Crypto Biz Magazine—July, 2014/Issue.02

Page.20 July.2014
Crypto Biz Magazine
and debates that you can spend weeks reading
into, none of them spell the doom of Bitcoin. As
for a mass exodus to another digital currency,
in order to supplant the massive first mover
and networking advantage
Bitcoin has, it better have
features that far surpass it,
and it’s hard to beat instant,
and virtually free. More likely
Bitcoin will be the “Facebook”
of digital currencies, with
newer ones with specialized
features appealing to
niches that may be sizable
in themselves but won’t
threaten the incumbent. Gold
originally became soughtafter
because of its luster,
and will always retain some
kind of value because of this
property. Similarly a Bitcoin
will always have value as long
as the network continues to
function, something that its
decentralized architecture ensures as there is no
one point of failure.
In a debate with Stefan Molyneux of Freedomain
Radio, Mr. Schiff commented, in regards to
Bitcoin, “A currency backed by something is
always better than a currency backed by nothing.”
To be fair, in a world of precious metals and fiat
cur rencies, this is an accurate statement. Modern
day fiat currency is merely a tool leveraged by
governments to help finance unsustainable
spending and debt. In the United States the
dollar has lost 97% of its purchasing power since
the abolition of Bretton Woods in 1971, deficit
spending continues to spiral out of control,
and as of 2011 the largest holder of US debt is
the Federal Reserve. Contrary to the delusions
of some, like Paul Krugman, there is no reality
where this ends well. All of these developments
have only been made possible by fiat currency,
and the power of the printing press. The opposite
of this monetary system was the Classical Gold
Standard, which tied currencies to the supply
of gold. That is the primary purpose of any
commodity-based currency: to prevent the
unlimited, unsustainable, and arbitrary printing of
currency by a central authority.
While there is certainly a certain allure to a tangible
and physical store of value like gold, this should
not be confused as a superior monetary property
in regards to Bitcoin. In fact the physical nature of
gold has a number of major disadvantages in that
regard. Let’s use a hypothetical example Mr. Schiff
presents on a number of occasions to illustrate
this point: A gold-backed digital currency. Actually
it’s not a hypothetical, as it has been attempted a
number of times and failed. There are a number
of problems with a gold- or commodity-backed
currency today, and the simple way to sum them
up is centralization. To back a digital currency
with gold requires a place to hold all this gold, be
it a Swiss bank or Fort Knox, and the capital to
support all of that storage and overhead. This all
requires trust in the party holding the gold, in the
infrastructure running the digital currency to be
maintained properly, etc.
At the end of the day, this is not only massively
expensive but it’s pointless. What this system
ultimately tries to accomplish is a modern form
of the classical gold standard. A digital currency
that can indeed be traded and transferred
instantly but is fundamentally limited in supply.
However if the ultimate goal of tying a currency
to a commodity is to create scarcity, and therefore
ensure its sustained value, then why bother with
these shenanigans at all? The technology behind
Bitcoin fundamentally allows for hard-coded
scarcity, doing away with the need to be tied
down to a commodity to keep supply limited. In
fact the most important quality gold has in terms
of securing its value is its scarcity. If it rained from
the sky, or a massive super reserve was discovered
and mined, for all its aesthetic appeal it would
still be worthless. Bitcoin perfectly employs the
great attribute of scarcity that has allowed gold
to exist as a standard of value in countless world
civilizations for thousands of years.
But having that scarcity be physical can actually be a
downside. Gold-backed digital currencies all had one
major reason for failure due to their centralization:
government shutdown. You see, governments aren’t