Many Americans are concerned about their privacy today, and with good reason. Current technological advances and the current political environment make privacy an increasingly difficult good to secure. The NSA and governmental authorities maintain that such measures are ultimately for the safety and security of the american people. We will leave that debate in the capable hands of others. We are interested in how this public conversation of privacy, safety and the stability pertains to money. To my knowledge, there isn’t really an active spirited debate out there about this. That’s sad, because it’s really important. Is our money private? What does the current technological revolution hold in store for our money? Is bitcoin the future of money? Is it stable, safe and secure? Have central governments given us a safe, secure and stable money in the dollar system lead by the Federal Reserve? We will break the silence in this short analysis comparing the dollar, gold and bitcoin in terms of monetary security, privacy and stability.
A Secure Money
First, let’s define what we mean by security. Dictionary.com defines security as “freedom from danger and risk.” So, a more secure money would be a money that minimizes any risks and dangers which threaten its use as money. Under these terms, the dollar is not such a secure money and is becoming increasingly less secure. The dollar is a non yielding slice of a closed loop debt based monetary system. Since it’s a closed loop debt system with no means of extinguishing the debt, the debt can’t help but grow. As the debt burden looms larger and larger, the integrity of the system weakens until it eventually implodes.
How about bitcoin? Bitcoin is a cryptocurrency. It runs on an underlying and interconnected system of hardware and software like the internet. Since the value of bitcoin is derived from the healthy functioning of those underlying systems, if any one of them were to fail or stop functioning, BTC itself would then be in danger. It’s worth noting that there have already been several “threats” to the BTC ecosystem. Reason.com documents that bitcoin has been declared dead over 90 times. Yet none of those threats have dethroned the king of the cryptocurrencies. On the other hand, it is still young and there are many serious obstacles that loom in its future. Our opinion is that the jury is still out on bitcoin and cryptocurrencies in general which means a risky bet for anyone who is wants to keep their capital secure.
And what say ye of gold? Well, gold is independent of any system or counterparty. As a physical commodity money, it exists apart from any hardware, software or internet. Though, if desired, it can be represented and function as money there too. Gold, unlike the dollar and bitcoin, comes with no strings, systems or central bankers attached. It grants full sovereignty and control to its owner. Counterparties, and third party risk are only introduced if the gold owner chooses to do so.
Don’t miss this important point. Dollars and bitcoin are dependent upon additional systems and counterparties in order to function as money. Apart from those systems in the background, neither can function as money. The dollar is nothing without the federal reserve and the federal government. Bitcoin is nothing without blockchain technology, its public ledger and the internet. Gold is different. Gold is just gold. It is independent of any third party for its existence. Evaluating the trustworthiness of a counterparty is something that each individual must do with his or her money. However gold is unique in that the owner of gold need not evaluate any counterparty by owning gold. (One may argue that the owner of gold has to get it from somewhere. But this is true of dollars and bitcoin as well and is a different point altogether. We trust our banks to give us real dollars. We trust popular exchanges online to give us real bitcoin. We trust each other in the exchanging of money for goods and services and vice versa. We may trust a reputable dealer to give us real gold. That is besides the point I am trying to make. The point I am trying to make is that once you own the gold, you own it completely, with no contingency impeding your ownership or use of it). The same cannot be said of dollars or bitcoin. Indeed, lest you happen to wander too close to the fires of Mt. Doom, (not sure how hot Mt. Doom fires are, but gold has a melting point of 1948 F) your gold is quite secure.
A Private Money
Which money affords its owners the most privacy? Beginning with gold, consider that there are no reporting requirements when you buy physical gold. Neither is there an official reporting registrar where you must declare how much gold you own and where it is. One is able to own and keep large quantities of gold completely unbeknownst to anyone save the parties involved. As a final point, enormous quantities of gold can be exchanged discreetly and “off the books” or “out of the system.”
With electronic dollars, it is nigh impossible to privately exchange value since those dollars are part of a larger system of banks which must keep records. Compliance and regulation in this system is fierce and growing with the onus on banks to report any suspicious activity. On the other hand, physical dollars, or cash, gives the owner a privacy similar to that of gold. However, it’s not quite the same. Ironically reporting requirements for cash transactions are in some cases more stringent than with electronic transfers due to increasing concerns over money laundering. This discourages one of the principal reasons to use cash in the first place.
What about Bitcoin? When bitcoin was first gaining traction, I remember that privacy and anonymity were touted was one of its main selling points. I don’t hear much about it today. Perhaps the implications of permanently recording all transactions on a public ledger has something to do with it. (Say that one more time out loud for emphasis and then ponder why bitcoin may not be so anonymous as everyone thought). I will not go into all the details here but this, this and this are all good starting points. All that to say bitcoin offers what can be best described as pseudo-anonymity. On the one hand bitcoin is completely traceable, trackable, and transparent as every single transaction is recorded permanently and publicly on the all-visible all accessible blockchain ledger. This is closer to the opposite of anonymity. However, the other side of the bitcoin is that its heavily encrypted and layered. Theoretically you can own a wallet, or several, which doesn’t directly link to your identity. However, for the vast majority of its users, privacy has proven not a major issue. This is proven true as the most popular exchanges, such as coinbase, are requiring more and more users to verify their identity in exchange for the wallet services they provide. Users have been more than happy to comply. Still there are others in the BTC universe who are offering services and features which increase the privacy and anonymity a bitcoin holder can achieve.
A Stable Money
Our final point of comparison is stability. By stability we mean firmness or resistance to sudden change or sudden deterioration. Since we are talking about competing monies, it’s appropriate to include the concept of liquidity in addition to stability. Stability and liquidity are closely related though not the same. Stability can be differentiated from liquidity as firmness or resistance to drastic change over longer time periods. Liquidity refers to how easily and efficiently one can convert into another asset with minimal loss of capital. In the current state of monetary affairs, dollars are without question the most liquid money. Paradoxically however, the dollar is not the most stable money without question. Gold has proven itself as a stable money over long periods of time (thousands of years) whereas bitcoin has proven just the opposite – very volatile over a relatively very short time frame. As for liquidity, there are several ways to measure it. Spreads are one way. Market depth is another. Let’s look at both.
The average spread for gold is around $0.30-$1.00 per troy oz., about .0004-.0008%.Larger Bitcoin exchanges have an average spread of anywhere from $0.03 to $0.13, around .000056 to .000242%. Using only spreads as a measurement it would seem that bitcoin is as liquid if not a slightly more liquid than gold. However once you bring market depth into view, well gold start to look a bit denser than bitcoin (very much intended).
Last month, Reuters published an article giving some stats about the bitcoin market,
“Bitcoin currently has a market cap of $6.9 billion….while average daily volume for bitcoin is $87.2 million.”
The same figures for the gold market come in at roughly $7.5 trillion market cap and an average daily turnover of around $240billion (see this 2010 report by the LBMA). In other words, the volume in the gold market will turn the total bitcoin market cap over about about 34 times a day. The takeaway here is that it requires a lot more to move the gold market than the bitcoin market making gold more liquid than bitcoin.
In conclusion, we are quite certain the dollar and the dollar system are not going to survive. We are also quite certain that gold is going to stick around. As for bitcoin and other cryptocurrencies, we think the jury is still out. Personally, I think the future of early cryptocurrencies is uncertain at best and dubious at worst. However, I am 100% certain that blockchain technology, the structure behind those currencies, is here to stay. There are some obvious analogies to the early advent of the internet. Not all the early internet players made it to the next round, but the internet itself is alive and well and as disruptive as ever. I don’t think that all the crypto players we see today will still be in our future. But blockchain tech and its derivatives are going to stick around. In fact, they are already disrupting traditional financial markets. And there is a lot more to come. To be sure, this is an exciting age to be living in. I look forward with great anticipation to the marriage of blockchain technology and gold and what exciting new developments entrepreneurs will create. As for answering the question which money offers the most stability, privacy and security today, the choice is clear; gold.
A version of this article was published at SchiffGold.com