Comparing Bitcoins and Online Currency to Gold Mining

What is a Bitcoin?

The future of online currency is here in the form of Bitcoins – a new experimental P2P Digital Currency that enables you to make instant payments to anyone, anywhere in the world. It functions on peer-to-peer technology and operates with no central authority as managing transactions and issuing currency are carried out collectively by a network which runs on open source software which enables the use of this currency.

The Future of Online Currency

Bitcoin Market

Essentially, Bitcoins are an intangible currency, really no different in action than the numbers bouncing up and down in your bank account. Alternately, instead of representing sums of physical currency, Bitcoins are literally a majestic sequence of unique numbers that can be traded for goods. Instead of swapping wads of bound fibers and inks that are woven together into this germy thing we call cash, Bitcoins exist in a purely digital tapestry. It’s an experiment in decentralized currency, and while it’s been a good experiment and still has some growing to do, it doesn’t show any signs of disappearing anytime soon.

While it’s still got some time to really appreciate and grow stronger as a currency, a purely online currency will exist in one form or another. It won’t ever replace your tangible currency, but work alongside it for all of your online consumer decisions.

Bitcoins vs USD

Illustration: Martin Venezky

Bitcoin Exchange Rate to USD, Euros, Yen, Pounds & Rupees

Money as an object is meaningless. It’s paper and and some inks and, thanks to people, lots of bacteria. It’s an arbitrary token that merely represents a commercial promissory value people can earn in exchange for goods or services that can then either be saved or spent on other goods or services. Dollars, euros, yen, pounds, rupees, tobacco leaves, rands – it doesn’t matter what object you invest value into, it’s the idea behind the currency that buttresses its value. The Bitcoin is no different.

The only difference is that, as opposed to physical money that you’ll stuff into your pockets and wallets, you will likely never actually hold a Bitcoin (yes, there are physical versions of Bitcoins if you absolutely must have a real version to thumb around in your palms). Just because you’re likely to never touch one, though, doesn’t mean that Bitcoins are any less valuable than the bills you have folded up in your right pocket. Instead, think of it like this: you are no more likely to hold a Bitcoin in your hand than you are to hold Pythagoras’ theorem in your hand.

Business Owners: Food for Thought

So now that you’re familiar with the concept of Bitcoins would you as an online business owner accept this form of currency? Accepting cash does not eliminate risk from being ripped off, so what would be the main reservations for business owners to accept this new, exclusive form of online currency?

Bitcoin wallets and usage of the network is free for users making it very attractive to open up the Bitcoin market. Transactions are handled through strong, secure cryptography and are verified with the same state-of-the-art encryption used in military and government applications. It’s open-source and fully decentralized..nobody owns it. That’s right it’s fully democratic money.

Bitcoins and Gold Mining

Rare physical Bitcoins: Flickr zcopley

The production of Bitcoins is best explained through the simile of gold mining. Instead of boring through a mountain to unearth precious metals, new Bitcoins are generated by unlocking a mathematical sequence called a block chain and are doled out in increments of 50. The people that produce these Bitcoins, then, are known as miners (that’s actually the technical term for Bitcoin producers, too, not just a metaphorical descriptor). These miners, however, have traded in their helmets and pickaxes in exchange for loads of GPU firepower and very sophisticated software capable of deciphering the block chains. The software works in tandem across a network to solve these cryptographic proofs and the miner who is the first to solve the block chain will receive the 50 Bitcoins. Once a block chain has been unlocked, it is added to a ledger in order to prevent those Bitcoins from double-spending.

Eventually, as more blocks are solved, fewer Bitcoins will be generated because the block chains will be worth fewer new coins. Solving a block chain today is worth 50 new Bitcoins, but as of this December that reward will be reduced to 25 Bitcoins. Some time off in the future, it will be reduced again to 12.5. The gradual reduction in rewards works to mitigate the generation of new Bitcoins so as to avoid flooding the market, which would result in a devalued currency.

As more miners work to generate Bitcoins, the difficulty in unlocking the block chains increases so as ensure that a new block is generated only every 10 minutes on average. The increased difficulty of unlocking a block chain’s sequence is designed in such a way that, over time, the maximum capacity of Bitcoins that will be generated will be 21 million. Added to the multiplied difficulty of solving subsequent block chains, more and more computer power is required, which some have said could be a deterrent for would-be miners from working on the more difficult block chains.

Bitcoin Lead Core Developer, Gavin Andresen

…Disagrees with the argument that hardware needs are becoming preventive. “Mining Bitcoins is becoming increasingly energy efficient,” he says. “Bitcoin miners want to pay as little as they can for electricity, so they’re constantly working to make mining more efficient.”

Energy requirements wouldn’t really matter in the grand scheme of Bitcoin production anyways, Andresen explains, as the Bitcoin production process is smart enough to adjust for variations in the miner work force. “The Bitcoin system adjusts itself so that the target number of Bitcoins are created about every 10 minutes, no matter how many miners there are.”

He adds, “The number of Bitcoin miners has almost nothing to do with how quickly Bitcoin transactions are processed, so it doesn’t matter to the Bitcoin system how much energy or how many miners are working – as long as there is one, the system will work.”

The production of Bitcoins isn’t infinite, though. In fact, there is a fixed amount that will ever be produced: 21 million. Although that peak Bitcoin mark isn’t expected to be reached until 2140, the number of Bitcoins generated will begin to taper off toward zero well before that, at which point miners will then be compensated with Bitcoin transaction fees.

As the generation of Bitcoins decreases over time, the cost of a transaction using Bitcoins will increase, which these blocks exist to verify. In lieu of transaction fees, though, Andresen postulates that miners could also be compensated by a “more complicated arrangement between merchants that want their transactions confirmed quickly and securely.” One way or another, though, the monetary reward for generating Bitcoins will always be present.

As of this year, over 8 million Bitcoins have been generated. The first block of Bitcoins to be unlocked was completed by Satoshi Nakamoto, who could be considered the progenitor of Bitcoins. As Wired Magazine’s Benjamin Wallace covered extensively in a piece about bitcoins last year, Nakamoto might be best understood as the Tyler Durden of the Bitcoin culture. An effluvium of mystery envelopes Nakamoto as no one is certain of who he is or where he came from or, most intriguing, where he disappeared to following his last public communication near the end of 2010.

It’s rumored the name was a pseudonym or that Nakamoto was actually a collective of developers. It’s even been suggested that Nakamoto was a nom de guerre for assorted bodies of the United States government. Nobody knows, and every major player in the Bitcoin industry denies being Nakamoto.

Long-Term Outlook: Bitcoins vs Precious Metals

Do Bitcoins make a good long-term investment or is it just a more effective means of exchange?

ADVANTAGE:

Bitcoins are decentralized and bypass banks, central banks and any form of government manipulation

DISADVANTAGE:

Bitcoins are a fiat currency. It relies heavily on an electronic infrastructure (metals were traded before and can be traded without one)  Unlike gold or silver or even copper or aluminum, there is a finite value.

WINNER:

Although cutting edge and highly innovative since Bitcoins fall under the category and are susceptible to the same pressures of fiat currency, precious metals still maintain their edge in building long-term wealth and being a measure of real value. Although there are many comparisons to gold mining, Bitcoins are not an investment vehicle. They are simply a convenient means of exchange for day-to-day transactions. In fact, it is predicted that many private bullion dealers will one day adopt Bitcoins as a means to buy gold, silver and other precious metal investments.

Source(s):
http://www.webpronews.com/bitcoins-the-future-of-online-currency-2012-04
http://bitcoin.org

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Past performance is not an indication of future potential values.