as an answer to collective prayer. Individuals can get their money out of the local currency, and both send and store Bitcoin quickly and discretely outside of their government’s control. Gold had a similar function, but since Bitcoin and other cryptocurrencies are not bulky and do not take up actual physical space where they can be discovered, Bitcoin functions better in this role.
Overall the similarity between gold and Bitcoin is remarkable. Although they are distinctly different in make-up and history, they both have a similar function: limiting government control and allowing individuals more financial freedom, independence, and privacy which is why a bitcoin IRA is a great alternative to precious metal IRAs. It will be interesting to see the continued growth of cryptocurrency in the future and government intervention attempts. If it successfully avoids litigation, it can change the way business is done in a way that has not been seen in millennia.