Bitcoin vs Bitcoin Exchanges

One of the common errors made in analyzing Bitcoin is conflating its security with the security of Bitcoin Exchanges such as Mt. Gox or Bitstamp.

Bullion.Directory precious metals analysis 8 January, 2015
By Terry Kinder
Investor, Technical Analyst

I have used a few Bitcoin exchanges – BTC-E, Mt. Gox, CampBX and Coinbase in the past and managed not to be separated from my money. One of the reasons why is because I did due diligence on each of the online exchanges before doing business with them. It only takes about 30 minutes to an hour to conduct basic due diligence on any Bitcoin exchange, enough to insure you won’t be ripped off or do business with someone running an exchange out of their basement.

The Bank Robber Argument

But, I’ll get back to due diligence in a moment – specifically Mt. Gox as it is most often pointed out as the reason why you should stay away from Bitcoin. When you think about it, a Bitcoin exchange is somewhat similar to a bank or an online stock broker. Banks get robbed all the time – whether it be at gunpoint or hackers stealing your debit or credit account information. Despite this fact, I can’t recall many arguments being made that we should abandon digital forms of exchange.

Just because a robber walks out of a bank with a bagful of paper fiat currency, you don’t hear widespread arguments made that we need to do away with paper money because it might get stolen. Yet, with Bitcoin, when an exchange fails to secure customer wallets holding Bitcoin it becomes conflated with Bitcoin itself being insecure. Nothing could be further from the truth. In fact, when properly secured Bitcoin is as secure as any other medium of exchange.

Bitcoin: As Secure as you Want it to be

Bitcoin, whether stored in a so-called paper wallet, or in cold storage, is very secure. However, like anything else, if someone breaks into your home and finds your paper wallet, they could steal it, just the same as they could steal your gold or silver bullion if it was stored there. Goldcore outlined the risk with any digital medium of exchange when they wrote:

It is imprudent to rely on any asset which derives its value from or can only be accessed through the internet and certain online platforms and websites.

This includes bank deposits in our modern digital banking system. In the event of a systemic crisis involving issues with ATMs, online bank accounts, capital controls and bail-ins – it will be prudent to own some assets that are outside of the financial system and indeed outside of the technological grid.

Goldcore makes an excellent point about holding some assets outside the financial system and technological grid, which is why I choose to hold physical gold and silver.

Don’t Buy Bitcoin Without Doing Your Due Diligence

Another quick point – you shouldn’t buy Bitcoin, whether through an exchange or not, if you don’t understand what it is and how it works. That’s another step you should conduct in your due diligence of Bitcoin. You have to do the legwork yourself and search out diverse opinions. You need to understand why some people love Bitcoin and others hate it. Personally two of my favorite writers about Bitcoin are Peter Surda and Konrad S. Graf who analyze Bitcoin through Austrian Economic Analysis and have determined that it is a medium of exchange rather than a currency, or digital currency if you will.

Mt. Gox = Magic the Gathering Online Exchange

Yes, Mt. Gox started out as a place to trade Magic the Gathering cards. No, I didn’t know that before I purchased Bitcoins from them the first time. So, my due diligence wasn’t that great at first. However, I tend to be the type of person who keeps their ear to the ground – in other words, I try to pay attention to what is going on. I tried other exchanges such as CampBX, BTC-E and Coinbase. I heard stories that people were having trouble getting their Bitcoins out of Mt. Gox and didn’t sit around to wait and see what happened. I researched Mt. Gox and learned they had problems. It became more and more obvious that Mt. Gox was out of their depth as an exchange, after all they started as a place to trade Magic the Gathering cards. Mt. Gox made it difficult to pull any cash out of their exchange, but they left the door open to transferring out Bitcoins which is what I did before the exchange collapsed. Notice, I said the exchange, not Bitcoin. Yes, the price of Bitcoin has cratered over the past year, something I have pointed out over at the Gold silver bugs on Google+ community where I am a moderator. Take a look at the digital currency section and you’ll see my posts.

Two More Asides

The Bitcoin Bubble

The Bitcoin bubble, rather than being negative for Bitcoin is actually positive. Don’t misunderstand what I’m saying. I’m not saying to go buy Bitcoin. I haven’t bought any in a long time. The Bitcoin bubble is similar to the bubble in railroad stocks or automobile stocks in the past. The rush of speculation into Bitcoin has helped fuel the development of innovative Bitcoin companies, most of which will disappear. However, like the early automobile makers, some will survive, innovate and thrive, helping to build the Bitcoin economy. The true value in Bitcoin, long-term, isn’t in speculating on the price of Bitcoin. Rather, the value is in the cost savings that Bitcoin will provide to businesses and individuals as a lower cost medium of exchange. More than that, Bitcoin is programmable. You can add layers on top of it to create anything from virtual exchanges to trade stocks and currencies, to digital contracts that don’t need lawyers or courts to enforce them.

Getting Paid in Bitcoin

Our site recently highlighted the news that Amagi Metals would pay a part of its employees salaries in Bitcoin via Bitwage. For that I applaud them. As someone who has a healthy distrust for government and the banks I welcome innovations such as Bitcoin that offer competition to the dollar and are at least somewhat removed from the current monetary system. There are certainly some risks being paid in Bitcoin. Should the Bitcoin price drop dramatically before you exchange it back to dollars, or whatever currency, you could find you’re not earning what you did before. The flip side is, should Bitcoin move higher, you might find you earned more than before. Regardless, employees face similar risks who are paid in foreign currencies. That may not be a large slice of the workforce, but this type of risk is not unknown. I imagine, over time, innovative companies will find ways to help mitigate this risk just as they help companies mitigate the risk of accepting payments in Bitcoin.

We shouldn’t forget, getting paid in fiat is risky too, as many people in the world have learned after their country devalued their currency. So, risk is everywhere, which is why we must learn to deal with it – yet another good reason to have some gold and silver.

We shouldn’t conflate the security of Bitcoin exchanges with the security of Bitcoin itself. They aren’t the same. As with any other investment don’t just jump into Bitcoin. Do your due diligence first.

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