Bitcoin vs Gold debate intensifies

Just another day

I went through my daily RSS list of articles the other day. My reading list regularly contains Gold-related articles with the usual pro-Gold arguments and outlook and a sobering review of the current state of our economies.

Bitcoin and cryptocurrencies have long entered the small space of 'Austrian economics' and alternative websites that aggregate all kinds of economic news (like ZeroHedge. While the articles on this topic have many times been critical, there is a general tendency visible of greater understanding of cryptocurrencies and what they could bring in terms of sound(er) currency and increasingly free communities.

Wave of crypto-critics

Quite to my surprise, I found as many as three articles on this single day with authors suddenly turning very sour about cryptocurrencies. Surprisingly, because the authors concerned are well-thinking individuals who have contributed tremendously in describing the sorry economic state of affairs and the need for sound(er) money and better government policies. Why the sudden attack of cryptocurrencies?

On top of that, Miles Franklin stated a day thereafter that Andrew Hoffman (who also contributes here at Steemit under the name @andyhoffman) will no longer contribute to their blog. Miles Franklin, a seller of precious metals, also provides a daily blog and sometimes a podcast with - perhaps a bit hyperbolic - a summary of recent events and the need for sound money. While I do not expect Miles Franklin (or Andy) to share the details of his dismissal as contributor, I cannot rule out that Andy's recent enthusiasm for Bitcoin and cryptocurrencies and his brutal honesty in advising both Gold and cryptocurrencies as investment, play a role. After all, a precious metal seller advocating cryptocurrencies as well does not really fit the business model.

What's up?

Although I cannot draw conclusions, It almost seems as if the recent price rise of Bitcoin far above Gold's price (doing ok, but lagging in terms of big gains the last few years compared to stocks and especially cryptocurrencies) gives the pro-Gold camp the creeps and a reason to attack the concept of cryptocurrencies. Although I support discussions about cryptocurrencies and the need to discuss negative aspects and the risks involved, I do appreciate if the arguments are thought out well. And in that respect, the articles in my reading list the other day were disappointing in a few ways, especially because I know the authors can to much better.

The trouble

Keith Weiner

First article that caught my eye was Keith Weiner's Bad Ideas About Money, Bitcoin, and Gold Report 20 Aug 2017 . In this article, Keith touches upon Bitcoin with the question whether it constitutes 'money'. While I cannot find a clear defition of what 'money' is supposed to be in the article and thus do not have a coherent view on what the article is trying to convey, there are a few snippets that I take direct aim at.

Consider the following parts:
"The dollar is borrowed into existence. It is backed, but only by debt and that debt is payable only in dollars. There is something there, but it’s circular. The next logical progression is to remove the backing, which is what bitcoin is. To pugnaciously put a chip on one’s shoulder, daring anyone to knock it off—to say that a currency printed into existence, printed ex nihilo out of thin air (albeit at a metered rate and with a maximum limit) is money.

Bitcoin is a liability of its issuer, without any asset to balance it. It is a currency believed to be money because there is no asset. Many who rightly attack the dollar as debt-based money, seem happy with bitcoin because the debt backing it is removed."

What I do not understand is why Bitcoin are not considered when suggesting that Bitcoin is a step forward towards sound(er) money (or currency, if the term 'money' is a loaded term here). It cannot be printed out of thin air, it does not come with the inherent logical fallacy that there is always more debt than currency and it is not distributed centrally (although not fully decentralised either). Perhaps his argument is solely pointed at his thesis that Bitcoin is not 'money' and he may consider Bitcoin a step in the right direction anyway.

However, the following paragraph seems to point at the opposite:
"Bitcoin is carefully designed to appear just like an irredeemable government-issued currency. Which is carefully designed to appear just like a gold-redeemable government-issued currency. Which was carefully designed to appear just like a bank-issued gold-redeemable bank note. Each is a deliberate adulteration, to the final one with bitcoin today.

Having indoctrinated people to accept irredeemable currency, the Fed has opened the door for bitcoin. In a way, bitcoin is a perfect denizen in the Fed’s worldwide regime of irredeemable currency. That is, a regime where each printed promise to pay has fine print saying “this promise will not be honored”. So why not substitute it with “this is not even a dishonored promise” and see how it flies."

I fail to see how Bitcoin is 'carefully designed to appear just like an irredeemable government-issued currency'. I simply take Bitcoin for what it is: a software protocol designed to give users the ability to send tokens over a decentralised network. There is nothing more to it. Why does it work: because people attach value to Bitcoin tokens. This is similar to fiat currency, at least from my perspective. The average citizens does not give a hoot about his currency supposedly being backed by debt or government guns. Although the argument of government enforcement certainly plays a role, clear thinking leads to the conclusion that fiat currency seemingly works because people expect (and are not disappointed in this for long stretches of time) that other people will accept their fiat currency and prizes priced in fiat currency not fluctuating to wildly. One should not make things more complicated than this. I doubt Satoshi Nakamoto had irredeemable government-issued currency in mind when designing Bitcoin. So what is Keith aiming at?

The second paragraph clearly shows a negative bias towards Bitcoin. I guess that this is based on the notion that Keith wants economies (or, people) to return of the use of 'money' or currency backed by 'money'. But if 'money' consist only of Gold and Silver, I tend to think of the following picture.

Substitute fiat in the picture for precious metals. Good luck with that in our modern economy.

I think we should not necessarily have to do away with currency instead of precious metals as 'money' to perform day-to-day transactions. The invention of paper money may not have been all bad. I am not advocating that paper currency does not have problems, but a carefully managed paper currency can support a thriving economy. Trouble - as always - is that human interference spoils the party (politicians, economists). Cryptocurrencies can provide a better way forward byt taking out the human element in terms of managing supply and allowing transactions to take place, leaving this to transparent software algorithms.

The last paragraph I would like to bring forward is the following:
"P.P.S. However, it is worth saying something we have not seen elsewhere. Everyone knows that bitcoin has a strict limit of 21 million. However, this limit can of course be changed by a majority of the bitcoin miners. Miners, of course, profit by mining, so they may have an incentive to increase this limit. The way Congress has an incentive to increase the debt limit."

As far as I understand, miners mine Bitcoin. They do not write software. The group that usually changes the Bitcoin software is called the 'developers'. So what Keith seems to mean is that miners may change the Bitcoin software (or have it changed) and start mining that 'forked' Bitcoin in which the limit of 21 million Bitcoins is changed upwards (or removed altogether). Let's call it 'Bitcoin II'. Missing in that picture is what the effect would be of such action.

• would users start using Bitcoin II?
• would the market assign a similar value to Bitcoin II as to Bitcoin I?
• would miners mine a worthless Bitcoin II (if users reject Bitcoin II en masse)
• would Bitcoin I and its users suddenly cease to exist?

Don't get me wrong, it makes perfect sense to question how the 21 million limit is enforced and what the weak spots are, just like contemplating that the supply of Gold could theoretically double if a very very large Gold deposit is found. But the matter is not new and reaching the practical maximum number of Bitcoins is still far away. Hardly an issue in the infancy of Bitcoin (and other cryptocurrencies). As fan of free markets, I would have expected a better argument from Keith.

Michael Pento

Then, there was an article from Michael Pento Cryptocurrencies: Modern Day Alchemy who regularly writes content at Safe Haven. His first line immediately makes the case: "Cryptocurrencies make good currencies, but fail miserably when trying to achieve the status of money."

While this statement may be true, there are a couple of parts in the article that I do not agree with.

Consider the following paragraph:
"While the technology driving cryptocurrencies is very interesting, the “coins” themselves are not equivalent with the Blockchain technology. Cryptocurrencies are simply piggybacking on the blockchain as they masquerade as real money."

This is an interesting remark (the 2nd sentence) because highly esteemed Bitcoin connoisseur, Andreas M. Antonopoulos, regularly makes the case that a 'blockchain' whereby the term blockchain can be substituted with 'database' and the article concerned still reads the same, its just a normal database and is not interesting from a disruptive stand point. Taking this a bit further, a lot of blockchains do become regular databases without any disruptive element involved if there is no incentive involved: a coin, a token. So while not explaining himself thoroughly, Michael may be moving onto a slippery path here.

The point that Michael drives home is that 'money' must meet the following criteria in order to quality as a store of wealth (and thus qualifying for the term 'money'):

• money must have intrinsic value
• money must also be virtually indestructible
• money must be extremely rare.

While I am not interested in the debate whether Gold and other precious metals qualify are better money than Bitcoin or whether Bitcoin actually qualifies as money, some arguments put forward by Michael are not the strongest or rule out the conclusion that Bitcoin could evolve in being 'money'. For the purpose of this article, I limit myself to a couple of observations:

• the argument of a power failure
• the argument of Government repression

Power failure

Michael has the following paragraph to offer:
"However, unlike PM’s, fiat cryptocurrencies lose their utility during a simple power failure or whenever the internet goes down. People who put their faith in cryptocurrencies have to ask themselves how confident they are that there will never be a victim of an Electromagnetic Pulse bomb or a nuclear war that disables all forms of electronic communication. Try bartering for a can of beans with a fried PC"

Well, I am very curious about what caused Michael to pen down this paragraph. As far as I am aware, Safehaven.com is not a prepper site but geared towards investors seeking a no nonsense view of economics and the hidden forces behind it. True stories and facts instead of all the bull shit. I take it that the argument is put forward purely to claim that precious metals are 'money' and Bitcoin is not because in case of a power down, the Internet won't work. The question I have is what kind of power down Michael has in mind. A power down of a few hours. A couple of days, Months? The reference to an EMP/nuclear attack suggests that he takes the devastating type of power down into account.

Well, if that's the case, his argument that precious metals are a better store of value could most certainly be true. But if advising on actions to deal with such calamity. Michael could better be advising people to stock up on food, toilet paper and ammo instead of precious metals. And for short power failures: I do not expect Walmart to accept gold coins (and good luck with the change). A large stack of fiat currency would probably do much, much better in that intermediate scenario.

This is not meant to do away with Michael's argument that precious metals could be a better store of value in the worst case scenario described, but is he only advising people on retaining value in a post apocalyptic world (prepping advice), or should the 'normal world' where stocks, bonds and fiat currency still work on electronic systems also be taken into account when advising in these matters? And what if cryptocurrencies do continue to work (the 99.99% part of the chance that no fatal apocalypse occurs)? His readers would be happy to learn how to invest in that world (being: our current world) as well.

shutdown by Governments

The following paragraph goes into the matter of a shutdown of Bitcoin exchanges by Governments:
"A more likely scenario is that governments or hackers shut down Bitcoin exchanges. In fact, back in 2014, there was the infamous Mt. Gox hack, in which over 800,000 coins were stolen and almost caused the end of Bitcoin. The owners of cryptocurrencies must hope that governments never shut down the exchanges or websites that enable these electronic transactions. Governments can try to ban gold ownership, but that must be done on a door-to-door basis and is extremely difficult to accomplish. But to place confidence in cryptocurrencies is to put faith that governments cannot control the internet."

I see a lot of different arguments mixed together. If I understand Michael correctly, the arguments boil down to the following:

• governments/hackers may shut down Bitcoin exchanges
• the Mt. Gox hack almost caused the end of Bitcoin
• governments can shut down exchanges and websites and thus shut down cryptocurrencies
• banning cryptocurrencies is easier than banning gold

While government interference certainly plays a role, I consider it kind of a black thought that governments would completely ban cryptocurrencies. That would be token of a total lack of trust in current governments. Perhaps a wise approach, but it seems a bit of a stretch that governments would completely ban cryptocurrencies. It would be very unwise, because efforts would be made (and projects already exist) to move underground into dark web type of projects and untraceable cryptocurrencies. The government shut down would only be temporary and governments would lose complete control over cryptocurrencies. I do not think a ban will happen for this reason.

But let's take the argument face value and suppose governments ban cryptocurrencies AND gold. This for the purpose of comparing both. For this purpose, I refer to both asset classes as 'money' in this paragraph (I can hear the Zero Hedge crowd howling already :) ).

• can the government shut down central exchanges/websites: sure
• can the government shut down/close gold stores/websites: sure
• can the government confiscate cryptocurrencies: not unless breaking into every computer in their country (provided that the cryptocurrencies have not bee moved to a brain wallet or device in a foreign country outside of the reach of that government)
• can the government confiscate gold: not unless going door-to-door as Michael states
• can the government ban the use of cryptocurrencies and gold: sure. All it takes is a law
• can the government block the use of cryptocurrencies and gold: no. Cryptocurrencies cannot be blocked unless governments shut down the entire internet. That is not foreseeable. Gold cannot be blocked from being handed over by one person to another person, unless there is a government official guarding every person in the country 24/7. That is not foreseeable.

Looking at the comparison, I do not see much difference between gold and cryptocurrencies in case of government repression, except for a vital difference: cryptocurrencies can move over the world - no country borders and no permissions involved - in the blink of a second and rather anonymously (if structured right). Good luck doing that with gold in a country that forbids gold.

I won't touch the topic of possible 'suppression' of the Gold price by the paper Gold markets (talking about real government suppression....).

The statement that the Mt.Gox failure almost meant the end of Bitcoin is not even hyperbolic. It is plain wrong and a dumb thing to say. The Bitcoin protocol was never compromised by this hack and Bitcoin hummed along just fine while humans frantically shouted over the Internet about Bitcoin this and Bitcoin that. Individual Bitcoin users were not affected (I am not considering price action here though). The Mt.Gox failure showed the perils of centralised exchanges. A risk that still exists nowadays, although the concept of decentralised exchanges - think of BIsq and BitShares - has progressed nicely (so Michael's argument here, if meant to point to the risk of centralised exchanges, should diminish over time).

The 21 Million cap

We reach the well know argument of the 21 Million Bitcoins cap:
"The advocates of Bitcoin believe they have the upper hand to gold because it is limited to 21 million units. But what the holders of Bitcoins don’t yet understand is that even though this one cryptocurrency is limited in supply, the universe of commodity-like cryptocurrencies is unlimited."

The argument of Michael is valid: there are no limits in creating new coins and there is always a danger that a new cryptocurrency will take over. However, investors do not have to stand by and seeing all this happening. They can switch to newer coins when available and rising in use. There is a similarity to investors buying Facebook stocks. Facebook can be copied (and is being copied) but the network effect makes sure that Facebook remains top dog for the foreseeable future. A change won't happen over night. There is an inevitable inertia involved. The argument can also be extended to the 'danger' of 1000's of altcoins around. Well, the free market sorts that out, just like the Facebooks of this world. Why Michael sees this as a risk is unclear to me. I would expect more faith in the workings of free markets in this respect. After all, what if (theoretically) a better 'precious metal' would be found. Wouldn't the same risk apply to gold and other existing precious metals?

All in all, cryptocurrencies and precious metals are not the same, but do have some similarities. It is unclear to me how down-to-earth Michael Pento cannot focus on these similarities and the chances for cryptocurrencies in that respect instead of purely focusing on precious metals supposedly being better 'money' than cryptocurrencies. His investors may not care but for the potential increase of the value of their investment portfolios. Are his investors best advised in this manner?

Antonius Aquinas

Finally, the last Bitcoin article of interest to hit my RSS list was Antonius Aquinas' Bitcoin in an illusionary Age. Being a article strongly critical of the current state of affairs (instead of taking the view that we never had better lives and less war on this planet than in the current age), cryptocurrencies are spoken of negatively as well.

If I summarise Antonius' remarks, it boils down to the statement that cryptocurrencies are not money and gold and silver are. The usual arguments (that I won't delve into) are presented (scarcity, intrinsic value, medium of exchange). The paragraphs that I am interested in are the following:
"In a fundamental sense, crypto currency cultists are rebelling against the natural order of things. The precious metals were created in their quantity and quality by Divine Wisdom for a purpose – to act as money. While governments have habitually corrupted the monetary order through coin clipping, fractional-reserve banking, and other nefarious schemes, it does not undo this primordial fact. It is for the intellectually honest opponents of monetary chicanery to point this out and decry all governments and banksters’ attempts to eradicate gold and silver as money, not attempt to create another unnatural and false monetary order that mirrors the current fiat system.

Money, like all other institutions of society, will reflect its belief system. Decaying cultures will most likely have debased monetary units. A turnabout in the status of money will only happen when Western Civilization returns to what money is – gold and silver – and abstains from trying to create illusions of it through computer software schemes."

I fail to see why increased use of cryptocurrencies cannot be considered a step forward in the quest to use sound money. Whether money is limited to scarce precious metals or (artificial) scarce leading cryptocurrencies does not make a difference. If network effect and first mover advantage lead to the use of 'hard' cryptocurrencies mimicking 'real money' - gold and silver in the words of Antonius - why would that not be an important step forward. Again, referring to the picture above, modern economies would not be served by sloshing gold crumbles around instead of digital equivalents.

Bitcoin vs Gold -> Bitcoin AND Gold

Again, it stroke me as a strange coincidence to suddenly see a lot of articles aimed at stressing the value of precious metals wile talking down cryptocurrencies. Especially because the authors are respected people contributed a lot to the development of better thoughts and insights in our troubled financial systems and economies. Although negative aspects of cryptocurrencies can of course be presented and discussed, they could do better in presenting them.

The drama is on the side of their readers. One could say that these authors (and others like Peter Schiff) are doing a tremendous amount of financial harm to their readers. Not only are readers harmed by the current financial system, now they are being misinformed by the very people that are supposed to be advising them. Instead of framing the debate as Bitcoin versus Gold, the story is better framed as Bitcoin AND Gold.

I really hope these authors take the time to really study cryptocurrencies and learn how unique the opportunity is for a better (financial) world and a tremendous wealth gain for their readers. It is a paradigm shift staring them in the face without registering. Andy Hoffman already say the light.

When will they join us?