Gold Vs. Bitcoins: Let's Try to Cut Through the Confusion First

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Humor, Precious Metals

Upon being forwarded an article by my editor on whether bitcoin is the new gold, I can’t say I wasn’t intrigued.

What I can say is that I was confused.

Sure, I’ve seen and heard mentions, headlines and stories about bitcoin circulated for several months now, but for some reason I hadn’t had the impetus to click on any of them. Much like the Libor scandal, or anything related to Miley Cyrus.

Maybe all I was doing was putting off the inevitable, because if the bitcoin/gold story did anything, it hit me with the fact that it’s seemingly for real.

But I was still confused. If you’re in the same boat as I am, join me in going down the rabbit hole!

What the Eff Is Bitcoin?

The obvious place to start was with a question I posed inside my mind: “What the f$%& is bitcoin?” Naturally that took me to a Google search bar and a verbatim entry of that phrase, which led to the #1 result on a site called Not Sketchy.

The author of the eponymous post encapsulated my feeling exactly – “The first couple of times you probably shrugged it off but it just kept popping up. Is this some kind of currency in a game? Is Minecraft responsible (it usually is)?” – before embedding an explanatory video:

Ok, it seems clear that it’s a new, digital system of currency, apparently decentralized (unlike US dollars backed by the Fed) that is obtained through “mining.” Supposedly if your computer unlocks an algorithm resulting in a 64-digit number, you “get” 50 bitcoins. According to the video, only 21 million bitcoins are available to be unlocked in total; in other words, there’s a finite amount available – which is why they call it mining.

It follows that there are bitcoin exchanges, where you can buy/sell bitcoins with others. The biggest exchange is Mt. Gox. (What??) It’s secure, but once in a while subject to hackers, we’re told. Also, bitcoin fuels the ‘Dark Web’, where you can use software called ‘TOR’ to hide your identity and access ‘the Silk Road’ where you can buy illegal stuff such as drugs.

Just when I was about to burst out laughing and close the browser, unable to suppress my incredulous laughter any longer, the voiceover tells us that the Royal Canadian Mint launched Mint Chip, backed by the Canadian government, which is based on the idea of bitcoin. Whaaat?

But How Does Bitcoin Work?

I needed more. How does one “earn” a bitcoin, among other things? As my editor said, “How would I pay my rent in bitcoins?” Another, more targeted Google search got me to Bitcoin’s official site and this, arguably simpler (and unarguably, less doom-and-gloom) video:

According to the site, “managing transactions and the issuing of bitcoins is carried out collectively by the network…it’s open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part.”

Boy, that sounds like a recipe for disaster. However, you can buy physical goods (such as gifts, books, etc.) and trade your bitcoins on exchanges for dollars, euros and other real-world currencies. (Here’s the How It Works section; but I’d be damned if I tried to distill it. Oy, I should’ve just gone to Wikipedia.)

However, what implications does this have for physical stores of value such as gold? Continued in Part Two.

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