High Tech Fiat Alchemy

By Dr. Jeffrey Lewis: The curious case of Bitcoin and the associated rise of electronic currency has rekindled money and wealth discussions. It has also given rise to the re-birth to a libertarian cyberpunk ideology. In some ways, the response is a natural reflection of the devaluing of paper promises. In others ways, electronic crypto-currency is perfectly positioned to launch into physical metals. In fact, early correlation has been established, despite the overall tight control of the precious metals markets.

The most enthusiastic e-currency proponents have an insatiable appetite and need for understanding and defending their positions. What is fascinating is the much sought after anonymity and speed of movement. More difficult to establish is credible backing.

However, the intensity and enthusiastic defense are manna from heaven for the long-term physical precious metals investor. Such an investor is apathetic to the cause that any significant mass of the populace will gradually wake up to the ongoing (and historically unprecedented and ultimately hyperinflationary) monetary experiment being run today.

Bitcoin investors, outside of the pure speculator, are not necessarily buying from the safety or fear side of the trade. Obviously, the same could be said for the speculative side to precious metals paper trading, though at this point the betting is heavily to the short side of the boat.

The machine will start and feed on itself, becoming more and more fragile. And then velocity hits light speed. Collapse.

The New vs. The Strong

Electronic and currencies have a market backing. And while this may suffice in providing confidence, the speculative patterns that have developed along with the rise of derivatives in the crypto space threaten the worthiness of that market backing.

In much the same way, precious metals trading is dominated by manipulative paper trading wagging the physical dog. Electronic currencies could fall into the same pattern. It is worth noting that (without much of their own defense) the precious mining sector has been nearly destroyed by these illegal and unregulated price management practices.

JP Morgan’s recent patent application for its own digital currency might be construed as a warning sign rather than a vote of confidence. It is easier to imagine this move as stakeholder - just in case the U.S. Treasury’s enforcement arm doesn’t decide to come down on businesses that accept virtual currencies (which if course it already has).

A currency with a “market”, rather than commodity, backing is much more exposed to an array of external influences that are largely political in nature. This makes it much easier to manage perceptions, using a monetary propaganda put in place long ago to keep the oldest forms of money out of the system.

The Bitcoin movement is reminiscent of the tendency to limit our projection of new technologies. In his recent book, "Antifragile", author Nassim Taleb characterizes robustness of the inanimate objects. Taleb notes that if some thing or technology has already existed for a significant amount of time, the likelihood of its survival into the future rises considerably. 

Precious metals are obviously an old world technology that, despite machinations to the contrary, have continued to exist. They wield influence and are desired. The current period of overt price manipulation, horrible sentiment, propaganda and misinformation is spread by the priesthood of monetary policy. This pales in comparison to the demand for physical metal, which has never been stronger.

The Medium vs. The Storehouse

Money loves speed and momentum, and digital currencies offer this in a way that dovetails with the magic of user-friendly electronic devices designed for toddler interaction.

Speed and ease of use, however, is not necessarily conducive to a store of wealth, savings vehicle, or the formation of capital - essential ingredients for organic economic growth.

The use and widespread adoption of digital currencies would easily dovetail with an investment class still anchored by the desperate search for yield and the often fruitless endeavor to have money work for you.

Indeed, the digital currencies could be an essential mechanism for transferring or coaxing the trillions of dollars in retirement accounts and pensions soon to be looking for yield.

Much like a glass of water in the desert, fair value and civilized commerce ultimately revert to the natural predictability of commodity - not debt, military or market-backed mediums of exchange. 

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X art by WB7