Economist Jim Rickards on gold versus bitcoin — intrinsic value is meaningless for both but the bitcoin prices aren't real

Jim Rickards is the editor of Strategic Intelligence and the author of Currency Wars: The Making of the Next Global Crisis. He believes gold can go to $10,000 an ounce but he is much more skeptical about bitcoin. Rickards doesn't trust the bitcoin price action and doesn't believe the cryptocurrency will fare well in a financial crisis. Following is a transcript of the video.

Jim Rickards: Hi, I am Jim Rickards, editor of strategic intelligence. Today I’m going to talk today about gold vs. Bitcoin — it's a very popular debate. I'm happy to say the gold and bitcoin are both forms and money but it's a liquidity preference which do you prefer in a crisis?

Sara Silverstein: So we've been talking a lot about gold versus bitcoin, everybody has. You love gold. How do you feel about bitcoin? How do the two compare?

Rickards: Personally I’m very skeptical of bitcoin, I know where the price action is. It’s, you know, going up about 10% a day at this point. Although bitcoin could go up to 20,000, it can go to 30,000. It's on it’s way to zero — somewhere between zero and 200. It’s a utility token for criminals, terrorists, money launderers, tax evaders — they’ll always find some use for it. So it might not go all the way to zero. It’s clearly a bubble — it looks like the second biggest bubble in history after tulip mania. Although at the rate it's going it will pass tulip mania, you know, in a matter of days. [It’s] bigger than the south sea bubble, bigger than the Mississippi bubble, New York’s — the Dow Jones in 1929, the Nikkei in 1989 — name your bubble, it's bigger than all of them. So I don't own any, I don't recommend it to clients. But, you know, I'm a free market guy, if people want to buy it, you know, knock yourself out.

Silverstein: And why are you skeptical of the price transactions?

Rickards: A couple reasons — number one, there’s pretty good evidence that there's a lot of fraud going on. Look, every market in the world — gold, silver, stocks, bonds, Libor — every market, you name it. They've all been searching to manipulation. That's why we have all these regulators; that's why we have the SEC; that’s why the stock exchange is regulated, etc. Are we supposed to believe that bitcoin is the only market in history that's not manipulated? That’s nonsense, of course it is.

In fact, the fact that it’s unregulated is a magnet for all the manipulators who probably were, you know, The Wolf of Wall Street, you know, 20 years ago. So the point is — imagine the following: you and I are bitcoin miners, right? So I sell you at 10,000. You sell back to me to 10,100. I sell back to you at 10,200. We just traded back and forth all day. There’s no P&L. We’re trading the same bitcoin back and forth. That’s called painting the tape. These exchanges get reported on the bitcoin exchanges. So an outsider who’s completely naive about this, says, “oh look the price is going up.”

It's just you and me painting the tape. It’s the oldest, you know, the oldest fraud in the book. It’s call a ramp or, you know, whatever you want to call it. But the point is that brings in the suckers from the sidelines and then they buy it. And, of course, what do we care? We're miners so our costs — the costs are going up very steeply by the way — this thing is completely non-sustainable. There have been — the amount of electricity power — the reason the bitcoin miners are in China is because they burn coal, pollute the air, and have subsidized electricity. Or they’re in Iceland because it's so cold, it reduces their cooling costs for all the computing power.

Right now they're using — bitcoin miners — every year are using as much electricity as the country of Nigeria — a country of 90 million people. Before long will be using as much as Japan, third largest economy in the world. That's not going to happen. You can say that, that’s the simple extrapolation, but there's no way the bitcoin industry is going to be allowed to use as much electricity as the country of Japan. But that's how much you need to mine the bitcoin. So they're going to hit a wall, in terms of total bitcoin output. At that point the miners have no incentive to mine. So who’s going to validate the blockchain? Are they going to charge a fee? Well fine, that sounds like Wells Fargo. That’s what banks do.

Silverstein: And when you talk about the electricity cost and other costs of mining, and some people equate that with the value of bitcoin. Where do you stand on the valuation theory of ...

Rickards: Yeah that would be like looking at electricity and mining costs, that would be what you call intrinsic value, which is not how we’ve valued anything since 1871. David Ricardo came up with the theory of intrinsic value around 1812. Karl Marx took the ball and ran with it. And he said yeah, intrinsic value, but you know, capitalists control the means of production so they extract excess value from labor, labor doesn't get their fair share. All that’s nonsense in terms of how we value things. This was overthrown by Karl Manger in 1871, University of Vienna.

He came up with a subjective theory of value. Something is worth what anyone will pay for it. If you and I — you know, if I'm a miner — say a gold miner, a real gold miner, and my costs of production are $1,400 an ounce and the market for gold is $1,300 an ounce, you don't care about me. You’ll say, “Jim, I'll pay you $1,300. I'm not going to pay you $1,400, just because your costs are higher. That's your problem.” So intrinsic value is meaningless. What does matter is subjective value. And that’s true of bitcoin and gold. So when I see bitcoin at $11,000 an ounce or whatever, that’s somebody's subjective valuation of what it's worth, leaving aside the fact that the price is manipulated. That's a separate issue.

But the point of subjective value is based on confidence. It's a liquidity preference. If you're willing to transfer your hard-earned dollars to get a bitcoin, you're expressing a liquidity preference for a different form of money. But confidence is fragile. It can be very easily lost and when it's lost, it's impossible to regain. So there are lots of forms of money in the world. I consider gold money. I’ll say bitcoin’s money. Euro’s money, dollar, yen, yuan — they’re all forms of money. Which one do you want? Where do you want to put your wealth? That’s a liquidity preference. And again, if you’re throwing your wealth into bitcoin and that confidence is lost, what’s left?

Silverstein: And so if intrinsic value doesn't matter, because that's the strong argument we hear a lot for gold.

Rickards: It doesn't matter.

Silverstein: So then what — is it all a liquidity preference? What makes gold more valuable in your eyes than bitcoin?

Rickards: Well basically it has been around a long time. Bitcoin has never weathered a recession or financial crisis. So bitcoin was invented in 2009. We have not had a recession or financial crisis in 2009. We did in 2008, 1998, and many others throughout history — 1929, 1873, you name it. I know how well the other asset classes perform in panics. And, you know, not just gold — gold, stocks, bonds — you can see how they perform. We've never seen bitcoin’s performance in a financial panic. So that's a big uncertainty right there, leaving aside the criminality, and the electricity usage, and the fraud, and painting the tape, and who's behind these exchanges — leaving aside all those issues, which I think are big ones. Even just in a pure economic sense, we have no idea how bitcoin will perform in a panic. My estimate is not very well.

Silverstein: And what is the one thing that can cause the whole thing to collapse — bitcoin to go to zero?

Rickards: I think if one of these frauds were exposed. And there is some research out there. Bear in mind, there's nobody kind of looking into these things. There are no regulators. The one big thing, which I do expect is, you know, let’s say you bought a bitcoin for $1,000 and you sold it for $8,000 or, you know, couple days ago or exchange it, you have $7,000 gain you have to put in your tax return. It’s no different than buying IBM at 150 and selling it at 180. You have to put the $30 gain on your tax return. How many bitcoin sellers are putting those gains on their tax returns? I don't know the answer, but my guess is very few. If you don't, you're a felon. That's a felony. That’s how Al Capone ended up in Alcatraz. And people say, “Oh the IRS will never catch me.” Believe me, I was a tax lawyer before I was a securities lawyer. I was the tax counsel to Citibank. The IRS will track you down. They have ways of doing it. People — Americans who had offshore bank accounts in Switzerland — prior to five or six years ago — thought the IRS would never find them either. And they did.

One whistleblower took a CD with all the names and handed it to the IRS. And some of those people are in jail. They’ve arrested brothel owners for tax evasion by counting the laundry bill. They said – they put the burden of proof on you. They say, “No, we estimate your taxes by the following, prove it's not.” The burden of proof is on you. So they’re going to come into all these exchanges, they’re going to request all the books and records. The exchanges are going to give them up, or they’ll be shut down, or they’ll be frozen. Remember even if you have bitcoin exchange you still have to — you have points of connection with the dollar payment system or the euro payment system. You got to get the money in to sell the people the bitcoin. They can all be shut down. They can all be interdicted. The thing — all these things can be frozen. The IRS is all the authority they need. So between the SEC looking at initial coin offerings, the IRS looking at tax evasion, the FBI looking at criminality, and who knows what else is going on, I just don’t want to play in that space.

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