The blog is about storing gold and how to buy it in a time of the virtual market, not about bitcoins. It’s a good blog with a lot of information. The blog is the most reliable source of information I’ve found on bitcoins.
If you want to be rich, the first thing you have to know is how to buy gold. For most people, the only way to buy gold is through a website that buys it for you and holds it. There are two big problems with this approach. First, there’s no guarantee the website will have enough of what you want; second, there’s no guarantee the website won’t go bust at any time.
If you are going to invest in gold, your best bet is to buy it from a physical-to-virtual merchant, who has bought it from someone else. They are more trustworthy than websites because they have less money at risk. If they go bust, it won’t make much difference if you can’t get your gold till Christmas. And if they have enough gold for your order, then you don’t need them any more: all the risk is transferred to their clientele.
The opposite of virtual is physical. Physical gold is the gold that you can hold in your hand. It’s all around us, and it’s made out of the same stuff as everything else. Virtual gold is money in a computer program, or “simulated gold” as some people call it. It’s not real, but it’s just as good as real gold in a lot of important ways. The only difference between this kind of gold and ordinary gold is that you can’t touch it, or judge its value by weighing it and finding out how much it weighs.
There are two ways to store your money in case there’s a financial crisis: (1) on paper, which increases the risk of paper-money runs; or (2) on computers, which decreases the risk of computer-money runs.
Gold is money. It is a good way to store wealth. But it’s not the most efficient way to do so, because it isn’t great at holding value over time. If you have your wealth in gold, the price of gold may go up a lot, and you’ll end up with less wealth than you started with.
Virtual currencies are a way to store wealth without having it in physical form. So virtual currencies are like virtual gold: they are a new way to hold wealth, but they’re not really better than real gold for doing so.
The difference between real gold and virtual gold boils down to convenience. Gold lacks liquidity, meaning that if you want to buy something with your gold, you’ve got to do it in person. You can’t just send the stuff by email or courier, or use an automated vending machine (which we will call “the vending machine”). The virtual currency market solves this problem by giving you a sort of account that works like a bank account: you can transfer funds into your account from anywhere in the world, and then later transfer them out again whenever you like.
If any of these details are confusing or unclear, don’t worry; I’m going to explain them all as we go along.
Virtual currency is a funny word. If you use it in a VM, you can’t spend it there–it’s not real money. But if you use it outside the VM, it’s real money.
One of the benefits of the virtual-currency idea is that you don’t have to trust people. Let me give you an example. Suppose I accept electronic payment from you for a book I’ve written and want to make my next book available for electronic payment, too. I post that on my blog and ensure that no one else can buy it until you pay me.
Now suppose that someone comes along and posts something else for sale at the same time. It’s obviously a fake, because he’s trying to sell his own book instead of yours. But what if he succeeded? Then everyone would feel like fools–and we’d all be at risk because of something we trusted.
A modern version of this story is what happened at Wikipedia when some people tried to sell their own encyclopedia instead of Wikipedia itself. You know that Wikipedia is different from other encyclopedias; they have a central system where anyone can edit anything and everything, so every article is free of typos and biased opinions and plagiarism, etc., etc., etc.–there are no
Virtual currencies are an innovation of the modern banking system. There was an earlier, more primitive form of virtual currency: gold in the form of coins and bars. That is still around and it will probably be around for a long time. The virtual currencies that are now under development are based on banking systems, not on gold or silver.
The problem with banks as we used to know them is that they use money as a medium of exchange, but money can’t be used as a medium of exchange unless it has value. If everyone trusts a bank to make good on any promises it makes, then the bank’s promises can be used as money. But if you don’t trust the bank, or if people don’t trust the bank’s promise-making ability, then its promises become worthless.
The reason most banks require customers to put up collateral when they borrow from them is that they can’t be sure their customers won’t default on their promises. Virtual currencies solve this problem by making their promise-making process fully automated and transparent. The result is that you can trust the bank more than you could before because you know exactly what kind of backing the bank has.
There are three main kinds of virtual currencies in development right now: virtual gold, virtual currency credit cards and
Virtual currency is what happens when you try to have a currency without backing. In a country where the government has issued its own currency and promised to back it with gold, the government’s promise is meaningless. Virtual currencies are backed by nothing. Bitcoin, for example, is supposed to be backed not by banks but by the code that backs Bitcoin transactions. Right now this means bitcoins are created as transactions are made. If no one makes a transaction, bitcoins vanish.
That’s not quite right. Bitcoins are supposed to be created at a fixed rate of 25 bitcoins every 10 minutes. But nobody knows how much electricity it would take to run Bitcoin at 25 bitcoins per 10 minutes; they just know it wouldn’t be enough all the time to keep up with the rate at which bitcoins are being created. So every time there isn’t enough electricity available, people have to figure out a way to create more bitcoins than there are in existence before the next block is mined–or some bitcoin use gets trashed and loses money–and decide whether that tradeoff was worth it.
When something is backed by nothing and created at less than a fixed rate, it’s unstable and subject to wild swings in value; what started out as 1 BTC will turn into $1 billion or 0 BTC overnight