Bitcoin: A Global Currency, Digital Gold, or Neither?

Bitcoin as a global currency:

On May 17 2010, bitcoin enthusiast Laszlo Hanyecz posted on bitcointalk.org: “I’ll pay 10,000 bitcoins for a couple of pizzas… Like maybe 2 large ones so I have some left over for the next day”. Five days later he found a taker and received two large Papa John’s pizzas in exchange for 10,000 BTC; worth about $40 at the time. While leftover Papa John’s sounds nasty and $40 seems a bit pricey, Laszlo made a far worse exchange than he could have imagined.
In 2017, 10,000 bitcoin would buy Lazlo 2.75 million large Papa John’s pizzas. In hindsight, Laszlo essentially chose 2 pizzas in 2010 over 2.75 million pizzas in 2017 (or $55 million in cash): a regrettable trade. Instead of making the purchase in bitcoin, let’s assume that Laszlo paid for the pizzas with USD. With an inflation rate in the United States of about 1.9% over the past 7 years, Lazlo’s $40 should theoretically buy him about 1.75 Papa John’s Pizzas in 2017. Had he paid using USD, Laszlo would have effectively chosen 2 pizzas in 2010 over 1.75 pizzas in 2017: an excellent trade. While this example is extreme, it highlights the most overlooked difference between USD and bitcoin: inflation.
While many bitcoin enthusiasts will rant about how the Federal Reserve is defrauding us by “printing” money and creating inflation, clearly, printing money serves a purpose: it encourages us to buy things with USD today. Implicit in each transaction we make in USD is a belief that the USD we spend will not appreciate in value and afford us more goods or services in the future. The same cannot be said for bitcoin. Given the currency’s fixed supply, the more popular bitcoin becomes, the more goods and services each bitcoin will likely buy. As Laszlo’s purchase demonstrates, falling prices reduce people’s willingness to spend bitcoin: destroying any hopes of it becoming a global currency.

Bitcoin as “digital gold”:
So if bitcoin will not be used extensively for daily transactions, what will it be used for? Among other uses bitcoin could potentially be used as a store of wealth or “digital gold”. Despite gold being a physical asset and bitcoin a digital asset the two are comparable across multiple facets:

• Limited Supply — A maximum of 21 million bitcoins will be created or “mined”. Further limiting this supply are the millions of bitcoins which have been and will continue to be lost. Current estimates for the total amount of bitcoin already permanently lost are as high as 4 million. Estimates for the total quantity of mine-able gold range from about 171,000 metric tons to 2.5 million metric tons. While estimates of gold’s supply cover a much wider range, both gold and bitcoin come with a degree of certainty that neither will be devalued due to the creation of more units.
• Costly extraction: The average cost to extract one ounce of gold is estimated to be about $1,000. Similar to how gold must be extracted from the earth, bitcoins must be digitally “mined”. Bitcoin miners are taxed with the massive responsibility of verifying all transactions on the bitcoin network in return for modest fees and, more importantly, a chance at getting newly created bitcoin. The amount of electricity used to mine one bitcoin is roughly equal to the amount of electricity needed to power 3 American households for an entire year. With 657,000 thousand bitcoin being created in 2017, the electricity used to extract bitcoin in 2017 could power over 2 million homes for an entire year.
• Security: Gold holds a distinct advantage over bitcoin when it comes to security: the ETF. With the introduction of the ETF, investors in gold can easily offload the risks associated with holding physical gold to a custodian bank. While many uncompromising investors still prefer to hold physical gold out of distrust for the custodian, for most of us, the ETF represents a cheap way to reduce the risks originally associated with holding gold. For bitcoin, security is dependent on measures taken by individual bitcoin holders. Abstracting from the risk of hackers stealing bitcoin off of phones or computers, physical security poses a major risk to bitcoin holders. Anyone who has opened a bitcoin wallet should remember writing 12 or so obscure “wallet words” on a sheet of paper and stashing it somewhere in their house. While these words serve as a backup password, whoever finds these “wallet words” can immediately steal your bitcoin. Serious investors would be wise to take more reliable measures when it comes to storing their “wallet words” such as putting them in a safety deposit box at the local bank: An action that would demoralize the pioneers of the anti-establishment bitcoin revolution.
  While bitcoin and gold share a number of characteristics, the growth of bitcoin as “digital gold” is dependent on people continuing to arbitrarily assign value to it. Begging the question of whether there is more intrinsic value in a few numbers on a digital ledger than in a lump of gold: a question which remains to be answered.

Neither:
While Bitcoin’s use as an alternative to gold seems more plausible than its rise as a global currency, it could be neither. Actions taken by governments could force bitcoin onto the black market. Excessive speculation could cause downward spirals in prices. Attempts by hackers to steal large quantities of bitcoin off of exchanges could be successful. Alternative currencies could dethrone bitcoin as the leading cryptocurrency.
Nevertheless, the innovative block chain technology underlying the bitcoin payment system is here to stay. While the risks posed with investing in cryptocurrencies run abound, the only way to learn about cryptocurrencies is to go out into the market, buy some, and make a transaction.