The Swiss Bank Account of the Internet Age
 Aug 3rd, 2003
Advantages:
Easy to use, low risk, no frozen accounts
Disadvantages:
Transaction fees, security
Recommendable:
Yes
Detailed rating:
Product package
Security and Privacy
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About me:
'Reason is a net thrown out into an ocean. What truth it brings in is a fragment, a glimpse, a scint...
Member since:20.05.2003
Reviews:11
Members who trust:4
Review rated by 43 Ciao members on average: very helpful 
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Commerce is increasingly moving onto the internet, and for clear reasons: the internet creates a level playing field for sellers from all around the world, encouraging increased competition and consumer choice. Naturally, online commerce requires an efficient way of transferring money internationally: if you want to make a $5 payment for which your bank charges a processing fee of $50, you are unlikely to go through with the deal, no matter how good it is. To answer this demand, a number of online payment services have cropped up in the recent years. The most widely used one is Paypal, which however has a reputation for bad customer service and freezing client accounts for dubious reasons. Contenders include Stormpay, Moneybookers, Evocash, and e-gold. Unlike most of these payment services, which generally operate in major currencies, the money in an e-gold account represents gold. The company, e-gold Ltd., actually has reserves of gold in places like London and Dubai, corresponding to all e-gold in circulation; thus, you can even redeem your e-gold balance as real gold, although the cost of this is prohibitive in practice. Now, you may ask why an account holder would want to have a gold-denominated account.
* Why Gold? *
The reasoning behind investing in gold goes basically like this: gold is a scarce element with a limited world supply which may once be exhausted. (While atoms of other elements can be turned into gold in a particle accelerator, the cost of this production method far exceeds the value of the final product.) It has been used as money and in jewellery for thousands of years all around the world and also has applications in electronics and other fields. In sharp contrast, the US dollar (as an example)
is just a piece of paper with no intrinsic value, which moreover can be infinitely reproduced by the Federal Reserve (and precisely this is happening at the moment as Fed chairman Alan Greenspan pushes liquidity into the economy). Gold can therefore be considered a fairly safe long-term investment.
Gold is generally quite resistant to inflation, and the price of gold in a particular currency goes up as inflation eats into the buying power of the currency. Gold is also not as vulnerable to political forces as any single currency and its price tends to go up at times of international crises. These factors make gold the most common element in the investment portfolios of the most bearish preachers of doom in the financial markets.
* Using e-gold *
The e-gold website is fairly minimalistic, as it should be. You are identified by your account number, and authorisation takes the form of a single password. After logging in, you can view your balance and account history, send e-gold (they call this "spending"), redeem e-gold for real gold, and change your personal details. That's all; e-gold isn't as complicated as it seems at first. Since for most purposes you won't send a particular amount of grams or troy ounces, the balance and spending sections have a handy system where you can express the amount you want to send in any currency, which will be automatically translated to a gold amount using real-time quotations. Changing money between e-gold and real currencies is not done through e-gold itself for financial security reasons. There are a number of market makers you can choose to handle your transaction. They have a variety of payment options such as translating between e-gold and other e-currencies or cheques. Many paid-to-read programmes offer payments in e-gold, if you want to increase your balance in a very slow way.
The e-gold website contains a list of merchants that accept e-gold, much like Paypal Shops. The list is pretty short and not very impressive. A particular class of services that is available to e-gold users but not other payment services (due to their conditions of use) are HYIPs. HYIP stands for High-Yield Investment Programme, which generally seems to be another name for a hoax. For example, this might mean that you invest $10 and then get a dollar each week for the next 15 weeks, gaining a 50 per cent profit on your investment in theory. In practice, most of these programmes simply rely on new members to keep the system solvent, and when the influx of new members dwindles, the pyramid collapses with the result that the few first members receive a good profit whereas the majority who came slightly later will lose most of their investment. Try it yourself if you like risk more than your money, but don't say you haven't been warned.
* Security *
Compared to Paypal and other competition, e-gold is significantly safer in some ways. If Paypal were to go bankrupt now, the status of money in your Paypal accont would be unclear, and Paypal's debtors would at least make an attempt to claim it. In contrast, the gold that corresponds to e-gold is not owned by e-gold Ltd., eliminating this worry. Instead, title is held by a trust (The e-gold Bullion Reserve Special Purpose Trust) founded specifically for the purpose of holding e-gold users' gold, and the metal can only be removed from storage by permission of both e-gold Ltd. and an independent escrow agent. In fact, exchanging money is done through market makers to eliminate the need for e-gold Ltd. itself to hold any national currency with its associated risks. Also, unlike its peers, e-gold publishes a lot of statistical information regarding registered users and the amount of e-gold in circulation, which is nice and makes you feel a bit safer about your money. In another sense, however, the security feels less watertight. Your account number is public information (since you need to tell it to anyone who wants to send you gold), and therefore only a single password controls access to your gold. Having used a number of internet banking sites, I feel that additional security such as password lists is needed.
* Fees *
In the fees department, e-gold does not fare very well against competition. First of all, there is a storage charge of one per cent per year, which is deducted continuously, just like fees in typical investment funds. Historically the price of gold has gone up faster than this, but there is no guarantee this will continue. Then there are transaction fees. As for total fees incurred actually making a payment, comparison of payment services is awkward since the total cost of real money being translated to e-currency, transferred, and exchanged back is expressed in different mixtures of fixed and percentage fees, but roughly speaking, you can expect to pay a minimum of perhaps 1-3 per cent of the transmitted sum as transaction fees in most payment services; whereas in e-gold this might be 5 per cent or even higher (most of the expense lies not in direct charges, but in the spread between buying and selling quotations by market makers). The charges of exchanging money naturally depend on the market maker you use. Sending e-gold is free, as all transaction fees are incurred by the recipient.
* Some Thoughts on e-gold *
Personally, I find the thought of having money that actually has some use beyond being money appealing. In fact, some types of money do have other functions, and at the risk of sounding desperately far-fetched, let me list a few: Some notes can be considered works of art, although their use as money usually makes people blind to this angle. The Japanese one yen coin weighs exactly one gram, so a number of them could possibly be used as a counterweight to measure something light. The Chinese one yuan coin contains iron, so it'd be possible to magnetise it to create a fridge magnet (note that having such a magnet is unlikely to impress your friends with either your artistic sensibility or your wealth).
Since the door has been opened for the use of raw materials as currency in private transactions, I would like to see... e-oil. The rationale is simple: the worldwide production of oil is likely to peak any year now due to depletion of known reserves, ensuring that scarcity will push its price up in the future. Perhaps there could be an e-oil debit card you could use at BP stations to cash your balance straight into your car's fuel tank, and you would at last be immune to fuel price hikes!
* Verdict *
While most of the other online payment services substantially differ from each other only in fees, e-gold brings a novel idea into the industry. At the end of the day, however, e-gold is not that appealing. That a payment service's main selling point is that it does not freeze client accounts is a testimony not as much to the good quality of that service as to the poor customer service in the industry at large. As a payment service e-gold is more expensive to use than most of the competition, and as a method of investment it feels insecure: would you sleep well knowing that just a single password sits between your savings and the hordes of crackers that roam the internet? If you like gambling, you might like HYIPs, which offer a high-risk instrument that makes junk bonds seem a safe haven. Also, e-gold is an interesting concept worth checking out just to see what it is like, and perhaps even offers a way to diversify investments. But if you are simply looking for a payment service, I suggest you look elsewhere.
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by (9%):
29.12.2005 23:31
Good comments, and while I am not a big invester in things like HYIP's, there are a growing number of services and goods that can be purchase by the use of E-gold. Certainly with the recent increase in gold prices, it certainly helps if you have money invested in gold.
04.01.2005 16:35
I like the end comments about functional currency and I agree with the point of HYIP being a big user of this service. To its detriment
17.06.2004 17:57
It's an interesting concept.