The normally calm and transparent waters of the Gold sphere are still rippling from the impact of Cryptos. While most understand that Cryptos are not money – not a replacement for Gold and/or silver – there remains a lingering sense that the two spheres do meet at some point.
Comparisons are tenuous. Gold, with its unique properties, is money, and Cryptos are a speculation – giddily exhilarating while they last but potentially ruinous when they come to a stop and turn to Crashtos.
Below’s article is from stalwart contributor Rudy Fritsch who is a Crypto enthusiast. I have received phone calls seeking an opinion on the subject from long-term monetary metals holders, so I know that interest is strong.
In the links below are two additional pieces on Cryptos from Monetary Metals. I suggest that if one reads one, then one should read all.
I remain uninterested, disinterested and disinclined to publish any further articles on the subject of Cryptos.
Philip Barton August 2017
Bitcoin has risen to historic Dollar highs, but some pundits are claiming that this is just the ‘Madness of Crowds’… that Bitcoin is just another bubble, and that soon Bitcoin and other crypto’s will assume their intrinsic value, that is zero.
Indeed, some pundits… or are they perhaps trolls? Claim that ALL crypto currencies are but Ponzi schemes, nothing more. Well, I have recommended the purchase of crypto’s; have I led you astray?
Let’s make sure we are on the same page; exactly what is a Ponzi (scheme)? Wikipedia defines Ponzi scheme as follows. “A Ponzi scheme; (also a Ponzi game) is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities.”
So, do crypto’s belong in this category? Surely some do! There are over a thousand newly minted ‘flavors’ of ‘alt coins’ and no way can they all represent ‘legitimate business activities’… but perhaps some do? Remember, even tulip bulbs had a ‘legitimate business activity’… namely growing tulips.
Furthermore, all investments have the feature that early investors (in on the ground floor) make more profits than later ones. This is not a feature unique to Ponzi. Early investors in Amazon, or Intel, or any (successful) legit business made far more profits than later ones.
Major Banks, including the Russian Sherbank (now now, let’s not get into Russo-phobia ;-) are investigating block chain, the technology behind most crypto’s. The reason is simple; cost and time saving through a virtually impossible to hack method of conducting financial transactions.
If you consider financial transactions as legitimate business activity (and surely some are!) then you cannot say ‘all crypto’s are just Ponzi schemes’, any more than you can say that Intel or Amazon are Ponzi, just because the early birds make out like bandits.
Indeed, the second part of the Wiki definition is key; profits ‘from legitimate business activity’ define what is NOT Ponzi. Notice that many ‘legit’ businesses go bankrupt, total loss to investors; yet are not considered Ponzi because of the intent to make a legit business rather than an empty scheme or game that serves only to separate investors from their money.
Legit uses of crypto currencies are to ensure security in internet devices, to secure cloud data storage, to bypass greedy central banks… oops, this is controversial, yes? But think about the Central Bank of Zimbabwe and the trillion dollar Zimbabwe note… greed and insanity, and surely Ponzi?
How about the hundreds of other Fiat currencies that have been debased to zero value? Greenbacks, Reichmarks, Continentals, Lira, Forint, Peso… Fiat without end. Bitcoin and other crypto’s get around this. Indeed, in Africa (and now Venezuela) crypto’s are literally a life saver. Perhaps the pundits should be claiming that all Fiat currencies are Ponzi!
So, if the key is to find ‘legit business activity’ then that is what we need to do; find crypto’s that represent legit business. Now that may not be easy, no easier than distinguishing Intel or Amazon from Enron… early in the game that is. Much due diligence is needed… but the claim that ALL cryptos are Ponzi is no truer than the claim that all dot coms are Ponzi.
One thing is crystal clear; while there are thousands of crypto’s, there is only one Gold… and only one Silver. Owning either one avoids any possibility of Ponzi… and any possibility of bankruptcy. Neither monetary metal is about to lose all its value; on the other hand, neither one offers the spectacular returns possible in crypto speculation.
Finally, there is one more vital issue that is usually missed; the very word asset in English is ambiguous. A real asset is not the same as a ‘paper’ asset. A Gold coin and a Silver bar are real assets. The difference is crucial; a real asset has no counterparty holding the same asset as a liability, thus no counter party risk.
Paper assets, on the other hand, all have just that; a risk that the counter party fails to keep their promise. Bonds, stocks, certificates etc. all have counterparty risk; that is, they are but promises. A bond is an asset in one hand, but a liability in the other hand. Once netted out, the resulting value of such paper assets is zero.
By contrast, Gold and Silver have no offsetting liability; they are real assets, and netting out Gold debt will leave the Gold untouched… real assets cannot disappear like paper assets can and regularly do. The real asset merely changes ownership. We need to keep in mind that under our Fiat system, bank notes (Dollars, Euros, etc.) are paper assets; they are assets in our hands, but they are liabilities on the books of the Banks of Issue (Central banks).
All Fiat currency is borrowed into existence. The Fiat notes (liabilities) issued by banks are balanced by the debt notes (assets) on their balance sheets. Thus, Fiat can and does disappear regularly. Treasury debt is funded by Fiat borrowed from the CB; the CB creates Fiat notes from thin air to buy treasury debt. Paying back the debt pushes the Fiat notes back into thin air.
So how about crypto’s? Are they also ‘paper assets’ by this definition? NO! Bitcoin does not have a counterparty. Bitcoin simply exists on its own. There is no liability balancing the asset; Bitcoins are not borrowed into existence.
This is a seldom heard aspect of the crypto story… and one reason some people compare crypto’s to precious metals; no liability to balance the asset… just a real asset, like Gold or Silver. Of course, value (purchasing power) is another issue; the value of Gold and Silver are historically proven and have held steady for thousands of years, while the value of Bit coin is subject to wild swings on a daily basis… but this is what makes Bitcoin a great speculation. It is by no means an indication that Bitcoin will disappear like all Fiat currencies do disappear in their own good time.
At the end of the day, I do recommend buying some crypto’s. On the other hand, crypto’s are no substitute for holding Gold and Silver; at best crypto currencies complement the strengths of the monetary metals.
Rudy J. Fritsch