Bitcoin vs. Gold: Hedge Fund Adviser Weighs In

Mises Economics blog ^ | 2/3/14 | Joseph Salerno

[BfloGuy]

Paul Singer is the manager of the $23 billion Elliott Management hedge fund. In a recent letter to investors in the fund, he expressed bearish sentiments on bitcoin, while remaining bullish on gold despite its recent fall in price. Wrote Singer:

There is no more reason to believe that bitcoin will stand the test of time than that governments will protect the value of government-created money, although bitcoin is newer and we always look at babies with hope. If you want an alternative currency, check out gold. It has stood the test of thousands of years as a store of value and medium of exchange. Better yet, it is not just a computer entry in the ether somewhere, and it is currently available at a good price. Bitcoin and its relatives represent an understandable impulse (anti-big-government, pro-freedom, pro-modernity), but we do not see how it actually survives. . . . We think that gold is a unique investment asset, the only real money that has stood the test of time throughout recorded history. With its durability, finite and difficult-to-extract supply and natural allure, it is a store of value that should be particularly attractive at a time when monetary debasement is the major policy practiced by most developed countries to keep their economies afloat.

Whether or not Bitcoin survives and whether gold returns to favor among investors and, eventually, to its traditional monetary role are, of course, purely empirical questions, which cannot be solved by theoretical arguments. At the moment both are valuable commodities and neither one can be considered as money. Thus, tedious arguments on the blogosphere which invoke Ludwig von Mises’s regression theorem, are completely irrelevant to the issue. Both items are scarce commodities which are valued by consumers and command a price on the market. As such, the regression theorem does not prevent bitcoin from being monetized or gold from being re-monetized in the event or anticipation of a fiat-money breakdown. Rather, it is a matter of human valuations and volition which are not determined by economic law. In this matter, our only guides are historical experience and what Mises called “thymological” insight into people’s likely choices under varying circumstances. Will the general public trust and routinely accept a commodity embodied in lines of computer code or a tangible commodity that has served for millennia as the general medium of exchange? Hmmm, I wonder.

[BfloGuy]

A very good point. A commodity is worth what people decide it's worth.

We can argue all day whether BitCoin meets the generally-established criteria for money, but ultimately the market will decide.

Money today, trash tomorrow -- or still money?

[Dutchboy88]

Ping to OP

[marron]

I believe the perceived value of bitcoin is the hoped for but not fully realized portability (theoretically you can access your money anywhere in the world though I don’t think its fully convertible yet) and more importantly, privacy.

The ability to transact business in private is its value, and governments will do all they can to squeeze that out of it. If they do, if bitcoin transactions are not private, then I don’t see how it can remain a thing of value or even interest.

There is no freedom without financial privacy, and I think people are beginning to perceive this. In fact, your personal security requires that you keep the amount and distribution of your finances private and yet governments are pushing to make this kind of privacy criminal.

Hence the desire for something like bitcoin.

[palmer]

With its durability, finite and difficult-to-extract supply and natural allure,

He could be talking about bitcoin except he's an old fart and doesn't realize it. Bitcoins are more durable than most digital artifacts. They certainly are finite and very precisely defined to be difficult to mine, unlike gold which is sometimes discovered in haphazard quantities. The allure of bitcoin is fairly obvious, they would not be collected otherwise.

[Errant]

Thanks Dutchboy88.

Click to be Added / Removed.

[sten]

I like bitcoins for their transportability and global reach. locally, I like btc to gold for long term storage, if fear of societal collapse is on your mind

of course, as bitcoins grow, the marketcap will grow from the $10b it’s at today to over $1 trillion easy... that’s 100x it’s current value. yes, I’m saying a single bitcoin could easily be worth $100,000.

if that came to pass, and since a bitcoin can be divided down to 8 decimal places, a single bit-cent would be worth $0.001

(I know thats not the name, but I’m unsure if satoshi is the name of 0.00000001 bitcoins)

[Rebel_Ace]

"...Bitcoins are more durable than most digital artifacts..."

The underlying weakness of ALL "digital artifacts" is that they require a complex, delicate and advanced infrastructure to be made use of.

Not too long ago, NASA was freaking out because gobs and gobs of Apollo Mission data on tape was effectively "lost" because no machines around could read their format. This data was "valuable and rare" having been obtained by unimaginable blood and tears going to the Moon. Imagine trying to recover something from an 8 inch floppy disk formatted by CP/M...

Whenever the underlying computer network that makes BitCoins readable and transferrable is unavailable, BitCoins effectively do not exist. If the outage is local and temporary, it is merely an inconvenience. If it is widespread and long term, well, all the BitCoins vanish for all practical purposes.

That all being said, banks today move informational bits, and not bars of bullion. Bits are easier and faster to whiz around the world. Gold, Silver and other physical commodities often used to back currency are cumbersome and inconvenient.

But.... A bar of bullion will survive an EMP pulse.

[palmer]

Whenever the underlying computer network that makes BitCoins readable and transferrable is unavailable, BitCoins effectively do not exist. If the outage is local and temporary, it is merely an inconvenience. If it is widespread and long term, well, all the BitCoins vanish for all practical purposes.

The internet is designed to be durable despite numerous attempts to undermine that. I have little doubt that a network will ultimately become ubiquitous and self-sustaining and quite problematic because of that. I look at the way young people save their stuff on someone else's server without a second thought and no other backup. It seems foreign to me, but that is the way it is and it will only go further in that direction.