Ever since BitCoin was invented, comparisons have been drawn with gold, often to gold’s detriment. Charles Morris argues that BitCoin and gold can happily co-exist, while technological advances will ultimately work to gold’s benefit

Content supplied by the World Gold Council

On 2nd March 2017, the price of BitCoin surpassed the price of an ounce of gold for the first time. For those who worry that gold has found a digital rival, it hasn’t – this is merely a nominal coincidence. BitCoin does have something over gold – the market is small (US$40 billion network value) and growing. But gold also has an advantage – the market is deep (US$8 trillion) and it enjoys an unrivalled sense of stability.

BitCoin deserves to appreciate rapidly as it is a growth asset. In that sense, it is more comparable to a social media stock than to gold. Around US$1.5 billion changes hands each day over the BitCoin network. That has risen ten-fold over the past three years – all while bypassing the banking system. Whatever that money is up to, most thinking folk acknowledge the blockchain behind it is a technological masterpiece.

If we cast our minds back to the era before modern technology, gold stood out as a technology of its time. A universally accepted form of payment, it could be authenticated, measured and exchanged. That simple idea enabled different economies to be calibrated and trade to flourish. Gold’s monetary dominance lasted until relatively recently. In fact, gold’s formal role was only eroded with the rise of modern communications.

The first big shift occurred in the mid-19th century, when the telegraph was set up, facilitating access to real-time information and paving the way for the current financial system. Communication has become increasingly rapid since then, thanks to the telephone, computers, satellites and the internet, but, with each fresh development, reference to gold became less important.

Even as gold lost much of its formal role, it maintained its credibility and status with central banks and other longterm investors. That informal role is significant as roughly US$250 billion changes hands each day through the gold market. Consider that gold offers no annual income, yet the market remains vibrant – a sign that this is a true and lasting safe-haven. As a result, gold should continue to thrive in the digital age as it remains the ultimate store of value.

Digital gold

The blockchain technology that drives the BitCoin network has one great advantage – it is immutable, which means that past data can never be changed. As such, it is a point of reference that can be trusted by all. And it has big ramifications for gold. Using blockchain, modern communications enable gold to be redistributed round the world at the touch of a button, without ever leaving the vaults.

Hedge fund manager, Adam Cleary of Cavenham Capital, was a pioneer in this field, founding Bullion BitCoin in 2013, just as BitCoin was capturing the public’s imagination. Cleary wanted to make gold freely transferable by piggybacking on the BitCoin blockchain so he created an electronic token backed by gold. Back then, he was ahead of his time but today, his ideas are beginning to take root, as he reveals:

Following my initial experimental attempts at creating a gold token on the BitCoin blockchain in 2014/15, it is great to see the huge multiplicity of innovation and startups in the space. This shows that the idea of a redeemable digital gold token is sound, but to succeed, above all, this idea requires a highly capitalised, immediately recognisable sponsor with strong market credibility who is highly trusted by gold market participants. The technology is readily available and easy to implement so there is a huge opportunity here for a major gold market player to swoop in and dominate the digital gold market.

Cleary’s dream was to make gold digital so that it could be transacted around the world in a decentralised manner, enjoying the same anonymity as a cash transaction. However, as he suggests, such a system would require trust and therefore a “recognisable sponsor.” That sponsor would struggle to operate without providing an audit trail to the authorities, which directly contradicts the notion of decentralised and anonymous payments in gold: at least on a grand scale.

Today, many well-known brands such as The Royal Mint are building new gold platforms, using either blockchain or other technologies.

One company, expected to launch in the next few months, will be able to store gold securely in a vaulting service, yet allow you to spend your gold using Master Card. You can also text it, email it or transfer it at the touch of a button, and at no cost. It’s impressive, usable and slick and may well have broad appeal.

This fledgling operation has chosen to abstain from the blockchain, primarily because, in order to achieve the functionality they desired, the system had to settle a transaction in one hundredth of a second. However, this new firm does recognise the appeal of BitCoin’s public record keeping.

And this is the crux. A traditional database must be private, yet a blockchain system can be private or public. If private, the owner maintains control of the system so it is centralised. A public blockchain is the breakthrough design that enables the network to be decentralised.

A growing role for gold

Many gold market participants have dreamt of a decentralised system for gold, yet it needs a brand to provide trust and grow the network. And a brand will be under the control of authorities. This is a fundamental obstacle standing in the way of decentralising gold: someone or some entity must be responsible for the gold in the vaults and reconcile what is shown on the blockchain.

It therefore seems that centralised systems for gold offer the best practical solution. Yet developments in FinTech mean that we can still maintain a balance in gold rather than cash and spend it, as if it were cash, using widely adopted systems such as Master Card or Visa. In so doing, gold’s liquidity will improve further and its central role will be restored.

In an indebted world, there are plenty of reasons why people should want to carry electronic gold in their pockets – and technology is allowing them to do so in a seamless way. Whether or not the systems opt for blockchain over traditional databases isn’t the issue, as they can all succeed in different ways.

In years to come, therefore, historians will probably see the late 20th century as gold’s ‘Dark Age.’ Gold was relevant in the preceding millennia and its relevance has been on the rise again in recent years. At first, technology threatened gold. In the end, technology was its saviour.


This article was first published here.


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15 Comments

What is BitCoin never hear of it? How can Interest.co.nz publish mis-information like this? Aside from the fact you still have counterpart risk when using any type of digital gold, blockchain or not. The only exception to this is using Bitcoin which has no counterparty risk.

Really? Conceptually think of it as globally accepted currency free from Govt and all banking control, spying, tracking and fiddling. It has the potential to "disrupt" the control that our banking masters have so cant see it going away.

It is untraceable in transfers, which is why all the crypto virus hackers prefer to be paid in it. Government and traditional banking owners really dont like that it can totally bypasses any controls they put in place, which is exactly why punters love it. Spikes in its value seen with China going large recently, hot money escaping Govt controls anyone.. https://www.businessinsider.com.au/china-behind-latest-bitcoin-craze-201..., and was also seen in Cyprus when they were bailed out and the European banks threatened to seize depositors money http://money.cnn.com/2013/03/28/investing/bitcoin-cyprus/index.html.

Very volatile in value, up and down a lot.

Bitcoin is a wonderful idea, I love the fact that you can travel and exchange Bitcoin into the local currency without paying banks exchange rate fees or horrendous ATM charges, there is no limit on withdrawals and it is very fast. Most people that hold gold like the fact that it is physical and a store of wealth so I don't know how combining it with blockchain technology would go down. The question I would like answered would be would the government come up with some sort of OBR rule that they could access your gold stored in the vault

Also the beauty of blockchain and Bitcoin is that you have your own wallet and do not use an exchange to store your money. If your gold is stored in an exchange you are vulnerable if that exchange fails.

Which company are you talking about here?

"One company, expected to launch in the next few months, will be able to store gold securely in a vaulting service, yet allow you to spend your gold using Master Card...... This fledgling operation has chosen to abstain from the blockchain, primarily because, in order to achieve the functionality they desired, the system had to settle a transaction in one hundredth of a second."

It sounds a lot like Digix, which is absolutely using the blockchain, it's just not using "BitCoin". Also it's spelled Bitcoin.

Goldmoney.com already provides this service and has done for a while now.

"The blockchain technology that drives the BitCoin network has one great advantage – it is immutable, which means that past data can never be changed" This is also mis-information due to some blockchain's hardforking to reverse bad code(Ethereum).

Does Interest.co.nz fact check what they post or do they just blindly publish any old rubbish sent their way?

Ethereum's hard fork did not 'reverse code', was not a rollback, and did not change past data...

A new state change (equivalent to a transaction) was inserted into the chain that transferred the thief's funds to a withdrawal contract, and this was agreed by the community in a decentralised manner. Ethereum's code was not affected.

I get where you're coming from but you need to fact check your comment too...

The bad code was the DAO contract and the state change turned Ethereum from a immutable blockchain to a blockchain at the whim of the devs. The original immutable blockchain is still here called Ethereum classic. Facts corrected thanks.

DAO's code wasn't changed either, and the change wasn't 'at the whim' of the devs, it was voted on by the community. In my mind Ethereum carries the chain that the community agreed on and is therefore the correct one. Of course the situation was not ideal, but that is how a decentralised chain should work. And Ethereum Classic will continue, at a fraction of the price and developer uptake, for the minority who value a flawed idea of immutability over the reality of the social contract and game-theory aspect of the blockchain.

https://www.cryptocompare.com/coins/guides/the-dao-the-hack-the-soft-for...
* Reverse the results of bad code would have been better wording.
Flawed idea? You must have been one of the gullible that bought in to the DAO...

I just sold all 10 of my litecoins for 420 euros. Mined them for fun years ago at little cost. Its intrinsically worthless, you cant use it as a medium of exchange and the markets aren't deep enough to trade large amounts. I almost feel sorry for the poor chumps who purchased them.

Bitcoin and etherum are the currencies of criminals around the world and at some stage will have to be regulated. It is not far off a ponzi scheme.

The blockchain technology is great and will transform many industries.

Penguin you should stay off the ice...
http://www.coindesk.com/eu-report-digital-currency-use-by-organized-crim...
The USD is the most widely used currency for criminals.
A ponzi is an investment scheme. Bitcoin is a protocol for the internet of money.
Your ignorance is astounding...