Dominic is wrong – the time is ripe for digital gold

James Turk, founder of GoldMoney (recently acquired by BitGold), responds to Dominic Frisby’s take on BitGold from Thursday’s Money Morning.

Dear Dominic,

I am writing in response to your latest article about BitGold’s purchase of GoldMoney. I would like to clear up some points, so that your readers understand this transaction. BitGold is not a “bitcoin company” – if you need a comparison, it is much more “PayPal” than “bitcoin”, but BitGold can be better understood as a “digital gold” company, which of course is what GoldMoney invented and patented.

The digital gold currency being offered by BitGold is a technological advancement upon the service GoldMoney provided until January 2012. The profitability of a high velocity payments business like PayPal dwarfs that of gold ETFs and custody businesses. When GoldMoney launched 15 years ago, its payment service was ahead of its time. Today the market is ripe for innovation.

BitGold and GoldMoney will operate separately, offering products and services that appeal to different market segments. GoldMoney will continue to operate as before, while BitGold is focused on widening access to gold by enhancing its use as currency in day-to-day current accounts, and by enabling customers to accumulate value over time with any level of savings. These services are particularly useful in emerging markets and for those just starting on the path toward wealth accumulation.

GoldMoney customers who are not US residents can open an account with BitGold if they choose to do so, and I expect that many will. Similarly, BitGold customers can open a Holding in GoldMoney. Just as many people have two bank accounts – a current account and one for savings – we expect customers to use BitGold/GoldMoney in the same way.

Though our two companies will operate separately, there will be efficiencies that can be achieved that benefit customers, which results in satisfied customers. That means the shareholders of the combined company will benefit too, which leads to the heart of your article.

You are making a judgement call about the share price of BitGold. I am a firm believer in the market process. I also believe that investors will undertake the research needed to make an informed decision about whether or not to buy the stock of any listed company.

In my five decades of investing experience, I know first and foremost to look at the management team. I am impressed by the breadth and depth of the team that BitGold has assembled. They have experience in online commerce, deep IT skills, creativity, dedication, enthusiasm and above all, integrity. This mix of ingredients is necessary to build a successful company, and when joining with the people already within GoldMoney, it is a formidable combination.

By choice, GoldMoney shareholders are receiving shares of BitGold, not cash. I view these shares to be a long-term investment for holding well beyond the 12-month lock-up. There exists vast potential for changing online payments, and in my view, BitGold has the right people and resources to take advantage of this potential to the benefit of its customers and shareholders. GoldMoney shareholders want to be part of that effort, but will BitGold/GoldMoney be successful?

The future cannot be predicted of course, which explains the importance of relying upon a first-class management team. Good people can make good things happen. Importantly, the opportunity to change online payments exists, notwithstanding your concern that metal payments years ago never took off. Nor for example, did ATMs, which existed for many years before bank customers finally understood their many benefits. The point is that customer adoption in financial services often comes slowly; it is a natural response because people do not want to take risks with their money.

Additionally, the use of metal payments in GoldMoney was affected by Gresham’s Law, which states that bad money drives out good. In other words, money can be spent or saved, and the bad currency gets spent, and the good currency gets saved. BitGold has the opportunity to reverse this, for two reasons.

First, although safety plays an important part, currency is driven mainly by ease of use and cost, with the lower-cost currency being spent. BitGold’s technology addresses both of these points, and makes digital gold currency the easiest to use, lowest-cost and most secure way to make payments. Using the latest technologies in mobile payments, functional programming and cloud computing for speed and scalability, and effectively reorganising the way gold bullion will exchange and settle, the BitGold technology can help solve the most fundamental problem in money – making a store of value a good medium of exchange.

Second, Gresham’s Law is something goldbugs understand, which is the market segment that GoldMoney addressed. But BitGold is attracting users who have never bought gold. What’s more, the average account size in GoldMoney is about US$70,000, compared to about US$100 in BitGold. Anyone with such a small exposure to gold will not care about Gresham’s Law. BitGold is opening accounts for people who want to use digital gold currency to make payments and buy things online, which will attract merchants to BitGold and provide it with another important source of profits.

Only time will tell of course whether or not new impediments develop and hinder the adoption of digital gold currency. But GoldMoney shareholders want to participate in this journey, and I will also participate as a member of the Board of Directors of the combined company.

In 2013, I retired as chairman of GoldMoney, but have remained a member of the board. Once this transaction closes, I will join the BitGold board with two fellow GoldMoney directors, Hector Fleming and Mahendra Naik.

I look forward to participating in the combined company which offers an historic opportunity for the gold industry by creating an entirely new demand for gold – its use as online currency, to spend gold and even earn gold as people’s currency of choice. I am hopeful that I can contribute to the BitGold/GoldMoney strategy to ensure that its plans and ideas come to fruition. I will also do my best to ensure that BitGold/GoldMoney remains the industry leader in governance practices to provide our customers with assurances of integrity so they know that their money is safe.

Yours sincerely,

James Turk

Founder & Director, GoldMoney