Tuesday, November 26, 2013

Bitcoin Is The Wrong Vehicle

I want to spend a few moments talking about Bitcoins. And while I have a lot of sympathy with what the bitcoin community is trying to achieve, I just think they have the wrong vehicle.

Now, I think the idea behind bitcoin was to digitally replicate gold. A kind of a gold standard for the internet. Gold 2.0 has some people have alleged. And you know, if you look at bitcoins, the way they come into existence is just that they are mined just as actual gold. You mine them into exixtence. And just like mining gold, when you mine for bitcoins you actually expend real resources, real energy. There is a cost associated with creating a bitcoin. Just like there is with gold, in contrast to central banks that create pretty limitless amounts of currency for nothing, out of thin air at virtually no cost.

And also like gold, there is a limit there is a scarcity in that there there only 21 million bitcoins that can be mined into existence. I think right now there are probably around 12 million. So there is still more that can be created but again that is going to cost money to do so. And also like gold, bitcoins are divisible. You can take one bitcoin and make 100 million fractional bitcoins that collectively would have the value of a whole coin. But the idea is that you can break your bitcoin up into smaller increments for transaction, just like gold. You can have an ounce of gold, then you can have half an ounce, one tenth of an ounce. You can make smaller quantities that are more ideal for transactions. But unlike gold, you can instantaneously send your bitcoin over the internet. You can`t do that with gold. You can`t transport gold, because gold actually has substance. Bitcoins exist in the cyberspace.

When you have gold, you have to protect it. It can be stolen, you have to guard it and it may even cost you money to store it. It does not cost you any money to store bitcoins in your digital wallet. So bitcoins  really replicate all the properties of gold, even improving on some of them. But here is the problem. They replicate all the properties except the single most important. You see without that property, gold never would have been money. I am talking about value, intrinsic value, the metal itself. Bitcoins does not have any.

The reason gold became money, first it was valued as a commodity. It was a luxury good, known through out the world, everybody wanted gold. And so you knew that if you needed something you could always buy it gold because even if the person who accepted your gold did not want it, he knew somebody else who did.

Gold was uniquely suited to be money over a lot of other commodities. It basically won the free market competition for money because it had a lot of other characteristics. These are the characteristics that bitcoin is replicating, but they are not replicating the intrinsic value. That made gold desirable in the first place.  

Peter Schiff is an American businessman, investment broker and financial commentator. Schiff is the CEO and chief global strategist of Euro Pacific Capital Inc.

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