4 Questions and Answers about Money, Precious Metals and Bullion
Published: 07-07-2014 00:00
Torgny Persson is the founder and
Torgny is an educated economist
David Moskowitz is the founder of
Coin Republic's platform enables
David also operates the only two way
1) What is money?
Money has three major functions.
Medium of Exchange – Money is supposed to serve as payment for goods and services i.e. what is called medium of exchange.
Asset retaining – Money is supposed to keep value over time.
Unit of Account – Money is supposed to be a measuring stick when someone is referring to value.
The current monetary system is called fractional reserve banking (FRB). By issuing debt to borrowers, banks are creating money out of thin air. The track record for fractional reserve banking is dismal. Let’s look at it from the perspective of money’s three functions mentioned above.
Money can be an efficient medium of exchange when cash is used in a transaction. The seller of a product receives immediate payment and the buyer receives the goods bought. However, many transactions today are electronic. It takes 2-4 business days to send an international payment. It’s costly and the banking transaction systems are fragile. The current system is at best very average in its role as medium of exchange.
How about retaining value? Cash is often said to be the safest asset of all. But what has inflation done to our money? How much did an ice cream cost when you were a kid? What does it cost today? All currencies have lost 97 % - 100 % of the course of the last 100 years. Today’s money fails monumentally in the role of keeping value and purchasing power over time.
It’s neat to have a standardized unit of account when referring to the value of something. However, assume that a company with a capital of 100 000 dollar is making a small profit of 1000 dollar during one year but with a price inflation in the economy of 3 %. In terms of purchasing power, the company is actually worse of even though it made a profit. However the company still have to pay profit tax on its “profit”. When comparing the cost of the same product 100 years ago compared to today, today’s money is a useless unit of account.
A very broad definition of money is a commonly accepted means of exchange. However, exchanging a chicken for a guitar lesson isn't always practical, so an intermediary form of exchange is needed.
There are also some more specific definitions of money that Torgny mentions, like asset retaining (store of value), unit of account (you price things in it), and some more such as fungibility (any one equals another), divisibility, low cost to preserve, and resistance to counterfeiting.
I don't think bitcoin currently fits all of these definitions, although it is being used as a means of exchange. It excels in the areas of divisibility, low cost of preservation, transport, and the cryptography and a global ledger backbone make counterfeiting impossible.
I look at it as a synthetic asset which is also being used as a means of exchange. Given it's limited lifetime (5 years so far). I wouldn't say its a store of value yet. Also due to it's volatility it is not used as a unit of account. As time progresses and its market cap and usage expands, it will take on more and more characteristics of money as classically defined.
Most of these definitions are made my economists looking back on what made money-money in the past. It's very possible that in the future, they may add 'ability to be digitally transferred' to the list.
2) How can precious metals and bitcoin complement each other?
Precious metals has served as money for thousands of years. Every time some sort of unbacked paper money system has been tried historically, it has failed with gold & silver reemerging as money.
I don’t envision that we will walk around with gold and silver in our pockets to make payments again in the near future but I certainly don’t rule it out. A more electronic system which may be based on similar technology as bitcoins but with backing of precious metals is more likely.
When it comes to making payments, the bitcoin technology is a welcome invention. The banks have for a long time effectively had a monopoly of money transfers, a monopoly on which they have made a lot of money through fees, slowing down the payments and loading the exchange rates. Bitcoins is near free to use, it’s quick and it is decentralized positioning it as a good alternative to traditional bank controlled payment methods.
For keeping value over time and as a unit of account, precious metals is and has been superior to any other monetary form for thousands of years.
By combining bitcoins with precious metals, all three monetary purposes mentioned above can be served in a much better way than what is the case today.
Bitcoin was created with many of the characteristics of precious metals in mind. Some people are calling Bitcoin gold 2.0 because of its similarities such as fixed supply generated during the 'mining' process. However it also has many advantages such as ease of transport, and usage as a means of exchange.
Like bullion, bitcoin is an asset. Instead of the current system of debt based transactions where you would borrow from the bank to make a purchase and later pay it back, with Bitcoin you send the asset to the seller. This allows sellers of hard assets like bullion the security of knowing that they control the bitcoin once they receive it. In other words, there is no risk of chargebacks for the merchant. Once the bitcoin are sent it is irrecoverable- just like handing someone cash, but even better, as it's impossible to counterfeit.
Additionally. the protocols being added on top of bitcoin, allow for contracts to be created and backed by physical assets such as bullion. For forward thinking companies like like BullionStar there are tremendous opportunities to create and market such certificates.
3) How do you predict the development of bitcoin ahead?
I think bitcoin will put pressure on the current banking transaction systems which may have no option but to consider including some of the inventions that bitcoins have brought into their systems.
As bitcoin is decentralized, it is difficult to ban. If it can’t be banned, it will likely be regulated.
The success of bitcoin depends on whether it will be embraced as a medium of exchange to a larger degree rather than just being traded for speculative reasons.
The pace of innovation with bitcoin is incredible.
Finance has been stagnant for 100 years, and software is quickly replacing existing institutions just as it has in the music, video content, and communications industry.
The financial companies of the future will look more like tech companies than traditional banks.
Governments will attempt to regulate the companies facilitating the transfer of fiat to bitcoin. However if they push too hard, innovative programmers will create more decentralized systems. They have already created decentralized marketplaces for goods and services. The harder governments try to squeeze, the more cryptocurrency will slip through their fingers. The reality is that this is an innovation that can not be uncreated and regulations will always fall behind the pace of innovation.
4) Why do you think some gold bugs are criticizing bitcoins?
While I agree that precious metals serve better as a stable unit of account and to risk minimize savings, bitcoin opens a spectrum of new transactional opportunities that challenges the bank monopoly. In my opinion, the current fractional banking system, where fiat money is created out of thin air and has to be repaid with interest, is the worst conceivable monetary system. Challenging the current fiat money system is good in whatever form it is done and bitcoin is at the front of that development.
I think you have two camps of gold bugs opposed to bitcoin.
The first are those who really believe that assets must be physical and have stood the test of time. For the most part, I agree with this group. Gold for example, has had 1000's of years of acceptance across multiple civilizations. However, as an investor looking for upside in addition to wealth preservation, gold has a limited potential for appreciation. Bitcoin, if it continues its growth, has the potential to become a global means of exchange along side traditional currencies. This puts its upside potential into the multiples in my opinion. Of course with that upside is downside risk as well.
The second type are well known gold bugs whose income is related to the idea that gold is the answer to governments inflationary policies. As a marketing tactic they attack bitcoin to create an US vs. Them dynamic, and creating sensationalist headlines. They sell products and services which are directly threatened by the disruptive nature of cryptocurrencies, as customers decide to move assets to the new asset forms. For this group its a matter of showing them the savings they will see for accepting bitcoin over credit cards or the ability to market to the wider world without additional fraud risk since Bitcoin is irreversible once sent.
|El Salvador's gold reserves, the BIS, and the bullion banks|
|US Dollar as Reserve Currency - Credibility Inflation|
|Gold or Fiat? That is the question...|
|The IMF’s Gold Depositories – Part 3, Gold Swaps and the Quality of the IMF Gold|
|Mr. Torgny Persson, CEO of BullionStar, interviewed by SG Wealth Builder|
|Closure on Good Friday|
|BullionStar Gold Bars - Trade gold without spread between the buy and sell price|
|Business hours during Chinese New Year|
|News & Article Archive|