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Sound money advocates who love the concept of cryptocurrencies but
don’t want to abandon precious metals have been trying to clarify their
thoughts of late. Risk Hedge just helped, with a comprehensive statement
of the pro-gold position. The following is an excerpt. Read the full
article
here.
Despite what the crypto-evangelists will tell you, digital tokens will never and can never replace gold as your financial hedge.
Here are six reasons why.
#1: Cryptocurrencies Are More Similar to a Fiat Money System Than You Think.
The definition of “fiat money” is a currency that is legal tender but not backed by a physical commodity.
It’s clear that cryptocurrencies partially fit the definition of fiat
money. They may not be legal tender yet, but they’re also not backed by
any sort of physical commodity. And while total supply is artificially
constrained, that constraint is just… well, artificial.
You can’t compare that to the physical constraint on gold’s supply.
Some countries are also exploring the idea of introducing
government-backed cryptocurrencies, which would take them one step
closer toward fiat-currency status.
As Russia, India, and Estonia are considering their own digital
money, Dubai has already taken it one step further. In September, the
kingdom announced that it has signed a deal to launch its own
blockchain-based currency known as emCash.
So ask yourself, how can you effectively hedge against a fiat money system with another type of fiat money?
#2: Gold Has Always Had and Will Always Have an Accessible Liquid Market.
An asset is only valuable if other people are willing to trade it in return for goods, services, or other assets.
Gold is one of the most liquid assets in existence. You can convert
it into cash on the spot, and its value is not bound by national
borders. Gold is gold—anywhere you travel in the world, you can exchange
gold for whatever the local currency is.
The same cannot be said about cryptocurrencies. While they’re being
accepted in more and more places, broad, mainstream acceptance is still a
long way off.
What makes gold so liquid is the immense size of its market. The
larger the market for an asset, the more liquid it is. According to the
World Gold Council, the total value of all gold ever mined is about $7.8
trillion.
By comparison, the total size of the cryptocurrency market stands at
about $161 billion as of this writing—and that market cap is split among
1,170 different cryptocurrencies.
That’s a long shot from becoming as liquid and widely accepted as gold.
#3: The Majority of Cryptocurrencies Will Be Wiped Out.
Many Wall Street veterans compare the current rise of cryptocurrencies to the Internet in the early 1990s.
Most stocks that had risen in the first wave of the Internet craze
were wiped out after the burst of the dot-com bubble in 2000. The crash,
in turn, gave rise to more sustainable Internet companies like Google
and Amazon, which thrive to this day.
The same will probably happen with cryptocurrencies. Most of them
will get wiped out in the first serious correction. Only a few will
become the standard, and nobody knows which ones at this point.
And if major countries like the US jump in and create their own
digital currency, they will likely make competing “private” currencies
illegal. This is no different from how privately issued banknotes are
illegal (although they were legal during the Free Banking Era of
1837–1863).
So while it’s likely that cryptocurrencies will still be around years
from now, the question is, which ones? There is no need for such
guesswork when it comes to gold.
#4: Lack of Security Undermines Cryptocurrencies’ Effectiveness.
Security is a major drawback facing the cryptocurrency community. It
seems that every other month, there is some news of a major hack
involving a Bitcoin exchange.
In the past few months, the relatively new cryptocurrency Ether has
been a target for hackers. The combined total amount stolen has almost
reached $82 million.
Bitcoin, of course, has been the largest target. Based on current
prices, just one robbery that took place in 2011 resulted in the hackers
taking hold of over $3.7 billion worth of bitcoin—a staggering figure.
With security issues surrounding cryptocurrencies still not fully
rectified, their capability as an effective hedge is compromised.
When was the last time you heard of a gold depository being robbed?
Not to mention the fact that most depositories have full insurance
coverage.
The gold vs bitcoin debate has a long way to run. But if the outcome
is a world in which money is what the market — rather than the
government — says it is, then hopefully there will be room for both.
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John Rubino runs the popular financial website DollarCollapse.com. He is co-author, with GoldMoney’s James Turk, of The Money Bubble (DollarCollapse Press, 2014) and The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street(Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.
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The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
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