In 1966 Alan Greenspan wrote an article ‘Gold and Economic Freedom’, in which he claimed in the absence of a gold standard there would be no way to protect one’s savings from inflation. Greenspan noted that if there were a safe store of value government would make its holding illegal, the banning of private gold holdings in 1933 being a famed example. But was there a different reason behind the banning of gold? After all, holding a balanced indexed portfolio over the long term has proved a good way to protect your savings, why no war on stocks and bonds?
Gold was targeted in 1933 because it was the monetary base people could hoard at the time. The monetary base people can hoard today is cash. It is the hoarding of cash, not gold, that threatens to bring about deflation. This is why attacks on cash have become more frequent, and why you are seeing more and more articles covering the war on cash. Without cash in the way negative interest rates can be imposed to encourage spending.
Like gold, hoarding Bitcoin does not lead to deflation, so why has it has received heat?
Bitcoin has received heat for its perceived anonymity. This reason is starting to go away as understanding of Bitcoin improves. All transactions in Bitcoin are available for all to see on a public ledger. Once a name is associated with an address anonymity is lost. This happens at all regulatory compliant exchanges as well as merchants where you spend Bitcoin.
Even a small, not so sophisticated user can learn your transaction history. If I run a bar that accepts Bitcoin, and you pay me using Bitcoin, I can tell where else you have spent Bitcoin and when. The association of names with Bitcoin addresses would be trivial for a well written computer program. Some programmers (SABR.io) are already putting themselves in the position of cryptocurrency police, promising to sniff out illegal activity and identify the perpetrators.
Under Bitcoin your freedom to transact can be even worse than using your usual national fiat currency. Exchanges such as Coinbase have been shutting down accounts they believe have been using Bitcoin for online gaming (even if legal in your area) or to run their own local exchange.
Throwing Off The Scent
The development of Bitcoin mixers attempted to address the issue of privacy. Bitcoin users send their Bitcoin to a mixing service, which does some swapping of Bitcoin between addresses before sending it on to its destination. There are two problems with this, the centralized mixing service may not take care of your Bitcoin, or they may keep records of the mixes that could be hacked making the mixing useless. Altcoins have addressed this issue by having mixing services built into the currency. At the forefront in bringing privacy to cryptocurrency are Monero and Dash. To give you an idea of where both lie in the cryptocurrency landscape, below are the current top 10 cryptocurrencies by market cap. (Mar 13th) (Source: coinmarketcap.com/ )
The inevitable arrival of these anonymous altcoins will be a regulators worst nightmare. And for the user will bring a level of economic freedom that leaves the free to purchase all that is good and all that is bad.
Physical Gold Vs. Cryptocurrency
To start I am not recommending holding cryptocurrency or making a recommendation of a particular cryptocurrency, just pointing out the attributes of cryptocurrency and how they measure up to gold.
The main two advantages I see for gold are its long term history as a store of value and some price floor. A cryptocurrency can go all the way to zero, gold will at least have a floor set by jewelry and industrial demand. However everything else gold can do a cryptocurrency can do better.
Cryptocurrency can be divided into ultra small units of value making it useful for very small as well as very large transactions. Another advantage of cryptocurrency is the ability to backup your currency, or more accurately your keys for accessing your cryptocurrency. You can’t back up your physical gold.
Also, in today’s global economy where people migrate often for work, saving in gold and bringing it with you as you change jobs is a lot of hassle. In comparison, you could march through an airport with the keys to millions of Bitcoin printed on paper and nobody would know.
Of course you could avoid the problem of transporting gold by holding a gold ETF such as the SPDR Gold Trust (NYSE: GLD) or the iShares Gold Trust (NYSE: IAU), but a gold ETF is an asset of a different nature than physical gold in hand. Owning an ETF you have counterparty risk that you would not have by being in complete control of your own cryptocurrency.
As for gold, there is a lot of ideological demand for cryptocurrency. Holding gold is seen as a way to avoid supporting immoral fiat currency used to fund wars and bailout banks. The creator of Bitcoin left the following message in the genesis block:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”
The interest in Bitcoin was no doubt helped by the financial crisis and the perception that one could stick it to the banks by using a new peer to peer decentralized currency. I can personally get on board with the sentiment, but only if such a currency can work and provide real practical use.
A cryptocurrency that is a stable savings asset, private and easily spendable would do the trick for me. Currently no cryptocurrency does a good enough job in all those areas, but I feel it won’t be long before I find one of these cryptocurrencies persuasive, and it may even compete with some of my gold holding.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.