Tag: Bitcoin

Minacoin: Cryptocurrency Backed with Gold

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Until now, cryptocurrencies—Bitcoin, as well as derivatives like Litecoin, Namecoin, and Dogecoin—derived their value purely from scarcity and a community of users willing to invest in them, without any tangible backing.  There’s now a new entrant called Minacoin which, like the US Dollar in the beginning of the 20th century, is on the gold standard.

This may sound antiquated and even counter-intuitive for what digital currency was supposed to do for the world, but the creators of Minacoin, Melvin Ng and David Gallo, wanted to merge the benefits of Bitcoin with gold. Gallo states that “although gold has a more stable value, it’s really hard to transfer. With Bitcoin, it’s easy to transfer but we’ve seen the volatility over the last year when it went from $100 to $1000, down to $400 again.”

Minacoin is slated to be available to customers by the end of May. All 21 million coins are pre-mined, and backed by real gold held in a reserve, with each coin equal to one milligram of gold (making the entire currency worth a bit over $870k by my calculations). In this sense, Minacoin will be like a Gold ETF that can easily be traded person-to-person on a blockchain, without having to go through an exchange. On the downside, a 51% attack will no longer just be stealing bits, but actual gold. I don’t see how enough mining power is going to be deployed to protect against this given the entire value of the currency is a fraction of Bitcoin’s, and ultimately this is a trust run by a single, central authority, contrary to the entire point of having a decentralized blockchain.

In my view it’s an interesting experiment to use blockchains to effectively replace traditional securities markets (and allow them to be traded 24/7), but there are a lot of challenges that may present Minacoin from getting off the ground any more than the thousands of more traditional copycat currencies. Pando points out some other potential issues(such as the fact that you can’t actually withdraw the gold) here.

Bitcoin and Deposit Insurance

bitcoin-logo-3dOne of the world’s Bitcoin exchanges, Mt. Gox recently lost $400 million worth of digital currency and cash. This left many of the customers without any way to get back their money. While removing such an incompetent company is likely good for the ecosystem in the long run (indeed Bitcoin prices have rallied since), this event was devastating for many who  had accounts with Mt. Gox, and highlights the need for insurance for Bitcoin and other cryptocurrency held with third parties.

MtGox has filed for bankruptcy after losing almost all of its customers’ deposits. In addition to the financial risk of price fluctuation, Bitcoin held in third party accounts is more susceptible to theft and loss than other assets because it handles like digital cash, without protections like those in place for bank accounts (FDIC insurance) or credit cards (extensive CCPA protection). 

One solution many are now proposing is for increased government regulation of Bitcoin. This may be inevitable at this point, but it reduces many of the decentralization benefits for which Bitcoin was originally created. Two of the best arguments against knee-jerk government regulation are in letters written by Brad Burnham and Fred Wilson.

An alternative that is closer to the tradition of Bitcoin is for the community to introduce its own, free-market improvements such as private insurance. One company  trying this is a London startup called Elliptic. It has offline servers to prevent hackers and has negotiated a deal with a large international insurance company. Elliptic charges steep rates to keep your cybercurrency safe. They keep 2 percent of its value per year, but will take less if you hold a larger amount. The bottom line is that insurance for cybercurrency is expensive, but may be worth the risk.

Another company is Inscrypto, founded by Ryan Selkis, who was instrumental in breaking news of Mt. Gox’s insolvency. The company’s website describes Inscrypto as “Bitcoin’s privately funded, decentralized version of the FDIC. We help you reduce or completely eliminate the risks of owning Bitcoin.” Selkis’ company is still in a private testing period, but it could have big implications for the future of Bitcoin. There are many advantages to using cryptocurrency, but also many risks. If there was a means to insure holdings and mitigate risk, many more players may join the Bitcoin market, which is good for the currency in the long run.