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.”
Rickards 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.