Bitcoin is a virtual currency. It doesn’t have the kind of physical form that the currency and coin that we used to have. These are electrons – not molecules.
But think about how much you personally manage. You get a salary that you take to the bank – or it is autodeposited without you seeing the paper without printing it. Then you use a debit card (or checkbook, if you’re old school) to access the funds. At best, you will see 10% of it in a cash form in your pocket or in your pocketbook. 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 you’re from), bank safe and guaranteed in full faith by the FDIC up to about $250K per account, right? Well, not exactly. Your financial institution may only be required to keep 10% of its deposits on deposit. In some cases, it is less. It lends the rest of your money to other people for up to 30 years. It charges them for the loan, and pays you for the privilege of lending to them.
How is money made?
Your bank makes money by lending it.
Say you deposit $1,000 in your bank. Then they loaned $900 to it. Suddenly you have $1000 and someone else has $900. Amazingly, there’s $1900 floating around where once it was just a grand.
Now 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. Poof! $3,430 in a flash – almost $2500 made from nothing – as long as the bank follows your government’s central bank rules.
Creating Bitcoin is different from creating bank funds because money comes from electrons. It is not controlled by the central government bank, but by the consensus of its users and nodes. It is not created in a limited mint in a building, but through distributed open source software and computing. And it takes some kind of actual work for creation. More on that soon.
Who invented BitCoin?
The first BitCoins were in a block of 50 (the “Genesis Block”) created by Satoshi Nakomoto in January 2009. It had absolutely no value at first. It was just a cryptographer’s game based on a paper published two months earlier by Nakomoto. Nakotmoto is an apparently fictional name – no one knows who he or they are.
Who keeps track of all this?
When the Genesis Block was created, BitCoins were created by doing the work of tracking all transactions for all BitCoins as a kind of public ledger. Nodes / computers that perform ledger calculations are rewarded for doing so. For each set of successful calculations, the node is rewarded with a certain amount of BitCoin (“BTC”), newly created in the BitCoin ecosystem. Hence the term, “BitCoin Miner” – because the process creates new BTC. As the supply of BTC increases, and as transactions increase, the work required to update the public ledger becomes harder and more complex. As a result, the number of new BTC in the system is designed to be about 50 BTC (one block) every 10 minutes, worldwide.
Although the computing power for BitCoin mining (and for updating the public ledger) is currently increasing, so is the complexity of the mathematical problem (which, in fact, also requires a certain guess amount), or “proof” required for mining. BitCoin and settle transactional books at any time. So the system still only generates one 50 BTC block every 10 minutes, or 2106 blocks every 2 weeks.
So, in a sense, everyone is tracking it – that is, all the nodes in the network are tracking the history of every single BitCoin.
How many are there and where are they?
There is a maximum number of BitCoin that can be created, 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) in your own storage – your computer. The file itself is proof of the amount of BTC you have, and it can move with you on a mobile device.
If that file containing the cryptographic key to your wallet is lost, so is your supply of BitCoin funds. And you can’t take it back.
How much is it worth?
The amount varies based on how much people think it’s worth – like exchanging “real money.” But since there is no central authority trying to keep the value at a certain level, it can vary very dynamically. The first BTC was basically worthless at the time, but that BTC is still there. As of 11AM on December 11, 2013, the public value is $906.00 US per BitCoin. When I finished writing this sentence, it was $900.00. At the beginning of 2013, the cost was about $20.00 US. On November 27, 2013 it was worth more than $1,000.00 US per BTC. So it’s a bit volatile at the moment, but it’s expected to settle.
The total value of all BitCoin – at the time of the end of this sentence – is about 11 billion US dollars.
How can I get me?
First, you need to have a BitCoin wallet. This article has links to get one.
Then one way is to buy some from another private party, like these guys at Bloomberg TV. One way is to buy some on an exchange, such as Mt. Gox.
And finally, one way is to dedicate a lot of computer power and electricity to the process and become a BitCoin miner. That is outside the scope of this article. But if you have a few thousand extra dollars lying around, you can get a rig.
How can I spend?
There are hundreds of merchants of all sizes that take BitCoin as payment, from cafes to car dealerships. There is even a BitCoin ATM in Vancouver, British Columbia for converting your BTC to cash in Vancouver, BC.
Money has a long history – millennia long. A recent legend tells us that Manhattan Island was bought for wampum – shells and such. In the early years of the United States, different banks printed their own money. On a recent visit to Salt Spring Island in British Columbia, I spent money that was just fine on the beautiful island. The common theme among these is a trust agreement among its users that a particular currency has value. Sometimes that value is tied directly to something durable and physical, like gold. In 1900 the US tied its currency directly to gold (the “Gold Standard”) and in 1971, that tie ended.
Today money is traded like any other commodity, although the value of money in a particular country can be increased or decreased by the actions of their central bank. BitCoin is an alternative currency that is also sold and its value, like other commodities, is determined by trade, but is not restricted or reduced by the action of any bank, but directly by the actions of its users. Its supply is limited and known however, and (unlike physical money) so is the history of each BitCoin. Its perceived value, like all other currencies, is based on its utility and trust.
As a form of money, BitCoin is not exactly a new thing in Creation, but it is certainly a new way to make money.