Bitcoin is constantly being likened to gold. Other cryptocurrencies fight over the opportunity to be the associated “silver”. This is, by-and-large, nonsensical. Cutting-edge digital technologies need to be thoroughly misrepresented to appear in any way similar to elements on the periodic table.
These analogies are spreading quickly, and they are dangerous for many reasons – the greatest danger probably being their oversimplification of complex systems. Collapsing all of the complexity of a particular blockchain ecosystem into something more familiar might allow people to feel more comfortable with a technology. However, it does not help them to fully comprehend the reality and possibilities of that technology.
Technology can and will change in ways that the known elements of the universe will not. Allowing yourself to even entertain a conception that implicitly suggests otherwise is foolish at best – and reckless at worst.
Scarcity vs Digital Scarcity
If someone tells you that “Bitcoin is digital gold” and then you press them a little, they’ll probably explain themselves like this: “Gold is hard to mine. Bitcoin is hard to mine. They are both scarce. Scarcity leads to value appreciation.” This was supposed to be your eureka moment… was it?
There’s a big problem with this idea: digital gold is not and could not be scarce in the same way that physical gold is scarce.
Elemental gold has a certain combination of physical and chemical properties that make it intrinsically unique among the building blocks of the known universe. It is not just physically scarce, it is also functionally scarce. Further, it is guaranteed to remain this way based on the laws of physics.
Digital scarcity is self-evidently not guaranteed by the laws of the universe. It is dependent on social/ideological adherence to a certain implementation of a particular technology. By all appearances – it is a digitally implemented social contract.
As empirical proof, consider that there have already existed far more Bitcoins before than there are today – their creation was the result of a software bug, and they were promptly forked out of existence. The sole guarantee that there will only ever be ~21 million Bitcoins is social consensus – software alone can and has made far more Bitcoins. That doesn’t sound anything like physical gold – which can’t instantly fork in or out of existence, regardless of human interventions.
Speaking of forks, anyone with enough interest and resources could theoretically duplicate every Bitcoin that currently exists. Not just the blockchain part – (as that is known to be trivially easy in light of the constant Bitcoin forks) – but they could even duplicate the algorithm, distributed hash-power, and number of fiat exchanges that comprise the existing Bitcoin network. It would most probably not make economic sense to do so, but it is within the realm of possibility in a way that duplicating the amount of gold in the universe is certainly not.
Duplication is fundamentally easier in the digital realm. Making something functionally identical is far more straightforward digitally/technologically than it is physically/elementally – this should not be easily disregarded.
You may protest, here, careful reader… but if Bitcoin is not just its hash power, its blockchain… its network – then what is it? It must clearly be something far more complicated than gold (or any other previously encountered store of value) – can you see that yet?
Considerations Re: Stores of Value
We can likely agree that “stores of value” are socioeconomic phenomena – but the uniqueness or quantity of the underlying asset itself is generally fixed by something stronger than a social contract. The idea of digital stores of value appear to be brand new territory, and not just in their technological sense.
I won’t pretend to have all of the answers – in fact, I hope this entire post makes you skeptical of anyone who purports to – but I do have myriad questions:
How long must something persist as a store of value to be reasonably confident that it will remain as such? Is less than a decade of history (volatile history at that) enough to be sure that a new technological innovation can stand the “test of time”? When have we ever desired our technological innovations to remain steadfastly in the image of their first attempt, regardless of further innovations?
Has any given implementation of a technology lasted as long as a bar of gold? For that matter, has any social contract?
…Is not to dismiss these world-changing blockchain innovations. It’s to get you thinking a little more deeply about even the most ubiquitous claims in the space – and to see these blockchain technologies for what they truly are (and to understand what they truly are not).
I love the promise of blockchains, cryptocurrencies, and smart contracts. I love them for all that they make possible. Digital, decentralized, manifestations of human tools and organizations now have the potential to be far more flexible and transparent than their historical counterparts.
If you love these technologies solely because the idea of digital gold appeals to you – then you may find that your love is destined to be somewhat unstable. You should be aware: digitally implemented social contracts can upset your deflationary dreams for the future just as easily as they could enforce them.
Bitcoin is not digital gold in any meaningful sense – and that is perfectly fine.