Bitcoin Under Attack By Gold Bugs

As I predicted, there has been a new wave of bitcoin critics who are claiming bitcoin is like the tulip bubble in Holland in the 1600s. These critics who never liked or understood bitcoin have new ammo because the price fell quickly from about $1,100 to the mid-$800s in a couple days. Given that I predicted their arguments, it shows I understand what their points are and am easily able to refute them. While bitcoin has incredibly complex concepts that need to be worked on as the currency develops, it’s also important to refute bad arguments to make sure everyone understands the proper information.

When bitcoin was making new highs, it was nearing the price of gold which sparked comparisons between the two. The nominal price relationship between the two is a meaningless connection other than the psychological conclusions people make. Some people may think bitcoin is better than gold just because its price is higher. That would be nonsensical, but possible given the amount of coverage this story received. This was added on to the news that bitcoin was near its all-time high.

I expect bitcoin to face criticism in the mainstream press because the establishment will always try to maintain the status quo. Bitcoin is a disruptor which unsettles people who are in power. What you wouldn’t expect is the criticism bitcoin receives from the alternative media. This alternative media is mainly online and doesn’t support the status quo. The reason why most oppose bitcoin is because they work in the gold industry getting commission to sell the yellow metal. There’s nothing wrong with expressing an opinion, but when you recognize people’s motivations, you can understand where the criticism is coming from. Bitcoin is a threat to their gold business so it is disparaged as being a bubble even though it has been around for 8 years and keeps recovering from its price corrections.

Personally, I am not biased. I do not own gold or bitcoin and do not make money from selling either asset. I plan on owning bitcoin in the future as a means to store value. Gold will probably always be valuable, but I think bitcoin has many advantages over it. The first advantage is gold needs to be stored. The storage of your gold costs money and carries the risk that it can be stolen. While it’s unlikely to be stolen if you secure it properly, there’s also risk of government confiscation of gold. In 1933 FDR created the Emergency Banking Act which forced Americans to give their gold to the banks. Americans were allowed to keep gold jewelry, gold for industrial usage, and up to $100 in gold coins.

Many gold proponents don’t understand the security of bitcoin. Bitcoin is itself can only be hindered by a 51% attack. A 51% attack is if an entity controls 51% of the hashrate, it can prevent and reverse transactions. I consider it unlikely because if a mining pool came close to gaining 51% control, another one would sprout up to stop it. While being in a pool has advantages such as economies of scale and predictable payouts, each individual in the pool would want to act in their own self-interest by leaving a pool which is growing too fast. It wouldn’t make sense for individuals in a pool to want the pool to gain 51% of the hashrate because it would cause people to lose confidence in the system. Miners own bitcoin and wouldn’t want their earnings to decline in value. Therefore, I view a 51% attack unlikely because only mining pools could come close to that hashrate and the individuals wouldn’t let it happen.

Other than that, bitcoin is unhackable and cannot be shut down. There are ways to secure your bitcoin without being connected to the internet. TREZOR is a bitcoin hardware wallet which costs only $99 to secure your private keys. It’s for the bitcoin you want to save for later use. You can write down the bitcoin keys in case you lose it or it’s stolen. If your device is stolen, it would be impossible for the thieves to hack in because it relies on a passwordless login. It instead relies on a mnemonic code made of 12, 18, or 24 words so keyloggers cannot break through. If it is lost, you can buy a new one and type in the words. The entire project is open source, so it is continually being improved at a rapid pace.

The government can never force confiscation of something which is anonymous and wouldn’t do any good if it was taken. The storage of your bitcoin is almost free and it has no counterparty risk. You can easily spend the bitcoin by keeping some in a digital wallet like Coinbase. This is a hot wallet meaning it is connected to the internet. This is why you would want to keep only a small amount in it to avoid the potential of losing a lot of money. Bitcoin is much easier to spend then gold. There are some websites like gold money which attempt to digitize gold, but you’re relying the website to work to spend the money. I’ve read reviews which say the website often crashes. Because Mt. Gox’s failure gave bitcoin a bad reputation, firms such as Circle and Coinbase are always stepping up their security and ease of use.

Another issue to keep in mind is scarcity. While there is only a certain amount of gold in the world, when the price rises, more gold is produced. When the price of bitcoin rises, it does nothing to the amount produced. The amount produced slows over time. There is a possibility the amount of bitcoin created is more than 21 million. If bitcoin users decided to create more bitcoin there would be a fork in the chain. According to bitcoin.org a hard fork is “a permanent divergence in the block chain, commonly occurs when non-upgraded nodes can’t validate blocks created by upgraded nodes that follow newer consensus rules.” The question is why bitcoin users would want more to be created since it would decrease its value.

Another point about gold is it has uses such as for jewelry and industrial usage. This means the supply and demand of gold is affected by which jewelry is in style and what industries need the metal. As you can see, gold inherently has uncertain supply issues and can have its demand impacted by other factors. The number of bitcoin created will likely be 21 million and demand will only be affected by those who use it for money.

One challenge gold promoters say is that bitcoin can be overtaken by another digital currency. I think that’s unlikely because of the network effect bitcoin has. However, it’s ironic someone who promotes gold would say this because bitcoin has already out innovated gold itself. Bitcoin is easily transferable, easily storable, and can be broken down into very small increments. Bitcoin is also more secure than gold.

The final criticism, which is also the most common one, is that bitcoin’s price is too volatile. In this conversation, we are discussing bitcoin and gold in terms of store of value. While bitcoin has had sharp moves, gold has been volatile over longer stretches which I would argue matters more for those trying to hold their purchasing power constant. Gold has spent decades in decline. In 1980, it hit about $700 an ounce. It took until 2007 to recover that value. Bitcoin’s periods of under performance have been shorter and it has always rallied higher because it keeps growing its user base. Short term price fluctuations will lessen once the total valuation gets higher. With a $14.6 billion market cap, bitcoin is like a mid-cap stock. I’d only consider it an annoyance to have a small percentage of money in a digital wallet varying in price when you spend it. In the long term, daily price swings will smooth out, so they don’t matter.

2 Comments

  • Phil

    January 10, 2017

    I don't know where to go to get a daily Bid
    & Ask. Appears to me, that the pricing may be easier to manipulate than gold.

  • Dr. Bruce

    January 11, 2017

    Perhaps this already exists on the site somewhere, but I would appreciate being directed to a source (here or elsewhere) that explains cryptocurrencies (Cryptocurrency 101 or LOWER) so I could begin to get an understanding of this area of finance.

    It sounds like it has many benefits but I have a hard time believing govts would allow cryptocurrencies to "get out of hand" as it is a tremendous challenge to the monopoly they have on controlling our assets, controlling movement of assets, monitoring our assets and detectability. It's exactly the OPPOSITE of what govts want us to have access to.

    Thanks.

    Dr. Bruce

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