Monthly Archives: April 2016

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Why Bitcoin is Better Than Gold

Category : Uncategorized

Bitcoin (sometimes called "digital gold") has been more stable than gold for the last twenty-four days according to this Wall Street Journal article. The article points out that:

Some point to the drop (sic. drop in volatility) as a sign that investor perception of bitcoin is drawing closer to gold as a safe store of value.

So it appears Bitcoin may be finally catching on in the mainstream (though it has already performed as an alternative safe haven to a limited degree in some previously collapsing economies such as Cypress, Greece and Argentina). But as the global Bitcoin exchange infrastructure and liquidity have improved tremendously since those crises, Bitcoin now has practically instant global liquidity. Bitcoin's ability to settle accounts globally in minutes compared to physical gold needing a physical, expensive and risky shipment to do the same makes it a hands down winner in my opinion and that gap will only widen as Bitcoin becomes even more mainstream. 

The phrase "safe haven" is used to describe the flow of stored value from a perceived risky type of money into a perceived safer one. Perhaps one of the best resources to investigate the risks associated with current money systems is Jim Rickards. Author of two best sellers with dire predictions on the current money system, Rickards says something in this video with Greg Hunter I never heard him admit before. Rickards has always talked about IMF Special Drawing Rights being a candidate to replace the current fiat currencies of the sovereign countries. In other words, Special Drawing Rights are being proposed as a global fiat money system. What Rickards says in this interview is that he doesn't believe that the general public will fall for the trick again (the "trick" being the ability to create money out of thin air). What he ends up predicting is a return to a gold-backed currency and spends quite a bit of time speculating about the price that gold would need to be pegged to in order to avoid massive inflation or deflation. 

Bitcoin has no such pricing problem as it is an instantly self-adjusting and global market already in place. Rickards' proposed solution of pricing gold by governments totally ignores free market principles. With wide-spread belief that the governments already manipulate the gold price, he seems to believe that they will forget government price fixing schemes done with gold?  Another problem with Rickards proposals is when he suggests a type of "fractional reserve" gold backing of a currency where the government only needs to back a percentage of the printed money. I would think the now enlightened public would see through that scam and realize nothing would prevent a government from exceeding the legislated backing requirements. Governments could "cheat" at will, print as much fiat as they wanted and would capitulate when a "bank run" occurred when the public rushed the banks to get their gold. In other words, Rickards seems to be proposing a return to the mistakes of the past. Rickards also derides digital currency's potential problem of being hacked or lost through hardware failure which seems to indicate a certain level of ignorance on his part of how to prevent hacking ( perhaps a generational issue shared with Hillary Clinton) and how to backup critical data. But with all his misgivings about these potential losses he proposes a limited gold-backed currency so that it could retain the advantages of being digital. His proposal surely falls far short of the already established accountability and security of Bitcoin.

But back to the Wall Street Journal article … suppose Bitcoin is, indeed, on its way to becoming an alternative to gold? A visit to the World Bitcoin Network's Bitcoin Price Model and an adjustment to the gold setting there results in a Bitcoin price of an astounding $ 33,710.30 if Bitcoin is chosen as an alternative to just 10% of the current gold market! Ten percent is NOT that a large a market share to be beyond possibility especially if we consider that the demand for "safe havens" may be increasing. As it does increase Bitcoin simply could become the "safe haven" of choice among the new entrants and Bitcoin's market share would keep increasing. Here is the screenshot of the results of setting Bitcoin at a level of 10% of that of gold…

Screenshot from 2016-04-19 14:12:16