Guest Post: Bitcoin: As Good As Gold?

Submitted by Jeff Thomas of Doug Casey's International Man blog [9],

Only a few years back, the majority of people were saying that the dollar was as good as gold. Or the euro, for that matter, or any of a number of fiat currencies. In fact, at the time, confidence was such that even the term “fiat currency” went largely undiscussed.

But, today, even those who insist that fiat currencies are not only safe, but the only means by which commerce can reasonably occur, are admitting that they are getting a bit nervous regarding the assurance that their own currency will not be either somehow confiscated or grossly devaluated. And, today, the term “fiat” has become understood by most when describing currencies.

Of course, those of us who for many years have suggested that no fiat currency is truly reliable in the long-term, have long recommended an alternate: precious metals.

For millennia, precious metals have been accepted as the primary currency. Over time, man has, on occasion, relied on many forms of currency, including cattle, seashells, tobacco, and even (in an extreme departure from all that is logical) tulips, ca. 1637.

However, mankind has always returned to precious metals, as they alone have the greatest number of characteristics that would make them useful as a currency.

This is a point that cannot be over-emphasized. It should be said here that there is nothing sacred about gold and silver. It has not been anointed by any deity. It has no magical quality. But, neither was it chosen at random as having enduring value. It has been the true default currency by different civilizations through the millennia, because it answers the greatest number of needs that a form of currency may answer.

And yet, in 1924, British economist and avowed socialist John Maynard Keynes described gold as a “barbarous relic,” and, since that time, governments the world over have done their best to reinforce that perception.

The reason?

Gold has the niggling characteristic of being relatively finite. Governments, when they wish to create false prosperity, cannot simply create more gold. And this is one of the very reasons why gold has been the currency of choice over millennia—it is relatively finite.

So, let’s look at the various criteria that may contribute to the validity of a currency. The greater the number of criteria any one currency possesses, the greater its true worth.

Finite: Large amounts cannot be produced at the whim of any bank or government.

Divisible: When divided into smaller portions, each portion will have all the characteristics of the previous whole.

Portable: The currency may be easily transported without taking up too much space.

Durable: Gold is one of the 118 basic elements. Therefore, it cannot be or broken down or destroyed. Also, it does not rust or otherwise corrode.

Tangible: It is not theoretical—it has physical properties.

Clearly, items such as sea shells, cattle, and tulips are very poor choices as currencies. Tobacco and bank notes are better, but they are not finite and can easily be destroyed. So, historically, we have always returned to precious metals.

But there is a new currency arising—Bitcoin—and it promises, like banknotes before it, to solve all the problems of currencies. Even a senior manager of Barclays Bank recently asked my advice as to whether he should invest in Bitcoin.

Bitcoin certainly appeals to those who are attracted to technological breakthroughs. It possesses modernity, just as paper currency did when it was first created. And, most certainly, it is extremely convenient and does tick most of the boxes above.

But, as can be seen, there are those two boxes above in which Bitcoin does not quite hit the mark. Bitcoin is touted as a currency solution specifically because it has no physical properties whatsoever. This appeals to the techie in us, yet those who promote the idea of Bitcoin have created images like the one at the top of the page that give it the illusion of physical existence. It is presented as… a gold coin. (In looking at these images, we can almost hear a few bitcoins jingling in our pocket and be reassured of their value.)

However, the fact that bitcoins only exist as an abstract computer-driven concept begs the question as to whether they are durable. In fact, they are exceedingly durable, as long as the computer exists and computer programmes recognise them as existing. However, should the programmes be fiddled with successfully either by hackers or governments, the illusion of Bitcoin could vanish in the wink of an eye.

This is further emphasised by the last criterion in the chart above. Bitcoin is not in any way tangible. If conditions become a bit nasty where you live, you cannot bury a few bitcoins in a soup can in the back garden. Nor can you stuff a bag of bitcoins in a safe deposit box. You cannot melt them down and make them into wearable jewellery.

Interestingly, the Bitcoin wiki website features the warning:

“Warning: Please be careful with your money. When sending bitcoins to an exchange or other counterparty you are trusting that the counterparty will not abscond with your bitcoins and that the operator maintains secure systems that protect against theft -- internal or external. It is recommended that you obtain the real-world identity of the counterparty and ensure that sufficient recourse is available. Exchanging or storing significant funds with exchanges is not recommended.”

Just like fiat currency, which banks can confiscate, bitcoins are at the mercy of the computer itself. And, just as governments are seeking to find ways to control the internet and limit the information that is available to their citizens, so each government will resent this new economic upstart on the scene, as it offers a threat to their ability to create and manipulate fiat currencies.

Paper currencies have existed for over 1000 years and have led to governments doing whatever they could to control and limit the use of gold and silver. At no time in history has that been more true than in the last 100 years. However, precious metals continue to return, time after time, as the true default currency, specifically because they are basic elements and cannot be broken down or destroyed. They may be hoarded by kings and presidents and have even been sunk with ships and remained on the sea floor for hundreds of years, but once rediscovered, they retain value.

Wealth changes hands over time, but whether it exists in the hands of a few, or is spread out amongst many, it continues to exist. Similarly, precious metals change hands over time, but their characteristics remain unchanged.

Just as paper gold is proving not to truly exist, except as a promise by financial institutions, and fiat currencies are also teetering on the edge, there is every reason to believe that the latest in “theoretical” currencies may disappear at some point in the future. However, as they have throughout millennia, precious metals will continue to shine in all corners of the globe.