Clearing Up The Bitcoin Versus Gold Debate

November 4th, 2013   Submitted by Roman Skaskiw

GoldBitA lot of otherwise useful analysis of Bitcoin versus gold misses an important point. This analysis only considers physical gold, and points out its obvious disadvantages. Mainly, physical gold can’t be transported almost effortlessly, and almost instantly to anyone with an internet connection. Gold is also more difficult to divide and to verify. This analysis is accurate, but through the ingenuity of entrepreneurs, gold can behave like Bitcoin. In fact, it used to.

The company E-Gold operated for more than a decade before the company’s directors accepted a plea bargain with federal prosecutors in 2008.

The company allowed psuedonymous users to transact in electronic representations of gold expressed to one tenth of a gram. They provided aspiring developers with a useful API for automating commerce, and were very transparent in publishing usage data. For these reasons, E-Gold is sometimes considered a philosophical predecessor to Bitcoin.

E-Gold was incorporated in Nevis, Saint Kitts and Nevis and operated out of Florida. It spawned many imitators including Goldmoney.com, e-Bullion.com, CrowneGold.com, Pecunix.com, INTgold.com, and the Ponzi scheme, OSgold.com.

By the time of its 2008 shutdown, E-Gold processed more than $2 billion in precious metals transactions per year. The company’s directors plead guilty to one count of “conspiracy to engage in money laundering,” and received lenient sentences. The plea bargain resulted in one of the largest ever confiscations of physical gold — almost $100 million worth. Account holders have until later this month to file a claim.

The reason Bitcoin is so important, the reason it will change the world is because entrepreneurs have been forbidden from engineering gold to behave like Bitcoin. It seems safe to assume that the E-Gold imitators which continue to function do so because they’ve made the necessary concessions to the money monopolies.

As I’ve written before, Bitcoin is a jailbreak. For however long states continue to guard their monopoly, Bitcoin will continue to reign supreme as the most ready alternative, but how would the two compare in a world in which the fiat system was dead and buried, in a free market for money?

Here, Bitcoin would maintain an albeit smaller advantage. Namely, it would not require a trusted third party. You wouldn’t have to trust any company. (I’m assuming Star Trek-like teleporters are beyond the memory horizon of this article.)

Anyway, in a free market for money, one would have to consider the advantages of participating in what will by that time be a proven, decentralized ledger system, versus the level of trust they’re willing to put in a company that offers the same service backed by gold.

The entrepreneurs would also be burdened with having to provide their service affordably enough to compete with Bitcoin transaction fees.

I think they might succeed, but we’re a long way away from a world which tolerates that sort of reckless innovation. For now, I’m keeping my Bitcoins.

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21 Responses to “Clearing Up The Bitcoin Versus Gold Debate”

  1. EthanNo Gravatar says:

    I can buy/sell gold and silver on an instant in multiple jurisdictions at market prices. I store mine in Zurich. With the click of a button I can move it to London, New York, Toronto or Singapore. No need to wait for physical transfers, they just move my name on the computer. Every one has a totally separate jurisdiction, and new ones are being added all the time…

    “E-gold” is a terrible example to use when considering what’s possible.

    Bitcoin is still an unstable boom/bust currency with nothing real to back it up. I invest/mine, but I do not hold, that’d be reckless of me.

    • I’d be curious what system you use to move your gold so quickly and easily. It’s good to know what ones options are.

      I doubt it’s merchant ready and pseudonymous though.

      I used E-Gold as an example because they were the trail blazers. Others innovated on top of their work.

      “Bitcoin . . . with nothing real to back it up.”

      🙂 That’s a valid concern which I respectfully disagree with, but I’ll leave it to other readers who might want to make the case.

      • Davi BarkerNo Gravatar says:

        I agree it’s a boom/bust currency. But nothing backing a currency is what I’m looking for. Nothing backs gold. It’s just gold. Dollars are backed, mainly by guns. If dollars weren’t backed they’d fall to their actual economic value.

        • Martin BrockNo Gravatar says:

          The dollar is a fiat currency backed by guns, but it could lose its gun-backing and continue to be backed by nothing other than demand for its use as a currency without the value of a dollar falling to zero. How the value of a Federal Reserve System dollar changes without gun-backing depends upon policies of the FRS.

          Suppose the U.S. government surrenders its money monopoly. Rather than raising taxes in dollars, it accepts a percentage of a subject’s income/sales in any currency the subject accepts, and it spends only the currencies it receives without currency exchanges, and it sells no entitlement to tax revenue (does not “borrow”).

          In this scenario, the FRS could continue to exist, and the central bank could continue to issue reserve notes to buy and sell securities other than entitlement to U.S. tax revenue and so on. Member banks continue to circulate only FRNs subject to FRS reserve requirements and other regulatory requirements. The value of FRNS need not fall to zero any more than the value of a Bitcoin must fall to zero because no state forces Bitcoins to circulate by exclusively taxing and spending the currency.

    • Seth KingNo Gravatar says:

      Are you an anarchist, Ethen? If so, how do you reconcile the fact that the companies that store your gold could easily be ripped off by the state at any time?

  2. Davi BarkerNo Gravatar says:

    For a while I was using e-Dinar.com. It’s an e-Gold type outfit in Dubai. I liked using it as a savings account because it was digital, and I was moving around a lot at the time. But opening the account required all kinds of paperwork I wasn’t happy about, and putting money into the account required a physical bank visit. It wasn’t anonymous in any sense. They required notarized copies of government IDs. It was also essentially useless for making purchases, but it could be used that way in theory. I haven’t used the account in years. I emptied it out by taking physical possession, and of course shipping was outrageously expensive.

    That being said, most of those problems are government created. I’m sure the operation would be much more user friendly if it weren’t for the international commerce regulations I’m sure they’re subject to.

  3. Martin BrockNo Gravatar says:

    The decentralized ledger system is clearly Bitcoin’s most promising feature, and any competing black market currency, opposed by statutory money monopolies, must replicate it, but if states tolerate competing currencies, I don’t expect a system like eGold to become the most common currency.

    I bought my daughter a mobile wifi hotspot from Walmart for her birthday recently. Walmart’s data plan is interesting from a monetary perspective. The owner of a hotspot buys so many gigabytes of data and may use the quota at any time.

    http://www.internet-go.com/

    The current price is $15/gigabyte, pay as you go. A quota never expires, so if I pay $45 for three gigabytes today and use only one gigabyte this month, I have two gigabytes left for next month or any time in the future.

    At this point, I can’t resell a gigabyte to the owner of a different hotspot, but if I could, data access quotas could be a very practical and rapidly adopted form of electronic money. It’s already electronic, widely used and valued, divisible and so on.

    The price of a gigabyte is likely to fall, so the currency is inflationary, but that’s an advantage in my way of thinking. Currency is for spending, not for holding. An internet access quota of this kind is similarly for using, not for saving.

    Using internet access as money requires centralized accounting, but a provider could make the exchange of quotas anonymous in principle; however, I expect states (and even free communities) increasingly to oppose anonymous transactions, and I doubt that anonymity is important enough to most people to make it a significant advantage for Bitcoin ultimately.

    • Martin BrockNo Gravatar says:

      Of course, if inflationary gigabytes of data access are money, anyone desiring to store value may buy gold or anything else with gigabytes.

  4. VanmindNo Gravatar says:

    Having introduced at my old BBS (accessible from the internet via telnet) the world’s first gold-backed e-currency — a year or so before e-gold ever came along — I feel safe laughing at the contention that bitcoin has surpassed gold in any way.

    Back then I needed such a proof-of-concept as part of a business model pitch. I was glad when e-gold emerged to take away that pain-in-the-a$$ administrative burden (I always hoped to outsource the “banking” part of my business but until e-gold no outsourcing was possible), and I happily dumped e-gold in a heartbeat once goldmoney.com entered the scene as a way to store & trade bullion (I remember my opinion: “Now we’re talking”). Since then, though, as many know, Gold Money has chickened out left & right in the face of one-world bureaucracy and is no longer worth much of anything to anyone except as a storage service.

    Bitcoin, though, is a complete non-starter.

    • Martin BrockNo Gravatar says:

      I’m a Bitcoin skeptic myself, but Bitcoin has certainly started. If nothing else, it’s the proof of a concept that might work with further refinement.

      • VanmindNo Gravatar says:

        Yes, thanks for the clarification. It’s a non-starter for my life, not in some general existential way.

        No refinement is needed. Ditch bitcoin altogether and go back to something more like I was trying to demonstrate as a concept. On my old BBS, the credits that were backed by gold (I gave them the working title “gol”) were encrypted as far as encryption technology goes (differing quality with none being fool-proof). Encryption itself is in no way innovative.

        Think of bitcoin like an open source software project, with all the people on the inside claiming that everyone will looooooooove the thing “…once they take the time to study enough about blah-blah to get up to our speed” (this is why such projects tend to have crappy documentation — the insiders are too busy dreaming about implementing the latest feature to bother much with helping those who “should just suck it up and get up to speed”). There’s the rub: gotta l-e-a-r-n to love it.

        For a wanna-be money such a prerequisite is laughable, and if some out there are encouraging bitcoin adoption for people who won’t ever bother trying to learn the technical details, they are trying to get away with pump & dump fraud. Sure, maybe such naive “won’t ever bother to learn” investors, in buyer beware fashion, deserve to get fleeced in the same way that some people invest in the stock of a company without researching much about what the company actually does. I’m not quite that gullible.

        • I don’t see any evidence of pump-and-dump. I see people thrilled to finally have a viable alternative to fiat.

          I think it’s going to get much much bigger. As a former (and perhaps future) software developer, the benefits of Bitcoin are huge. They can do to commerce what email did to written communication.

          The only serious competition will come when entrepreneurs are allowed to develop E-Gold-like solutions. But that seems a long way off.

          • VanmindNo Gravatar says:

            Time will tell, for sure. I see the enthusiasm among non-techies as mostly blind faith consumer hope, much like FRN users who don’t know what a central bank is, much like those billions who screamed “I want a smartphone too” without understanding the surveillance trap into which they were running full-tilt.

            What makes pump & dump scammers salivate? Consumers with blind faith who want to be seen as wise investors. A con artist doesn’t get your money because he takes away your confidence. A con artist gets your money because he tricks you into believing that his confidence is a reflection of your own.

            Perhaps bitcoin will evolve into a full-blown specie-backed currency. Then I might reassess how much I value it. Until then it remains Galt’s Gulch Garbage.

          • Martin BrockNo Gravatar says:

            If states tolerate eGold like solutions, why wouldn’t they tolerate people using mobile data access quotas as money, and if people may use either, why are they using eGold as a medium of exchange.

            I carry this mobile hot spot around all the time anyway, because I want the mobile data access. Non-expiring units of access are associated with my hot spot and with many other hot spots, and these units are clearly valuable, since everyone with a hot spot is exchanging valuable goods for the units. Paying for this access is completely reasonable, because building and maintaining the communications infrastructure is costly.

            If people with these hotspots may exchange units of access, why wouldn’t they? I suppose people would exchange these units spontaneously, because using the units this way is very convenient, and when people run low on units, they would also obtain more units spontaneously.

            Storing value is a separate issue. People might buy electronic warehouse receipts for gold for this purpose, but I don’t expect people generally to want to hold gold in a warehouse or otherwise. I do expect people generally to want mobile data access.

        • MacianoNo Gravatar says:

          At these sites it’s possible to do some analysis for yourself.
          – blockchain.info/en/charts
          – bitcoincharts.com/charts
          – btcglobe.com/tool/calculate-future

          1) Every necessary element for liquidity increases exponentially; google searches (=people getting themselves educated), wallets(=users), transactions per day, market capitalization, etc. This has been the case for every year bitcoin has been in existence.

          See this chart by Konrad S. Graf:
          pbs.twimg.com/media/BYO3Ph2CQAAgAlX.png (continuous growth)

          2) The bitcoin market is still small compared to potential size: only < $$ 3Bio.

          3) Companies such as BitPay, Circle, etc. have gotten huge resources & Bitpay exponential growing numbers of merchants connected through them.

          4) Customers are A) already used to ease of creditcard companies, PayPal, mobile payments, but B) must pay them high transaction fees, suffer delay & insecurity in payment.

          5) Demand for safety in countries with extremely high inflation rates and draconian tax laws will have many citizens wanting to buy bitcoin for many years to come. This has happened before, it worked for those who used BTC as hedge and this principle will thus be repeated by others.

          6) Whether Bitcoin crashes to zero after this current mania remains to be seen, but my guess is that this will not be the case. In fact, I'm highly certain bitcoin will increase exponentially for the foreseeable future.

          Even if you don't believe in bitcoin, the markets will make sure BTC will have high ROI for some time to come.

  5. LibertymarkNo Gravatar says:

    Glad to have found this site…I thought Bitcoin was a scam/didn’t trust as well. But when everyone panicked I jumped in from some. The big attraction is like gold or silver, it’s supposedly outside the control of government or central banking money printing grips. As you know, all those morons do is destroy purchasing power by design. Anyway, It hit an all time last nite or today around Guy Fawkes. It looks like the real deal guys..but no one will take that serious until over 10 billion market cap! Plenty of upside. Also, I am looking for liberty loving people with businesses/organizations who want to list on my site and help us all connect . I want real change and this is part of a solution if we keep our money in the family so to speak. check it out

  6. AuNeroNo Gravatar says:

    Newbie here. What site(s) can someone recommend to get a bitcoin wallet and then purchase bitcoins? I don’t need to be anonymous.

    • Well I’m not sure how tech-savvy you are. For people who aren’t, I’ve been recommending the Electrum Wallet. It’s a light-weight wallet, meaning it doesn’t download the entire blockchain (ledger of ALL bitcoin transactions). Instead, it links to a server which keeps a copy of the ledger.

      It also has a cool feature where you can recover your bitcoins with a list of words it gives you when you set up the wallet. Let’s say you suddenly get a serious virus on your computer or begin to doubt its security for whatever reasons. You can uninstall electrum or delete the wallet file (‘electrum.dat’) — heck you can even throw your computer into the ocean or smash it with a hammer — and then on a separate computer, using a separate download of electrum, you can recover your Bitcoins using that list of words.

      You can download Electrum here: http://electrum.org/download.html

      There are many ways to buy Bitcoin. Several methods are explained here: http://blog.bitcoinbeginner.com/post/45910989805/how-to-buy-bitco ins-quickly

      Good luck! 🙂

    • LibertymarkNo Gravatar says:

      AuNero, check out my site…and if you sign up via my referral link you get 5 bucks . Coinbase is pretty popular

  7. SHIVANK MEHRANo Gravatar says:

    There are numerous instances of private organizations doing better than the government, without its aid. The American Letter Mail Company is one example. Someone should collect these instances… is there already such a book/collection I’m unaware of?