What are the differences between bitcoin and gold? The answer is partly philosophical. Gold is the most tangible of assets. It exists in the real world, in the forms of prized jewelry, computer contact points, sacred religious vessels, false teeth, King Tut’s funeral mask, and the golden dome of the Colorado state capitol building.

You can hold gold in your hands. It is amazingly durable, which is why gold was used to create a record of human voices that was carried aboard the Voyager I spacecraft, launched in 1977 and still functioning today, some 13 billion miles beyond the solar system. That King Tut mask still shone like new when first discovered in 1922; any dulling since then has been caused by improper cleaning in modern times.

An individual atom of gold may have been reprocessed a hundred times in the last few millennia, so that your wedding ring could contain gold mined in the days of King Solomon in the fabled lost city of Ophir, mixed in with gold mined in Ireland by the Bronze Age Celts, all melted together with more modern gold from mines large and small in Australia, California, Russia, Indonesia, and the Yukon.

We like to look at the nighttime webcam images from atop Pikes Peak, which show the lights of the huge, open-pit Cresson gold mine in nearby Victor, Colorado. In their days, the gold fields of Victor and Cripple Creek rivaled those of California. If you ever ascend to that height, be sure to take the Mollie Kathleen mine tour, 1,000 feet down the original mine shaft. Free samples (of ore chips, not refined gold) are available as you leave.

At the other end of the scale, we know a fellow who pans for gold dust in a certain stream in Indiana, where it was deposited by glaciers 10,000 years ago. I know he doesn’t find enough to make a living at it—or, some weeks, even enough to pay for his gas to get there—but he is having fun.

Fort Knox has tons of it, mostly in the form of 400-ounce cast bars. The workers wear steel-toed boots, because if you dropped a gold bar on your toe, you would know it. (If you choose not to believe that there is gold in Fort Knox, please have a nice day.) Gold has always been desirable in human civilization, even back when human civilization consisted of little more than the ability to cultivate grain, make a crude form of beer from it, and carve crude markings on clay tablets to keep track of who owned the beer. Small pellets of electrum, gold naturally alloyed with silver, were also used to settle up the accounts.

Roughly 2,700 years ago, a king in Asia Minor figured out that these pellets could be melted together and recast into standard-weight pellets and stamped with the king’s seal, and coinage was born. From that day onward, until the 20th century, gold was money and money was gold.

THE BITCOIN, on the other hand, is partly faith. Faith can make good money, if enough people believe in it. From the late 1870s to the late 1960s, you could take a $1 Silver Certificate to the Treasury Building and get a solid silver dollar for it, and the very fact that you could do so made people prefer to carry the intrinsically worthless, but significantly lighter, paper dollar.

In the 1960s, the Treasury managed to remove this convertibility without too many people noticing that their chicken had been plucked, but the new one-dollar Federal Reserve Notes easily circulated, because by then people were used to using paper dollars, and those people continued to have faith in those paper dollars.

The bitcoin was created on paper—or should we say on electrons?—when the domain name “bitcoin.org” was registered on Aug. 18, 2008. Its birth may have generated little notice at the time, as the economies of America and much of the rest of the world were crashing down all around it. For all we know, the collapse of the more traditional economies made the creation of an electronic mini-economy more acceptable.

On Halloween of that year, according to Investopedia, “Someone using the name Satoshi Nakamoto makes an announcement on The Cryptography Mailing list at metzdowd.com: ‘I’ve been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party. The paper is available at http://www.bitcoin.org/bitcoin.pdf.’ This link leads to the now-famous white paper published on bitcoin.org entitled ‘Bitcoin: A Peer-to-Peer Electronic Cash System.’ For the full article see here: https://www.investopedia.com/terms/b/bitcoin.asp.”

The paper contains a lot of math but it clearly establishes that the bitcoin was intended to be used as an alternative form of money that could be transferred from Party A to Party B with no financial institution intervening as Party C. Party A and Party B would not even have to know each other’s identity. Law enforcement officials were quite naturally disturbed at this prospect.

Tracking and intercepting the money derived from illegal activities has long been a function of the United States Treasury. This is one reason it discontinued issuing $500 and $1,000 bills in the late 1940s, to make large sums of money more unwieldy. The Treasury seriously considered doing the same with $50 and $100 bills earlier in this century, but abandoned the idea after a survey of drug money seizures proved that criminals capable of moving tons of drugs were equally capable of moving tons of $5, $10 and $20 bills.

Bitcoins are created by being “mined” using sophisticated computer hardware and software that create elaborate strings of computer code in accordance with the rules of the game. The code is typically stored in an electronic “wallet” that is protected with an electronic “key” that serves as a password. The system is so secure that if you lose that key, you have lost your bitcoins forever.

Once the codes are mined, they are validated by the issuing authority, after which a given number of bitcoins are awarded to the miner as “proof of work”. For roughly the first four years of Bitcoin’s existence, the “reward” was 50 bitcoins per accepted code string, out of a maximum ultimate issuance of approximately 21 million “coins”. For the next four years or so, the reward was 25 coins, and this has recently been halved again to 12.5 bitcoins per block string.

As the total number of bitcoins outstanding - including the pieces that have already been lost - gets nearer and nearer to the 21 million mark, the reward will be halved repeatedly so that the number never exceeds that cap. What that reward will be worth will, of course, depend upon the value of one bitcoin.

In December 2017, Great Britain’s The Telegraph reported a story about a Welsh man who allegedly mined 7,500 bitcoins between 2009 and 2013, and stored them in the hard drive of his computer. When the computer died, he removed the hard drive for safekeeping. He then accidentally threw the hard drive in the trash. It was buried under a few years’ more trash before its loss was noticed. The unfortunate miner then petitioned his city for the right to mine the landfill for the potential $100,000,000+ payoff, but the city declined, citing safety reasons.

THE VERY FIRST bitcoins were technically worthless, as nobody was making a buy/sell market in them. This changed in October 2009, when New Liberty Standard posted an offer to buy or sell bitcoins at the rate of 1,309.03 bitcoins per dollar, or roughly 76 cents per 1,000 bitcoins. The value was calculated as being the cost of the electricity used by a computer to mine one bitcoin. It wasn’t much, but it was better than nothing.

As the “mining” function has gotten harder and harder, some bitcoin miners have installed more computer hardware, which takes more electricity to operate. A coin dealer we know tells the story of a mining acquaintance who was racking up electricity bills of $2,500 per month, until he was raided by drug enforcement authorities, who had decided that he must have been running a marijuana grow operation. This experience curbed the miner’s activities, at least for a while.

A week after posting that first offer, New Liberty purchased 5,050 bitcoins from a miner for US$5.02, or approximately $1 per 1,000 bitcoins. At least now the company had a product inventory to sell.

In May 2009, the first actual transaction using bitcoins occurred. A man named Laszlo Hanyecz purchased, obviously by prior arrangement, two pizzas worth approximately US$25 for 10,000 bitcoins. As of this writing, those 10,000 bitcoins would be worth approximately $68,690,000, but had they never been spent, and accepted, it is possible that no bitcoin anywhere would be worth anything.

The bitcoin achieved parity with the U.S. dollar in late winter 2011, after which a short-lived bubble saw it break $30 per bitcoin before falling back to $2. Despite this prescient example of things to come, it bubbled up to over $265 in spring 2011 before dropping back to around $70. Since then, the bubbles and the busts have only gotten larger.

The currency function of the bitcoin remains difficult to quantify. It is widely assumed that the system is being used to launder drug money around the world, but the highly secretive nature of the cryptocurrency makes it impossible to verify this. For all we know, the vast majority of the bitcoins still existing are merely being used for speculation.

There are places where you can buy a cup of coffee or a bar of gold with bitcoins, but the devil is in the details. Unless your coffee shop has a Bitcoin account and the hardware to allow you to make a small payment (one pumpkin spice latte costing roughly 0.00058 bitcoin, hold the nutmeg) directly to them, you might end up paying a $20 service charge to a third-party company set up to facilitate Bitcoin purchases.

One of the numismatic forums recently carried a tale of woe from a member who tried to buy 10 gold bullion coins from a dealer that accepted Bitcoin using one of these third-party intermediaries, only to discover that the bullion dealer had a 15-minute time-out clock that started the second that the price between the buyer and the seller was established. This was to protect the seller if the typically volatile price of the tendered payment dropped before the transaction was completed.

Well, the third party took over 45 minutes to make the transfer, for a $20 fee, by which time the seller was no longer honoring the original price. Thinking that the seller had cancelled the transaction, the buyer asked the third party for his funds back, incurring another $20 fee. He then heard from the seller that the transaction had gone through, but that he owed another $66 due to a slight drop in the Bitcoin value.

He sent the money again, and before everything was over he had ended up paying $80 in fees, as well as mailing a check for the $66. He had bought into the bitcoins at a much lower price than he was spending them at, so he still did fine on the deal, but his profit was that much less because of the hassle factor involved with using Bitcoin as currency. The day after he complained about all this in the forums, the price of a bitcoin dropped to $11,000 from over $18,000, so all in all he came out OK.

In the end, a bitcoin is a nebulous thing with enormous potential, just as the weight of the water behind a hydroelectric dam has the potential energy to drive turbines and produce much good. However, the weight of a giant boulder perched on a hill above a small town can have that same potential energy to produce harm. Which one will Bitcoin be for you?

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Here are summaries of Bitcoin and Cryptocurrency books to read we believe will help you get a better handle on what the whole bitcoin and cryptocurrencies mania is all about.