

Bitcoin and Gold - oleganza
http://blog.oleganza.com/post/67872772342/bitcoin-and-gold

======
pearkes
> A friend of mine, Steve, noted that gold-backed economy logically evolved
> into the mess we are now

Here is where you lose me.

Other articles, just like this, fall apart in the same places.

Maybe it is the irony of this statement.

Why is it ironic?

I'm reading your blog post, hosted on Tumblr, on the east coast of the United
States, judging on the pings from where I am in Germany. The communications
travel over fiber-optic cable in the Atlantic Ocean. This cable was laid by a
partnership between commercial telecommunications companies[1]. Tumblr is
supported by this "mess" of an economic system, and thus gives you a platform
to talk on. Tumblr's hosting provider leverages this "mess" of an economic
system to invest in making it's infrastructure better, cheaper and more
reliable for Tumblr.

Why is this rhetoric so unaware of history? Why does it carry such a negative
outlook on the incredible things that this imperfect economic system has
delivered us?

By all means continue questioning, improving or changing the system we have
arrived at as a collective _humanity_. But please, do not pretend everything
is a horrible mess that only some minor [crypto-currency, technology] can fix.
Admit that what we've done so far has largely been pretty damn good.

Will the new ideas help? Hopefully, likely!

[1]:
[http://en.wikipedia.org/wiki/Transatlantic_communications_ca...](http://en.wikipedia.org/wiki/Transatlantic_communications_cable)

~~~
oleganza
It's a fallacy to look at what you can see and not count in opportunity cost
and what _could have been done_ if there were no economical disasters created
by governments all over the world. We'd probably had flying cars already and
free wi-fi everywhere if people were allowed to save money and invest how they
like.

During Putin's regime computers got 12 times faster too. Is it thanks to
"stability of the economy" that Putin provided?

~~~
varjag
Flying cars are a social problem more so than technical. Not even a super-fiat
currency like Bitcoin would solve that.

~~~
oleganza
At least, when everyone is on Bitcoin, you can't shift purchasing power to you
(via inflation or massive taxation) and have bigger vote on how cars should be
designed. You have to _earn_ your vote (make people send you bitcoins
voluntarily) to shift the status quo.

------
headgasket
Warren Buffett on Gold:

1\. “Gold gets dug out of the ground in Africa, or someplace. Then we melt it
down, dig another hole, bury it again and pay people to stand around guarding
it. It has no utility. Anyone watching from Mars would be scratching their
head.”

1.1 How would Martians looking at ProofOfWork brute force SHA256 hashing and
cryptographic scarcity feel any different?

2\. “The problem with commodities is that you are betting on what someone else
would pay for them in six months. The commodity itself isn’t going to do
anything for you….it is an entirely different game to buy a lump of something
and hope that somebody else pays you more for that lump two years from now
than it is to buy something that you expect to produce income for you over
time.”

2.1. Gold is inherently speculative. So is bitcoins, as a currency; with the
caveat that it only exists if the p2p network still exists, if not there is
absolutely no actual use for btc.

3\. “Gold is a way of going long on fear, and it has been a pretty good way of
going long on fear from time to time. But you really have to hope people
become more afraid in a year or two years than they are now. And if they
become more afraid you make money, if they become less afraid you lose money,
but the gold itself doesn’t produce anything."

3.1 IMHO bitcoins as a currency could not have emerged in any other time than
in a time where the governments of the world are on a serious QE binge in a
desperate bid to prevent a double dip and an extremely damageable deflation
era, like the 33-39 one, that can only be resolved by the reset a global
conflict brings. If we can snap out(inflate out) of the current slump,
bitcoins as a currency will not hold up, nor will gold. Gold is already on the
decline...

4\. “I will say this about gold. If you took all the gold in the world, it
would roughly make a cube 67 feet on a side…Now for that same cube of gold, it
would be worth at today’s market prices about $7 trillion – that’s probably
about a third of the value of all the stocks in the United States…For $7
trillion…you could have all the farmland in the United States, you could have
about seven Exxon Mobils (XOM) and you could have a trillion dollars of
walking-around money…And if you offered me the choice of looking at some 67
foot cube of gold and looking at it all day, and you know me touching it and
fondling it occasionally…Call me crazy, but I’ll take the farmland and the
Exxon Mobils.”

4.1 This is a key point for all the speculators out there. You will get
burned. Buy solid earnings of management-owned moat-protected business. Invest
in startups. Invest in brains. Dont get burned by this artificial bubble and
the prospect of easy money. There is no such thing. Talk to all the house
flippers. They were holding concrete: hard assets; protected solid future
earnings is where value is. Growth in in brains.

5\. “The major asset in this category is gold, currently a huge favorite of
investors who fear almost all other assets, especially paper money (of whose
value, as noted, they are right to be fearful). Gold, however, has two
significant shortcomings, being neither of much use nor procreative. True,
gold has some industrial and decorative utility, but the demand for these
purposes is both limited and incapable of soaking up new production.
Meanwhile, if you own one ounce of gold for an eternity, you will still own
one ounce at its end.”

5.1 Gold is safer than bitcoins in the fact that it does not depend on an
honest p2p network to exist individually.

6\. “What motivates most gold purchasers is their belief that the ranks of the
fearful will grow. During the past decade that belief has proved correct.
Beyond that, the rising price has on its own generated additional buying
enthusiasm, attracting purchasers who see the rise as validating an investment
thesis. As 'bandwagon' investors join any party, they create their own truth —
for a while."

6.1 This is the same for bitcoins, if when the expansion of demand comes to an
end the whiplash is going to hurt. The bc protocol is a very interesting
concept that IMHO will certainly find a use, and as such the POW will have a
value; but it will eventually be indexed to the actual energy costs and
expected future earnings.

7\. “I have no views as to where it will be, but the one thing I can tell you
is it won’t do anything between now and then except look at you. Whereas, you
know, Coca-Cola (KO) will be making money, and I think Wells Fargo (WFC) will
be making a lot of money and there will be a lot — and it’s a lot — it’s a lot
better to have a goose that keeps laying eggs than a goose that just sits
there and eats insurance and storage and a few things like that."

7.1 The goose is running miners. That opportunity is long gone for btc. If you
are interested and fired up about bitcoin, I would suggest investing in a
bitcoin startup. That's your best bet; investing in brains. Not things. Esp.
not virtual things.

Cheers and good luck!

~~~
oleganza
Good points worth debating.

1\. People do silly things because they have "reservation demand" and over
time, speculatively, they figured out the most marketable commodity to hold
for later spending (gold, silver, bitcoin etc.) Since it's purely speculative,
not based on immediate consumption, and always kept in someone's cash
balances, it may look silly to martians. But it's useful for people
nonetheless. See: [http://blog.oleganza.com/post/43378777734/on-circulation-
of-...](http://blog.oleganza.com/post/43378777734/on-circulation-of-money)

2\. See above. Yes, money is a speculative asset because it's what it is by
definition. It's used only to satisfy "reservation demand", or need to hold
something ultra-marketable for spending anytime because of uncertainty.

3\. It's only fear for those who hedge against USD. There are many ways to do
that, not only by buying gold or bitcoins. When you decide to invest
particularly in Bitcoin, it's this particular speculation about future
acceptance, not fear of USD going down.

4\. Same argument that disregards reservation demand. Also: it does not make
sense when all gold is a single cube owned by one man. Money is useful when
there are many actors holding some portions of it and willing to hold even
more. Then you have liquidity. If only you have something unique, it does not
become money. Even if it's all gold in the world.

5\. Bitcoin depends on p2p network the same way bitcoin and gold depend on the
market to value them. Miners are highly motivated to play nice with each other
to keep BTC value high. They are also motivated to censor bad spammy actors
who try to destroy network or censor transactions. Like, every gold owner is
motivated in having good ways to transfer, store and validate gold to keep
their value and liquidity in place. There's no dependence on "good will", it's
all driven by individual greed and speculation, like with gold.

6\. This argument applies to all money, any money. Any good money would have
to grow in price as demand for it grows (so it looks like a pyramid). Gold was
growing in value too as it was more and more liquid and widely accepted. The
quick growth does not tell us if it's tulip mania or real fantastic tool. In
both cases the price would have to grow like crazy. You have to look into
fundamentals - real reasons why people are making a bet that it will become a
huge thing.

7\. Another argument which misses reservation demand. Holding cash is useful
to owner of that cash as it provides freedom to make choices any time. Holding
a stable company allows keeping that cash balance above zero. People work for
money directly or indirectly just for that - to have economic freedom to make
decisions when they please, depending on the situation.

~~~
headgasket
IMHO the right asset to hold for reservation demand is either one you can
directly pay you taxes with: the sovereign entity's currency in which you
operate (or exist in case of a moral entity) or a marketable security with
moat-protected earning power. It has worked wonderfully for Mr Buffet. I have
done quite OK with the same principle; YMMV.

That being said, the idea of bitcoin p2p proof network and attached mining
reward is fascinating. I dont think "reserve demand" is the killer app for it,
something yet to come will be IMHO.

My current hand does not warrant investing my most precious asset of all,
time, in this. But a killer app could at any moment change that.

I see you are looking at iOS applications. That may very well be where it
resides.

Cheers and good luck,

------
digitalengineer
Bitcoins certainly took a look at gold. You have to 'mine' it and it's limited
like gold. It's dividable as well, for easy transactions. Unlike gold you can
send them over the world. There is one problem however. They have no intrinsic
value. That's why gold became money, everybody around the world wants it (or
know they can accept it and swap it for a (local) currency). Right now the
only reason people want bitcons is because they think somebody will want them
in the future. With gold, people want gold to itself.

Bitcoin is not gold. It's a currency at best. Even fiat currency is backed by
the full faith in governement. Bitcoins seem to be valuable because a lot of
people are hoarding them instead of using them. Looks like a bubble with
people wanting in on the action...

~~~
applecore
Here's Satoshi's response to the "intrinsic value" problem:

[https://bitcointalk.org/index.php?topic=583.msg11405#msg1140...](https://bitcointalk.org/index.php?topic=583.msg11405#msg11405)

~~~
orblivion
Well, I'm glad Satoshi got right to the point. So many defenders come up with
these roundabout counterarguments. "There's value in the system" "As I
understand, its intrinsic value come from being so easy to spend across the
world"

The bottom line is, there is a belief that there can be a currency
bootstrapped into an exchange rate, with no compelling reason to have it other
than to pass it on to the next. It's a hard one to argue either way, but I'm
still holding out in camp "no".

Here's a simple engineering analogy since I'm among engineers. In both cases,
valuation is based on some sort of subjective valuation (advocates love to
point this one out, which is why I don't use the phase "intrinsic value"
anymore, they're right that there's really no such thing). In both cases,
prices can swing wildly. This is because there is a _positive_ feedback loop
constantly pushing prices in either direction, from people subjectively
reacting to previous prices and wanting to _follow suit_. However the
consumable commodity has an additional _negative_ feedback loop, from people
always ready to buy if prices get low enough, without regard to future
expected prices, because they just want a pretty ring.

~~~
digitalengineer
Correct. Not only because they want a pretty ring, also because it's what
their culture demands and has demanded for century's. (India, Asia, heck even
Germany with it's 'hard money'-policy finds it's roots in a defense against a
debasement of the currency). We should not forget _we_ are the generation that
has never seen a currency connected to something intrinsic like gold. (I'm
referring to the closing of the gold-window by Nixon in the 70's). We are
viewing this through our own culture.

~~~
orblivion
The biggest thing that makes me doubt my position is the fact that the gold
window was closed and the US hasn't collapsed in 40 years. Even if there's a
slow debasement, that's not what I expect to happen to Bitcoin, [edit to
clarify] I expect it to collapse very quickly. I know there's the "you need
dollars to pay taxes" argument. But that doesn't sit right with me. It's not a
fixed amount of dollars, it's a percentage of your salary. Exchange rates of
the dollar can go down, people's real salaries go down, and the real amount of
taxes they pay go down. There's no negative feedback loop.

~~~
digitalengineer
Yes, the gold window was closed (as was predicted by The Triffin Dillema
[http://en.wikipedia.org/wiki/Triffin_dilemma](http://en.wikipedia.org/wiki/Triffin_dilemma)
). It was replaced by the petrodollar. Oil could only be paid for in US
dollars. Lately we have seen more and more counties trading in their own
currency amongst one another. (Mainly China and BRICS). The fact that the EURO
does revalue gold's price to it's market price and the dollar does not is also
very interesting.

------
JackFr
Why should Bitcoin have a monopoly? If Satoshi2 comes up with another process,
similar but differing only in the mining computation, my Bitcoin2's should be
equal in value, or at least at guaranteed at an exchange rate based on compute
intensity required.

I assert that they would not be my Bitcoin2's would be worth less. This
highlights the observation that literally all of bitcoins value comes from
confidence that the network of willing participants is permanent and robust.
This makes it different than gold -- gold is gold, whereas one crypto-currency
is entirely different than another crypto-currency. This also makes it
different than other fiat currencies whose network of participants is
compelled by law.

~~~
digitalengineer
We can't have a currency competing with the US dollar. If I was the US, I'd
_love_ a domestic (crypto) digital dollar. If bitcoin fails people lose faith,
and I present the solution for a modern society: the Digital Dollar,
unbreakable crypto and easy for world-wide use and backed by the full faith of
the US government/NSA. And: I could tax every transaction, even the smallest
ones on Craigs List/eBay.

------
eshvk
I will buy your argument when 1 billion people across south asia start
hoarding bitcoins instead of gold jewelry with the hope that their daughter
can be covered with it when she gets married.

~~~
rrhyne
You won't be able to afford to buy his arguement if you wait that long.

------
T-zex
I really do not understand this Bitcoin promotion in comparison with gold. I
think that majority of people do not have gold, never had and never will. It
would reach a much bigger audience if Bitcoin was compared to credit cards and
Paypal.

~~~
cturner
Gold has a strong market as a store of value that doesn't depend on
government. The characteristics that make it good for this: it is naturally
scarce, doesn't degrade, it's easily divided, you can hold a lot of value in a
small amount of physical weight (compare to silver), it's fairly easy to
exchange for local currency at a time of your choosing. Hence, it has
historically functioned as a store of value.

Bitcoin has been designed to have the same advantages. It's weaker because
it's more complex to deal with (at the moment). But it's stronger than gold in
that - so long as the algorithm holds - its scarcity is guaranteed, and it's
easy to use for electronic transactions.

Bitcoins compete with gold for mindshare with people who want to be able to
store value in a way that isn't subject to the whims of government - who can
start printing lots of money at any time of their choosing and thereby wipe
out people with savings.

------
LogicalBorg
Another nutty Bitcoin article, equal parts nonsense and hype. Don't forget
that ownership of gold can be transferred digitally just like ownership of
Bitcoins. A real investor would know that already. Plus it's a false dichotomy
to claim that because Bitcoin becomes valuable gold must become valueless.
Both can have value. Finally, Bitcoin is subject to substitution replacement
(by altcoins) or technological obsolescence (by someone inventing a better
coin), but gold just isn't, since it is one of the fundamental chemicals of
the universe.

~~~
oleganza
"Digital ownership" of gold is a lie. You own promise, not the thing. You can
own bitcoin and can do that in a way that no one can access it except you.
It's easy to prove: you can create a random key, move some money there and
erase that key from everywhere. Now that money is not accessible by anyone
forever. Ability to destroy stuff is what ownership means. If you lock up gold
in a vault, it still can be cracked and opened. If you trust some bank to
store gold for you, they _own_ it and promise to deliver it when you want. But
you own promise, not gold. And that promise was constantly broken by banks and
governments throughout history.

[http://blog.oleganza.com/post/67362431718/you-can-own-
bitcoi...](http://blog.oleganza.com/post/67362431718/you-can-own-bitcoin-you-
cant-own-your-dollars)

On altcoins: [http://blog.oleganza.com/post/54121516413/the-universe-
wants...](http://blog.oleganza.com/post/54121516413/the-universe-wants-one-
money)

------
seanalltogether
You are too late, the stock market already beat bitcoin to the punch on this
one. We've been trading virtual assets for quite a long time now, and gold
simply went from being a hard asset that you hold in your hand to a virtual
asset that sits in a warehouse somewhere. Bitcoin is just another symbol on
the ticker.

~~~
digitalengineer
Except that you don't _really_ own the stock. In almost every instance when
you buy or sell securities with a broker, your name is not actually on the
stock or bond certificate. The name that appears on the certificate is that of
your broker, and this is referred to as being held "in street name".Ask the
people who were MF Global clients how much rights they had after the meltdown.
E.g. none. They got to line up at the end of the queue of debtors.

Bitcoins is more like stocks with Direct registration.

~~~
oleganza
Bitcoin is even better. You own it completely privately without even "direct
registration" with any one third party, even the government registry like in
case of stocks. Paper USD that you own is "direct registration" and it still
does not belong to you. Government takes a bite from it when it wants by
printing more paper dollars like yours. You can only own physical stuff like
paper of the dollar itself (but not the value), and Bitcoin. Everything else
is promises, not ownership.

[http://blog.oleganza.com/post/67362431718/you-can-own-
bitcoi...](http://blog.oleganza.com/post/67362431718/you-can-own-bitcoin-you-
cant-own-your-dollars)

------
mariusz79
Gold is needed in health care, electronics, space, physics... The supply is
limited, and unlike bitcoin someone can't just rename gold to dolg and start
mining the new version. Bitcoin, at it's current price is not cheaper than
gold. I would argue that it's more expensive, considering its limited use.

~~~
oleganza
Gold production value is maybe 10-20 times lower than it's speculative value.
Just check how much gold is sitting in vaults and not being sent to factories.
If it's only demanded for production, then the price would be much-much lower.

Bitcoin has many uses too, not only for reservation demand. It has scripts to
protect contracts without expensive court system, blockchain can be used as a
secure timestamp service, or a global name registry. It's full of
opportunities apart from protecting your wealth.

~~~
mariusz79
You're forgetting that at any point, any government can prohibit using
bitcoin, as they did previously with gold, and may prohibit using these
scripts. What's left?

~~~
jimktrains2
Prevent the use of a computer program?

Sure, you may not be able to purchase things locally with it, but it's just a
computer program and information, you can hardly prohibit with any force. Look
at tor.

------
rrhyne
The conspiracy theorist in me says the powers that be will not abide a non
fungible currency. Fractional reserve banking, the fed's actions to stimulate
the economy through printing, these things dont't work with bitcoin.

~~~
oleganza
I'm optimist because:

1\. Bittorrent is not shut down. And in average, people are getting freer with
new tech, not more controlled. Some vocal revolutionaries are still easy to
find and catch, just like in Jesus times. But average guy who is not
specifically targeted, he's quite free.

2\. Government is always a parasite on productive society. If it gets too
heavy, it breaks the economy and dissolves without something to eat. If
productive people start working with Bitcoin, that's where the value will be
and govt will have to adjust and feed from that. BTC can be confiscated and
monitored, but not outright banned. Gold was not destroyed when fractional
reserve system was bootstrapping. It was relocated from weak hands to armed
ones and then used to trade between other well-armed hands. Gold still
maintained value, and very big one.

------
applecore
It's possible that bitcoins have value because they're more useful as a form
of money than precious metals like gold or fiat currencies like dollars.

They're durable, portable, perfectly fungible and divisible, scarce and
limited, easily recognizable, trivial to verify, impossible to counterfeit,
and cheaper to store, protect, and transfer.

~~~
mariusz79
Durable? When you lose your passphrase or wallet hash all the bitcoins in it
are lost.. forever.. With gold there is hope that at some point in time
someone will find it and be able to use it.

~~~
applecore
Durability, in the context of money, simply means that it doesn't physically
degrade over time.

In that sense, bitcoins are perfectly durable.

------
headgasket
the bitcoin protocol as a p2p open ledger is the interesting idea, and as such
it is a valid proposition as a transaction system. Contract signing for
example.

The derived value store has not much going for it IMHO. It suffers from a
reverse network effect; as the block chain becomes heavier, it becomes
clumsier, and a clone -- alt is more and more attractive, and a few simple
clicks away. (no lock was a down side argument that was around when google
became a home run(vs MS) but has yet to materialize; lately they might be
setting themselves up for it to happen tho)

As soon as the expansion of demand(is all this demand really real?) comes to
an end, bitcoins are susceptible to become tulip bulbs. You cannot pay any
taxes in bitcoins, and this is how prices on everything are indexed in our
fiat world.

~~~
oleganza
I'd argue that for blockchain to function as secure ledger, miners must be
motivated to do so. So you have to make a currency out of it anyway.

~~~
headgasket
yes that's perfectly right. But the value of the currency should then become
indexed to the cost of securing the ledger over the long run. At this point I
would think that's it not the case for btc. IMHO developing ASICs for SHA256
hashing is not a grand development for humanity; it's an expected capitalist
response to the fact the the p2p system is valuable. It's a capitalistic proof
of the bitcoin protocol.

But as a ledger gets bigger it gets more expensive to secure and harder to
use; at one point the best economic alternative is to start a new one, based
on the same principle, but not the same POW. And then start a new one. So the
value resides in the p2p protocol not the currency itself which is a temporary
corollary store that exists while the network is growing.

------
rlwolfcastle
There is one difference between gold and bitcoin. When you break the
encryption on gold, it is still gold.

~~~
yawniek
gold also has an offline mode, worldwide adoption and a commercial use. plus
whats exactely the difference between bitcoin and all other altcoins other
than technicalities. sooner or later there will be lots of competition

~~~
scotty79
Like there's huge competition to ebay.

------
hatu
tl;dr: Author loves Bitcoin

~~~
oleganza
Author makes a case for unique feature of Bitcoin: asymmetry in security which
may prevent what happened with gold-based economy - accumulation of
physically-representable wealth in hands of the very few using force. This
unique feature has never been tested before in the economy in the entire
history of mankind.

~~~
mariusz79
With bitcoin very few still control most of it. And they use force... asic
brute force :)

~~~
oleganza
ASIC makers have the biggest risk and cost in investing into BTC than anyone
else. And miners have the most incentive to keep BTC fungible and liquid to
keep its value.

These guys would have to liquidate a lot of bitcoins smoothly to cover their
massive costs and not to deeply disrupt the markets. And they are not
interested in playing bad games with people's transactions as this will cause
either of two things: the value of BTC may easily go down, and their blocks
may be censored by other miners who don't like the value to go down. Every
miner thus is motivated to be nice to everyone and maintain his business even
if he has 80% of hashrate. Some pools were even addressing concerns of 50%
power by limiting their own userbase. No pool wants BTC price to crash only
because it got too big and frightens people.

------
NateDad
Honestly, the speculation around bitcoin is the least interesting part about
it. The fact that you can do secure person to person transactions with no
intermediary is awesome. The fact that it is a "push" system and not a "pull"
system (the way credit cards work) is a huge advantage.

The _technology_ is really cool. It's just been unfortunately overshadowed by
the get-rich-quick types, druggies, and libertarian/anarchists.

------
shocks
> put some money in a “brain wallet” that has no traces anywhere at all.

Please do not do this.

~~~
headgasket
yeah, did that. Lost the password too. If I find it I can guarantee those BTC
are hitting this market yesterday.

~~~
shocks
There are already scores of people building rainbow tables of brain wallets.
Someone will, eventually, put that BTC on the market for you. :(

------
dpacmittal
He missed the point where gold is an actual tangible item and has a massive
market of jewellery.

