Dead Currency Walking?

Dead Currency Walking?

The concept of crypto-currencies is in many ways a truly wonderful idea. Unfortunately, most all reports and articles that support crypto-currencies in general and Bitcoin in particular focus on the potential of the currency.

They are entirely correct about the potential; however, they rarely, if ever, move forward to the next logical consideration, which is the likelihood of the currency living long enough to see its potential realised.

This consideration can be simplified into two questions:

  1. Is Bitcoin’s ability to compete with and/or replace existing forms of currency threatening to the powers that produce those other forms of currency?
  1. Do those powers have the ability to discredit and/or outlaw Bitcoin?

When Bitcoin was first created, it gained the immediate support of libertarians, as it is a “stateless” currency—it has no ties to any one government and is therefore not subject to the control of any one government. Any individual could keep his wealth as close as his computer and would not be beholden to governments or banks to legitimise and/or regulate his wealth. With Bitcoin, his wealth was with him wherever in the world he might be at any given moment and, just as important, could be transferred to others as payment anywhere in the world, in a matter of a few keystrokes.

As a concept, crypto-currency was (and is) the monetary dream of any libertarian.

Techies, very predictably, also jumped onto the Bitcoin bandwagon immediately, for their own reasons. For those whose lives are highly computer based, Bitcoin was the monetary equivalent of the Second Coming—a totally new way of dealing with currency. Bitcoin answered most every desire that any techie might have, relative to currency.

Yet, in 2014, Bitcoin was one of the world’s worst-performing currencies, losing more than half its value against the dollar.

That’s saying a lot. Even Ukraine’s hryvnia and Russia’s ruble did better! And Bitcoin was not saddled with dramatic political-economic events, as Ukraine and Russia were.

What Went Wrong?

So, why has Bitcoin taken such a dramatic dive? Well, first off, supporters of Bitcoin have exaggerated its existential characteristics. They typically make use of words like “mining” when describing its creation, which tends to make it seem more “real” in the sense that precious metals are real. And when Bitcoin is represented pictorially, it’s represented most often as a shiny metal coin—adding to the illusion of its tangibility. In hoping to make Bitcoin appear more tangible, supporters unintentionally have created a picture in their own minds of Bitcoin as something other than what it really is: an intangible concept.

But the real danger to Bitcoin was, and is, banks and governments.

As stated above, Bitcoin has no ties to any one government and is therefore not subject to the control of any one government. In praising this aspect, many Bitcoin supporters failed to consider that Bitcoin is, in a sense, subject to the control of all governments. That is, whilst governments tolerate and even at times welcome the existence of other state-run currencies, the very idea of a non-state-run currency is a threat to each and every government, as it suggests that sovereign states are unnecessary in order to create and distribute a currency. This is a major threat to governments the world over.

Those who heralded Bitcoin as “a force for peace,” “a currency that governments can’t print,” and “the elimination of the need for central banks,” were, in fact, describing the very reasons why banks and governments were likely to do all they could to discredit and destroy Bitcoin.

Banks and governments, who, today, hold the monopoly on currency creation (with the exception of precious metals) were not about to take Bitcoin lying down.

In my own view, crypto-currency is a wonderful concept, for all the reasons that its supporters give. However, as a pragmatist, when Bitcoin first appeared on the scene, my immediate and lasting reaction was that banks and governments would say to themselves, “This is a brilliant idea and we should be thinking of getting rid of paper money and switching to crypto-currency… In the meantime, we’ll need to destroy Bitcoin, since it threatens our monopoly.”

I first wrote these warnings in International Man article (“Bitcoin—As Good as Gold?”), describing its principle failing as being its intangibility. The very aspect that makes it easy to hold and transfer is also its Achilles heel. Bitcoin is at the mercy of the computer itself. Governments can hack into computers. They can declare the Internet transfer of a particular currency illegal. They can penalise the conversion of a crypto-currency to a hard currency. Governments have many options that can make the use of a maverick currency risky to possess.

The Future of Crypto-Currencies

Does this mean that Bitcoin is a dead duck? Or that crypto-currencies in general should be shunned? Not at all. What it does mean is that the litmus test for crypto-currencies—Bitcoin—is fraught with the potential for failure. It may be useful on a short-term basis for monetary transfer but should not be used long-term as a store of wealth.

In my belief, advances in technology will, in the new millennium, be coming at us so fast that, ultimately, they will outstrip the ability of governments to control them. (And this, of course, is a very good thing.) At some point, crypto-currency might not only take root as a permanent form of currency, but may overtake fiat currencies and even possibly eliminate the dominance by banks and governments over the movement of currency. (We live in hope.)

But that day has not yet arrived. Bitcoin is the Kitty Hawk flight of the future of currencies. Today, no one remembers the name of “The Wright Flyer” itself. As essential as it was to aviation, it was an experimental aircraft. It flew only four times before it was damaged beyond repair, but it inspired the world to create the aviation industry.

Hopefully, Bitcoin will do the same, creating thousands of imitators, each with their own improvements. In an ideal world, this will result in crypto-currency becoming a form of currency that solves most of the problems of currencies in general.

As stated in the aforementioned International Man article, man has, over the millennia, “relied on many forms of currency, including cattle, seashells, tobacco, and even (in an extreme departure from all that is logical) tulips, ca. 1637.” Crypto-currencies hold the promise of being more logical and more successful than any of these as a means to transfer funds. What they will not do, however, will be to become a successful means to store wealth. Their intangibility will prevent that.

Over the last 5,000 years, man has experimented with countless forms of currency. Each, in turn, disappears eventually, as its shortcomings become evident. Paper money appears to be the next in line for extinction, and with good reason. The one form of currency that has always remained both valid and in continuous use has been precious metals. As we progress toward the demise of paper currency, more than ever, gold, the “barbarous relic,” retains its shine as the eternal safe haven for wealth preservation.

Editor’s Note: The ultimate way to diversify your savings internationally is to transfer your stored purchasing power out of the immediate reach of your home government and into something tangible. Something that cannot be easily confiscated, nationalized, frozen, or devalued at the drop of a hat or with a couple of taps on the keyboard—while retaining as much privacy as legally possible. Physical gold stored abroad in a non-bank vault fits the bill.

Gold has served as money for centuries and across many different civilizations. It has always been an inherently international asset. There is nothing at all particularly American, Chinese, Russian, or European about gold. Buying gold is perhaps the easiest step you can take toward internationalizing your savings. The next step is to store that gold in a safe foreign jurisdiction.

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