The Difference Between Gold and Bitcoins? Intrinsic Value!

In his latest video appearance, Peter Schiff explains in detail the difference between gold and bitcoins. His main point: gold is real money because it has an intrinsic value!

Schiff first sums up the similarities between gold and bitcoins. He sees the following similarities:

  • one needs to put effort in mining bitcoins, so one actually expands real resources
  • there is a cost associated with creating a bitcoin just like there is with gold (in contrast to central banks that create pretty much limitless amounts of currency)
  • there is a limit there is a scarcity in that there are only 20 million bitcoins that can be mined
  • both bitcoins and gold are divisible (the idea is that you can break your bitcoins up into smaller increments for transaction just like gold)

On the other hand, there are some differing characteristics between gold and bitcoins:

  • one can instantaneously send bitcoin over the Internet
  • gold has to be protected as it could be stolen
  • it does not cost any money to store bitcoins in a digital wallet

Although bitcoins replicate all the properties of gold, there is one major fundamental difference: intrinsic value. Schiff explains:

Bitcoin does not have any intrinsic value. The reason gold became money was first it was valued as a commodity. It was a luxury good known throughout the world. You knew that if you needed something you could always buy it with gold (even if the person who accepted your gold didn’t want it he knew somebody else who did). Gold was uniquely suited to be money over a lot of other commodities and basically won the free market competition for money because it had a lot of other characteristics. These are the characteristics that bitcoin is replicating but they are not replicating the intrinsic value that made goal desirable in the first place. The only reason that anybody wants bitcoins is because they believe somebody else wants them; they want them to exchange them for the things that they want. People want gold for itself. Yes it can also be used to exchange but it has a value unique to itself. It has its own properties that are desirable; there is nothing you can do with a bitcoin except give it to somebody else.

Is it correct to think that, because it is easier to use bitcoin than gold, bitcoins have intrinsic value? Peter Schiff does not think so:

Go back to the original currencies. The original currencies were issued by private banks. In fact if you go back to the beginning, the first currency was issued by a goldsmith; somebody took their gold
to a goldsmith and gave a warehouse receipt for that gold. Now the person who owned a warehouse receipt from a reputable goldsmith, instead of going back to the goldsmith and fetching is gold, he might be able to take that receipt and exchange it with somebody else who had goods and services that he desired and the other person might accept it because they recognized the receipt, they know it’s a reputable mint, they know there’s gold there, and so that warehouse receipt can circulate as currency. That is what banks did. Before the Federal Reserve in 1913, private banks all around the US issued their own note currency. The currency was backed by gold that the banks had in their walls but it was easier to use the currency rather than lugging around gold, you can use these bank notes. So the original paper currencies had a benefit the gold did not have in that it was easier to use than the gold itself. But that did not give paper money backed by gold intrinsic value. The only reason the paper had value was because it was backed by the intrinsic value of gold.

Today we do not have legitimate currency, we have a fiat currency. There is nothing behind the dollar which is why people think what is wrong with bitcoin? There is a significant difference. The dollar
is legal tender here in America, other currencies are legal tender some place else. Even though I do not want dollars, the government only accepts dollars in payment of taxes. So there is a legitimate use for dollars even though they do not have any intrinsic value the way gold does. But bitcoins do not have any intrinsic value whatsoever.

To sum up, Schiff is pretty clear in this thinking that bitcoin is a bubble in the making. Whether it is ready to burst, or if it will go on for some (longer) time, he has no idea. This is why he thinks so:

So here is the problem. People are up advocating the use a bit coins as if it is a form of money. But it can’t be because bitcoins do not represent a store value. You don’t know what it quite you could be worth next week, next year, in five years. Nobody knows if it will be worth $0 or if somebody could come up with an alternative digital currency that maybe is more attractive than bitcoin. Somebody might come up with a legitimate digital currency that is actually backed by gold. In the meantime you have got a very volatile bitcoin (it swings in price). Most of the bitcoins that have been mined are not circulating; they are being hoarded by the miners or people who bought some other bitcoins when they were just pennies a piece; they are not being used in commerce, they are not being sold, that is one of the reasons that the prices are rising. A lot of people are trying to enter the market enticed into the market by the spectacular gain in prices. Again why are people buying bitcoins? They are buying them because they believe the price is going to go up; they are hoping to spend the bitcoins on something else in the future.

I’m not doubting the sincerity of a lot of the people who own bitcoin, I just think that their judgment has been clouded by the money and by the potential of a windfall IF what they are hoping to occur does. It is not going to happen because what makes gold money is not just the fact that it can be divisible or that it is scares but that it has intrinsic value on its own. Right now the price of bitcoin is going up and people are validating their belief in bitcoin by the rising price. That does not validate anything, it just as easily validates my premise that there is a bubble in bitcoins if there is legitimate value. When the tide turns, a lot of people are going to want to get out of bitcoins, not too many will be there at the other side of the trade and then when the price plunges you will have a lot of people that can be very upset because they paid a high price for their bitcoins. If you do not want to be in government fiat money, if you want to be in real money that can not be crated it will they can not be inflated away, buy gold. In fact, if anything, I think the recent weakness in gold has added fuel to the bitcoin fire because some people who might be buying gold but may be discouraged from the recent price declines, compare that to the skyrocketing price of bitcoins and jump to the wrong conclusions. I think it’s going up because it is a mania because it is a bubble. In the meantime, real value is being overlooked by people who are rightly concerned about all the money being printed, concerned about a currency crisis, and who want to do something about it to preserve their savings. Bitcoin has been around for about four years, gold has been around for more than 4,000 years. Will bitcoin be around in four years from now? I have no idea but I’m confident gold will.

 

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