Doug Casey on Bitcoin and Currencies

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 than 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?

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