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Bitcoin or Gold: Safeguards and Alternatives to the Global Monetary System

Commodities / Gold and Silver 2014 Apr 29, 2014 - 09:33 AM GMT

By: Keith_Hilden

Commodities

In our latest Squawk Walk series, we set out to learn- given a chance to either take Bitcoin or gold, what people of different backgrounds would pick, and why. We asked Chinese tourists, locals, and Westerners in Taipei, and we found, surprisingly, that the rate of acceptance regarding Bitcoin or gold was roughly equal, and far different from a 80/20 spread that we were anticipating. The reason? Ultimately it can be boiled down to a preference in risk profile. People who were willing to take on more risk were willing to take the Bitcoin, while people who valued stability and risk mitigation over quick gains were willing to take the gold. What further surprised us is that in a well-to-do neighborhood surrounding the Taipei 101 skyscraper is that risk profiles, again, were split close to 50-50. Furthermore, we were surprised in certain instances when a couple would be interviewed, and that the Taipei woman would have a higher risk profile than the man, who chose gold. The man was more concerned with stability and a long term outlook for their savings.


In this latest Squawk Walk, we found out that gold certainly has its place in Asia, but that the Bitcoin concept is seen as a valid alternative to holding one's savings, as well as a  convenient vehicle for shopping and everyday transactions. This has relevant applications from the street, local transaction level, to the Fed itself, one of the key influential drivers of global money flow today. Therefore, it is crucial to examine gold with Bitcoin, and how it ties into and affects the US dollar and global currencies today to understand how preferences of gold vs. Bitcoin factor into a big macroeconomic picture.

Gold and Bitcoin: The 21st Century Story of the Tortoise and the Hare?

The first thing that can be noticed is the headstart gold has on Bitcoin: roughly 5,000 years. Bitcoin in comparison has only been around since 2009, but arguably has gone through the development process of a maturing instrument of value much quicker than gold has. Furthermore, Bitcoin has a stream of upgrades in functionality, convenience, and security to look forward to, with a level of venture capital investment in Bitcoin parallel to what the internet experienced in the mid 1990s. Aside from the new divisibility of gold the Combibar offers and a couple of other minor advancements, gold has largely had most of its advancements already happen. Crucially, these advancements have not led towards an increasing mass acceptance of physical gold. Even the most successful gold experiment as currency in the modern world in Kota Bharu, Malaysia is only a flash in the pan due to its limited geographical nature, and that no other city in the world has chosen the same path as Kota Bharu.

Yet, this move cannot be completely discounted. While certainly slower in development than that of Bitcoin, gold as currency has been used for company acquisitions in Kota Bharu, and use of the gold dinar as currency has since spread to Malaysia's capital, Kuala Lumpur, with over 20 shops and counting now accept gold dinar in Kuala Lumpur's biggest market. Acceptance of gold currency in Kota Bharu and Kuala Lumpur seem to currently be limited to religious reasons, as using gold currency is sunnah, money validated and approved as part of a proper Muslim life. While other places such as Utah technically accept American gold coinage as payment, there appears to be little activity actually doing it, relegating the concept to a quirky experience with no common usage.

Therefore, Kota Bharu is the only place in the world right now that is making a push towards common usage, with the capital Kuala Lumpur following in cautious steps alongside the gold dinar minting from Bank Negara Malaysia, the country's central bank. Like Bitcoin, the gold dinar in Malaysia is facing regulatory hurdles from government and issues are rising regarding insurance, compliance, and other issues. Additionally, the religious issue is a crucial factor of acceptance for both gold and Bitcoin in the Muslim world. A Bitcoin fatwa going in way or the other could have a massive impact upon Bitcoin's market saturation potential. Yet, the government, private sector, and religious challenges placed upon both gold and Bitcoin make it an effective yardstick to measure the two monetary instruments from. Their speeds of adoption are clearly different, yet they are both dealing with the same hurdles from multiple sources and power brokers towards mass acceptance.

Gold and Bitcoin ≠  Gold or Bitcoin

The concept of gold vs. paper vs. Bitcoin is an argument worth shelving. Rather than the solution chosen from solely one of these three currencies, the most likely answer is a combination of the best qualities of each instrument of value for the benefit and increased stability of these instruments.

For instance, putting gold film strips in currency as a form of backing is certainly a method to assure that every bill maintains a minimum value as a tool of exchange, and it is an idea bringing together gold and paper currency in a mutually beneficial way, rather than dividing the issue into a gold vs. paper issue.

Similarly, gold and paper can have a co-existing relationship in the market. The gold dinar in circulation in Malaysia will present itself as a stopgap mechanism against careless overprinting of the Malaysia paper ringgit, as Malaysians will pile into the gold dinar if it is perceived that the Malaysia ringgit is not worth the paper it is printed on. This subtle move by only one Malaysian province, Kelantan, has virtually assured that the Malaysian ringgit will continue to be a stable currency in the world, thereby trouncing the concept of global fiat currency being a race to the bottom in an over-aggressive rate of money creation. And what of the concept of the “race to the bottom” if other countries follow in suit, creating effectively a market consequence to over-printing of their sovereign paper currencies and electronic 0s and 1s brethren on the central bank ledger? Then consequences are created for the central bank that create them, and provide pause and caution towards printing too much money into the system.

Gold and Bitcoin can have, and already do have, a co-existing relationship in the market. Casascius
coins, the merging of gold and Bitcoin, is the first but by no means the last instance of Gold and Bitcoin coming together. If paper is modern society's solution to circulation, and gold is ancient society's solution to value maintenance, then Bitcoin is surely the technological gear in the arrangement to create a valuable precision instrument, not unlike the reliability and timelessness of a Swiss watch?

The fact that Malaysia has erected such a safeguard in the form of the Malaysian gold dinar has provided a significant safeguard towards a lower rate of wealth erosion via money printing, stealth inflation, the secret tax that governments use to ensure their citizens will not be able to rest simply because they have built up enough money in their accounts. Instead, inflation will eat up those savings and force one to either work again, or to wager that money in investments and hope and pray it grows faster than the inflation rate of one's country. Malaysia's move has brought 23 million Malaysians out of that situation- if push really comes to shove and the Bank Negara Malaysia feels the need to print the ringgit aggressively and render many Malaysian's savings null and void. No! The gold dinar provides an alternative against that fate, and an alternative that leads towards stable savings that maintain themselves over the years, and provide a more stable financial future for all Malaysians.

Bitcoin also holds these properties, but yet for the world, and in a way that not only 23 million, but 7 billion people can have a stopgap against governments aggressively rendering their citizen's savings to a whittled down fraction of what it was 15-25 years ago. Bitcoin and gold both serve the function of limiting the amount of money printing a country can do. And just as gold has succeeded in providing a safeguard against wanton money printing by Bank Negara Malaysia, has Bitcoin provided a safeguard against wanton global QE?

Possibly.

A Safeguard Against Global Wanton QE

Janet Yellen's continued stance towards tapering is generally clear, with a general market expectation the tapering is to continue. It is a very undermentioned topic that both the emergence of Bitcoin onto the scene, along with pro-gold legislation globally in Utah, Malaysia, and other jurisdictions, have provided precisely that stopgap to create consequences for the over-printing of fiat currency, and the market has responded to this potential consequence, all the way up the monetary chain to Janet Yellen herself. If Bitcoin and/or pro-gold legislation did not exist, would there be any incentive to stop the money creation process and the continued enrichment of Wall Street, the prime domestic beneficiary of the QE proceedings? Simply because of the consequences that now exist, money creation now comes at a cost, a development that is unprecedented in over 80 years.

However, this unprecedented development does not come without its own set of consequences. The 1930's showed us when the US government is faced with a veritable alternative, the government has chosen to confiscate that alternative, and use it to bolster the legitimacy of the challenged instrument. In the past, that was the US dollar, and gold was the confiscated alternative. In the future, will the alternative to the US dollar, be it gold or Bitcoin, also see itself confiscated?

Unlike the 1930's, both the status quo, the US dollar, and the alternatives, gold and Bitcoin, are as a percentage much more widely used outside the US than before. Hence, the strategy of simply confiscating gold or Bitcoin has much more limitations for successful implementation than it did in the past in the 1930's.

Hence, rather than a threat against the US dollar, Bitcoin and gold together serve as a safeguard and an incentive towards the proper stewardship of the US dollar, and Janet Yellen in her continued QE tapering is responding to these market forces of Bitcoin and gold upon the US dollar. From our Squawk Walk video findings, our takeaway is that these forces are set to influence future Fed governors' stewardship of the US dollar for some time to come.

Stay tuned for more future updates regarding Bitcoin and other frontier market developments at www.squawkonomics.com

By Keith Hilden

Keith Hilden holds a degree in Economic Crime Investigation and has CFE training. He is an Asia Pacific markets and Cyber Security Researcher for geopolitical consultancy Wikistrat, and researches frontier markets in developing countries and digital currencies on Squawkonomics.

Squawkonomics offers frontier market research in the areas of due diligence, market entry strategy, compliance, and custom tailored solutions. Contact us at info@squawkonomics.com for more information.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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