• 204 days Could Crypto Overtake Traditional Investment?
  • 209 days Americans Still Quitting Jobs At Record Pace
  • 211 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 214 days Is The Dollar Too Strong?
  • 214 days Big Tech Disappoints Investors on Earnings Calls
  • 215 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 217 days China Is Quietly Trying To Distance Itself From Russia
  • 217 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 221 days Crypto Investors Won Big In 2021
  • 221 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 222 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 224 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 225 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 228 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 229 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 229 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 231 days Are NFTs About To Take Over Gaming?
  • 232 days Europe’s Economy Is On The Brink As Putin’s War Escalates
  • 235 days What’s Causing Inflation In The United States?
  • 236 days Intel Joins Russian Exodus as Chip Shortage Digs In
How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

  1. Home
  2. Markets
  3. Other

Bitcoin and Gold: Currency versus Money

Bitcoin holders -- especially those who bought in during the crypto-currency's recent surge past $1,000 -- are a bit shell-shocked this week:

Bitcoin prices plunge as problems persist

Bitcoin prices plunged again Monday morning after Mt.Gox, the major exchange for the virtual currency, said technical problems require it to continue its ban on customer withdrawals.

Mt.Gox said it has discovered a bug that causes problems when customers try to use their account to make a transfer or payment of bitcoins to a third party. It said the problem is not with Mt.Gox software but affects all transfers of bitcoins to third parties.

The exchange said it was suspending withdrawals and third-party payments until the problem is fixed, although trading in bitcoins continues.

A bug is allowing a third party receiving a bitcoin transfer to make it look as if the transfer did not go through, which can lead to improper multiple transfers, Mt.Gox said.

Bitcoin prices on Mt.Gox plunged from about $693 just early Monday to $510 at 6 a.m. ET, soon after the statement was posted. Prices had been as high as $831 just after 7 p.m. Thursday before Mt.Gox's halt of withdrawals was first disclosed early Friday morning.

Mt.Gox tried to put the best face on the technical problems in its latest statement, noting that the technology is "very much in its early stages."

"What Mt.Gox and the Bitcoin community have experienced in the past year has been an incredible and exciting challenge, and there is still much to do to further improve," it said.

This is one of those "teaching moments" that the President likes to point out. But the lesson isn't that bitcoin in particular or crypto-currencies in general are fatally flawed. It is that they are currencies, not money or investments, and the differences between these three concepts is crucial to doing asset management right.

An investment is something that, if successful, generates cash flow and potentially capital gains, but if less successful can produce a capital loss. Money, in contrast, is capital. It is what you receive when you sell an investment and/or where you store the resulting wealth until you decide to buy something with it. Money does not generate cash flow and does not "work" for you the way an investment does. Instead, it preserves your capital in a stable form for later use.

"Sound" money exists in limited quantity and doesn't have counterparty risk - that is, its value doesn't depend on someone else keeping a promise - so it tends to hold its value over long periods of time. Gold and silver, for instance, have functioned as sound money for thousands of years. As you've no doubt heard many times, the same ounce of gold that bought a toga in ancient Rome will buy a nice suit today. Ditto for oil, wheat and most of life's other necessities.

Currency, meanwhile, is the thing we use for buying and selling. It can also be money, as in past societies where gold and silver coins circulated. But it doesn't have to be. Paper dollars, euro, and yen are representations of wealth rather than wealth itself and are only valuable because we trust the governments managing them to control their supply and banks to give us back our deposits on demand. Such currencies are not very safe but are extremely convenient, so even people who understand the inherent flaws of today's currencies keep some around for transacting.

As for bitcoin, for a while the more excitable in the techie community seemed to think that crypto-currencies could function not just as currency but as money, i.e., as a form of savings, because the supply of bitcoin was limited by the algorithm that creates it. But they were overlooking counterparty risk. Since the vast majority of bitcoins in circulation are stored electronically and transmitted over the Internet, they're only valuable if those media function correctly. Let a system fail, as Mt. Gox apparently has, and the bitcoins in that system are either unavailable (in which case their immediate value is zero) or suddenly very risky, in which case they're obviously not a good savings vehicle.

Is this a deal-breaker for crypto-currencies? No. In many ways bitcoin is a better currency than the dollar because it can't be inflated away by a desperate government or confiscated in the coming wave of bank bail-ins.

People who understand crypto-currencies and own a small amount of bitcoin for transactional purposes are probably unfazed by the latest speed bump. And people who had their life savings in it have received a valuable lesson in the nature of money.

 

Back to homepage

Leave a comment

Leave a comment