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The Hard Assets Alliance Blog

New Cryptocurrency Addresses Bitcoin’s Key Flaw: Will It Reinvent Gold Ownership?

In the April 2013 edition of the SmartMetals Investor, I explained why I would be steering clear of Bitcoin. Flash forward 12 months: the cryptocurrency is not only still standing, but its value has appreciated substantially. Nonetheless, Bitcoin is still a high-risk speculation vehicle in my eyes. Sure, the digital currency has gained broader market acceptance, but it has a long way to go before it contends as a legitimate medium of exchange.

One of my biggest knocks on Bitcoin is that it’s backed by nothing by blind faith. So you can imagine that my interest was piqued when I learned that a gold-backed cryptocurrency called Minacoin is scheduled to launch in a couple weeks. The project is the creation of Toronto-based financial services company Mina Financial. It hopes to combine 21st-century technology with the time-tested stability of gold.

Like Bitcoin, Minacoin uses a peer-to-peer network to facilitate exchange and prevent double-spending. Its defining characteristic is that it’s linked to a gold reserve weighted 90% to bullion—two 400-ounce gold bars valued at $1,050,000 USD, to be precise—with the balance invested in gold ETFs. By pegging Minacoin to a hard asset, the founders hope to avoid the extreme volatility that has plagued Bitcoin. Sounds like a libertarian dream come true, right?

A Technology Not Ready for the Big Leagues

Minacoin isn’t the first attempt to pair cutting-edge technology with the advantages of gold. LibertyBit and EGold were similar projects that both ended in disaster. One of Minacoin’s cofounders—Melvin Ng—actually ran LibertyBit until indictments of money laundering brought the experiment to its knees. Ng also headed up the now-defunct CADBitcoin—a Canadian bitcoin exchange that had its accounts frozen in 2013 for failure to comply with national money service regulations.

Minacoin appears destined for a similar fate. With a full launch just two weeks away, Minacoin’s founders still aren’t sure if they have created a platform to trade gold or an asset-backed currency. One would think this important technical matter would have been sorted out already, considering that it will determine how Minacoin is regulated.

The legality issue is just one of many challenges facing Minacoin. Like other cryptocurrencies, Minacoin is likely to become a magnet for theft and fraud, especially since its founders have vowed not to collect identification information on its users. This may sound great for those seeking privacy, but it really just makes life easier for thieves. Also, let us not forget cofounder Melvin Ng’s sketchy track record, which doesn’t exactly speak volumes for Mina Financial’s trustworthiness or competency.

Don’t just take my word for it: the Department of Justice recently warned against the risks of investing in virtual currencies, while the North American Securities Administrators Association included virtual currencies among its top ten threats to investors in 2013.

Despite the numerous risk factors outlined above, the main reason I’ll be avoiding Minacoin is the dubious value of the service provided. Minacoin’s website states that it offers “a safe way to transfer shares of gold easily without a central authority.”

I have a couple of issues with this mission statement. Let’s start with the claim that Minacoin features a decentralized network. I’m no cryptocurrency expert, but I imagine someone will be in charge of the 800 ounces of bullion Mina Financial claims it will store in a vault in Ontario. At least, I would hope so.

More importantly, the phrase “shares of gold” indicates that minacoins, much like shares of gold ETFs, do not represent an actual claim on physical gold, but rather act as a sort of IOU. Most of our readers are probably familiar with the advantages physical gold has over paper gold, so I’ll spare you that discussion. Even if you wanted to own paper gold, who in their right mind would choose Minacoin over a much more liquid gold ETF like GLD? Simply put, Minacoin doesn’t offer any meaningful service that a gold ETF or bullion cannot provide.

Gold Is Still the Ultimate Anti-Fiat Currency

Digital currencies such as Bitcoin and Minacoin are testament to the public’s growing distrust of government-controlled fiat money. Although we share this sentiment, our method of protest differs. Of the various alternative currencies, only gold (and to a lesser extent silver) fulfills the three necessary functions of money: a store of value, a unit of account, and a medium of exchange. At risk of sounding old fashioned, the adage of “If it ain’t broke, don’t fix it” seems fitting in this matter.


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