by Jeff Nielson, Bullion Bulls:
Readers of these commentaries are used to seeing original work. While sources are cited (for reference purposes) to substantiate the analysis contained in these pieces, the analysis itself is always original. Why, then, base a critique of BitGold primarily on the observations of Peter Schiff? Because Peter Schiff has now entered into a business partnership with BitGold, a mere four months after producing a scathing audio clip, where he articulated numerous issues with this company and its business model.
First, it will be helpful to lay out the chronology to readers. On March 22nd; Schiff published an articleentitled BitGold’s Secret: A Taxation Time-Bomb. He started off with the inflammatory statement that he was “warning potential gold-buyers about another gold ripoff.” He stated of BitGold that “their real intention is to deceive investors”, and referred to some of their marketing claims as being “grossly misleading.”
On March 23rd, one of BitGold’s founders, Roy Sebag, responded to that attack. But his reply only partially rebutted Schiff’s accusations. He concluded by praising(?) Schiff for his capacity to “evangelize the truth.” This is a very strange choice of words, since the truth requires no evangelist. The truth is self-validating. Indeed, many (most?) people would argue that the terms “truth” and “evangelist” comprise a non sequitur (apart from the evangelists themselves, and their devotees).
After seeing the response from Sebag, and receiving “flak” from many BitGold supporters, Peter Schiff responded by producing a 46-minute clip on BitGold, where he not only reiterated his original attack, but also made numerous other criticisms of BitGold and its business model. Here are some of Schiff’s criticisms:
1) The majority of BitGold’s customer base is comprised of tiny accounts, worth less than $50 – and most of those accounts were “acquired” through BitGold’s promotional offer of “free gold for new accounts.” Schiff stated bluntly that he wasn’t interested in such tiny accounts for his own business. “I don’t want that account. That’s a money-losing account.”
2) He argued that BitGold was only able to maintain its money-losing business model by “selling stock to investors”, and using the proceeds to fund day-to-day-operations:
… the reason why BitGold can offer its debit cards so inexpensively and have such low minimums is because their shareholders are subsidizing these huge losses. They are using the money they are raising selling stock to investors to provide these services to their customers, at a loss, and this is what is driving the rapid growth of the company.
3) He insisted it was very expensive to maintain such accounts, and he suggested that BitGold management doesn’t “have any idea of the size of the bite that they are going to try to chew” in maintaining these money-losing accounts as their business grows larger.
4) He noted that BitGold was engaged in aggressive advertising (via TV) and aggressive promotion (via its affiliate program) to “give away more gold”, and acquire more tiny accounts (and account-holders). Thus the more successful it was with its advertising and promotions, the larger and faster its losses would grow.
5) He argued (persuasively) that there is very little utility in currently using BitGold in the manner upon which the company intends to rely for most of its revenues: people “spending their gold.” He called this “a fatal mistake.” Said Schiff:
… The whole idea is that BitGold’s customers are going to use their debit cards that they are given for free, they are going to use these debit cards to make everyday purchases, like buy a cup of coffee, which is something that they show on their website… Nobody is going to do that. People are going to let their gold sit there at BitGold, and BitGold is going to have to store it for free.
6) Schiff explained the mechanics which allowed BitGold’s customers to “spend their gold.” First the card must be “charged.” This is done via BitGold customers selling their gold (for fiat paper currency), loading that fiat currency onto the BitGold debit card, and then spending that fiat currency – not gold – to pay for commercial transactions.
7) He pointed out that the only way for BitGold customers to redeem their gold (directly):
… is in these little cubes, that they made themselves. And nobody that wants physical gold really wants these cubes, because no one can really recognize them. They don’t have any real value in the marketplace besides their melt-value. But if someone handed me one of these cubes, I mean I don’t even know if it’s real. And the fact is, the way that they are made, you could shave some of the gold off and nobody would even know. So if someone handed you one of these cubes and they said it was 10 grams of gold, how do you know?
The only exception to this is for large clients, who have accounts so large that they can redeem their gold in BitGold’s 1 kilo bars, which are currently worth over $50,000 apiece (in Canadian dollars).
Irrespective of what motives we attach to Schiff’s attack (as a direct competitor of BitGold), these points and criticisms appear to be both rational and persuasive. Only one of these criticisms has been directly rebutted by BitGold: in Roy Sebag’s piece, already noted previously. There he states:
GoldMoney Inc. has a net worth of over $100 million and cash and liquidity of nearly $70 million. At our most pessimistic burn rate, we can continue operating in the manner we are for two decades…
Really? This is BitGold’s “most pessimistic burn rate”?
On July 9th; these strange bedfellows announced that they had become partners. SchiffGold was merging with BitGold in a “joint venture.” In a near-one hour clip produced by Schiff to promote this new partnership, BitGold’s other founder, Josh Crumb, stated BitGold’s corporate objective (at the 52-minute mark). They were seeking a “10% market-share” in “a $10 trillion market.” In other words, BitGold’s present business plan envisions $1 trillion in global currency being funneled through their software platform.
Seventy million dollars may sound like a lot of operating capital for a money-losing business of BitGold’s current size. To expand this money-losing business to the point that its client base reaches $1 trillion in size, $70 million is a tiny amount of capital. This brings us back to Schiff’s accusations of BitGold making deceptive and misleading representations about its business.
RELATED: Peter Schiff criticizing Bitgold on his podcast
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