Interview by Louis James,
L: Doug-Sama, we’ve had a number of
readers ask for your take on this new Bitcoin system. As a person who likes to see the private sector
compete in areas that governments try to reserve for themselves, this seems
right up your alley – what do you think?
Doug: It’s a sign of the times. Lots of people are actively looking
for an alternative to the dollar. I think Bitcoin
is a very good thing, in principle. But after the recent disastrous hack,
it’s probably a dead duck, at least in version 1.0.
It’s appropriate, however, that we’re
talking about Bitcoin – an Internet-driven
phenomenon – while you are in Bishkek, Kyrgyzstan and I’m in
Beirut, Lebanon, and we’re speaking essentially for free over the
Internet. Money is increasingly going to be Internet-related. But first we
should explain what Bitcoin is.
L: Sure. There’s a Wiki entry, but the basic idea is that Bitcoin
is an online (and therefore digital), non-government-backed currency.
It’s not backed by anything, actually, but that doesn’t seem to
be a problem for many users. The system has been adopted by a growing number
of people around the world in just the last two years. People are used to
currencies not backed by anything, so I guess I shouldn’t be surprised,
but I am. On the other paw, unlike government currency, the Bitcoin system is based on a decentralized computer
system that no single person or entity – including any government
– has control over. That’s part of a design to keep the number of
Bitcoins in circulation (inflation) strictly in
check. So I can see why some people would see Bitcoin
as being just like government currency, but better, because it’s
supposedly inflation-proof.
That’s the idea, anyway, but in my view,
it’s still not money – no more than unbacked
government promises are. You can only use them among others willing to
pioneer this cyber-frontier, so I really was quite surprised to see them
catch on as well as they have. I’ve seen estimates that the market
value of Bitcoins in circulation rose to about $130
million before they crashed last weekend.
Doug: Again, it’s quite encouraging to see that so many people are so
disgusted with government currencies, and the total lack of privacy in
banking. That’s why Bitcoin could catch on at
all. But let’s go back to basics, and see if Bitcoin
qualifies as money. Money is a medium of exchange and a store of value. Bitcoin may work as a medium of exchange sometimes, but
not a very good one, because it’s proving so unstable. It has
fluctuated so much in value over its short life that it is totally unsuitable
as a store of value. Over 2,300 years ago, Aristotle identified the five
essential attributes that are necessary for a good
money…
L: It has to be durable, divisible, convenient, consistent, and have
value in itself. But don’t forget your own addendum of
“can’t be created out of thin air infinitely.”
Doug: Right. Let’s see how Bitcoin stacks
up. First, is it durable? As nothing more than ones and zeros on a computer
network, it might seem that the answer is no – it’s certainly not
as substantial as gold. But a Bitcoin is arguably a
lot more durable than a piece of government-issued paper that can be lost,
burned, or even fall apart in your jeans pocket if you forget to take it out
before doing the laundry. Moreover, since the Internet was designed to be
multiply redundant, and even able to withstand nuclear attack, it’s arguable the Bits won’t just disappear.
L: We should point out that the recent problem with a bunch of usernames
and accounts being exposed was not a failure of the Bitcoin
system itself, but apparently of the physical security of an intermediary
business that interfaces between the public and Bitcoin.
There’s another attack put together by hackers, not trying to crack the
integrity of the Bitcoins themselves, but to get
artificially paid by the Bitcoin system for doing
computational work. Someone has also released a virus aimed at stealing users’ Bitcoin
account information.
Doug: Yes, these are all serious attacks, and there are likely to be
others. But it remains to be seen if Bitcoin will
survive the crash in value last weekend – Bitcoins
had been trading as high as $30 each and dropped to $0.01 at one point. Since
Bitcoins rest on nothing but confidence, it’s
going to be hard to restore that confidence now that it’s lost. But
it’s interesting that the Bitcoins themselves
have proven quite resistant to tampering. In short, they’ve shown
significant durability. So they pass that criterion.
L: Okay. Divisible?
Doug: No problem there; they’re electronic ledger entries, so they
can be divided and subdivided as many times as you like.
L: What about convenience? You can’t spend Bitcoins
at a gas station or a village in Africa.
Doug: Don’t be so sure. More and more people are on the Internet
these days. We’ve both seen villagers in Africa with smart phones. It
won’t be long before most everybody has one. Anyone with Internet
access can arguably deal in Bitcoins, so they could
potentially be very convenient to use. That’s a lot more people than
the number who will take, say, Russian rubles, Zambian kwacha, or Vietnamese
dong.
And Bitcoins are certainly
consistent; each one has identical properties.
L: Do they have value in themselves?
Doug: There’s the rub; I don’t see that they do. Bitcoins are just an electronic abstraction. They
can’t be used for anything else, nor are they made of something that
can be used for anything else. They are like one of those knots in a string
that disappear if you pull hard enough on the ends of the string. They are
not backed by anything at all. Like government fiat currencies, they are a
con game, functioning only as long as people have confidence in them,
regardless of whether that confidence is well placed or not.
I’ve always said that the dollar is an
“I owe you nothing,” and that the euro is a “Who owes you
nothing.” With Bitcoins – which no
individual can be held accountable for and which have no value in themselves
– I’d have to say they are a “No one owes you anything.”
It was inevitable, therefore, that the scheme would collapse… at least
in its present form.
Their main value seems to have been as a speculative
medium. Worse, actually, in that they are – or were – based on
finding a “greater fool” to pass them on to, for something of
value. The bubble in Bitcoins is, however, just one
of many to come as people try to get out of paper currencies in the years to
come. With the bubble that arose in tulip bulbs in 17th century Holland, you
might at least have wound up with a flower. This time, people just got stung.
The message is clear: Get used to bubbles, as governments print up more and
more fiat money.
Bitcoin reminds me of the so-called “barter
currencies” people tried to start in the U.S. some time ago, supposedly
trading units of “barter.” People traded chits, where a barber
might charge ten for a haircut, and a lawyer 100 for an hour of counsel. But
they were just another paper currency, based on confidence. And, when
you’re dealing with total strangers, confidence is hard to come
by…
L: Sounds like a contradiction; the whole concept of barter is trading
in goods and services directly, not via media of exchange.
Doug: Well, barter chits were supposed to encourage trade among those who
used them. And they were also a tax dodge, since no official money changed
hands. That was a major incentive for using them. But they all dried up and
blew away, and the people who wound up holding them had nothing. Sort of like
when the Argentine peso collapsed ten years ago. The provinces decided to set
up their own currencies, but they weren’t backed by anything either,
and they all dried up and blew away as well, leaving those who held them
holding an empty bag.
So, way before the dollar value of Bitcoins stepped off a cliff last weekend, I was telling
people who asked me that I didn’t use them and didn’t plan to use
them.
Frankly, I can’t see why anyone would, when
there’s already an electronic digital currency like Bitcoin
but backed with gold: GoldMoney. I should disclose that I’m a small investor
in the company. But I have to say that I really do like GoldMoney.
It does everything Bitcoin does – or did
– but is backed by something of real value: gold. That means it’s
not just an abstraction, but an actual store of wealth. The ultimate proof of
that is that you can take delivery of your gold if you want to. With Bitcoin, there’s nothing to take delivery of. I
don’t understand why anyone would use Bitcoin
when they can use GoldMoney, which does all the
same things but has real backing.
L: Neither do I. I was quite surprised to see
that the idea had actually caught on. I loathe the government currency
monopoly as much as anyone, but I wasn’t even tempted to try Bitcoin out, because it wasn’t backed by anything.
Maybe it’s simply Bitcoin’s case for
being inflation-proof. This gets to your addendum to Aristotle’s five
qualities: People clearly placed great value on Bitcoin’s
promise to limit circulation to a finite number. The perception among people
who’ve forgotten what money really is – which is most people
– is that money is only a medium of exchange. In this case, the meme
that “it’s better than government paper” created enough
perception of value to keep the things in circulation – or did until
last weekend. Bitcoin looks more like “Bit
the Dust” now. But in spite of its problems, do you still seem pleased
with the whole Bitcoin experiment.
Doug: I like the fact it’s untraceable and secret. I like the idea
that it was trying to be an alternative to the dollar; it’s great to
see people trying to get out of the U.S. dollar. The dollar is a state
monopoly of the worst kind. It’s not only the world’s reserve
currency for central banks, but it’s become the world’s de facto
international currency. If you’re Canadian or Asian or African or South
American and travel abroad, you pretty much need U.S. dollars as soon as you
leave the borders of your country. Even the euro isn’t much good
outside of the eurozone. That something like Bitcoin can gain any traction at all is a real – if
early – challenge to the supremacy of the U.S. dollar. This is quite
significant. That was probably one thing on Senator Charles Schumer’s
warped little mind when he referred Bitcoin to the
Justice Department for investigation recently. Schumer is always on the wrong
side of absolutely everything.
The U.S. dollar has actually become a major weapon
in the hands of the U.S. government now. All bank transactions go through the
U.S. SWIFT system. Even the Chinese and Russians, who have no love for the
U.S. government, have to use dollars for international trade. They
don’t like it. Muslims all around the world are coming to feel that
they are enemies of the United States, so they don’t want to use the
dollar either. And the more regulations the U.S. puts in place about how
money is transferred and used – like FATCA – the harder people
will look for alternatives. The U.S. government is treating everyone’s
dollars as its personal property. They’re becoming desperate, and
desperate governments are especially dangerous. This one is starting to
thrash around like a large, stupid dinosaur in its death throes – stay
out of its way.
Mohamed Mohatir in
Malaysia, following the dictates of the Koran, which I understand states that
only gold and silver should be used as money (the dinar and dirham), actually
made moves towards establishing a new gold standard. He tried to get other
Islamic governments to buy into it, and cut the dollar out of their
international trade. But most of those governments – then as now, although things may be changing – are both U.S. stooges and kleptocracies, so they weren’t interested in honest
money.
There’s huge and growing appetite around the
world for alternatives to the dollar. Bitcoin is a
beta version of what’s coming in the post-dollar world. GoldMoney, however,
is already a proven version 2.0.
L: So … Investment implications?
Doug: Well, it’s only a question of when, not if, the world will go
off the dollar as its international and reserve
currency. That has huge implications for the price of gold – and even
greater implications for gold-related stocks. It’s also very bad news
for the U.S. government itself, which has only the dollar and a bloated
military left to prop it up. A third-world-style collapse in the U.S. would
have major financial and economic implications, obviously, but also major
social and political changes would follow. It will be very, very messy. The
U.S. is not a place I want to be when that happens.
That’s why the U.S. government and its media
lapdogs have been so antagonistic to Bitcoin,
claiming it’s primarily of interest to drug lords who want to use it as
soap for their money laundering. They always mention it in conjunction with
Silk Road, which claims to allow purchase of any drug through mail order,
using Bitcoin as its payment system. I have no
problem with that, but it’s a totally impractical idea in today’s
world. It’s just an idea intended to scare witless Americans. Frankly,
I’m disgusted at the fact money laundering is even accepted as a crime;
thoughtless people believe whatever they’re told. It’s not a
crime, by any rational definition. But that’s another subject for
another day.
L: Well, I’m not surprised the U.S. government should take such
action. It already shut down e-gold, and more recently the Liberty Dollar. If Bitcoin really caught
on, it would only be a matter of time before they’d try to shut it down
too. Even if Bitcoin’s systems did turn out
to be government-proof (which I doubt, given what a few criminals have been
able to do already), the government could always go after users, punishing
anyone caught with a Bitcoin account.
Doug: Yes, that would likely happen. Like Bitcoin,
GoldMoney has the unique advantage of allowing transfers
of capital anywhere in the world without going through the Fed. That’s
a huge plus – although one now has to report ownership of a GoldMoney account to stay within the law, if one is an
American. If you’re an American, everything has to be reported to the
state today. You have zero financial privacy. But as people become more
desperate for alternatives to the dollar, and the systems get better at
providing anonymity, more and more people will abandon worthless government
paper, one way or another. I have no doubt gold will return to the forefront
as money. But in this digital age, people aren’t going to carry much of
it around in their pockets – it’s going digital too.
L: Hm. Well, if this is a sign that the end game for the U.S. dollar is
approaching, can you say when?
Doug: No. All we can say now, responsibly, is that this Bitcoin
flap is an important straw in the wind. There are about seven trillion U.S.
funny-money units floating around outside the U.S. At some point
there’s going to be a panic, and billions of foreigners are going to
try to dump trillions of dollars. It’s going to be a sight to behold.
Pity the poor fools who are left holding the monopoly money then – most
of them will be Americans, I fear.
L: Besides the obvious ideas of shorting the dollar, going long gold and
great gold stocks, is there a way for speculators to play this now?
Doug: It’s certainly worth repeating the obvious, because it’s
not obvious to everyone. Gold, though it has gone way up, is nowhere near its
top – it’s going through the roof. And the right gold stocks are
going to the moon. I believe the gold bubble some people are talking about is
just starting to inflate, and it’s going to create a market mania for
the record books.
L: You’re singing my song again.
Doug: It’s a bit self-serving, I know, but it also happens to be
completely true.
L: Okay then – until next time.
Doug:
Next time.
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