What does Bitcoin have in common with gold?

In these economically uncertain times, countries, nations and their central banks are worried about the future when it comes to world currencies, be it the dollar, the Euro, the Yen or any other.

Countries like Russia are carrying out a policy of buying very large amounts of gold on a regular basis.  They have bought 570 metric tons of the metal in the past decade.  Putin is using revenues from Russia’s oil reserves to make the purchases.   Conversely, many European countries are selling some of their gold reserve to bolster struggling economies.

So why gold?

Firstly, gold is globally recognised as a stable store of value and can be converted (i.e. bought and sold) to national currencies in relatively quick time depending on the needs of the nation.

Secondly, gold is a finite resource and therefore a finite economy, there is only so much of it on the planet.   New gold is introduced into the gold economy when it is discovered, extracted (mined) and sold for something else on a globally recognised public exchange.

So-called cryptographic currencies such as Bitcoin have several similarities to gold.

The Bitcoin economy is finite.  Neither gold nor Bitcoin can be easily created, as is the current trend with major currencies such as the Dollar and the Yen.

Bitcoin is mined, albeit in a less physical way. Very complex mathematical problems need to be solved on an ongoing basis, which leads to new coins being distributed to the lucky winners.  Resources are used to mine new coins, i.e. high performance computer processors and electricity, in a similar way to using mining equipment, people and other resource to mine gold!

It is possible to determine the number of coins out there.   There are currently a little under 12.2 million coins that have been circulated, and according to mtgox.com, currently the most widely recognised exchange, the value of 1 Bitcoin is around $950, meaning the Bitcoin economy is worth around $11.6 Billion.

It can be difficult to see how strange long random values of numbers and letters on a computer can be compared to the bright gleaming precious metal that you can touch and see, but we live in the 21st century. Your money in your bank account is also a non tangible thing,  just digital numbers stored on a banks computer system, but yet we perceive it to have value.

One advantage that Bitcoin has over gold  is the ability to easily exchange and transfer.  If payer and payee are trusted partners,  payment is effectively cleared within a few minutes.  For absolute certainty that the transaction has been firmly concreted into the Bitcoin distributed network, a wait time of around one hour is needed.

So gold and Bitcoin share many common features, currently also including price for the main units of transfer, with both an ounce of gold and 1 Bitcoin at roughly $1000.  Although total worldwide gold reserves far outweigh bitcoin by value, many expect Bitcoin to maintain a gradual rise in value over time.   If this trend continues, and Bitcoin remains technically reliable, perhaps governments and central banks, as well as Joe Public, should consider investing in larger amounts of the Cryptographic currency as its value increases.




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