The Fallacy of Crypto Superiority over Gold
When it comes to the economics of cryptocurrencies, all arguments start with, or find their foundation in, the statement “gold has no inherent value”. This statement is 50% true and 100% wrong.
While gold in and of itself has no value, the value of gold in the current financial ecosystem stems from our ancestors who have been valuing it for centuries. Gold, like Bitcoin, has a limited supply which makes it scarce in nature and gives it the property of being deflationary. That is why we value gold and all precious items like jewelry are made of gold.
Building on this legacy, gold became a monetary standard for backing up dollars until Ronald Raegan liberated dollars from gold in 1973. Since then US dollars have come under the fiat rule of the US government. And to keep US dollars precious, there have been wars and economic upheavals (more on this in a different post) but more so it depends on the economic outlook and predictions of the country.
But the reason that gold became a valuable metal is not only because we have decided to value it over all the other metals but because gold is a metal that is perfect to be precious.
In the periodic table of 118 elements, we have noble gases and halogens. We can’t use them as a currency. Then there are two liquid metals mercury and bromine — it is impractical to have liquid as a currency.
We can’t use arsenic metals because they are poisonous. Neither we can use alkaline nor earth metals because they are too reactive and they react with water and air causing explosions. No one wants cancer so rule out radioactive elements. Then there are rare earth metals that are hard to distinguish and too expensive to produce and maintain in circulation as a viable currency.
This leaves us with 49 elements out of 118. We have iron, copper, zinc, lead, etc.
Metals like titanium are way too hard and have a very high melting point, so it’s difficult to create coins from that. That is why it finds its application in rockets. Aluminum is hard to extract and too thin and delicate for a coin. Iron can develop rust and corrode away. We can rule out copper and lead on the same basis.
Now we have noble elements. They are non-reactive but there is just too much of them. So no scarcity factor and is easily prone to inflation.
We are now left with platinum, gold, and silver. Platinum is hard to extract because it has a high melting point of around 2000 degrees Celsius. Silver tarnishes because it reacts with sulphur present in the air. That leaves us with only one metal — Gold.
- It is relatively inert which means it won’t tarnish.
- It is scarce
- It is a stable and non-toxic metal
- It is malleable and ductile
- It is golden! No other metal has this unique color.
Also, gold is a metal that finds its application in various domains — dentistry, computers, electronics, medical equipment, aerospace. All these factors and applications give gold has an inherent value which makes it unique and useful. Therefore, gold is valuable like any other metal but because of its wide swathe of application, chemistry, and appearance, more valuable than most other metals. That is why comparing gold with cryptocurrency is a fallacy because gold is not a currency in the first place.
On the other hand, bitcoin, like the dollar, has no inherent value. The difference between the two is in the way we have decided to value them. The dollar got its value from the fiat ruling of the government whereas Bitcoin got its value from a distributed consensus. Bitcoin (crypto in general) won’t be replacing gold because you cannot use bitcoin to build electronic circuits. You can use bitcoin to buy gold that will be used in the chip. Bitcoin is, therefore, a means to transfer a value store, like the dollar, and not a value store in and of itself.
