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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 itweight and size.
3. Money must be divisible. Money should be relatively easy to separate
and recombine 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 better decisions about their money.
Our Model Conservative Portfolio has outperformed the DJIA and the S&P
500 by more than 3:1 over the last several years. Follow @TheGoldSpec
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