Bitcoin holders — especially those who bought in during the crypto-currency’s recent surge past $1,000 — are a bit shell-shocked this week:
Bitcoin prices plunge as problems persist
Bitcoin prices plunged again Monday morning after Mt.Gox, the major exchange for the virtual currency, said technical problems require it to continue its ban on customer withdrawals.Mt.Gox said it has discovered a bug that causes problems when customers try to use their account to make a transfer or payment of bitcoins to a third party. It said the problem is not with Mt.Gox software but affects all transfers of bitcoins to third parties.
The exchange said it was suspending withdrawals and third-party payments until the problem is fixed, although trading in bitcoins continues.
A bug is allowing a third party receiving a bitcoin transfer to make it look as if the transfer did not go through, which can lead to improper multiple transfers, Mt.Gox said.
Bitcoin prices on Mt.Gox plunged from about $693 just early Monday to $510 at 6 a.m. ET, soon after the statement was posted. Prices had been as high as $831 just after 7 p.m. Thursday before Mt.Gox’s halt of withdrawals was first disclosed early Friday morning.
Mt.Gox tried to put the best face on the technical problems in its latest statement, noting that the technology is “very much in its early stages.”
“What Mt.Gox and the Bitcoin community have experienced in the past year has been an incredible and exciting challenge, and there is still much to do to further improve,” it said.
This is one of those “teaching moments” that the President likes to point out. But the lesson isn’t that bitcoin in particular or crypto-currencies in general are fatally flawed. It is that they are currencies, not money or investments, and the differences between these three concepts is crucial to doing asset management right.
An investment is something that, if successful, generates cash flow and potentially capital gains, but if less successful can produce a capital loss. Money, in contrast, is capital. It is what you receive when you sell an investment and/or where you store the resulting wealth until you decide to buy something with it. Money does not generate cash flow and does not “work” for you the way an investment does. Instead, it preserves your capital in a stable form for later use.
“Sound” money exists in limited quantity and doesn’t have counterparty risk – that is, its value doesn’t depend on someone else keeping a promise – so it tends to hold its value over long periods of time. Gold and silver, for instance, have functioned as sound money for thousands of years. As you’ve no doubt heard many times, the same ounce of gold that bought a toga in ancient Rome will buy a nice suit today. Ditto for oil, wheat and most of life’s other necessities.
Currency, meanwhile, is the thing we use for buying and selling. It can also be money, as in past societies where gold and silver coins circulated. But it doesn’t have to be. Paper dollars, euro, and yen are representations of wealth rather than wealth itself and are only valuable because we trust the governments managing them to control their supply and banks to give us back our deposits on demand. Such currencies are not very safe but are extremely convenient, so even people who understand the inherent flaws of today’s currencies keep some around for transacting.
As for bitcoin, for a while the more excitable in the techie community seemed to think that crypto-currencies could function not just as currency but as money, i.e., as a form of savings, because the supply of bitcoin was limited by the algorithm that creates it. But they were overlooking counterparty risk. Since the vast majority of bitcoins in circulation are stored electronically and transmitted over the Internet, they’re only valuable if those media function correctly. Let a system fail, as Mt. Gox apparently has, and the bitcoins in that system are either unavailable (in which case their immediate value is zero) or suddenly very risky, in which case they’re obviously not a good savings vehicle.
Is this a deal-breaker for crypto-currencies? No. In many ways bitcoin is a better currency than the dollar because it can’t be inflated away by a desperate government or confiscated in the coming wave of bank bail-ins.
People who understand crypto-currencies and own a small amount of bitcoin for transactional purposes are probably unfazed by the latest speed bump. And people who had their life savings in it have received a valuable lesson in the nature of money.
19 thoughts on "Bitcoin and Gold: Currency versus Money"
Money has all the attributes of currency but in addition it is a store of value over the long term. Why gold is a store of value over the long term is that the supply is limited and its usefulness has been proven for centuries. Bitcoin also has a limited supply (21 M BTC), although young, it is proofing so far to have a usefulness in electronic transfer. So far, it is demonstrating the attributes of money. As opposed to gold, it is highly dependent on technology so time will tell what will happen to it. But the idea and concept of a distributed peer-to-peer decentralized currency is here to stay.
Phil said, “Bitcoin also has a limited supply (21 M BTC)…”.
Maybe. But there is no limit to the number of other crypto currencies that could be launched. If it looks like the masters are going going to allow this sort of thing (doubtful), then Google, EBAY, Amazon, etc. will most likely create their own individual crypto currencies.
I don’t think you get the point when bringing up Google and Ebay, etc,
whatever comes up needs to be open source and distributed. Even if they did, just imagine trying to come up with another TCP/IP protocol, the value is based on the power of the network – how many people are using it.
It is my understanding that there are some pretty robust, competing crypto currencies already out there. Bitcoin has the advantage of prior acceptance, which is a big advantage, but that will only take you so far.
My main view is that, in the coming hyper inflationary wave, paper money and electronic money will fall completely out of favor, and we will go back to a hard money system. With modern debit card technology this will be very easy to do. You want to access some of your silver? Go to an ATM and get an ounce, or get some out from under your mattress.
If interest rates rise, people will take silver out of the mattress and take it down to the bank to earn interest. If interest rates drop, they won’t.
So far, there aren’t any serious contenders to Bitcoin. Can you name your “pretty robust competing crypto”? Litecoin is just a tweak on the SHA algo. Any major changes that are worth it can be incorporated in bitcoin, making many of those all crypto, more like laboratory experiment. Even if another distributed decentralized crypto comes up with some major advantage and replaces bitcoin, such as ethereum, so what? I’m betting we will be having this same conversation you and I but about this new one. What is great is that digital decentralized crypto currencies are here to stay.
Your main view contains speculation. And you are contradicting yourself “and we will go back to a hard money system. With modern debit card technology this will be very easy to do.”
May I remind you that modern debit card uses electronic money!
How will you pay for your dozen of egg with 1 ounce of silver when its worth $500 in today’s dollar? Bitcoin is divisible to 10 power of -8 so, plenty of granularity.
I notice that BTC is plunging just as gold is taking off. In spite of the (very important) differences described in John’s post, they’re still competitors, and I’ve heard it argued that Bitcoin is a bit of a drag on gold prices because it sucks up some of the money that’s fleeing government currencies. So it’s interesting that gold chose today, a very bad day for BTC, to break above $1275.
That said, I think it could just be coincidence. The Bitcoin market is tiny compared to the paper gold market, and paper gold prices don’t really correlate with demand anyway. Still, it could be fun to watch the BTC/Gold ratio. It touched 0.80 in late January but has plunged to 0.45 today: https://www.bigterminal.com/chart/currency/BTCUSD_XAU/ .
Don’t be so certain about gold taking off. It’s still under 1300 and if we can
believe ‘broken clock Harry Dent’, whose been more off than on, he is still
sticking to his prognosis of gold to $750 or lower. Giving him a little credit,
he has been spot on in the last year or so but we’ll see if gold continues
on down. If it breaks 1200, look out below, at least short term.
btw, if we can believe whistle blower Karen Hudes, she confidently commands there are ONE HUNDRED SEVENTY THOUSAND TONS OF GOLD IN
HAWAII and has substantial documentation to back it up.
Does Karen H. have any idea why they won’t part with 300 tons of gold to get Germany off their back, lol.
Most likely, BitCoin is a beta test for various ideas the IMF is exploring to replace the failing major fiats. Looks like they are about ready to discard it and go on to some other tests. Gotta admit, though, the ‘security flaw’ angle as the excuse to torpedo it was reasonably clever.
About Karen Hudes, Greg Hunter plans to interview her in the next few days I think. Shud b an interesting interview!
About bitcoin, anything’s possible but I think u may be correct.
There appears to be some type of ‘reboot’ in the near future
but too many ‘black swans out there on the wing’.
The Biblical concept of a ‘Jubilee’ is a dream but still a
possibility.
But even if it somehow occurred, the Banksters would probably
still come up with a way to keep control of the system, just
as the mutation to the Fed Reserve in 2013.
Gold is $1,330.90 today – seems like it is taking off to me! If there is that much gold and Karen Hudes says that is still not a bad thing. Bitcoin is as valuable as any other fiat currency – it has no intrinsic value and putting your life savings into bitcoin is ridiculous – putting your life savings into gold and silver is intelligent.
Putting your life savings into anything is risky imo, other than
Jesus Christ.
We’re in uncharted territory: Key word ~ diversify.
Frankly, I’d be surprised if most people who bought bitcoins conflated the concepts of money and currency. It seemed to me they thought of it more as a speculative lark that might prove profitable even if only in currency terms. I’m sure some have still made a mint so far, at least digitally.
In any case, playing devil’s advocate, I suppose those who have great faith in the long-term stability and integrity of technological infrastructure could argue that bitcoin’s price volatility can be no different than that of gold’s or silver’s, because networks may eventually be essentially risk-free “counter-parties.”
At some point bitcoin’s price may stabilize and it it ever does it will be interesting to see how it will relate to the price of gold. If it doesn’t track gold’s price then that will prove empirically it is nothing more than another form of currency and not true money like gold is.