A long time ago in a galaxy far, far away we wrote a series of articles arguing that bitcoin is not money and is not sound. Bitcoin was skyrocketing at the time, as we wrote most of them between July 30 and Oct 1 last year.

Back in those halcyon days, volatility was deemed to be a feature. That is, volatility in the upward direction was loved by everyone who said that bitcoin is money, in their desire to make money. In the first instance of the word, the term money refers to bitcoin. In the second, it refers to the dollar. The same problem we see with gold:

From what we remember from a logic class in the philosophy department back in university (in the halcyon days long before the halcyon days of bitcoin skyrocketing), there may be a fallacy or two in here that have Latin names.

Anyways, in our bitcoin articles, we were careful not to get into the game of setting price targets. We didn’t know (and no one else did either, as it turned out) where the price would go. Other than, we did say that bitcoin has no firm bid and its price will drop when the speculators turn. Bitcoin had just hit $3000 when our series began. We were careful to say that the price could go a lot higher, and we made no prediction as to how high or when it would turn.

We added one more article on December 10. That turned out to be days before the top, though we didn’t know it at the time. Neither did those presuming to give you financial advice, telling you to buy it. We didn’t call the top (the article was an argument that gold is money because its marginal utility does not decline).

In today’s article, we are not just trying to say “we told you so.” We have a point to make. We want to revisit bitcoin in light of an interesting development.

The Ultimate Stablecoin

This week, bitcoin fell hard. It closed last week around $6,400. And this week, it was around $5,400. This is $1,000 in a week, or about another 15%. That is on top of the epic drop from its high near $20,000 set about 11 months ago.

When bitcoin was rising, its volatility was a feature. But once it began falling, then this feature became a bug. Probably for this reason, there has been the rise of so called stablecoins. Tether, the most prominent, is tied to the pseudo-stable dollar.

And, though they are generating much less buzz (for now), there is a better class of stable crypto currencies, which are redeemable in gold (e.g. Digix Gold) or even gold legal tender coins (e.g. Quintric). We like to think we helped kick off the concept with our piece in April 2013, where we said:

“The time may not be right yet, but we would love to see a similar technology to provide a gold-redeemable cryptographic based currency. “BitGold” would not be based on the labor theory of value (i.e. “mining” to generate new coins), the quantity theory of money (i.e. absolute cap on the quantity of coins). It would not be plagued by a ridiculous bid-ask spread. In short, it would behave as dollar bills did before the advent of the Fed. Arbitrage would set the value of BitGold…”

We like to think of things in terms of preferences. We ask the question what would happen in the following scenario. Suppose investors can buy one of two different bonds from the same issuer, each subject to the same credit risk, and the same maturity. The only difference is that one promised to pay $120,000 in 2028, but the other promised 100 ounces of gold. Given this simple choice, we are confident that many will choose the gold.

Similarly, if savers had a choice between the irredeemable bitcoin and a gold-redeemable coin, assuming equality utility, security, indelibility, etc., which would they choose? And now with bitcoin falling, it’s obvious.

There’s just one little problem with gold redeemable crypto currencies.

Making Gold Cryptocurrencies Work

There is a cost to store and administer the gold. So there are three conventional ways that an issuer can cover this cost. One is simple enough. Charge for storage. Digix, for example, charges 60bps per annum. That works for the company, but of course to the saver it’s negative interest. Saving becomes a Sisyphean task (as we wrote about the Swiss franc) when there is a constant drip-drip-draining away of your savings. No one would choose to pay 60bps per year unless they are expecting big capital gains (in dollars).