Jim Rickards: Bitcoin vs. Gold

[Ed. Note: Jim Rickards’ latest New York Times bestseller, The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis, is out now. Learn how to get your free copy – HERE. This vital book transcends bitcoin trends and rhetoric from the Fed to prepare you for what you should be watching now.]

Jim Rickards joined The Street and Kitco’s Gold Report to discuss bitcoin, gold and the future economy with Daniela Cambone-Taub. The conversation covered a leader in virtual currency, bitcoin, which continues to make headlines in financial media coverage. Jim Rickards’ interview takes on investor confidence, liquidity preferences and what it might mean for the U.S dollar and gold.

To begin the conversation the host asked how Rickards’ saw the cryptocurrency and the craze unfolding. Rickards’ pressed, “It is interesting. I looked at it last night and it was nearing $3,000 for one bitcoin. It could be closing $4,000 by tonight.”

“Bitcoin is a form of money. I have no quarrel with that. When people say the price is $2,000 or $3,000 it is still not an investment and has no yield. When you buy stock in a company you can analyze the company, the management, the assets, etc. When you buy a bond you can see the interest rate, who is the issuer, creditworthiness, inflation. There are ways to analyze all of these things.”

“There are ways to analyze these things. When you buy a bitcoin and give dollars, euro, yuan to get bitcoin all you are doing is exchanging one form of money for another. It has no yield. There are no bitcoin investable assets. There are no bitcoin bonds. You are just swapping money. When you see the price going to $2,000-$3,000 you can say that bitcoin is going up, but you can also say that the dollar is going down.”

Jim Rickards is a currency expert and economist who examines the complex dynamics of geopolitics and global capital. Rickards’ has worked as a portfolio manager, lawyer and held various senior positions on Wall Street. His most recent New York Times best seller, The Road to Ruin offers his critical analysis of financial crises and what he believes is ahead for the global economy.

When speaking on the trend and value of the cryptocurrency Rickards’ noted, “People are expressing a liquidity preference for bitcoin as a form of money over dollars. That’s one theory of valuation. What’s the evidence for that? None. Because, if that were true, if you were losing confidence of the dollar then gold would be going up and it’s not. So it looks like a bubble.”

The host then pressed on the restriction on “printing” of the virtual money and its reproduction Rickards’ responded that it, “is capped to some level but we’re not there yet. Where does bitcoin come from? Yes, bitcoin can be purchased on a secondary market. But they are created by “miners” which is a bit of a misnomer. They’re basically people with a lot of computing power and developing expertise that solve very hard math problems and give a bitcoin as a reward. When bitcoin reaches levels similar to today, two or three thousand dollars, that is a pretty big incentive.”

“While the cost of [digital] “mining” is not zero, but it is pretty low relatively to the cost. To me it looks a bit more like the Fed. How much does it cost the Fed to create a dollar? The answer is zero. It doesn’t cost them anything to create a dollar.”

“What does it cost to create bitcoin? Sure, you have some investment in computing but it is nowhere near the market price. [So that’s why] it looks a bit like the Fed where you keep cranking them out, they are money, and when you buy bitcoin for dollars you are just swapping money.”

Jim Rickards Bitcoin Reserve Currency

When asked whether he viewed the possibility of bitcoin as reserve currency the economist responded that in his view, “No. To be a reserve currency it is not enough just to be money. The dollar is a reserve currency, 60% of global reserves are in dollars. The reason they’re in dollars is not because of the dollar – it is because of the bond market.”

“Let’s say I am China and I am exporting and get dollars. Then you are forced to invest in something, and so we have the Treasury bond market. There is the same with the euro. I can go buy German government bonds. Those are reserve currencies because they have investable assets. If I buy bitcoin or have things shipped that are purchased with bitcoin, there’s nothing to invest in. It can’t be a reserve currency until someone goes out and creates a bitcoin bond market. It is just too small.”

When asked by the host on whether the IRS might start paying greater attention to cryptocurrency market and some of the most shadow features of the money Rickards leveled, “People don’t understand this. Let’s say I bought bitcoin for one thousand dollars and I sold it for two thousand dollars. I have to report a thousand dollar gain on my tax return. Then you’ll have to pay taxes on it, at forty percent or whatever the rate is. How many people are actually doing that? I don’t know the answer but I am going to guess that it is not a large percent.”

“Most people are working in bitcoin, racking up large gains and not putting it on their tax returns. The minute you do that, you’re a tax evader. You’re like Al Capone who ended up in Alcatraz. Now, there hasn’t been much enforcement.”

“I am a tax lawyer and was a tax counsel to Citibank for many years. The IRS seems to be waiting on this one. I expect they’ll ‘come out of the woodwork’ sooner than later. Probably subpoena one of these [cryptocurrency] exchanges… and then the IRS will get a court order to freeze up all the bitcoin.”

“This is what the IRS did to Americans with Swiss bank accounts, they’ll do it with bitcoin.”

Finally, Rickards’ was asked on his reaction to the mounting comparisons between bitcoin and gold. “Dollars are money. Gold is money. Bitcoin is money. Euro’s are money. They’re all different forms of money. So you have a liquidity preference… [that examines] the dollar price of gold, the dollar price of bitcoin. They’re all just cross-exchange rates. I like gold. I have some cash, I have some dollars and I have some silver…”

To catch the full interview with Kitco’s Gold Report on The Street with Jim Rickards’ here.

Thanks for reading,

Craig Wilson, @craig_wilson7
for the Daily Reckoning