 http://www.dioxidized.com/wp-content/uploads/2014/09/bitcoin-75px_featured.png" alt="bitcoin-75px_featured" width="75" height="75" />The other day, a firm by the name of https://panteracapital.com/">Pantera Capital released their rather bullish assessment of bitcoin's potential titled https://cdn.panteracapital.com/wp-content/uploads/Bitcoin-vs-Gold.pdf">"Gold Versus Bitcoin As A Store Of Value", which estimated that the future value of a single bitcoin could exceed $4 million ($4,291,060 if you want to be precise), which was released to an http://www.reddit.com/r/Bitcoin/comments/2imk7q/pantera_capital_what_could_bitcoin_be_worth/">extremely receptive audience on Reddit.
I feel it's important to note that while it took me some time to come around to bitcoin (a friend first mentioned it to me in the 2010 or 2011 time-frame, to which I essentially just rolled my eyes and said "that's nice"), I have since seen some of the light and do think/will agree that bitcoin does indeed have a future. With that said, no matter how many mental leaps I make, I can't come close to agreeing with Pantera's assessment of the value of the technology.
Strangely, on the first page of the report, by quoting an article titled http://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/">"Why the Gold Standard Is the World's Worst Economic Idea", by https://twitter.com/ObsoleteDogma">Matthew O'Brien from the http://www.theatlantic.com">Atlantic, Pantera makes a rather strong argument FOR fiat currencies. That quote can be summarized as follows:
Exactly zero economists endorsed [returning to the gold standard] in a recent poll ... It prevents the central bank from fighting recessions by outsourcing monetary policy decisions to how much gold we have ... When we peg the dollar to gold we have to raise interest rates when gold is scarce, regardless of the state of the economy. This policy inflexibility was the major cause of the Great Depression, as governments were forced to tighten policy at the worst possible moment. It's no coincidence that the sooner a country abandoned the gold standard, the sooner it began recovering.”
Pantera continues, explaining in their own words that "inflation (and deflation) was much worse under the gold standard than it has been since", and that a return to such would not lead to any form of price stability.
So far, in their argument for bitcoin, Pantera has explained that the root cause of http://www.history.com/topics/great-depression">Great Depression was due to the http://www.frbsf.org/economic-research/publications/economic-letter/1999/march/monetary-policy-and-the-great-crash-of-1929-a-bursting-bubble-or-collapsing-fundamentals/">monetary inflexibility (of course, http://www.freedomworks.org/content/debunking-myths-great-depression">others disagree with that assessment) that was imposed on countries who operated under the gold standard, that the sooner a nation abandoned the gold standard in favor of fiat currency, the sooner they recovered from the Depression, and that both inflation and depression have been far more pronounced when monetary policy is dictated by the supply of a scarce resource. While factual, I'd expect a pro-bitcoin article to gloss over such details, not emphasize them.
But all that is just an aside, let me continue...
Citing the http://www.gold.org">World Gold Council, Pantera shows that from 2010 through 2013, world-wide demand for gold amounted to 17,500 metric tons, of which 8,400 tons were used for jewelry, 5,900 tons were purchased for investment purposes, 1,600 tons in industry, 170 tons for dentistry and 1,500 tons were purchased by central banks (if you're using a calculator, I'll admit that the numbers won't total correctly, as I did some rounding).
Jewelry is not an investment in gold...
Pantera assumes gold jewelry to be an investment and argues that by moving their wealth from gold jewelry to bitcoin, and Indian family's (without access to banks, but presumably with access to the internet) wealth would be much safer.
Lets first point out that jewelry is one of the worst possible ways to "invest" in gold. Even http://webcache.googleusercontent.com/search?q=cache:qOPhm1H4-f8J:https://www.thegoldbug.com/index.php?option=com_content&view=article&id=105&Itemid=115">thegoldbug.com, (the link goes to a cached version of the site on Google's servers, as the "real" site has been defaced by hackers), lists investing in gold in the form of jewelry as one of the top 10 mistakes, saying:
"Remember that Gold Jewelry is not an Investment — As with nuggets, jewelry is an unreliable source of gold. Not only is the purity of the metal once again a concern, but there is also the added artisan's premium present in all jewelry. The cost applied by the craftsman who made the piece will always inflate the price well past the value of the metal alone. Therefore, while jewelry may have value in its own right, it has no place in the hands of an investor who is looking to own gold as an asset. (Emphasis' are my own)
Essentially, gold jewelry is a means of displaying that one has wealth, but to use the jewelry a method to store that wealth itself is a terrible idea. Whether the national currency of India is Rupees or bitcoin, Indians who want to display that they hold significant wealth will contiune to buy gold jewelry. Gold is "blng", and bitcoin, existing only in the form of electrons, has no "bling" factor. Arguing otherwise is essentially trying to argue that as a result of an ec51%onomy moving to bitcoin, that demand for http://www.mbusa.com/mercedes/index">Mercedes' or http://www.rolex.com">Rolex watches will dry up. Right there, 48% of the gold demand which Pantera presumes that bitcoin could replace evaporates.
Bitcoins' "advantages" over gold. Are they really "advantages"?
Further along, when Pantera tries to explain the traits that bitcoin has but gold lacks, explaining that for gold miners to deliever the same service as bitcoin miners, they would have to provide armed guards, concealed tranaction values and a constantly updated ledger of transactions. None of these arguments make sense:
- armed guards (why? miners don't guarantee the security of the wallet file on your computer),
- concealed transaction values (inexplicable; if I hand a gold coin to you, is that transaction not concealed from the rest of the world?), and
- a constantly updated ledger (for what? an up to date ledger is essential for a digital currency, yes, but for a physical currency, a ledger is of no added value - why do i need a transaction recorded in a ledger when I have my gold in hand?)
Furthermore, in explaining bitcoins' advantages over gold, they state that bitcoin is superior to gold due to the difficulty of theft. Dig through enought bitcoin-related discussions on http://www.reddit.com/r/Bitcoin/">Reddit's bitcoin-related threads and https://bitcointalk.org">bitcointalk's forums and you'll see that whether its because of a keylogger on one's computer, an exchange not using http://en.wikipedia.org/wiki/Multi-factor_authentication">2-Factor Authentication, a user choosing an insecure method of generating a wallet (say, http://www.reddit.com/r/Bitcoin/comments/1ptuf3/brain_wallet_disaster/">brainwallet, for example), or an https://www.mtgox.com/">exchange declaring that all of their customers holdings are gone due to a "bug" in the bitcoin protocol, bitcoins can be stolen just as any other asset can be.
Would nations really rely on the blockchain to store their wealth?
They also describe the network of bitcoin miners as being a robust form of security. While presently true that achieving enough computing power to conduct a 51% attack is beyond most people means, if a nation adopted bitcoin as their currency, I could easily envision a scenario where a rival, or a group of rivals, could be motivated to discretely and covertly develop and deploy their own network of ASIC miners in order to conduct http://econwarfare.org">economic warfare against that state. And unlike the "limited" means that most of us have that places a 51% attack out of reach, once nation-states are in the game, there is no telling how many of their resources they would devote to such an effort. Just because such an event has not yet happened http://www.johnperkins.org">does not mean that it won't, ESPECIALLY if bitcoin became the official currency of a country.
Supply Limits
Another "advantage" they cite is bitcoin's strictly limited supply, compared to the continued mining of gold. I struggle to see the relevance - 165,000 metric tons of gold http://www.numbersleuth.org/worlds-gold/">has already been mined, and the http://www.usgs.gov">US Geological Survey that Pantera cites says that there are an esimated 52,000 metric tons of gold still remaining underground. Meanwhile, bitcoin mining continues along, creating 3600 new coins per day, and though reward halvings will continue to occur roughly every four years, the full supply of bitcoin won't have been mined until the year 2140.
Aside from that, recall earlier in their report when Pantera pointed out how the flexibility of fiat currencies was "superior" to the inflexibility imposed by using an asset of limited supply as a means of conducting trade. Now, it is a supposed advantage? They need to take one side of the argument or the other, not both.
So where does that leave us?
For starters, bitcoin is incapable of replacing gold in dentistry and industrial applications, two sources that contibute $66,114 to the $4.2 million final estimated value that bitcoin could achieve. Neither would bitcoin replace jewelry, as jewelry is means of displaying value, not storing it. There goes another $286,496 of their estimate. While it could and likely will be used as a means of investment, indeed, it already is, it's foolish to think that the bitcoin would replace 100% of the gold presently held either in investment portfolios or in safes. Yes, it is another instrument that people can use to invest their wealth in, but it won't erase nearly 10,000 years of human history and cause demand for holding gold as an investment to zero. Another $88,153 off of the value
And the biggest item on their list, world M2 (money supply)
First off, to bear down on the same point yet again, circle back to Pantera's original quote from the Atlantic regarding the effects of a nation sticking with the gold standard versus fiat currencies, as a bitcoin denominated economy would operate in a manner far closer to one operating under the gold standard than one with fiat currency.
Secondly, from what I just pointed out above, I have difficulty imaging any nation wanting to switch to bitcoin as their nominal currency, knowing that another nation could concievably overtake and subvert the entire network. The two biggest threats in that scenario would be the United States and China, both of whom have a deep supply of people with the necessary skillsets to design the needed hardware and the domestic production capacity to create the needed hardware without drawing any outside attention until it is too late.
And where does that leave bitcoin?
Despite my arguments above, I believe that bitcoin is still an asset that could possess significant value; as a peer-to-peer currency, it allows individuals to send money to one another quicker than sending checks through the mail and more inexpensively that wire transfers or worse, money transfer services.
It can certainly be adopted by companies as a means of receiving payments to cut down on credit card processing fees. The challenge there is convincing the customer to opt to pay using bitcoin and abandon the incentives offered by credit card companies to "charge" their purchases. Bitcoin doesn't have reward points, for instance, and more critically, consumers lose the ability to charge back a purchase if necessary (for instance, if a company refuses to adhere to its refund policy), or, to take an example from the bitcoin community - if http://www.butterflylabs.com">Butterfl... I mean, a company, takes orders for a product and doesn't ship those orders until a year had passed.
The lack of ability to reverse a bitcoin transaction is frequently cited as reason why biusinesses should adopt bitcoin, but there are also plenty of legitimate reasons why consumers prefer to have that ability besides try to defraud merchants.
One place where the lack of chargebacks shouldn't be a concern to consumers are for products/services that can't really be returned anyways. Dining. Haircuts. Digital purchases such as software or musc (an area where https://www.paypal.com">Paypal's subsidiary https://www.braintreepayments.com/blog/goodbye-passwords-one-touch-hello-bitcoin">Braintree has already entered the market).
But for goods, especially from vendors whose ability or willingness to deliver those goods in a http://www.reddit.com/r/BitcoinMining/comments/1w2hdk/horrors_of_butterfly_labs/">timely manner might be in question, most consumers will likely want a payment method that allows them to dispute the charge and recoup their money if the vendor doesn't honor their obligations.
That brings us to the next place where bitcoin can really shine - the remittance marketplace.
I fully expect bitcoin to either overtake or be adopted by http://www.dioxidized.com/2014/09/18/remittance-a-place-where-bitcoin-can-shine-today/">the remittance market. For it to trully dominate, though, my personal thought is that bitcoins involvement in remittanes will need to be made transparent to the end-users; a remitter would simply walk into a store and hand their money to the cashier and provide instuctions as to where to send the funds. The transfer company would then buy bitcoins and send those coins to the branch were the receiver will be picking up their funds, who would then immediately sell those coins and deliver the proceeds in the recipients currency of choice.
| http://www.dioxidized.com/wp-content/uploads/2014/10/fannie-mae_stock.png" alt="fannie-mae_stock" width="500" height="434" /> The dangers of putting all your eggs in one basket, whether that basket is bitcoins, litecoins, or the shares of any single company is irrelevant. |
Lastly, bitcoin can absolutely serve as a means to store wealth, but in my view, only it's only appropriate to use it as "store of value" as part of a diviersified investment portfolio. Asset prices flucuate - storing all of ones wealth in bitcoin should be just as frowned upon as storing all of ones wealth in shares of a single company, say, Fannie Mae, for example.
To conclude, while I think that bitcoin certainly has value in the future, I think that the maximum value of a single bitcoin well below the $4,291,060 estimate published by Pantera, and disagree with many of the reasons that Pantera cites that bitcoin could or should replace gold rather than being viewed as an asset to own in addition to gold (and real estate, and equities, and bonds, etc).
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lol
