The Austrian Way: Gold versus Bitcoin – what is the best private money?

Gold bullion, silver bars and Bitcoin – the favoured currencies of the libertarian malcontents.

Count us amongst them – we’re in favour of all three forms of money and savings.

The market caps of the physical gold and silver markets and the Bitcoin market differ greatly and in a recent study were found to be 10,000, 30 and 2 billion respectively.

Since the emergence of digital currencies there is now a growing debate over which is the best form of private money.

Historical lovers of gold and silver have new suitors to look over. These individuals might need to consider whether divinely distributed precious metals have new, better alternatives delivered by man, the internet and technology.

Digital currency fanboys also need to consider whether older forms of private money might be superior due to their very simplicity and natural origination. Digital currencies are techy, smart, sophisticated and also alluring, but are the precious metals really to be usurped as the money most often chosen by the market?

Rightly or wrongly this debate has created a private money super-fight between gold and Bitcoin. Poor old silver has been left to watch.

The private money super-fight

In a way similar to looking at the fighters’ records before the opening bell, let’s look at how the cases for gold and Bitcoin stack up.

The case for gold: old yella’ is a decentralised money, provided by nature and removed from man’s meddling. A steady supply that even with millennia’s worth of attempts at alchemy has provided the least worst form of money in the opinion of Austrian thinkers and economists with even a shallow understanding of monetary history. Inflation rates under metallic standards at their worst (during gold rushes) have often been lower than inflation rates under fiat standards at their least inflationary. The market has chosen precious metal more times than any other form of money.

The case for Bitcoin: a new, digital, decentralised form of money. Conceived by developers with anti-fiat sentiments, you might call it gold with 1s and 0s. Audited and accounted for by its participant community, Bitcoin is built on maths, algorithms and encryption technology. Bitcoin is promoted as more easily transferred and tradable than gold and the real challenger to the fiat currency dictatorships of today.

So there are the fighters’ form sheets and records, but how to they perform in the key criteria of money they are deemed best at addressing: restricting the supply.

The supply of Bitcoin and gold

The supply of gold has been governed by Mother Nature and has escaped the lusty meddling of man for thousands of years.

There have been many attempts at alchemy – from one of Britain’s brightest minds, Sir Isaac Newton, when he ran the Royal Mint, to US scientists who are trying modern, high-tech methods requiring huge energy inputs – but all have failed.

Bitcoin is rather different, being ‘of man’ and not ‘of nature’.

Does this make it more likely to be flawed?

The encryption technology that is so key to restricting the supply of Bitcoins has been kicking around for 15 odd years. In my conversations around London’s tech-city, developers mostly tell me it cannot be cracked although a few techies do say otherwise. These few say that quantum computing, yet undeveloped, is needed to hack Bitcoin. If this breakthrough was achieved it wouldn’t just threaten Bitcoin but the security of the entire online world. Apparently this breakthrough is possible though.

So what is more probable: alchemy or quantum computing?

Our Bogpaper money (wouldn’t it be fun if we issued that!) says that alchemy is less likely to be cracked than encryption technology, but what do we know. We might be free-minded libertarians (hopefully at least!), but maybe we’ve been left behind…

We also think money needs to be understandable – Main Street needs to get it and trust it for mass use of a currency. Main Street understands the rarity of gold and our inability to suddenly double, triple or quadruple the global inventory of gold bars.

Our humble opinion is that Main Street would have a way to go to understand the tech justifications and workings of Bitcoin. For now we’re backing digital gold payments to be a larger threat to the monetary status quo than these very welcome new digital currencies.

Let’s enjoy the fight play out, as the market decides what currency is best.