Don’t touch this gold and bitcoin combo with a ten-foot bargepole
This Canadian startup is using bitcoin technology to allow gold to be used for everyday transactions. But don't fall for the hype, says Dominic Frisby.
Last week, Canada saw the initial public offering (IPO) of BitGold.
It opened with a lot of publicity and a bang.
Today we consider BitGold.
We don't ask whether you should run away but how fast.
Bitcoin plus gold = sexy name, but not a lot of substance
BitGold is listed on the Venture Exchange in Canada with the rather handy ticker of XAU.V.
There are 36.6 million shares outstanding, of which 20 million are controlled by insiders. Based on Friday's close at C$4.14 per share, it has a market capitalisation of around C$161m.
It has C$9m cash and, with 6.4 million warrants (3.9 million exercisable at C$1.35), another potential C$5m in the pipeline. The marketing budget this year is C$5m.
Among its early investors are, notably, Soros Brothers Investments and Sprott Asset Management.
The idea is for the company to become a PayPal for gold. You can go into a coffee shop or a grocer's and buy everyday items with gold. You can also buy and store gold.
The company makes its money by charging 1% on transactions. For now, storage is free (although that is going to be an issue going forward gold costs money to store).
As blogger Otto Rock notes, last year BitGold's founders were paid in shares worth 3.3c a piece. The seed placements and pre-IPO fund raisings were at 90c plus warrants. The stock went public at C$2.70. After hitting C$4.50 on Thursday, the stock closed the week at C$4.14. Almost 701,000 shares traded on Friday.
Some people have done very well out of this already. But the business has hardly got going yet. It has very little market share, let alone profit. As someone who's seen what Vancouver is capable of, this has set all my alarm bells off.
There's been a lot of hype and now somebody is selling. There's an expression for that. Can't for the life of me remember what it is.
The long and sorry history of gold-backed digital currencies
As for the company itself, the website looks great. It's intuitive and easy to use. There'll be a mobile phone app before long. I'm sure that'll be great too.
But that's not the problem here.
All previous attempts at gold-backed payments systems have run up against the same problems.
First, Gresham's Law "bad money drives out good". If people have more than one form of money, they will spend the bad stuff and hoard the good stuff.
If you're a gold bug and this product is at least partly targeted at goldbugs you probably think there's some kind of currency crisis around the corner. (Not an unreasonable assumption given all the abuses of fiat money that have been going on over the last 20 years, and, in particular, since 2008.)
But if we're just a hop, skip and a jump away from some kind of currency crisis, why spend your gold (with all the associated costs) at these depressed prices, when you can dump your fiat instead?
The second reason gold payments systems don't work is that gold is not a day-to-day medium of exchange and nor has it ever been.
Even when the world was on a gold standard, the role fell to copper, nickel and silver. Gold's role has always been a store of value though it was used for high-value transactions.
Sure, thanks to digital technology, it is now possible to spend tiny amounts of gold gold flakes, if you like so, in theory, digital technology could change the habits of history. It's an argument that once persuaded me, it doesn't any more.
Some of you might remember E-Gold. Founded in 1996, by oncologist and economic history buff, Douglas Jackson, with attorney Barry Downey, you could open an account, buy some gold and then use it to pay other E-Gold account holders.
By 2008, it was processing more than $2bn-worth of transactions a year with some four million accounts open. The problem was that many of them belonged to money launderers and drug dealers. E-Gold was falling victim to hacking, fraud and identity theft. By 2009, it had been shut down.
On the back of E-Gold's (relatively short-lived) success, many other companies sprang up and failed Ebullion, Standard Reserve, INTGold, and, most notoriously, (it was an enormous Ponzi scheme) OS-Gold. They all died a death.
Online storage vault, Goldmoney, patented its own gold payments system, but eventually abandoned the idea due to the cost of compliance. BitGold's basic service is very similar to the GoldMoney system, though BitGold only uses one vaulting company (Brinks), while GoldMoney used four.
Nor is this the first attempt to combine gold and bitcoin most notably with GoldMoney's spin-off Netagio. It was quietly shut down due to lack of business.No one has yet been able to make gold payments work for the very good reason that gold is not a medium of exchange.
Given all this, my view is that BitGold's founders, Roy Sebag and Josh Crumb, don't properly understand gold.
Bitcoin and gold are two very different things
Bitcoin and gold both present alternatives to the fiat money system. So they attract people with similarly libertarian world views.
But the similarities end there. Go to a bitcoin conference, you don't see any grey hair (except mine). Go to a gold conference, you see only grey hair. The technical jargon of a bitcoin conference is little more than gobbledegook to a goldbug, who will tell you that bitcoin is a "nice idea, but will never work, because it is not backed by anything tangible", or that "governments will shut it down".
The fortunes made by early bitcoin adopters mean that anything with bit' in the name will always be sexy. That's, I'm sure, the reason they chose the name BitGold (and all that does for me is set off more alarm bells).
Yes, BitGold processes transactions using the blockchain the technology behind bitcoin but it is essentially a centralised system, whereas the whole point about bitcoin is that it is distributed.
But it's worth noting that an American computer scientist and legal scholar by the name of Nick Szabo (who many, including me, argue is Satoshi Nakamoto himself see here if you want to find out more on this) put together something called bit gold in the 1990s. It is, in essence, a precursor to bitcoin.
If BitGold's founders knew their bitcoin history, they would not have named the company thus. It is yet another factor that makes me worry that this is little more than a gimmick.
In the wake of all the hype, the company has a market cap of C$160m. To put that into some kind of context, BullionVault, the world's largest online gold storage facility by market share, has an asset value of about £27m. Its market cap is hard to declare as it's a private company, though a deal done five years ago valued BullionVault at £55m. But gold was in a bull market then, north of $1,800 an ounce.
BullionVault has about 50,000 customers. Its closest rival GoldMoney has about 20,000. A large chunk of that customer base was built up when gold was in a bull market and there was all the associated hype. It takes a lot of time to build that kind of customer base. And here's the thing: BitGold's services are not available in the US.
In short, there is a huge amount of success already priced in here, based on little more than a superficially persuasive idea. As soon as the hype dies out, a lot of money is going to get made shorting this one and a lot of money lost by those who were taken in.
PS I'm going to be speaking at the MoneyWeek Conference next month, and I'm hoping to see as many of you there as possible. I must admit I'm also looking forward to a rare opportunity to see Bill Bonner on stage if you haven't booked your place yet, you don't want to miss this get your ticket now!