The ever-outspoken investment broker, author, financial commentator, and renowned “goldbug,” Peter Schiff, has once again gone on record to express his opinion in the latest installment of Bitcoin vs. Gold.
Everyone familiar with Peter Schiff knows that he is certainly no stranger to the gold market. In fact, Schiff's incessant warnings of a looming economic collapse have earned him the nickname of "Dr. Doom.” The best way and quite possibly the only way to protect yourself from this pending crash is to buy gold, according to Schiff.
Bitcoin equals gold?
“Bitcoin really replicates all the properties of gold, even improving on some of them,” said Schiff, noting such similarities as the “mining” process, which both require resources to be expended in order to get the “coins” or metal out.
Schiff also noted other analogous properties to gold such its scarcity: only 21 million Bitcoins will ever be created similarly to the finite amount of gold on the planet.
Finally, Bitcoin is similar in its divisibility just like gold, which can be melted down into smaller quantities. Bitcoins might even be more cost-effective in this manner as it costs virtually nothing to break a whole Bitcoin down to the nearest tenth, hundredth etc.
Schiff likewise conceded that Bitcoin as a technology even improves some properties of the precious metal. These include its mobility, allowing users to send Bitcoins to anywhere in the world instantly bypassing any central bank or third-party.
Additionally, gold must also be stored and secured – a problem which led to the establishment of the banking system. However, there are many issues that arise with the implementation of such a centralized system such as friction, third-parties, time-cost etc.
Compare this to Bitcoin where it costs virtually nothing to store any amount from a tenth of a Bitcoin to a trillion Bitcoins in a digital wallet.
Peter Schiff
Store of value
Schiff remarked that given all of these similarities and improvements over gold, it seems like the idea behind Bitcoin was to replicate gold - Gold 2.0, if you will. Unfortunately, he claims that the single most important property of gold allowing it to be globally adopted as money has been omitted: its value.
“But here’s the problem: they [bitcoins] replicate the properties except the single most important one. Without this property, gold would have never been money. Of course, I’m talking about value - the intrinsic value of the metal itself.”
Schiff has admitted that while he sympathizes with the Bitcoin community, he calls it the “wrong vehicle,” saying gold has substance unlike bitcoins, which only exist in cyberspace. And the difference between these two realities is where the demand comes from.
People want Bitcoin because they believe someone else wants them. On the flip-side, people want gold for its intrinsic value as a metal. Additionally, Bitcoin also varies from fiat currencies like the dollar since it has not been declared legal tender by the US government.
Say what you want about fiat currencies, but as long as they are accepted by the government for the payment of taxes, the dollar will always be king.
Crowd psychology
According to Schiff, the problem with Bitcoin lies in the psychology of the users and the community. A lot of people view crypto-currencies with much less skepticism than they normally would as fiat-currencies like the US dollar are not backed by anything either.
Also hinting at the current state of Bitcoin as being pyramid-scheme (attributing fiat to this as well), he noted that as long as the BTC exchange rate has upwards momentum, it will attract new users.
However, Schiff warns that these sentiments will eventually turn, just like with any other bubble. “It’s not gold standard 2.0, it’s tulip mania 2.0,” said Schiff.
The reason for this crash could come down the road as holders of large quantities will eventually opt to cash out. In addition, the volatility of Bitcoin makes it less desirable for everyday and micro-transactions according to Schiff. This is a major concern for Bitcoin as it cannot be used exactly for what it’s touted as: a medium of exchange.
Instead, it the coins are being hoarded largely by many users for the purposes of speculative investments and hedging.
“Here’s the problem, people are advocating the use of Bitcoins as if it’s a form of money, but it can’t be. Because bitcoins do not represent a store of value. You don’t know what bitcoins are going to be worth next week, next year, in five years….”
Final thoughts
Citing the aforementioned problems of Bitcoin as currency, Peter Schiff has admitted that as technology, Bitcoin holds much promise. “Someone might actually come up with a legitimate form of digital currency that is backed by gold. That’s not hard to do,” said Schiff.
Therefore, Schiff is keeping the door open to technological innovation while warning the public that the current Bitcoin bull-run has all the makings of a Ponzi scheme, where “peoples’ judgment becomes clouded by a potential windfall.”
His position probably won’t surprise you either - buy gold - which has seen a drop in price recently. Schiff attributes this partly due to the increasing popularity of crypto-currencies as an investment and gold’s recent downward trend.
So do you agree with Peter Schiff? Is Bitcoin a financial breakthrough or tulip mania 2.0? Certianly, Mark Rees of Bitcoin Magazine would beg to differ. But we would love to hear your thoughts on this matter in the comments section below.
Commentary
Manuel Heilmann (CEO & Cofounder Coinzone): "It depends what is meant by "backed by gold". There have been attempts or talks to back Bitcoin by gold. There was an e-gold project that failed. It sounds great, Bitcoin backed by gold. But what other currency is backed by gold? My take is, if someone wants to deposit money then gold is a great choice and I would actually choose it over Bitcoin unless I would want to speculate for an increased Bitcoin price. If someone wants have a currency and use it for day-to-day payments, then a digital currency like Bitcoin is a valuable alternative for fiat currencies that comes with many benefits for travelers, people in emerging and developing markets as well as markets with a low credit card penetration such as Germany."