Backing/pricing Bitcoin with Precious Metals

You must be logged in to create new topics.

Backing/pricing Bitcoin with Precious Metals

  • Adem Tumerkan

    We have two completely polar opposite currencies right here:

    Bitcoin: A new, homogeneous, virtual 21 century crypto currency and truly the pioneer of its kind.

    Gold/Silver: Currencies for 4,000 thousand years, Mises regressive theory time tested, inflation hedge, scarce and non printable, and industrial use. Plus it is a tangible real commodity.

    Now why don’t we think of a way to price bitcoin to gold and silver and platinum and palladium? Instead of using dollar terms to price them.

    Even farther, why don’t we start a marketplace/fund that will back bitcoins with physical gold and silver on demand?

    Use a weight of value similar to a gold standard. Since gold and silver are globally acknowledged as currencies and bitcoins are becoming popular as-well, we could combine them to have a virtual currency that is redeemable in physical commodities if requested (Similar to the classical gold standard in the early 1900’s).

     

    Thoughts?

    You must be logged in to reply to this topic.

  • Michael Sørensen

    I like the idea about pricing it with Gold and Silver, i really don’t like comparing it to fiat, and i’ve often thought of starting to value it in gold instead.
    But what stops me, is that i have no place to get on it with ease (I have a bad memory, and especially have a hard time remembering numbers.)

    Backing it with gold, is another matter though.
    As much as i like gold, i don’t care much for a gold standard. – And with Bitcoin, it seems like there is no need.
    A regular gold standard on fiat, is too easy to mess up. (Which have happened over and over through history.) – But with Bitcoin, the problem with having a backing, is pretty much gone. You can’t print them, and as for my concern, the only reason you neede a gold standard, is to make sure, that overprinting isn’t happening.

    No universals or definite conclusions, just my thoughts.

    You must be logged in to reply to this topic.

  • You must be logged in to reply to this topic.

    Adem Tumerkan

    I personally believe in thought of the classical gold standard where the dollar is in-fact a ruler of value (i.e. a dollar is 1/20 an ounce of gold) but I agree, throughout history politicians have destroyed what was once good.

    My problem with bitcoin is that it is always susceptible to hacking, which isnt likely but who knows, and that it is completely held together by internet and technology (what if technology isn’t available or no service or something?) and also that having it physically in your hand can make you feel at ease that it is with you.

    I would like to counter your sentence with the fact that not every country would accept domestic currencies, gold has always been a universal balance of payments.

    I believe if we first allowed gold and silver to float freely with bitcoins and let it find a market price after a while, lets say 5 bitcoins can get one ounce of gold. We then can fix the price of a bitcoin as value is 1/5 an ounce of gold and silver can float freely still (or vice versa).

    If someone amasses 5 bitcoins then he may contact the bullion bank and exchange it for 1 ounce of physical gold. Although who would want to carry around, lets say 20 ounces of gold? people can go freely using their cell-phone as their wallet, maybe even have debit cards tied to bitoin as-well (we can discuss that later), instead of lugging around the gold, but gives them the peace of mind that they could exchange it for gold and that it does in fact have intrinsic value.

    You must be logged in to reply to this topic.

  • You must be logged in to reply to this topic.

    Adem Tumerkan

    Anyone else, programmers or innovators, have any ideas?

    You must be logged in to reply to this topic.

  • You must be logged in to reply to this topic.

    Kyle Torpey

    There’s no need to back Bitcoin with gold or any other commodity. Bitcoins have value, and I would actually argue that they’re more useful than gold as a form of money. Bitcoins can always be stored offline if you’re concerned about hackers. I think things like the TREZOR hardware wallet and multi-signature addresses will improve the security of Bitcoin rather dramatically in the coming months. There’s also the problem of bitcoins becoming too valuable for redemption in gold. It doesn’t matter if you always promise to accept 2 bitcoins for an ounce of gold if we get to the point where that’s a horrible deal for the person holding bitcoins.

    You must be logged in to reply to this topic.

  • You must be logged in to reply to this topic.

    Adem Tumerkan

    Well technically they don’t have any intrinsic value because its price could fall to zero. Commodities such as gold and solver are used in industrial demand and jewelry and cost money to produce, so there will always be a price for them even if it isn’t monetary.

    Tangible currencies also being physical is a way of people not owning the same dollar (fractional reserve banking. For every 1 dollar deposited the same dollar is lent out 10 times. IT collapses once everyone shows up at the bank to redeem that physical dollar.)

    And if we got to that point then the free market is more then willing to accommodate the difference in the ratio.

    I do not find a bitcoin more valuable as gold especially since gold has proven the test of time and universally accepted by every culture as payment. But i do agree I like bitcoins swift payment system and how you can store them in a virtual wallet. This is why I wanted to take the best aspects of both and start a bullion bank linking them.

    You must be logged in to reply to this topic.

    • You must be logged in to reply to this topic.

      Chris Pacia

      @Adem. There really isn’t any way to make a commodity standard that isn’t centralized. For a gold standard you need a large network of banks, clearinghouses and depositories. All of which the government will either shut down or demand it be heavily regulated. (which is essentially how we got here).

      If you sever the link to gold you can make a completely decentralized censorship resistant currency that cant be shut down at the whim of the bureaucrats.

      You must be logged in to reply to this topic.

    • You must be logged in to reply to this topic.

      Kyle Torpey

      @Adem. There really isn’t any way to make a commodity standard that isn’t centralized. For a gold standard you need a large network of banks, clearinghouses and depositories. All of which the government will either shut down or demand it be heavily regulated. (which is essentially how we got here).

      If you sever the link to gold you can make a completely decentralized censorship resistant currency that cant be shut down at the whim of the bureaucrats.

      This is the key point of Bitcoin’s value. Whenever you back a currency with any kind of commodity, you’re opening that currency up to counterparty risk. Bitcoin is often referred to as Gold 2.0 because it is a commodity. It doesn’t need to be backed by anything, it is the commodity. It’s not like paper or fiat versions of digital currency. It’s a scarce resource for transferring value on the Internet.

      You must be logged in to reply to this topic.

      • You must be logged in to reply to this topic.

    Kyle Torpey

    If gold were only valued for its use in jewelry and industrial applications, then we’re still talking about a massive devaluation.

    Having said that, there are certain situations where Bitcoin is required as well. Bitcoin is the currency of the deep web, which does give it a bit of underlying value. This underlying value will also increase as applications are built on top of Bitcoin. Decentralized exchanges, Bitcloud, BlackMarket, Toroken, and other projects are only possible with Bitcoin. It is a commodity with “intrinsic value” because its the only system for transferring value over the Internet. (I know there are altcoins, but bitcoins work better as money due to the network effect/liquidity) Microtransactions are another use case where Bitcoin is basically required. So you could make the same argument for Bitcoin. Its value cannot drop to zero because of the above use cases.

    I don’t quite understand your second and third paragraphs, so perhaps you could go into more detail on that.

    You cannot back Bitcoin with gold because that defeats the purpose of the currency in the first place. It brings counterparty risk to Bitcoin. One of the main value propositions of Bitcoin is that it’s a digital asset that requires no trust in a third party. The point of a P2P electronic cash system is that you can store bitcoins in your own home and send them anywhere in the world instantly. Ironically, bitcoins are likely to be used to insure gold-backed cryptocurrencies in the future through a concept known as Lex Cryptographia. Read about that here: http://bitcoinism.blogspot.com/2013/12/lex-cryptographia.html

    You must be logged in to reply to this topic.

  • You must be logged in to reply to this topic.

    Lincoln Gardner

    Thanks for a good discussion. Thanks Kyle for turning us on to Trezor. We need ways to make it easy for non banking folks in developing countries to adopt bitcoin. Trezor is a step in the right direction. That Lex Cryptographia page is really intriguing. Although there may be no need (maybe even counterproductive) to back bitcoin with gold, we eventually need to stop thinking about bitcoin in dollar terms. What is the best way to make that transition? Is it to price bitcoin in gold on some exchange? Maybe some country like Iran starts selling oil in bitcoin, and we end up thinking of bitcoin price relative to oil.

    You must be logged in to reply to this topic.

    • You must be logged in to reply to this topic.

      Kyle Torpey

      Hey Lincoln,

      Pricing goods and services in terms of bitcoins is something that should come with more liquidity. It just doesn’t make sense to price things in bitcoins when the price is so volatile. A Big Mac could cost 3 mBTC one day and 2 mBTC the next day. Once there is more liquidity in the market, the price becomes more stable. With a stable price, it becomes more practical to price goods and services in terms of bitcoins.

      You must be logged in to reply to this topic.

      • You must be logged in to reply to this topic.

    Lincoln Gardner

    Kyle, since the supply of bitcoin is constrained, the only way to boost liquidity is to boost demand. How do you boost demand if it is too volatile for use as a currency? Could it be that until there is more widespread adoption, it’s better to regard bitcoin as a store of value, not as a currency, and that it is better used it as a savings device, i.e., as a way to avoid devaluation risk of fiat currencies? Volatility can be used to one’s advantage in that context if one has a regular savings program in which some bitcoin is acquired and saved each month. Assuming that demand for bitcoin grows faster than the supply (which is known and predictable), the value or purchasing power of bitcoin should grow over time. So is there is a built in disincentive to spend bitcoin?

    You must be logged in to reply to this topic.

    • You must be logged in to reply to this topic.

      Kyle Torpey

      Lincoln – I agree with you 100%. I view bitcoins as a commodity right now, but they could turn into money once the volatility slows down. The main driving force of volatility right now seems to be regulatory uncertainty. If you look at all of the major moves in the market over the past year or so, they are due to either a statement from a government or MtGox’s incompetence. I think it will be easier to find a stable price once governments stop saying they’re going to ban Bitcoin every other week. It’s also important to remember that the bitcoin does not need to be better than the dollar or euro. It only needs to be better than some of the worst currencies in the world. It can then slowly takedown the competition one by one as more people leave their local fiat currency and join the Bitcoin network.

      You must be logged in to reply to this topic.

      • You must be logged in to reply to this topic.

    Adem Tumerkan

    Chris, most importantly once the bureaucrats had severed the link to gold in in 1971, the price of gold skyrocketed. So I am a little confused with your statement regarding severing gold, especially when bureaucrats are elected to serve our purpose in voting, which I find silly to have a nation of 330 million have 435 representatives elect for them.

    Kyle, I disagree on your statement about claiming how bitcoin has intrinsic value especially when it cant be physically held in ones hand. But that is just our humble opinions.

    Sure a group of computer wiz’s and such can use it for apps and such but thats a very very small amount of people who will use it. there are 7 billion people in the world. How do you expect, if everyone wanted to use bitcoin, that would work? Theres not even enough for 1 bitcoin per living person. It takes costs and finite resources and labor and capital to get gold out of the ground, like any other real commodity. It has a cost of production price. It has been accumulated for millenniums. It is durable and homogeneous and rare. It has value besides a currency as it is tangible (as I wrote above). I think bitcoin is more of a virtual credit than a currency.

    Its value could certainly drop to 0 since any hacker could create its own crypto-currency, just as I could go out and print a bunch of TUMERKAN dollars. Whoever accepts the currency is expecting that when he/she spends it, the person they are doing business with will also accept it, and so on. It has no physical substance. Bitcoin, in my opinion, cant be money since it isnt a store of value. Nobody wants a bitcoin for the bitcoin that I have ever met, but because the value of the bitcoin is increasing in dollars. One day those miners and hoarders after seeing the price plateau will begin selling into dollars and buy real physical goods with those dollars. Sounds a lot like tulip mania.. It would have to definitely stand the test of time to even consider it a currency.

    I do think bitcoin has done some things different and better than gold which it can learn from.
    With regards to my paragraph I was referring to how our banking system is a fraction reserve banking system. It means that 10 people have a claim on the same physical 1 dollar bill. Which is fraud.

    Linclon, I agree it seems as if bitcoin is more of a speculation at this point.

    You must be logged in to reply to this topic.

    • You must be logged in to reply to this topic.

      Kyle Torpey

      Kyle, I disagree on your statement about claiming how bitcoin has intrinsic value especially when it cant be physically held in ones hand. But that is just our humble opinions.

      I don’t think anything has intrinsic value. All value comes from how people perceive the asset. The usefulness of money comes down to what you can do with it. When compared to gold, bitcoin already has more utility as a form of money. The fact that the bitcoin is a censorship resistant digital asset makes it valuable. The problem with gold is that governments shutdown digital gold currencies (e-gold, Liberty Reserve, etc.). They can’t shutdown Bitcoin.

      Sure a group of computer wiz’s and such can use it for apps and such but thats a very very small amount of people who will use it.

      Many of the apps built on top of Bitcoin will be used by a large number of people. Decentralized exchanges and markets have competitive advantages over things like eBay and NASDAQ. Decentralized storage will be able to compete with companies like Dropbox. Yes, nerds will use this technology at first, but that was also the case with the Internet.

      Theres not even enough for 1 bitcoin per living person.

      A bitcoin can be broken up into 100,000,000 pieces. It’s more divisible than gold.

      It takes costs and finite resources and labor and capital to get gold out of the ground, like any other real commodity. It has a cost of production price.

      Mining bitcoins also comes with expenses. People have spend millions of dollars on the development of hardware built specifically for the purpose of mining bitcoins. Electricity is another cost for Bitcoin miners after they buy the expensive hardware. It also becomes more expensive to mine bitcoins over time because more miners are joining the network with more powerful computers. This increase in competition also secures the Bitcoin network because it increases the amount of computing power that would be needed to attack Bitcoin.

      It has been accumulated for millenniums. It is durable and homogeneous and rare. It has value besides a currency as it is tangible (as I wrote above).

      You are right when it comes to the track record of gold, but that doesn’t mean it is the end-all-be-all of money. When it comes to sending a payment to someone across the world instantly, Bitcoin is obviously a better option. Value outside of money does not really matter. People use dollars every day, even though there is no gold backing them. The problem with fiat currency is that the control of the money supply is centralized, Bitcoin solves that issue.

      Its value could certainly drop to 0 since any hacker could create its own crypto-currency, just as I could go out and print a bunch of TUMERKAN dollars. Whoever accepts the currency is expecting that when he/she spends it, the person they are doing business with will also accept it, and so on. It has no physical substance.

      Yes, its value could drop to zero if it was replaced by something better, but that scenario is unlikely for a variety of reasons. Bitcoin is the first mover in the cryptocurrency space, which means it has the benefits of extra liquidity through the network effect. Liquidity is a vital aspect of any form of money because it leads to a less volatile medium of exchange. This means that any new digital currency is always at a competitive disadvantage from the start. This is why there are already hundreds of other currencies out there, but Bitcoin is still by far the most widely used and accepted. As mentioned before, a large portion of gold’s current value is not based on its industrial uses.

      One day those miners and hoarders after seeing the price plateau will begin selling into dollars and buy real physical goods with those dollars. Sounds a lot like tulip mania.. It would have to definitely stand the test of time to even consider it a currency.

      As mentioned before, there are certain properties that put a price floor on its value. People need to use the bitcoin as money for a variety of reasons I mentioned in a previous post. There are also people who will simply never sell their bitcoins for philosophical reasons. Your argument can also be made when it comes to gold. There have been some horrific crashes in the bitcoin, but the price hasn’t gone back to zero. You have to ask yourself why that hasn’t happened. Having said all that, I agree that time will play a crucial role in creating more trust in Bitcoin.

      I agree that the bitcoin is mostly a speculation at this point. It’s too volatile to be money, but I think the volatility will subside with time.

      One last note: You actually can hold a bitcoin in your hand. You can print out your private key on a piece of paper and take it offline. What you can’t do is hold gold in digital form. You can only hold a promissory note for gold on a computer.

      You must be logged in to reply to this topic.

      • You must be logged in to reply to this topic.

    Justin Heyns

    For anyone interested, the company Bitreserve.org does this already. They give you a bitcoin wallet for each asset type. So for instance, when I buy gold I send bitcoin to my gold wallet. It’s sold for gold which bitreserve stores for me. Instead of a bitcoin balance, the wallet gives me a balance in oz (down to as many decimal places as bitcoin). Then I can send bitcoin from that wallet. At the time of sending, the gold equivalent is sold at the spot price and the bitcoin is transmitted over the blockchain. They also have currency backed wallets. I live in an inflationary country and I use this service to store my bitcoin as dollars for short term savings. So right now, I’m saving up for a new computer, the price of which tends to fall in dollars but rises in my currency. Once I’ve saved the requisite dollars I can buy it straight from a site that accepts bitcoin without having to worry about converting it to my local fiat currency.

    You must be logged in to reply to this topic.

  • You must be logged in to reply to this topic.

You must be logged in to reply to this topic.