Why Bitcoin Is Not Gold

[mirelo]

Have you ever wondered why gold have been and ceased to be money so many times in history? Many talk about returning to gold, but if gold was that much better than fiat money, then why has fiat money recurrently replaced it? The supporters of Bitcoin would say centralization is to blame, since it allows the manipulation of the monetary system in favor of the wealthy. However, since most gold monetary systems were also centralized, how could centralization explain fiat monetary systems, especially debt-based ones? Clearly, centralization is not enough to explain our current monetary system.

Here I will present an alternative explanation that, despite recognizing the role of centralization, does not rely on it as a primary source of understanding.

Let us begin with money itself.

If a commodity has the same value of whatever has the same price, then these two values are neither of those objects for being the same, just like two numbers three are the same. And because this value common to both commodities is neither of them, it cannot have any of their utilities or material qualities, which derive from their material beings: their common value is the social abstraction of their utilities or material qualities for the sake of their common monetary value. This is money itself: an actual equivalent of all possible equivalents.

But commodity money--like gold--is also a merchandise, with its own economic value. This is clearly seen just by choosing another commodity to represent money, making money as concrete as gold, with all its utilities or material qualities.

Therefore, money has two dimensions: an abstract one, which is money itself, and a concrete one, which is its representation.

A representation can itself be represented: we already have replaced gold by many representations of it, like paper notes. However, most of these representations have one thing in common: just like gold, they make no inherent distinction between money itself and its representation--hence the following problem.

Lately, monetary representations have become ever cheaper to produce. Our last such representation is the cheapest so far: magnetic records readable by computers. Yet still, any confusion between money itself and its representation requires its value--the actual equivalence to all possible equivalents--to be the same as that of its representation, then decreasing with it. So preserving that value--hence money--requires delaying its most valuable representation, while keeping it also present as debt.

This is the origin of debt money: the confusion between money itself and its representation, which continuously depreciates money, forcing its original (more valuable) representation into the future as debt.

And here is the originality of Bitcoin: it is a form of money that, for the first time in history, inherently distinguishes between money itself (a private key) and its representation (the corresponding public key), eliminating the root of debt money.

Which is also why Bitcoin is incompatible with fractional reserve banking: in order to loan a fraction of any deposit, banks must confuse the identity of deposit money with its different representations in different bank accounts. This is what money creation in a debt monetary system actually means: cloning money identity by mistaking its different representations for it.

So, despite inspired by gold, Bitcoin is a fundamental departure from it: this cryptocurrency not only restores a valuable representation of money, but further enforces a permanent distinction between that representation and money itself--which neither gold nor bank accounts can do.

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[Coinabul]

The reason people like gold and liken it to Bitcoin is that there is only so much gold. People can't make more of it. They can mine more of it, but all of the easily mined gold has been mined already. The supply limits itself as time goes on. I think that's why people say Bitcoin is similar. However, I enjoyed your description of the differences in the technical transactions.

[Steve]

Excellent post.  Though I wouldn't say bitcoin is incompatible with fractional reserve banking.  I would instead say that people will view a bitcoin deposit more as a debt obligation rather than as a perfect substitute for actual bitcoins.  For that reason, we may never see fractional reserve banking applied to bitcoin in any kind of broad sense (people might instead hold some of their savings in shares of a loan business).

[silverfuture]

Have you seen this? http://mndrix.blogspot.com/2011/11/bitcoin-gold-of-future.html 

[ElectricMucus]

How about bitgold?

Use the blockchain mechanism to distribute IOU signings over a WOT mechanism and use 256bit values to represent a number of gold atoms. Remove mining at use the web of thrust mechanism to validate gold holdings.
Instead of mining use the mechanism of Guarding: Guards provide hashing power which is distributed to the network as certain number of gold atoms per plank time unit.

Using units which have the maximum possible amount of precision would seem overkill, but only so in guaranteed that the system is compatible with future implementations.

[MatthewLM]

The post is not correct because people have already tried to create bitcoin representatives already. You are seeing people trying to create bitcoin banks to solve bitcoin's problems in the wrong way. Bitcoin doesn't need any banks from what I've learned but it needs improvements in the software to solve particular problems.

And gold can be used a trustworthy physical currency. I do believe bitcoin can be used to facilitate a new digital financial system.

It is conceivable that in the future bitcoin could also become a method for trading digital contracts as well but that would be back to the derivatives. The bitcoin system or a similar one could be used to trade contracts that relate to something such as gold but I don't know how digitally signed contracts could work exactly and how current legal systems would deal with them.

A "bitgold" would have problems and advantages I suppose.

[silverfuture]

Bitcoin certainly takes much less technical proficiency to secure and assay than gold even at this early stage in development. I'd say that is a strength as far as properties that create value go.

[MatthewLM]

Having a bitgold would make the market much more stable as it is linked to the more stable (But not very) gold markets. Obviously bitcoin is super volatile.

But bitcoin is just having growing pains.

[ElectricMucus]

Having a bitgold would make the market much more stable as it is linked to the more stable (But not very) gold markets. Obviously bitcoin is super volatile.

But bitcoin is just having growing pains.

I'm certain that it will be around, and eventually grow up. But as for using it as a store of value that's a different story.

But Gold and Bitcoin also share a common issue: Pump & Dump by the big guys, but that's been the case with every commodity in history.

[evoorhees]

Have you ever wondered why gold have been and ceased to be money so many times in history? Many talk about returning to gold, but if gold was that much better than fiat money, then why has fiat money recurrently replaced it? The supporters of Bitcoin would say centralization is to blame, since it allows the manipulation of the monetary system in favor of the wealthy. However, since most gold monetary systems were also centralized, how could centralization explain fiat monetary systems, especially debt-based ones? Clearly, centralization is not enough to explain our current monetary system.

Gold wasn't lost as money because of "centralization."  It was lost as money because governments desire the ability to debase the national currency for deficit spending.

Upon a gold standard, the ability of governments to spend beyond their taxable means is limited. Upon a fiat standard, the ability of governments to spend beyond their taxable means is far less limited, for they can merely print some portion of the deficit (and the public, taught in government schools their whole lives, never learns about the insidious inflation tax they endure).

Put simply - the gold standard tends to be abandoned by governments because it restricts their ability to spend. It limits their power, so they find ways and excuses to get rid of it.

[evoorhees]

How about bitgold?

Use the blockchain mechanism to distribute IOU signings over a WOT mechanism and use 256bit values to represent a number of gold atoms. Remove mining at use the web of thrust mechanism to validate gold holdings.
Instead of mining use the mechanism of Guarding: Guards provide hashing power which is distributed to the network as certain number of gold atoms per plank time unit.

Using units which have the maximum possible amount of precision would seem overkill, but only so in guaranteed that the system is compatible with future implementations.

One of the beauties of Bitcoin is that it is not an obligation of any party. With an IOU, or "backing" of gold, there must be a person, group, or company that fulfills the obligation. Bitcoin eliminates counter-party risk, and tying such a system to an IOU structure removes that benefit.

[silverfuture]

Bitcoin isn't gold but it does seem to have more similarities with it than with fiat, especially concerning distribution. Fiat is always loaned into existence at interest, is distributed only through tightly controlled "approved" centralized channels and therefore contains the seeds of its own eventual destruction. Bitcoin, like gold must be mined by someone who has the capital, technical know how, etc to compete and discover some from a finite and ever diminishing quantity. These fundamental changes in distribution are important when considering how it may affect the greater economy in terms of savings, investment and freedom of access to the distributed commodity.

[notme]

Bitcoin isn't gold but it does seem to have more similarities with it than with fiat, especially concerning distribution. Fiat is always loaned into existence at interest, is distributed only through tightly controlled "approved" centralized channels and therefore contains the seeds of its own eventual destruction. Bitcoin, like gold must be mined by someone who has the capital, technical know how, etc to compete and discover some from a finite and ever diminishing quantity. These fundamental changes in distribution are important when considering how it may affect the greater economy in terms of savings, investment and freedom of access to the distributed commodity.

+1

Where gold and bitcoin differ is transactions.  Bitcoin can be sent around the world for little or no fee in a very short amount of time.  Gold involves customs, shipping insurance, and risk of theft.

[silverfuture]

Bitcoin isn't gold but it does seem to have more similarities with it than with fiat, especially concerning distribution. Fiat is always loaned into existence at interest, is distributed only through tightly controlled "approved" centralized channels and therefore contains the seeds of its own eventual destruction. Bitcoin, like gold must be mined by someone who has the capital, technical know how, etc to compete and discover some from a finite and ever diminishing quantity. These fundamental changes in distribution are important when considering how it may affect the greater economy in terms of savings, investment and freedom of access to the distributed commodity.

+1

Where gold and bitcoin differ is transactions.  Bitcoin can be sent around the world for little or no fee in a very short amount of time.  Gold involves customs, shipping insurance, and risk of theft.

Yes, that and very high divisibility to allow for precision plus easy quantitative assessment make bitcoin vastly superior to gold as a unit of transaction.

[mirelo]

The reason people like gold and liken it to Bitcoin is that there is only so much gold. People can't make more of it. They can mine more of it, but all of the easily mined gold has been mined already. The supply limits itself as time goes on. I think that's why people say Bitcoin is similar. However, I enjoyed your description of the differences in the technical transactions.

Gold and Bitcoin have in common a limited supply, and of course this is a key feature of both. However, because gold confuses money itself with its representation and requires proxy representations to cope with society needs, it leads to increasingly cheaper representations that are taken for money identities, which leads to debt money. So if Bitcoin had only a limited supply, without fundamentally distinguishing between money itself (a private key) and its representation (the corresponding public key), it would sooner or later lead to debt-money, just like gold did.

[mirelo]

Excellent post.  Though I wouldn't say bitcoin is incompatible with fractional reserve banking.  I would instead say that people will view a bitcoin deposit more as a debt obligation rather than as a perfect substitute for actual bitcoins.  For that reason, we may never see fractional reserve banking applied to bitcoin in any kind of broad sense (people might instead hold some of their savings in shares of a loan business).

The reason why Bitcoin is incompatible with fractional reserve banking is because fractional deposit loaning of a bitcoin deposit would require having the same bitcoins in different bank accounts, which in turn would require creating another identity for them--instead of a private key--one that allowed its own confusion with whatever its representation were--since fractional reserve banking requires confusing the identity of deposit money with its different representations in different bank accounts (the miracle of money multiplication). Unfortunately, this would no longer be a Bitcoin monetary system, but another monetary system built on top of deposits denominated in bitcoins that could just as well be denominated in dollars.

[mirelo]

Have you seen this? http://mndrix.blogspot.com/2011/11/bitcoin-gold-of-future.html 

I have a link to that article in my blog

[mirelo]

How about bitgold?

Use the blockchain mechanism to distribute IOU signings over a WOT mechanism and use 256bit values to represent a number of gold atoms. Remove mining at use the web of thrust mechanism to validate gold holdings.
Instead of mining use the mechanism of Guarding: Guards provide hashing power which is distributed to the network as certain number of gold atoms per plank time unit.

Using units which have the maximum possible amount of precision would seem overkill, but only so in guaranteed that the system is compatible with future implementations.

I would have to dig into bitgold to understand it better. My point here is that whatever our future money is (and so far I believe it is Bitcoin), its fundamental feature will be this distinction between money itself and its representation, which in Bitcoin is implemented as a distinction between a private key and its corresponding public key. That distinction is what allows Bitcoin to actively control the money supply without violating privacy, thus replicating the natural scarcity of gold.

[mirelo]

The post is not correct because people have already tried to create bitcoin representatives already. You are seeing people trying to create bitcoin banks to solve bitcoin's problems in the wrong way. Bitcoin doesn't need any banks from what I've learned but it needs improvements in the software to solve particular problems.

And gold can be used a trustworthy physical currency. I do believe bitcoin can be used to facilitate a new digital financial system.

It is conceivable that in the future bitcoin could also become a method for trading digital contracts as well but that would be back to the derivatives. The bitcoin system or a similar one could be used to trade contracts that relate to something such as gold but I don't know how digitally signed contracts could work exactly and how current legal systems would deal with them.

A "bitgold" would have problems and advantages I suppose.

There is no problem in creating representations of Bitcoin, provided that such representations are complete (physical coins with an embedded private key are a good example of a complete bitcoin representation). By complete representations I mean representations that replicate the dual nature of Bitcoin as both a private key and its public representation, thus preserving the fundamental distinction between them.

[mirelo]

Have you ever wondered why gold have been and ceased to be money so many times in history? Many talk about returning to gold, but if gold was that much better than fiat money, then why has fiat money recurrently replaced it? The supporters of Bitcoin would say centralization is to blame, since it allows the manipulation of the monetary system in favor of the wealthy. However, since most gold monetary systems were also centralized, how could centralization explain fiat monetary systems, especially debt-based ones? Clearly, centralization is not enough to explain our current monetary system.

Gold wasn't lost as money because of "centralization."  It was lost as money because governments desire the ability to debase the national currency for deficit spending.

Upon a gold standard, the ability of governments to spend beyond their taxable means is limited. Upon a fiat standard, the ability of governments to spend beyond their taxable means is far less limited, for they can merely print some portion of the deficit (and the public, taught in government schools their whole lives, never learns about the insidious inflation tax they endure).

Put simply - the gold standard tends to be abandoned by governments because it restricts their ability to spend. It limits their power, so they find ways and excuses to get rid of it.

Of course the motivation for debt money includes the "ability to spend," although this only hides a deeper motivation: the massive transfer of wealth resulting from a continuous creation of new money always born in the hands of the same few people.

Although it may seem that governments have an inherent desire for deficit spending, the gold standard was abandoned mostly during war periods, and those wars were motivated by private interests rather than by public ones.

The key point is that gold was the historical basis for fractional reserve banking, which in turn was the historical basis for central banking: gold makes no distinction between money itself (the actual equivalent of all possible equivalents) and its representation (the commodity, gold), so it not only allows but naturally favors and even requires fractional reserve banking (just remember how fractional reserve banking evolved from gold keeping).

Bitcoin, on the contrary, has the distinction between money as an abstraction (a private key) and its representation (the corresponding public key) as an essential, defining feature, which is as much an essential difference from gold as one can be.