Why Bitcoin Is Good for Gold
Commentary By Fergus Hodgson
Gold Newsletter’s Roving Editor
Dear Fellow Investor,
Make no bones about it: bitcoin is a competitor to gold, but there is a silver lining. The industry that serves gold investors is innovating and rising to the occasion with new investment opportunities and higher levels of transparency.
Since first appearing in 2009, the cryptocurrency has become an internationally used medium of exchange and store of value, with a market capitalization of $16.6 billion up from $6.3 billion just one year ago. That equates to $323 million worth of transactions each day, head and shoulders above the wannabe bitcoins, of which the most circulated is ethereum at $88 million.
Notable for its digital form, capped supply, and disconnect from state entities, bitcoin has attracted a generation of anarcho-libertarians and tech enthusiasts. They promote bitcoin for its potential to usurp cartelized banking, serve unbanked communities, and avoid the inflation tax.
Affirming bitcoin's disruptive threat, at least 10 nations have banned it, and others have placed restrictions and warnings against its use.
Such is the enthusiasm for bitcoin and never-ending line of conferences on its applications — alongside standoffs with regulatory and tax agencies — one cannot help but harken back to the 1970s. That was the heyday of the gold-bug insurgency, led by Jim Blanchard, and the genesis of his first New Orleans Investment Conference and Gold Newsletter.
Our current editor, Brien Lundin, regretfully notes that most of these old gold bugs are now dead. That begs the question of whether the new generation of individualists and contrarians will step in to take their place in the gold market.
Has bitcoin sucked the air out of the room with an ultra-modern alternative?
The question remains unresolved. It will play out in the coming years as bitcoin works through growing pains and gold merchants modernize for the digital era. Both gold and bitcoin offer an alternative to fiat currencies and protection against inflation, but they have considerably different histories and qualities.
There is reason to believe that both can coexist. Further, investors in gold will reap the benefits of the healthy competition — just as taxi drivers have raised their standards and started their own cell-phone applications to compete with Uber.
Keep in mind that gold has considerable advantages over bitcoin, which is still somewhat experimental. First and foremost, gold is a tangible item with intrinsic value and industrial uses; it has stood the test of time with near universal acceptance worldwide. Most cryptocurrencies, on the other hand, have zero backing and only garner value in so far as they facilitate transactions.
Gold has also overcome the barriers to entry that may plague bitcoin for decades. Consider that last month the Securities and Exchange Commission denied an application for a bitcoin exchange-traded fund, filed four years ago. This was the second SEC rejection, on the grounds that bitcoin lacks security and harbors anonymous bad actors.
The majority of bitcoin users are also in de facto non-compliance with US tax law, albeit inadvertent. Thus the Internal Revenue Service is compelling Coinbase, America's largest bitcoin exchange, to divulge the personal information of 4 million clients (including yours truly).
The key advantages that bitcoin has over gold are its portability, divisibility, and ease of trade across borders. The borderless element is particularly handy, but bitcoin transactions have recently slowed down due to upward pressure on the network's capacity. Specialists are entangled in a "block-size" debate about how to overcome this hurdle, which places bitcoin's future in doubt. Unless resolved, the capacity problem could open the door for an alternative cryptocurrency to dethrone the natural monopoly.
One might tout bitcoin's rising price over the past year, which more than doubled and vastly outperformed gold. However, that overlooks bitcoin's volatility — five times greater than gold's price fluctuations — and that bitcoin lost three quarters of its value between 2013 and 2015.
Further, one of the growing pains has been a slate of notorious security breaches that have seen exchanges shut down and bitcoin owners lose it all. Bitcoin is maturing and informed users can avoid the security pitfall, so do your homework if you choose to hold it.
The bright spot on the horizon for gold is that bitcoin is catalyzing the precious metal's digitization and innovation. In other words, people now have higher expectations when it comes to using gold as a medium of exchange for transactions, without the need for physical coins. Also, lenders now pay interest in bitcoin on bitcoin holdings, and a startup gold intermediary seeks to do the same.
Anthem Blanchard, the son of the late Jim Blanchard, has led the way with his innovation for "digital, spendable" gold, immediately transferable and easily cashed out, so to speak. He introduced inncoin in 2014, the first gold-backed cryptocurrency, and then HayekGold in 2015. Finally, after a name change, he settled on AnthemGold.
Regardless of the name, the market is demanding digitized gold in a secure, trustworthy form — unlike much of the paper gold floating around. It is still early days, but watch this space, because digital gold is on the rise, and it will increase the value and broaden the use of gold.
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