However, there is an important difference. By my estimation it is approximately one hundred quadrillion times more likely that all offline wallets can be rendered simultaneously unusable at parity value (i.e. that an offline wallet containing 100 bitcoins no longer contains 100 bitcoins, without any interference to the offline wallets) than that the same occurrence can happen with gold. (Anywhere in the world that there is 100 grams of gold, it turns into not-100-grams-of-gold.) Such an occurrence would have to happen through other than literal means: physical theft, legal, etc, and on an individual basis. Can't happen on a protocol basis.
However, the same is not true of bitcoin. The entire P2P bitcoin infrastructure, or the software, might have fatal flaws - and at the end of the day, the "true" location of an offline wallet is in a blockchain, which in a sense is a social construct. A bitcoin does not have a physical sense of existing outside of the blockchain.
This is not a minor point. No software is secure, and there have been close calls in the history of the development of bitcoin. There is no physical law that prevents the breaking of the entire bitcoin model, or that ensure the network - and one and only one unforked network - will always operate.
Whereas, there are very strong physical laws keeping gold stored at a location from turning into anything other than gold without anybody touching it.
Secondly, there are also strong physical laws that imply the scarcity of gold. Again, in the history of bitcoin there have existed flaws that made bitcoins less scarce: . In the past three hundred years nobody has come much closer to "printing" (e.g. synthesizing) gold. It needs to be "mined" - an analogy for getting it with difficulty.
"On 6 August 2010, a major vulnerability in the Bitcoin protocol was spotted. Transactions weren't properly verified before they were included in the transaction log or "block chain" which let users bypass Bitcoin's economic restrictions and create an indefinite number of bitcoins. On 15 August, the vulnerability was exploited; over 184 billion bitcoins were generated in a transaction, and sent to two addresses on the network. Within hours, the transaction was spotted and erased from the transaction log after the bug was fixed and the network forked to an updated version of the Bitcoin protocol." [1]
So there are a few major concerns that keep bitcoin from being a good analogy with gold:
1- Bitcoins do not have a guaranteed phsyical lifespan and location and can disappear at the whim of a network.
2- Bitcoins do not have a guaranteed scarcity and can appear at the whim of a network.
In both of these senses it is quite analogous to a fiat currency. It just does not have some of the physical properties that gold does.
Nevertheless, insofar as the protocol mimics gold in several important ways (including scarcity, storage of at least parity value [0.5 btc remains 0.5 btc in a wallet, just as 0.5 grams of gold remain 0.5 grams of gold], fungability, and mining) there is good reason to believe it can take a very similar role.
If it does, then a good target price for btc is approximately $300K per bitcoin today, which would enable it to take on a total money supply role similar as the total US money supply, or a price similar to the price of the total amount of all gold ever mined (at total spot prices). (Actually bitcoins are considerably more useful than gold for many reasons, including secure storage and transfer; nobody sends gold across continents to render payment, but this is easy with bitcoin. So the total value-as-money of all gold could be a bit lower than the total value-as-money of all bitcoins.)
That is a very large "if" however. I have absolutely 0 faith whatsoever that bitcoin the current protocol can last even 3 years, let alone 10, 20, or 100. If God himself said, "You know what, I shall will the bitcoin protocol into working perfectly forever" and were to fully meet all of its design constraints with no further input from anyone - if offline wallet became equivalent to a safe with gold in it, if transfers worked exactly as handing someone some gold does, and if scracity worked exactly as advertised --
then there is no reason the general protocol could not come to represent more money and velocity than dollars or gold do today. If that were to happen on an international scale, then the 21-million bitcoin limit (ever) would be a problem: to some extent the price of gold will always be kept in check by the ability to mine further gold. The price of gold can't be infinite (or close), as that unlocks further physical gold mining operations and brings the price down at least to an extent. However, if there is a hard limit on the number of bitcoins, then the value of a bitcoin can tend toward infinite without any corrective increase in the amount of the money supply. (The u.s. dollar money supply can increase even more easily, and the economy is never starved for dollars.)
In that case, many people would hoard bitcoins, and it would face a serious impediment to adoption as a currency: too much scarcity. A currency is no good if you can't get your hands on any at all, and the world economy has a rather large need for liquidity.
A good replacement for cash should be able to take on a total-money-supply role in the tens of trillions - that implies values of $1M or so per bitcoin given its absolute limit. But it is fairly obvious that it would be difficult for bitcoins to take on that value while continuing to service the world economy.
The truth is that there should be a bitcoin-like protocol that contains real-world regulatory action: if such a coin were pinned to the dollar, ($1/coin) and surges were met with lending (creation out of thin air and lending the created coins to borrowers) so that it would be spent and brought back down in value, the protocol would be able to replace fiat currencies much more easily.
In addition such a centralized money would be able to finance the operation of its authority, by means of collecion of the interest rates charged on new money.
As long as bitcoin will become absolutely scarce (unlike gold, which does not have hard physical/protocol absolute limits on the rate it can physically enter the economy, or dollars, which purposefully are the opposite in nature), nobody will ever lend bitcoins out for productive uses. (The hurdle rate, of natural deflation, would be far too high.)
Therefore there is a gaping hole of a market opportunity right now for someone to create a central bank of internet money, a kind of private federal reserve like skype (as opposed to a pure p2p system - which in this analogy, voice calls, never existed).
There are several good reasons that skype won out over some sort of truly p2p voice conversation network, and many of the same facts will allow a private skype-like bitcoin network to prevail over a pure p2p bitcoin.
if someone is interested you can email me. let's open a central bank of internet money together that can at its whim print and lend out more money, and does so whenever, and to the extent that, the real-world price of the currency is too high.
by strategically meeting the money supply needs of people who do not have to mine it or pay for it, it is also far easier to get the currency adopted. today, someone who hasn't mined bitcoins, and isn't paying for them, won't have any.
the same isn't true for dollars (they can just get some lent by a bank or government).
We can do better than bitcoin. Unlike the bitcoin people, we can also have massive revenues to spend on further development and security. (Again, inflation of the money supply is a secret tax.)
Let's do it.
[1] http://en.wikipedia.org/wiki/History_of_Bitcoin#Creation