Bitcoin is a virtual currency. It doesn’t exist in the kind of physical form that coin and currency exist in that we’re used to. It doesn’t even exist in as physical a form as Monopoly money. They are electrons, not molecules.
But consider how much cash you personally handle. You get a paycheck that you take to the bank, or it’s automatically deposited without you even seeing the paper it’s not printed on. Then use a debit card (or checkbook, if you’re old school) to access those funds. At best, you see 10% in the form of cash in your pocket or wallet. So it turns out that 90% of the funds you manage are virtual: electrons in a spreadsheet or database.
But wait, those are US funds (or whatever country it’s from), safe in the bank and guaranteed by the full faith of the FDIC up to about $250K per account, right? Well not exactly. Your financial institution may only be required to keep 10% of your deposits on deposit. In some cases, it is less. Lend the rest of your money to other people for up to 30 years. They charge them for the loan and they charge you for the privilege of letting them lend it.
How money is created?
Your bank can create money by lending it.
Let’s say you deposit $1,000 in your bank. Then they lend $900. Suddenly you have $1,000 and someone else has $900. Magically, there is $1,900 floating where there was only $1,000 before.
Now let’s say your bank lends 900 of your dollars to another bank. That bank, in turn, lends $810 to another bank, which then lends $720 to a customer. Fagot! $3,430 in an instant, almost $2,500 created out of thin air, as long as the bank follows the rules of your government’s central bank.
The creation of Bitcoin is as different from the creation of bank funds as cash is from electrons. It is not controlled by the central bank of a government, but by the consensus of its users and nodes. It is not created by a limited mint in one building, but by open source distributed software and computing. And it requires an actual form of work to create. More on that shortly.
Who Invented BitCoin?
The first BitCoins were in a block of 50 (the “Genesis Block”) created by Satoshi Nakomoto in January 2009. It didn’t really have any value at first. It was just a cryptographer’s toy based on an article published two months earlier by Nakomoto. Nakotmoto is an apparently fictitious name: no one seems to know who he or she is.
Who keeps track of everything?
Once the Genesis Block was created, BitCoins have been generated ever since doing the job of keeping track of all transactions of all BitCoins as a kind of public ledger. The nodes/computers that perform the calculations on the ledger are rewarded for doing so. For each set of successful calculations, the node is rewarded with a certain amount of BitCoin (“BTC”), which are then generated back into the BitCoin ecosystem. Hence the term “BitCoin Miner”, because the process creates new BTC. As the supply of BTC and the number of transactions increase, the work required to update the public ledger becomes more difficult and complex. As a result, the amount of new BTC in the system is designed to be approximately 50 BTC (one block) every 10 minutes around the world.
Although the computing power to mine BitCoin (and to update the public ledger) is currently increasing exponentially, so is the complexity of the mathematical problem (which, by the way, also requires a certain amount of guessing), or “proof” necessary to mine BitCoin and settle the transactional books at all times. So the system only generates a 50 BTC block every 10 minutes, or 2106 blocks every 2 weeks.
So, in a sense, they all keep track, that is, all the nodes in the network keep track of the history of each BitCoin.
How much is there and where is it?
There is a maximum number of BitCoin that can be generated, and that number is 21 million. According to Khan Academy, the number is expected to peak around the year 2140.
As of this morning there were 12.1 million BTC in circulation
Your own BitCoin is kept in a file (your BitCoin wallet) on your own storage – your computer. The file itself is proof of how much BTC you have and can move with you on a mobile device.
If that file with the crypto key in your wallet is lost, so is your supply of BitCoin funds. And you can’t get it back.
How much does it cost?
The value varies based on what people think it’s worth, just like in “real money” exchange. But because there is no central authority trying to keep the value around a certain level, it can vary more dynamically. The first BTCs were basically worthless at the time, but those BTCs still exist. As of 11am on December 11, 2013, the public value was $906.00 USD per BitCoin. When I finished writing this award, it was $900.00. In early 2013, the value was around US$20.00. On November 27, 2013 it was valued at more than $1,000.00 US per BTC. So it’s a bit volatile right now, but it’s expected to stabilize.
The total value of all BitCoin, as of the period at the end of this sentence, is around 11 billion US dollars.
How can I get myself some?
First, you must have a BitCoin wallet. This article has links to get one.
So one way is to buy something from another private party, like these guys on Bloomberg TV. One way is to buy some on an exchange, like Mt. Gox.
And finally, one way is to put a lot of computing power and electricity into the process and become a BitCoin miner. That is outside the scope of this article. But if you have a few thousand extra dollars laying around, you can get a great rig.
How can I spend it?
There are hundreds of merchants of all sizes that accept BitCoin as a form of payment, from coffee shops to car dealerships. There is even a BitCoin ATM in Vancouver, British Columbia to convert your BTC to cash in Vancouver, BC.
And so?
Money has had a long history, lasting millennia. A somewhat recent legend tells us that the island of Manhattan was bought by wampum: seashells and the like. In the early years of the United States, different banks printed their own coins. On a recent visit to Salt Spring Island in British Columbia, I spent money that was only good on the beautiful island. The common theme between these was a trust agreement among their users that that particular coin had value. Sometimes that value was tied directly to something solid and physical, like gold. In 1900, the US tied its currency directly to gold (the “gold standard”), and in 1971 it ended that link.
Currency is now traded like any other commodity, although the value of a particular country’s currency can rise or fall through the actions of its central bank. BitCoin is an alternative currency that is also traded and its value, like that of other commodities, is determined through trade, but is not held or diminished by the action of any bank, but directly by the actions of its users. However, its supply is limited and known, and (unlike physical currency) so is the history of each BitCoin. Its perceived value, like any other currency, is based on its usefulness and trustworthiness.
As a form of currency, BitCoin isn’t exactly something new to creation, but it certainly is a new way of creating money.
