Tag Archive: Fiat Currency

May 30

Bitcoins V.S. Gold & Silver – Which one is Better OR Are they the Same

Gold bullion vault Bitcoins V.S. Gold & Silver   Which one is Better OR Are they the Same

Plenty of people still have a difficult time wrapping their heads around what bitcoin is or why it even has value, especially as the virtual cryptocurrency continues to scale record heights. How isn’t this a Ponzi scheme, many have wondered?

A good way to look at it is to compare it to gold. What gives a shiny metal that doesn’t have a whole lot of real utility–outside of jewelry and limited industrial use–any kind of real world value?

The only reason gold has value is because one day, way back when, long before recorded history, society simply decided that this yellowish precious metal should represent “money.” From that day forward–as that idea spread virally across the globe (or at least the small part of the planet then settled by homo sapiens)–gold came to be worth something in the eyes of the people.

Uninscribed Lydian gold coins Bitcoins V.S. Gold & Silver   Which one is Better OR Are they the Same

Uninscribed Lydian coins made from electrum, a naturally occurring gold and
silver alloy, 6th century BCE. The first gold coins of the Grecian age were struck
in Lydia around 700 BC.

As a representative (and thus store) of value, it became a universal intermediary between goods and services. This was the natural, inevitable economic evolution of the barter system. As it retained its value over time–and eventually throughout human history–gold gained cultural credibility. That’s the quick and easy answer.

Why the chemical element Au? There’s its obvious aesthetic qualities. But gold’s longevity comes from scarcity; its limited quantities were never able to keep up with demand. Since the beginning of human history, a total of 171,300 tonnes of gold have been mined.

As the human economy evolved, we’d eventually transition from gold to paper money, but up until the end of World War II, gold remained a fundamental piece of the financial system in the form of the gold standard, by which governments pegged the value of their printed currencies to amount of gold they owned.

After the war, the gold standard was partially abandoned with the establishment of Bretton Woods, yet the world system remained implicitly tied to it even as countries adopted the U.S. dollar as their reserve currency, being that the U.S. promised to maintain the price of gold at $35.

Then in 1971, due to the financial strains of the Vietnam War, President Nixon ended the direct convertibility of the dollar to gold, thus establishing the U.S. as a fiat currency, money that was backed only by the credibility of the U.S. government. No longer elementally linked to the modern economy, gold still kept its value as an investment asset, given its historic credibility and cultural relevance. Today, one ounce of gold is worth over $1600.

Bitcoin, in its present form, has a stark resemblance to gold. Both are backed by no one. Both are, relative to fiat currency, inconvenient for day to day use. Your gold coins or bitcoins (yet) won’t do much good at the grocery store. Both lack intrinsic value. If the apocalypse arrived tomorrow, your gold and BTC won’t help you survive against the zombies. Both have value only because society has confidence that they will maintain said value over time.

Bitcoin, of course, has been around only since 2009, so it doesn’t have the same kind of long term credibility. But the supply of bitcoins, like gold, are also constrained, built into its elegant mathematical model. There’s hard limit of 21 million bitcoins to be mined, which is predetermined to be reached during the year 2140. So as bitcoin demand and adoption continue to outpace its supply, its price will increase in lockstep.

So why bitcoin? Because bitcoin is gold on steroids, designed for a society that lives through the internet. Bitcoin is designed with the ideals of the contemporary cyber movement in mind: decentralization, peer to peer, cryptography. Easily transferable in ones and zeros, it’s a storage of value for a virtual society. As a payment system, it’s a temporal store of money that can be easily sent across the globe securely and speedily without counterparty risk. No matter the price of bitcoin, these benefits will always give it purpose. With bitcoin trading over $60, its market capitalization is approaching $700 million.

bitcoin chart Bitcoins V.S. Gold & Silver   Which one is Better OR Are they the Same

The benefits of this model are clear. Given its self-contained nature, it eliminates the need for inherent human interference. There’s no need for a central bank because bitcoin self-regulates. Certain aspects of it are, of course, vulnerable, such as mining, as well as security. Every month, it seems, we hear a new report of a hacked bitcoin wallet. Millions have been lost since 2011.

Yet these issues are self-correcting over time given bitcoin’s incentivization dynamics. Security of data and money is a concern that predates bitcoin and even currency; better practices and technologies can help prevent theft. And it wouldn’t make sense for any one entity, for instance, to attempt to monopolize mining, except to destroy it. After all, this part of the system is somewhat transparent, and bitcoin’s value will be retained in the degree that it is decentralized. If one entity controlled the world’s bitcoin output, it wouldn’t be worth very much, so trying to take over bitcoin doesn’t make financial sense.

Even destroying it poses problems, tantamount to eliminating the world’s gold supply. It’s possible that certain governments or companies even could attempt to cripple it, either through regulation or attacks on the system, yet destroying it completely, for now, seems out of the question. We have to look no further than BitTorrent. Despite years of assaults from the likes of Hollywood, the RIAA, and U.S. government, torrenting continues to drive the majority of internet traffic.

And as long as bitcoin survives, it will rebound. As long as it exists, it will grow. So ignore the warnings of hype and talk of a bubble, in the long run, it’s all more or less irrelevant. The value of bitcoin could crash again, like it did in the summer of 2011. Or it could keep skyrocketing. Whatever happens, neither gold nor bitcoin are going anywhere anytime soon. In the end, that’s all that really matters.

UPDATE: Heres charts for bitcoin and gold since the Nixon Shock. (via reddit)

gold charts Bitcoins V.S. Gold & Silver   Which one is Better OR Are they the Same

Jul 29

The Fallout of Debts and Deficits Impacting a Nation’s Fiat Currency is NOT New! Neither is Running to Gold for Protection

In spite of constant headlines about debts and deficits, most Americans don’t really believe the U.S. dollar will collapse. From knowledgeable investors who study the markets to those seemingly too busy to worry about such things, most dismiss the idea of the dollar actually going to zero.

The price of gold climbed to $1633.50 an ounce Friday morning – as stocks and commodities fell following the decision to cancel a vote on proposals to cut the US deficit. It continued rising into the U.S. opening.  Heading into the weekend, the gold price was looking at a 1% weekly gain by Friday lunchtime.

History has a message for us: No fiat currency has lasted forever. Eventually, they all fail.

BMG BullionBars recently published a poster featuring pictures of numerous currencies that have gone bust. Some got there quickly, while others took a century or more. Regardless of how long it took, though, the seductive temptations allowed under a fiat monetary system eventually caught up with these governments, and their currencies went poof!

So what’s the one word for the “thousand pictures” below? Worthless.

image1 40 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Yugoslavia – 10 billion dinar, 1993

image2 27 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Zaire – 5 million zaires, 1992

image3 18 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Venezuela – 10,000 bolívares, 2002

image4 6 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Ukraine – 10,000 karbovantsiv, 1995

image5 5 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Turkey – 5 million lira, 1997

image6 5 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Russia – 10,000 rubles, 1992

image7 2 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Romania – 50,000 lei, 2001

image8 2 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Central Bank of China – 10,000 CGU, 1947

image9 0 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Peru – 100,000 intis, 1989

image10 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Nicaragua – 10 million córdobas, 1990

image11 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Hungary – 10 million pengo, 1945

image12 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Greece – 25,000 drachmas, 1943

image13 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Germany – 1 billion mark, 1923

image14 0 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Georgia – 1 million laris, 1994

image15 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

France – 5 livres, 1793

image16 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Chile – 10,000 pesos, 1975

image17 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Brazil – 500 cruzeiros reais, 1993

image18 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Bosnia – 100 million dinar, 1993

image19 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Bolivia – 5 million pesos bolivianos, 1985

image20 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Belarus – 100,000 rubles, 1996

image21 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Argentina – 10,000 pesos argentinos, 1985

image22 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Angola – 500,000 kwanzas reajustados, 1995

image23 The Fallout of Debts and Deficits Impacting a Nations Fiat Currency is NOT New! Neither is Running to Gold for Protection

Zimbabwe – 100 trillion dollars, 2006

So, will a similar fate befall the U.S. dollar? The common denominator that led to the downfall of each currency above was the two big Ds: Debts and Deficits.

Because when it comes to money, worthless is not a fun word.

Owning physical gold is good protection from the sinking value of the U.S. dollar>>>>>>>>>>>>>Details here