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Ask CryptoVantage: Why is Bitcoin Digital Gold? And is Ethereum Digital Oil?
Bitcoin bulls have christened the cryptocurrency “digital gold” to denote its perceived value as a store of value and a potential hedge against inflation, while Ethereum — the second most successful cryptocurrency — has earned itself the moniker “digital oil.”
Is Ethereum the digital oil to Bitcoin’s gold? How did each of these cryptocurrency protocols come to earn these labels? In this feature, we unpack the reasoning behind it and why some commentators disagree with each of those tags.
Bitcoin as Digital Gold
Many observers have likened Bitcoin to “digital gold” due to one similarity it shares with the precious metal — scarcity. BTC is scarce thanks to having its supply fixed or “hard capped” at 21 million. That means that once 21 million coins have been mined, no more bitcoins will ever be released into existence.
This starkly contrasts fiat money that central banks can print more of, anytime. This at-will pumping out of cash can trigger inflation — as witnessed several times in history — and erode citizens’ trust in a national currency.
The mysterious creator(s) of Bitcoin — Satoshi Nakamoto, created Bitcoin with this problem in mind. In Bitcoin’s historic white paper, Satoshi spoke of how trust is needed for conventional money to work — like central banks being “trusted not to debase the currency,” yet “the history of fiat currencies is full of breaches of that trust.”
This conundrum presented the opportunity to create a currency that’s effectively non-manipulable. One way to do that was to write its supply into the currency’s protocol in a way that it could only be changed with significant consensus from the network’s participants.
The Comparison to Gold
Bitcoin’s limited supply makes it scarce, deflationary, attractive, and, you guessed it — like gold. Physical gold is scarce and has a finite supply — and so does Bitcoin.
Satoshi went a mile further to increase Bitcoin’s scarcity by introducing the process of Bitcoin halving — also known as “halvening” among Bitcoin enthusiasts. Halving is a programmed event that occurs every 210,000 blocks or roughly every four years, in which the amount of new Bitcoin created mining is cut in half.
The grand idea behind Bitcoin’s halving is to ensure its long-term viability as a scarce, valuable asset. The scarcity created can increase demand for Bitcoin and drive its price, seeing as its quantity dwindles over time. Such scarcity also safeguards against inflation, reinforcing the idea of Bitcoin as digital gold.
Ethereum as Digital Oil
Ethereum fans believe that if Bitcoin is digital gold, then the king of altcoins fits the profile of digital oil. Ethereum first introduced and popularized the concept of decentralized applications (dApps), which are fueled by Ether.
dApps can be deployed for nearly all manner of uses — from decentralized finance (DeFi) to gaming, to non-fungible tokens (NFTs), social media, identity management, and more. As you can see, the use cases for dApps go beyond finance. However, some of the most successful deployments of dApps have been in the niche.
Stripped down, DeFi is a way of doing finance in a peer-to-peer fashion — without relying on banks. DeFi is an idea and belief that financial services such as lending, borrowing, saving, and more should be accessible to everyone regardless of their location or social status.
And although multiple platforms, including Solana, Cardano, Binance Smart Chain, Polkadot, and Tron (each touted as “the Ethereum Killer”), were also created to power dApps, Ethereum remains the most popular choice for DApp developers worldwide.
Global Computer to Digital Oil
In being the backbone of DeFi, Ethereum lives up to its “global computer” potential as envisioned by founder Vitalik Buterin in the project’s 2014 white paper. This global computer is run by a decentralized network of individual computers that can support dApps, making Ethereum “digital oil.”
Likewise, the platform’s native currency, Ether, has also been called “digital oil” for being the “fuel” of activity on the network. Ether is used to pay transaction fees and to incentivize users (known as validators) to secure the network.
The sentiment that Ether is digital oil has been supported by some high-profile individuals, including Tyler Winklevoss, who’s one half of the Winklevoss twins and the founders of Gemini exchange.
Traditional Finance Pundits Weigh In
But not everyone agrees with the assertion that Bitcoin and Ethereum represent the digital equivalents of gold and oil, respectively. Usually, it’s either Bitcoin skeptics pointing out Bitcoin’s real or perceived failure as digital gold or Bitcoin maximalists slamming the notion that Ethereum, a “shitcoin,” qualifies as a digital something.
Peter Schiff, the CEO of Euro Pacific Precious Metals, has long knocked the idea, once stingingly tweeting that Bitcoin “has nothing in common with gold” and is “fool’s gold.”
And economist Nouriel Roubini has declared that BTC “will never be digital gold,” with Nobel laureate Paul Krugman — a longtime Bitcoin cynic who famously denounced it as “evil,” criticizing the asset as “not a stable store of value.”
It’s not just high-profile people who have cast doubt on the prescribed gold-like status of BTC. The asset’s less than encouraging performance during global crises like Covid-19 pandemic and the onset of the Russian-Ukraine conflict triggered a raft of think pieces on its failure to live up to the promise of being digital gold.
And when it comes to Ethereum being digital oil, Bitcoin maximalist and podcaster Brad Mills has pushed back, contending that “digital snake oil” is a more fitting characterization.
And a Twitter user who’s an apparent Bitcoin diehard bluntly offers: “If you think Ethereum is digital oil, you’ve been played.” But what’s clear is the Ethereum as digital oil analogy has yet to catch on like its Bitcoin counterpart, as pointed out by Dogetoshi, an industry commentator.
The Bottomline: New Concepts for a New World
While some people might view Bitcoin and Ethereum as digital gold and digital oil, it would seem that it’s purely a matter of opinion. But there’s no denying that both these protocols revolutionized finance — with Bitcoin being the first-ever currency immune to manipulation and Ethereum powering dApps that promote a more democratic financial world.
