U.S. investment banker James Rickards says tie bitcoin to gold and avoid volatility

James Rickards, a portfolio manager at West Shore Funds and the author of “The Death of Money,” has mixed feelings over bitcoin, at least that is what he appears to feel in his latest op-ed piece published Monday in the Darien Times entitled “Bitcoin meets the taxman.”

In his article, Rickards attempted to explain what bitcoin is: a digital currency backed by nothing. He then argued that it’s quite similar to the United States a dollar, a digital currency also backed by nothing at all.

“It’s true we have a few paper dollars in our purse or wallet, but these are mere tokens of dollarness,” wrote Rickards. “The overwhelming majority of dollar transactions, from credit cards to the government bond market are digital. Dollars emerge from and vanish into thin air — just like bitcoins.”

James RickardsRickards would further continue by opining that dollars come from a computer at the Federal Reserve, while bitcoins originate from computers on a global scale, but it is not controlled by any central body. He cited Nobel laureate Chicago economist Milton Friedman, who predicted something like bitcoin.

The finance expert noted that opponents of the virtual currency refer to the recent exchange failures, but this is quite a common occurrence in the regulated sphere on the financial industry, such as the Lehman Brothers.

“The Mt. Gox failure is a speed bump, not the end of the road,” added Rickards.

Another example that bitcoin challengers cite are the various illicit transactions and criminal activities that are associated with the cryptocurrency. Again, this isn’t just prone to bitcoin but other currencies as well, including the dollar.

“But dollars have been used for crime from Al Capone to Bernie Madoff. Again, the critics are confusing the currency with the uses to which it is put,” stated Rickards.

If there are many similarities to the greenback does that mean then it will eventually rival the dollar? Not so, says Rickards.

“If bitcoin has so much in common with the dollar, does this mean that bitcoin may soon rival the dollar as a store of value? This is unlikely because the dollar has set a trap for bitcoin in the form of taxes,” wrote Rickards.

“If you acquire a bitcoin for $100 and use it later to purchase $200 of goods, the IRS says you have a $100 gain on the sale of bitcoin that must be reported on your tax return. It’s no different than buying and selling a share of stock. It seems likely that many of the technophiles so ardent about Bitcoin are not bothering to report those gains. They may be hearing from the IRS soon.”

Rickards warned that individuals should forego paying their taxes in bitcoins because the U.S. dollar maintains a monopoly as legal tender in the country. He quoted economist John Maynard Keynes, the father of government intervention in the economy and the present Federal Reserve mandate, by saying:

“It is the ability of state power to coerce tax payments in a specified currency that gives a currency its intrinsic value. This theory of money boils down to saying we value dollars only because we must use them to pay our taxes — otherwise we go to jail.”

One of the major deterrents to bitcoin is its volatility. In its short history, bitcoin has gone from $1 to more than $1,000, while a traditional fiat currency is traded in fractions of pennies and not $100 during one market session. A solution to this would be tie to bitcoin to gold at a fixed rate, but it would require an agreement within the bitcoin community.
Such a move could then cause bitcoin to destroy the dollar.

In the end, Rickards believes bitcoin is more than just a currency but also a technology that is provides affordable and secure processes for all kinds of transfers, including bonds, stocks and land titles. He would reiterate what others have been saying for quite some time: the bitcoin technology will likely survive even if the bitcoin currency itself fails.

“Bitcoin’s future may lie in its role as a technology platform for inexpensive verifiable transfers rather than its role as a currency,” concluded Rickards. “To the extent it remains a currency, bitcoin is an interesting, if risky, experiment. Just don’t try paying your taxes with it.”

Rickards has made news in the past. In March, he projected that gold could rise in value to anywhere between $7,000 and $9,000 within the next three to five years. Earlier this month, he forecasted that some sort of financial collapse is going to transpire soon because “the U.S. economy is a disaster.”

What do you think? Should bitcoin be tied to the yellow metal? Will the bitcoin technology survive? Let us know in the comment section.

  • Martin

    You can buy gold and silver directly with bitcoin. So there you have an intrinsic value for bitcoin and a direct connection to gold.

  • HSchrader

    If there should be a one world currency, it should be bitcoin. Bitcoin is backed by an algorithm that regulates its availability. The world economy would be stable if all fiat currency is done away with, and money instead is made available by a printer that’s authorized to print money based on bitcoins available. And the availability can be regulated by linking the algorithm to a world population data put out by a census bureau, so that it wouldn’t become too abundant or too scarce. Imagine a world where there are no corrupt central banks anymore, that the world economy is instead run by a computer program that always follows the rules based on fairness, cannot be manipulated, cannot be given death threats, and cannot be assassinated.

    • Victor

      That will not happen because 75% of bitcoins are held by 1000 nerds, do you think world’s elites will give all their wealth to 1000 nerds?

  • Ralph Mazio

    An independent organization could to this with colored coins if they wanted too.

  • user

    This guy doesn’t understand how bitcoin even works.

  • Brian

    “A solution to this would be tie to bitcoin to gold at a fixed rate, but it would require an agreement within the bitcoin community.”

    You might as well suggest tying the price of copper to the price of gold. No amount of “community involvement” would do that. Bitcoin is a commodity. The price is set by the market.

    • Reluctant Prepper

      Wrong! Bitcoin (having no intrinsic value but has other value) is a currency since you consume commodities. It is a means of exchange. That being said; I don’t like the idea Jim has proposed for the following reasons:

      1. Bitcoin can be lost or stolen. Yes this can happen to gold.
      2. Those that bought Bitcoin at its early years will have a windfall. An electronic gold note would work but you would need to buy gold first to exchange.
      3. Bitcoin has a block-chain so central planners can see every transaction. I for one would hate this idea since privacy is important to me. Privacy is important to the governments around the world i.e. confidentiality agreements and official secrecy acts. I for one am totally disillusioned with the “goings on” that lead me to conclude politicians look after themselves and not the people.

      Sorry Jim but you can keep your central planning. I’ve had enough of them and it’ll get a lot worst in years to come.

      • Christopher Guida

        Actually, Brian is correct. There is no way to “peg” Bitcoin’s value to that of something else, since Bitcoin is a commodity (like gold) traded in a free market.

        “Bitcoin (having no intrinsic value but has other value) is a currency since you consume commodities.”

        …what do you even mean by this? Gold is a commodity, do you consume gold? How does Bitcoin not have “intrinsic” value, but has “other” value, in a way that makes it different from gold? In fact, how is Bitcoin different from gold at all other than the fact that it is not physical?

      • Brian

        Who are you replying to? Nothing you’re saying relates to my comment.