2013-04-03 Monetary Metals: Gold, Redeemability, Bitcoin, and Backwardation

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Long essay from Keith Weiner more about gold than Bitcoin, he reiterates his positions that Bitcoin is not money using variants of the regression theorem & intrinsic/tangible value arguments.

http://monetary-metals.com/gold-redeemability-bitcoin-and-backwardation/

Returning to the question of Bitcoin, we have a conundrum.  Bitcoin is not debt.  In that sense, it is like gold—there is nothing to redeem because the thing is the final good.  Unlike gold, it is not a tangible good.  You cannot hold it or stack it in a safe in the floor.  Other than the value you hope it has in trade, it has no utility by itself.

Bitcoin in this context is like an attempt to reverse cause and effect.  Gold is money because people strongly desired it for its physical properties and then, subsequently, discovered that it was the most marketable good and thus useful as money.  Bitcoin bypasses this and attempts to go straight to being money.  Should hackers break its cryptography, the Internet go down for a few months, or any number of other scenarios occur, the above logic will reassert itself.

Owning Bitcoin is to be in a partially completed transaction.  Until it is exchanged for a tangible good in another trade, the owner of the Bitcoin is in the position of having given up something tangible for nothing in return.

I made the point, in a previous video that redemption is not the same thing as purchasing the monetary commodity.  Prior to 1933, one could go to any branch bank of the Federal Reserve and exchange dollars for gold.  This was not “buying” gold, but redeeming the dollars.  One accepted the dollar bill in trade, with the sure and certain knowledge of the terms (e.g. gold value) of redemption.  Unlike then, today the dollar can be used to buy gold.  But there is no way to know the terms—or indeed if one can even make the purchase at all—until one attempts the transaction.

It is the same with Bitcoin.

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[grondilu]

Gold is money because people strongly desired it for its physical properties and then, subsequently, discovered that it was the most marketable good and thus useful as money.

This is not exact.  The physical properties of gold are not that great.  In ancient times, many other metals were much more useful, especially considering how strong metals and allows were important to forge weapons.  Gold is soft and pretty much useless in metallurgy.  After all, we talk about iron age, bronze age and all for a reason.  We don't talk about golden age, apart from figurative speech.

Gold indeed had useful properties, but precisely those properties made it ideal as a medium of exchange.  It's easy to make gold coins, gold is almost absolutely inert chemically, it's rare and it is easily distinguishable.  All this made it the best tool as money.  Not because it had amazing properties for non-monetary uses in the first place.  It just hadn't.

[Rygon]

Although I own some PM's as a hedge, one of the downsides of gold is that the potential gold available to be mined is not a piece of information that is easy to come by. Estimates of the amount of gold that can be economically mined are anywhere from "a little" to "a lot." It's also very unpredictable because technology advances and new mines can rapidly change the amount of gold available internationally. For someone looking to save wealth, the level of predictability of currency increases adds a level of stability because everyone is operating with the same information. Say what you want about fiat currency, but at least the rate of currency generation is somewhat predictable, and often announced in advance.

[Piper67]

Although I own some PM's as a hedge, one of the downsides of gold is that the potential gold available to be mined is not a piece of information that is easy to come by. Estimates of the amount of gold that can be economically mined are anywhere from "a little" to "a lot." It's also very unpredictable because technology advances and new mines can rapidly change the amount of gold available internationally. For someone looking to save wealth, the level of predictability of currency increases adds a level of stability because everyone is operating with the same information. Say what you want about fiat currency, but at least the rate of currency generation is somewhat predictable, and often announced in advance.

Heh... and there are entire asteroids made out of the stuff out there 

[TraderTimm]

I've often wondered what would happen to precious metals if the earth got smacked by a large platinum/gold rock. Like piper said, there are mountains of rare metals just orbiting the sun in the Oort cloud.

[grondilu]

I've often wondered what would happen to precious metals if the earth got smacked by a large platinum/gold rock. Like piper said, there are mountains of rare metals just orbiting the sun in the Oort cloud.

Sure, and there are literally hundreds of billions times even more in the whole Milky way.  But it does not matter:  what matters is the amount easily available.

The Oort cloud is extremely far away from us.   We will never bring anything from there.  (Or when we can, we will probably be so advanced that we won't value precious metals that much)