Douglas "Doug" Casey is an American-born free market economist, best-selling financial author, and international investor and entrepreneur. He is the founder and chairman of Casey Research, a provider of subscription financial analysis about specific market verticals that he has focused his investing career around, including natural resources/metals/mining, energy, commodities, and technology. Since 1979, he has written, and later co-written, the monthly metals and mining focused investment newsletter, The International Speculator. He also contributes to other newsletters, including The Casey Report, a geopolitically oriented publication.
His 1979 book Crisis Investing (1979) became the largest selling financial book in history, listing at #1 on the New York Times Best Seller list for a total of 12 non-consecutive weeks.
Casey has lived in twelve countries, and visited 175.
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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 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?
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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