Bitcoin is a virtual currency. It doesn’t exist in the kind of physical form that currency and coin that we’re used to existing in. It doesn’t even exist in such a physical form as monopoly money. They are electrons, not molecules.
But be aware of 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% cash in your pocket or pocket. So it turns out that 90% of the funds you manage are virtual: electrons in a spreadsheet or database.
But wait: they’re US funds (or whatever country you’re from), safe in the bank, and guaranteed by the full faith of the FDIC up to about $250,000 per account, right? Well, not exactly. Your financial institution may only require you to keep 10% of your deposits in escrow. In some cases, it is less. Loan the rest of your money to other people for up to 30 years. It charges them for the loan and charges you for the privilege of letting them lend.
How is money created?
Your bank can create money by lending it.
Let’s say you deposit $1,000 in your bank. Then they lend you $900. Suddenly you have $1,000 and someone else has $900. Magically, there’s $1,900 floating around where there was just a grand before.
Now say your bank lends 900 of your dollars to another bank. This bank in turn lends $810 to another bank, which then lends $720 to a customer. Poof! $3,430 in an instant, almost $2,500 created out of thin air, as long as the bank follows your government’s central bank rules.
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 mint confined in a building, but by distributed open source software and computing. And it takes real 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. At first it had no value. It was just a cryptographer’s game based on an article published two months earlier by Nakomoto. Nakotmoto is an apparently fictitious name – no one seems to know who he/they are.
Who keeps track of all this?
Once the Genesis block was created, BitCoins have been generated ever since by doing the job of keeping track of all transactions of all BitCoins as a kind of public ledger. Nodes / computers that do the calculations in 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 newly generated in the BitCoin ecosystem. Hence the term “BitCoin Miner”, because the process creates new BTC. As the supply of BTC and the number of transactions increases, the work required to update the public ledger becomes more difficult and 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.
While the computing power to mine BitCoin (and to update the public ledger) is increasing exponentially, so is the complexity of the math problem (which, by the way, also requires a certain amount of guesswork) or the “proof” needed to extract. BitCoin and to settle the transaction books at every moment. So the system still only generates a block of 50 BTC every 10 minutes, or 2106 blocks every 2 weeks.
So, in a sense, everyone keeps track of it, meaning every node in the network keeps track of the history of every 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 the Khan Academy, that number is expected to surpass around 2140.
As of this morning there were 12.1 million BTC in circulation
Your own BitCoins are saved in a file (your BitCoin wallet) on your own storage: your computer. The file itself is proof of the number of BTC you have and can be moved with you on a mobile device.
If this file with the cryptographic key in the wallet is lost, so will your supply of BitCoin funds. And you can’t get it back.
How much is it?
The value varies based on how much people think it’s worth, just like in the exchange of “real money”. But since there is no central authority trying to keep the value around a certain level, it can vary more dynamically. The first BTC was basically worth nothing at the time, but these BTC still exist. As of 11 AM on December 11, 2013, the public value was $906.00 USD per BitCoin. As I finished writing this sentence, it was $900.00. Around the beginning of 2013, the value was around US$20.00. On November 27, 2013, it was valued at over US$1,000.00 per BTC. So it’s a bit volatile at the moment, but it’s expected to settle down.
The total value of all BitCoin – as of the period at the end of this sentence – is about 11 billion US dollars.
How can I get some?
First, you must have a BitCoin wallet. This article has links to get one.
Then one way is to buy one from another private party, like these guys from Bloomberg TV. One way is to buy one on an exchange, like Mt. enjoy
And finally, one way is to devote a lot of computer power and electricity to the process and become a BitCoin miner. This is well beyond the scope of this article. But if you have a few thousand extra dollars laying around, you can pull it off.
How can I spend it?
There are hundreds of merchants of all sizes that take BitCoin as payment, from coffee shops to car dealerships. There is even a BitCoin ATM in Vancouver, BC to convert your BTC to cash in Vancouver, BC.
Money has had a long history, millennia. A somewhat recent legend tells us that Manhattan Island was bought for wampum—shells and the like. In the early years of the United States, different banks printed their own currency. On a recent visit to Salt Spring Island in British Columbia, I spent coin that was only good on the beautiful island. The common theme among these was an agreement of trust 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 this tie.
Currency is now traded like any other commodity, although the value of a particular country’s currency can be propped up or down by the actions of its central bank. BitCoin is an alternative currency that is also traded and its value, like other commodities, is determined by trade, but is not held back 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 utility and trust.
As a form of currency, BitCoin isn’t exactly something new to Creation, but it’s certainly a new way to create money.