Bitcoin and the Myth of Digital Gold

Bitcoin arose as an amalgamation of ideas and technologies developed on a cryptography mailing list. Started in 1992, it was humorously nicknamed cypherpunks by one of the founders, Jude Milhon. In 2008, a cypherpunk, known by the pseudonym Satoshi Nakamoto, released the whitepaper for bitcoin. He envisioned it as the world’s first decentralized digital currency. Nakamoto had been active in the community since 2007. His idea drew from the previous work of cypherpunks like Adam Back’s Hashcash, Wei Dai’s b-money and Nick Szabo’s Bitgold and outside technology like Bram Cohen’s Bittorrent. The true genius of bitcoin is its ability to function without any central authority. It maintains a secured ledger of verified transactions between participants, called the blockchain.

The very foundation of Bitcoin lies in the belief that cryptographically secured public ledgers can be used for daily transactions. The transaction could involve an exchange of a particular service or material goods. But a growing brand of evangelists are fighting tooth and nail to have you believe otherwise. They see Bitcoin as a commodity, or simply put-
digital gold. This perception cannot be any farther away from the reality.

A commodity is a basic good in commerce that is interchangeable with other commodities of the same type. They are most often used as inputs in the production of other goods or services. Gold as a commodity has been traded across the world through generations. Its value draws from its scarcity and utility. Though you cannot ear gold, it has been the preferred metal to mint coins. Today, it finds use as jewelry, in electronics, medicine, computing and the list goes on. Prices of commodities in general are regulated by supply and demand. And while Bitcoin might seem strikingly similar since it has value and use, its not a commodity.

You see, no matter how hard you try, gold is gold. You cannot improve upon its properties. Its has and will stay the same till the end of time. A Bitcoin on the other is the product of a protocol which is followed and executed by millions of participants worldwide. Protocols can be changed, altered or redefined altogether! Investors who jump the gun to classify Bitcoin as a commodity should should not forget that its protocol has undergone countless revisions over the last decade. To maintain its market-leader status, Bitcoin needs to do exactly what Coca-Cola or Apple does: Provide a useful product at a competitive price, perhaps with some small premium over major competitors due to name recognition.

As Bitcoin gets larger, it also becomes increasingly susceptible to government bans, regulations, and tracking. After all, it is literally a central database of all transactions ever made, permanently linked to your wallet address. The more people who adopt it, the worse it becomes as a medium of exchange. This has been playing out to a point now where Bitcoin is slower and more expensive than the legacy big-banking payment system it set out to replace! And it hasn’t even reached anything near its proposed scale yet.

You could argue that instead of using it as a currency, we could use it to store value, like gold. But then Bitcoin would eventually lose its value if it does not continue to improve.