RGTyler: Bitcoin will never replace Gold

Call me old fashioned but I’m still not convinced by this Bitcoin thing. I will admit now that I was an early adopter, back in 2009, but quickly realised that it had no value and that I couldn’t spent it anywhere. And boy do I wish I hadn’t got rid of them. Simply because I know now that I could have suckered someone out of $400 for 1 digital coin.

My problem with Bitcoin isn’t that its a currency that has no limitations, in the sense that it can’t be seized by governments when you’re crossing the border. Or that it can be used completely anonymously. My problem with it is that I can’t hold it like Gold, Silver or precious Gem stones.

Because it’s online I have no real guarantee of its safety or value in the same way that I do with bullion. And like all digital entities I have no idea of any real world value. That’s part of the reason why I’m also a massive skeptic when it comes to companies like Twitter or Facebook trying to float on the stock markets.

For example when Facebook first floated people tried selling shares at $11 a pop. But the markets did the sensible thing, they questioned if Facebook was actually able to show any real world value or effects, and ended up watching as the price plummeted. And when you think about it what can Facebook show in the real world? Yes it’s a great platform for advertising and for targeted campaigns and so on but at the end of the day what product does it really produce? Bitcoin is arguably the same… It has a value because we are told that it has a value.

Gold and Silver on the other hand have a value because we can use them. I don’t see people wearing Bitcoin necklaces or rings in the near future, mainly because Bitcoin is not a physical element. Much in the same way that Rio Tinto produces real industrial output whilst Facebook and Twitter don’t. Even Amazon produces a real output.

So in effect I believe that Bitcoin is not much better than the Fiat Currencies that exist today and that if we really want to be free of the central bankers then it looks like Gold and Silver is the only option. Sorry Max Keiser but I think I would prefer to be a Gold Bug rather than suffer a repeat of the Millennium Bug.

  • Michael

    I’m with you on this one Tyler.

    I like, and I mean really like the idea of bit coin and I hope it succeeds. I like it even better as it’s bringing terms like fiat money to a bigger audience. Anything that makes people start to realise that money should be what people think it is rather than what Government tells us it is.

    What I can’t put my faith in is the coding that limits it’s volume to 21 million coins. Perhaps somebody with more expertise can enlighten?

  • http://eadontech.wordpress.com James Eadon

    Hi Rob, I enjoyed reading your article. If I may, permit me to play devils advocate in the spirit of discussion.
    First the title: “Bitcoin will never replace Gold” – I would agree, that is why we have the “Gold Standard”, nothing replaces gold in the sense of its intrinsic physical world value.
    But gold is inconvenient for two reasons. First it is heavy. Secondly, how do you spend it?
    That’s why we have notes and coins, they are more convenient. The problem with notes and coins is that governments can create more – an insidious tax on us all called “quantitative easing” that has made us all worse off.
    As for bitcoin, its supply is strictly limited, even more so than gold, as, at least with gold, you can extract it from the Earth. That is why bitcoin has some intrinsic value, like gold in the real world, bitcoin is scarse in the virtual world. And the virtual economy is, of course, worth trillions. So in some ways bitcoin bizarrely more “real” than paper money.
    Another upside of bitcoin is that it is convenient. Like paper money, bitcoin offers relative anonymity in the virtual world – very much unlike credit cards and the like. Theoretically transactions can be traced back to the spenders, but there are technologies such as Dark Wallet that can greatly increase anonymity.
    Thirdly bitcoin is decentralised and unregulated by a financial “authority”.
    A slightly scary downside of bitcoin is that there is always a risk that there is some flaw in the protocol that could lead to its devaluation. Also it’s perceived value is more volatile – so you see greater swings in its value.
    The way to look at Bitcoin is that, in the virtual world, where there is no physical gold, Bitcoin is the equivalent of “gold” in the sense of being scarce, and is the equivalent of paper money in the sense of being reasonably anonymous and convenient on the web, and, as more institutions accept bit coin, its convenience will increase and so will its value will go up in the long term.
    Gold, paper money, credit cards and bitcoin have different uses, they are complimentary. One thing is for sure, governments do not like bitcoin because they do not like anonymous spending. And if governments do not like something, then that’s a good thing. One final note of caution though, if governments have, somehow, got a hook into the bit coin system, i.e. they are able to cryptographically crack it, then that’s a strong reason to be worried about using it. >tin foil hat<

  • http://eadontech.wordpress.com James Eadon

    Clarification – when I say if governments don’t like something then that’s a good thing, that is, of course, an over general statement. What I really meant is to say that governments have so much surveillance over the populace that a technology that restores some balance is a good thing, because privacy is a human right, and without it, we cannot be free.

  • The Austrian Way

    Interesting piece, Rob,

    You might be right in the end.

    I am noticing a lot of overlap and interaction between the precious metals and crypto-currency communities these days. I think it’s a good thing. It’s all bringing issues of government controlled currencies into the popular consciousness.

    My main point to make about any currency is that there is no such thing as intrinsic value. The thing that affects value more than any other is supply. Gold doesn’t have value because it’s gold, but because its damn rare.

    Gold, apart from being permanent, free from corrosion, beautiful etc, has been deemed to be a good form of money over millennia because its supply was free from man’s control, save for mining. Gold is rare – it’s as simple as that. Gold mining today adds 1-1.5% a year to the total gold stocks around. Unless we crack alchemy after thousands of years of trying, gold’s supply will continue to be protected. Modern technology might change all this. Then we need to rethink gold’s supply equation.

    Bitcoin has been described as gold with 1s and 0s and I think it’s a great new competitor for our savings and trading needs. What Bitcoin has yet to prove is any long-term track record when it comes to its limited supply. I am not expert enough in this silo to get to the bottom of cryptography and the maths behind it, but my digi-currency loving developer mates tell me it is infallible. It may be. Time will tell.

    My worry is that this limited supply might be more due to something ‘of man’ rather than built of logic and mathematics. Bitcoin’s main battle when it comes to PR, because all currencies need marketing, is over this security of supply. Your sentiment I think is particularly interesting though, as it is the feelings expressed by the vast majority of the population. This 99% will never use the currency en masse unless Bitcoin wins their understanding and trust. Gold is rather more easy to understand that cryptography. Let’s see how it all pans out.

    Fascinating developments in money no doubt. If Bitcoin proves to be as limited in its supply, it may usurp gold. It is possible it could be a more mobile form of liquidity. Watch this space.

    • kevinsmith2013

      Unfortunately no form of cryptography is infallible. Many different encryption algorithms exists, but ask yourself, who writes these algorithms? Would an encryption standard be allowed for public use if agencies like the CIA, NSA and others don’t have de-encryption capabilities for them?

      Don’t have the definitive answer on that but it would appear unlikely. If much of our internet traffic is now encrypted (or encryptable) why would they mine the data (Prism, Echelon etc) if they can’t crack the encryption?

      The stronger encryption standards (3DES, AES-256) are excluded from export to coutries, such as China, Russia and many others, is this because they are potential threats to national security, or because they could crack the algorithms themselves, re-code them and make them unreadable to the NSA?

  • silverminer

    The problem of lack of mobility with gold and silver has been solved. GoldMoney offered payments in digital gold and silver grams between its customers. The metal doesn’t even have to move from the vault, it just changes ownership. Unfortunately, due to (artificial) regulatory issues they had to end this service.

    If government removed regulation and taxes from all forms of money I expect this would become the preferred model. Certain trusted locations, like Switzerland and Singapore, would store the metal, and people would just transact their business with a debit card, issued by the likes of GoldMoney, drawn on a gold or silver deposit.

  • Roderick

    Bitcoins are not immune from cyber-attack, and indeed there may already be official attempts to control them via such means. At least precious metals can be held in a secure location of your choice.

    To me though the big downside of precious metals is that they are worth only what a willing buyer is prepared to pay for them, if anything (the very definition of a market commodity). They have no guaranteed or intrinsic value of their own. In a post-apocalyptic world, a grower of food, say, may be less prepared to swap it for shiny metal ingots with no immediate use other than being locked away for future trading, than for something more immediately valuable such as water, fuel, seedgrain, etc.

    • http://eadontech.wordpress.com James Eadon

      Precious metals go up in value when the markets collapse and money inflation sets in due to governments printing money.

      • kevinsmith2013

        Correct.

        Currency can only have value if it is backed by something of real value, a real commodity. Paper (fiat) currency is not a store of value, its just a piece of paper with some printing on it, giving a value based entirely on trust or belief. If we, the people, stop believing in the percieved value of currency, it will cease to have any value. This is not true of a commodity like gold, it has a value whether you believe in its value or not (intrinsic value), because it possesses many desirable properties, the most important of which is scarcity. Governments can’t create gold, like they can worthless paper (fiat) currency, therefore they don’t like it, therefore they create legal tender laws so WE can’t use it.

        Hold up a £10 note (or any note) and ask yourself, “ten pounds of what?” If currencies do collapse, you can’t eat it to survive, but you can’t eat gold either, but at least gold will still be worth something.

        The nickel strips in our notes are worth probably a fraction of a penny.

        A £1 coin weighing 9.5 grams consists of 70% copper (6.65g), 24.5% zinc (2.33g) and 5.5% nickel (0.52g). Based on the spot price of those metals on 4th January 2011 each one pound coin is worth 12.4 US cents, based on the exchange rate at the same time that was 8 pence.
        A 50p coin weighing 8g consists of 75% copper (6g) and 25% nickel (2g), value as above is 4 pence.

        When the £1 was first released, the value of its metal (as above) was £1, now its probably about 6p in real terms, and that is all due to inflation, that is also why our houses cost more, its inflation over time. Gold, silver, platinum etc are immune to inflation, over any timespan you care to suggest.

        Contrast those with a 2011 UK Britannia 1 ounce silver bullion coin (32.454g) available from the Royal Mint was worth just under £19.00

        A 2011 UK proof full sovereign coin weighing 8g (same as 50 pence), 22 carat gold was worth around £207.00.

        These are worth much more than when the £1 coin was introduced, but this is due to their store of value, not inflation. Currency (notes and coins) over time lose value due to inflation, gold and silver over the same period have gained value.

  • kevinsmith2013

    If you want the evidence for the value of gold over time, check out this website:

    http://goldprice.org/gold-price-history.html