Scott Silva
Editor, The Gold Speculator
3-4-14
The Bitcoin
fiasco shows the difference between fiat money, virtual money and the only real
money, namely gold. Mt. Gox, the Tokyo private exchange for Bitcoins, filed for
bankruptcy last Friday, after the owner shut down its website. Mt Gox account
holders, including Mt Gox, lost $425 Million when the virtual exchange went
dark. Mr. Gox officials claim over 800,000 Bitcoins went missing from user and
company accounts, forcing the company into bankruptcy. Several authorities are
investigating the incident.
Mt. Gox is just
one of several private exchanges that sprouted up in response to demand for the
virtual currency. The value of Bitcoins jumped exponentially since its 2009
start, topping $1200 in December. Bitcoins are trading at $600 or so now.
Bitcoin is
virtual, cryptographic money which allows people to transact on a peer-to-peer
basis over a network. Bitcoin owners can transact with merchants that have
decided to accept Bitcoin cryptocurrency. Bitcoin transactions fall outside
traditional banks and banking regulations. Bitcoin.org is the open source
foundation that maintains the Bitcoin standard. Private exchanges and
application providers allow individuals and corporations and other users to
discover the current market price for a Bitcoin in most traditional currencies.
As we know from
Aristotle, money is worth precisely what people are willing to exchange for it.
Users believe Bitcoins have value, which is why Bitcoins enjoy a higher
exchange value now than in 2009. One Bitcoin feature that is attractive is it
carries no or low fees for any transaction. As more and more merchants accept
Bitcoin payments, demand increases for Bitcoin money, and its exchange value
increases. It’s the fundamental law of supply and demand in play.
As we also know
from Aristotle, true money is defined by the four characteristics:
` 1. Money must
be durable. Money must stand the test of time and the elements.
2. Money must
be portable. Money (coin currency) holds it “worth” relative to it
weight
and size
3. Money must be divisible. Money should be relatively easy to separate
and re- combine without affecting its
fundamental characteristics.
4. Money
must have intrinsic value. The value of money should be independent of any
other object and contained in the money itself.
By these
measures, it could be argued that Bitcoin meets Aristotle’s divisibility and
portability criteria, but fail to meet the durability, and intrinsic value
criteria. The Mt Gox fiasco shows Bitcoins to be vulnerable to internet
security threats and hacking. Therefore, Bitcoins are not very durable. By
their very nature, Bitcoins have zero intrinsic value. A crypto-coin is only as
valuable as its security code. Who would assign value to a Bitcoin account that
could be accessed by anyone without even a password?
So why are
Bitcoins so attractive? A major draw is the freedom to transact without a bank
or government regulation. Unlike fiat currencies, Bitcoins are not subject to
devaluation by central banks that can add to the money supply. Bitcoins are not subject to the costs and
risks of banking regulation. For example, Bitcoins are not subject to factional
banking reserve requirements. Bitcoin transactions do not require any
traditional bank, or bank fees.
Last week, Fed
Chair Janet Yellen, in a response to a Senate Banking committee member’s
question about Bitcoin regulation, was happy to say the Fed has no regulatory
authority, responsibility or role in any Bitcoin transaction. Her answer seemed
to shock Senator Joe Manchin (D-W Va) who apparently wants to slap some new
regulation on the virtual currency.
Whatever the fate of
Bitcoin, its emergence and recent difficulties demonstrate why gold is the only
true money. Gold meets every one of the Aristoltilian requirements for true
money, the most important being intrinsic value. Bitcoins and gold share one
important feature: neither is directly subject to the whims of the central
bank. The Fed can print trillions in new paper money as it attempts (and fails)
to stimulate the economy. Each Dollar the Fed prints debases those Dollars that
are outstanding.
But Bitcoins and
gold behave differently as the Dollar is debased by the Fed’s monetary actions.
Bitcoin prices (green line) appear closely correlated to moves in the Dollar
(blue line). Gold (candlesticks) tends to move inversely to the Dollar.
This means that
gold tends to hold its value better than Bitcoin as the Dollar loses value.
Gold has
survived thousands of years as the world’s only true money. While there are
costs for its safekeeping, owning gold is the prudent way to protect wealth
against the vagaries of fiat currency and government intervention.
Responsible citizens and prudent investors protect
themselves and their wealth against the ambitions of over-reaching government
authority and debasement of the currency by owning gold. Gold is honest money. Investors from around the world benefit from timely
market analysis on gold and silver and portfolio recommendations contained in The
Gold Speculator investment newsletter, which is based on the principles
of free markets, private property, sound money and Austrian School economics.
The question for you to consider is how are you going to
protect yourself from the vagaries of the fiat money and economic
uncertainty? We publish The Gold Speculator to help people make
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