The problem with gold is that it doesn’t do anything. Since gold coins have fallen out of use, most of the world’s gold now sits in the vaults of central banks and other financial institutions. As a result, gold has little connection to the real economy. That can seem like a good thing when the real economy feels like a scary place to be. But as soon as other attractive investment options appear, gold loses its shine. That is what we have seen with the recent declines in gold prices.In their push to bring Bitcoin to the mainstream, its promoters have accepted, and, in some cases sought out, increased regulation. Last month Mt. Gox registered itself as a money services business with the Treasury Department’s Financial Crimes Enforcement Network. It has also increased customer verification measures. The changes came in response to a March directive from Financial Crimes Enforcement Network clarifying the application of its rules to virtual currencies. The Winklevosses’ proposed ETF would bring a new level of accountability.In the end, however, I expect that Bitcoin will fade back into the shadows of the black market. Those who want a regulated, secure currency that they can use for legitimate business transactions will pick from one of the many currencies already sponsored by a national government equipped with ample resources, a real-world economy and far more transparency and security than the Bitcoin world can offer. bitcoin blog
The Winklevosses would make Bitcoin investing easier by allowing smaller-scale investors to profit, or lose, as the case may be, without the hassle of actually buying and storing the electronic coins. Despite claims of security, Bitcoin storage has proved problematic. In 2011, an attack on the Mt. Gox exchange forced it to temporarily shut down and caused the price of bitcoins to briefly fall to nearly zero. Since Bitcoin transactions are all anonymous, there is little chance of tracking down the culprits if you suddenly find your electronic wallet empty. If the Winklevosses get regulatory approval, their ETF would help shield investors from the threat of individual theft. The ETF, however, would do nothing to address the problem of volatility caused by large-scale thefts elsewhere in the Bitcoin market.While Bitcoin comes wrapped in a high-tech veneer, this newest of currencies has a surprising amount in common with one of the oldest currencies: gold. Bitcoin’s own vocabulary, particularly the term “mining,” highlights this connection, and intentionally so. The mining process is designed to be difficult as a control on supply, mimicking the extraction of more conventional resources from the ground. Far from providing a sense of security, however, this rhetoric ought to serve as a word of caution.Gold is an investment of last resort. It has little intrinsic value. It does not generate interest. But because its supply is finite, it is seen as being more stable than forms of money that can be printed at will.