by Jeff Nielson, Bullion Bulls:
As noted in Part I, the motivation for writing this article is what appears on its surface to be a large contradiction: Peter Schiff, until recently one of BitGold’s most strident critics, is now BitGold’s newest business partner. The justification for writing this (two-part) article is that it was not possible to fully encapsulate the entire contradiction in a single installment.
Schiff’s more recent attacks on BitGold began (back in March) with the assertion that he was “warning potential gold-buyers about another gold ripoff.” While rhetoric such as that can be attributed as simply the crass intent to bash a competitor of his own business, it is far less easy to write-off Schiff’s more specific criticisms in that manner.
Schiff claimed that the vast majority of BitGold’s current customer base is composed of tiny accounts, lured to BitGold by its promotional offer of “free gold” for new accounts. He asserted that because of the cost of such marketing and all of the advertising spent in pursuit of these accounts, BitGold’s business model is presently unsustainable. This appears to be correct.
Schiff claimed that he, himself, was not interested in having lots of customers with tiny accounts, because these are “money-losing accounts.” From a purely administrative standpoint, this also appears to be correct.
Schiff claimed that BitGold’s management did not “have any idea of the size of the bite that they are going to try to chew” to maintain all of these money-losing accounts. This remains to be seen. However, the veracity of this particular assertion is tied into another of Schiff’s volleys.
Schiff scoffed at BitGold’s primary source for (future) revenues, and (hopefully) its profits: that people were going to “spend their gold.” Said Schiff, “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.”
It is this criticism which will be one of the central focal points of this concluding installment. If BitGold’s assumptions and projections concerning the revenue potential from this commerce are overly optimistic, it becomes difficult to see how this company can turn around its money-losing business model, and make it viable from a long-term perspective.
However, before exploring that subject in more detail, it is worth noting that while Schiff’s new admiration for BitGold is a very recent flip-flop, his criticisms of BitGold are long standing. More than a year ago, shortly after BitGold first went public, Schiff was already expressing concerns.
The company has earned praise from onlookers, who think the idea has a lot of potential. But people are already starting to raise red flags about the valuation.
One of them is Peter Schiff, a well-known market commentator who owns a gold banking business through his firm Euro Pacific Bank Ltd. Euro Pacific offers a gold- and silver-backed debit card to clients, similar to what BitGold is planning.
Schiff said in an interview that gold dealing is a “very competitive” industry with a lot of costs, and that BitGold’s business appears to have low margins and caters to small buyers. He also said that there are no significant barriers to entry, and it will be easy for other people to launch rival services if BitGold catches on.
“The question is: what is their business going to be worth?” Schiff said.
“According to the market cap, it’s over $200 million. Would I sell my bank for $240 million? Of course. And my bank is profitable, it’s been in business for years, and has US$150 million in deposits.”
While, once again, we can question Schiff’s motives in making these observations, the reasoning behind them appears to be persuasive. Gold retailing is very competitive. BitGold’s margins are low. There is very little “barrier to entry” if (for example) a Big Bank wanted to muscle-in on BitGold’s niche. And as Schiff observed in his subsequent attack, with all of the financial infrastructure possessed by the Big Banks, they could engage in the same business with both greater efficiency and much larger economies-of-scale.
Based on these concerns, BitGold’s market cap seems rich. Of further note, Schiff is far from alone in raising such concerns.
“It feels a lot like 1999,” said John Kaiser, a veteran junior resource analyst. “This thing has a technology spin to it, nobody understands what it’s potentially worth, so it can be worth whatever you want it to be.”
Is Kaiser’s observation that BitGold resembles one of the Dot-Com Darlings legitimate? As with the Dot-Com Darlings, many of which infamously crashed-and-burned, BitGold is a scheme (gimmick?) based upon somewhat new technology, in an effort to invent a somewhat new financial/commercial niche for itself.
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