Angela Harmantas SmallCapPower | April 6, 2016: A Toronto-based startup is succeeding where others have failed in building a global financial services network backed entirely by gold. In less than a year of operation BitGold Inc., now a wholly-owned subsidiary of GoldMoney, has about $65 million in cash, amassed over 750,000 users and attracted big-name investors like Eric Sprott and Alexander Soros, thanks to a simple concept: treating gold as a savings vehicle, rather than as an investment.
At its core, BitGold’s goal is to modernize and democratize the accessibility of gold for the average person looking to build and preserve their wealth, according to the company’s CEO Darrell MacMullin. “An entire generation of millennials don’t understand the concept of an interest-bearing savings account. Why would you put money in a savings account, other than legacy and force of habit, which gives you less interest than the rate of inflation? Mathematically you are 100% guaranteed for the money to be worth less a year away. In my mind that’s not savings, that’s erosion.”
BitGold’s software platform allows users to buy a portion of physical gold, stored in more than 100 different vaults in seven cities around the world through a partnership with security company Brink’s. Users get the best bid and offer price in real time, allowing the customer to be able to purchase within 1% of spot price in over 100 different currencies. Every purchase is tied to a serialized bar of gold and is 100% owned by customers, eliminating any counterparty risk. And when users want to use their gold for purchases they use a special, prepaid gold-branded MasterCard.
The idea for BitGold was born when cofounders Roy Sebag and Josh Crumb saw what they perceived as inefficiencies in gold’s prevailing narrative that had the metal pegged as an investment. Despite outperforming every major fiat currency over the last 10 years, Sebag and Crumb felt the accessibility and usability of gold hadn’t changed. It’s a feeling that certainly rings true to MacMullin, who came on board as CEO in June 2015.
“How do we modernize and democratize the accessibilityand turn it into an alternative savings product? I don’t think that we should necessarily go back to a gold standard, but it’s powerful to allow someone to build their own standard.”
MacMullin brings the e-commerce expertise to complement Sebag and Crumb’s respective backgrounds in hedge fund management andequities research: as the managing director at PayPal Canada, he helped launch the company’s Canadian operations. Since he joined, the company completed a $59.4 million acquisition of GoldMoney Network Limited, one of the largest private custodians of precious metals with $1.5 billion of assets under administration, traded as high as $8 per share on the TSX Venture exchange and launched BitGold Inc. in the United States.
So far the business model has resonated with people who are looking to participate in the gold market. Currently, over 2000 new users are signing up each day, with 50% user growth in February alone.Although the company is on track to reach 1 million users in less than a year of operation, MacMullin is more interested in the fact that BitGold’s users have generated a cumulative amount of over $5 million in wealth by saving in gold.
“If you can get an ecosystem where deposits and transactions are outpacing user growth that’s a sign of a healthy company,” he said. Deposits are up 52% and transactions up 42% per month.
BitGold’s business model may sound familiar, and in some ways it is. Companies like E-Gold and Netagio tried and failed to create a digital platform to buy and sell gold and burned investors in the process. And of course there’s Bitcoin, the digital currency to which comparisons are inevitable. To MacMullin, BitGold is the iTunes to Bitcoin’s Napster – perfecting the technology without reinventing the wheel. “BitGold saw a way to move out of the central banking system without stepping outside of the regulatory system,” he said.“It’s imperative that the structure of this company was designed to comingle and interact with the banking system but remove a lot of the friction.
“People don’t want to exchange currencies – they want to exchange value, and we’re not trying to create a currency from scratch.”
Although it may seem as if the company is betting against the currency markets, MacMullin insists that the team isn’t forecasting a “doom and gloom” scenario in the future. “It is prudent for everyone to have about 10-15% of their net worth invested in something other than their domiciled currency,” he said.
There’s also the concept of Gresham’s Law, where people will save what is valuable and spend worthless currency, which runs counter to BitGold’s revenue stream that derives a 1% commission from transactions. MacMullin points to BitGold’s varied user base to counteract the effect of currency hoarding. “We have pockets of different users – some will only see us as a savings vehicle as opposed to an ETF. Other people don’t care about gold – they’re just looking for a safe, low-cost way to move their money around the world.”
MacMullin is already looking towards the future, expanding the customer base as well as adding new services to the platform.
There are plans to integrate a wealth management business but it is business accounts that are on the immediate horizon. A beta platform has already been launched with close to a thousand merchants signed up with plans for a full launch by summer 2016.
What excites the team most are the possibilities that exist as BitGold gains traction in developing countries, where access to traditional banking infrastructure is limited but mobile phone usage abounds in even the most remote areas. “Think of what having a global bank or bank-like experience does for the 2 billion underbanked people in the world that don’t have access to a credible banking service,” said MacMullin. “It’s bizarre to me that it doesn’t already exist.”