Bitcoin is a virtual currency. It does not exist in physical form like the currency and coin we are used to existing in. It doesn’t even exist in physical form like Monopoly money. These are electrons – not molecules.
But think about how much cash you personally handle. You get a paycheck that you take to the bank – or it’s automatically deposited without you ever 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% of that in cash in your pocket or pocketbook. So it turns out that 90% of the assets you manage are virtual – electrons in a spreadsheet or database.
But wait – those are 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? Not really. Your financial institution may only require 10% of your deposits on deposit. In some cases it is even less. He lends the rest of your money to other people for up to 30 years. He charges them the loan, and you the privilege of allowing them to borrow it.
How is money created?
Your bank can create money by lending it out.
Let’s say you deposited $1000 into your bank. Then they give $900 of that. Suddenly you have $1000 and someone else has $900. Magically, $1,900 floats around where only catfish used to be.
Now say your bank instead lends $900 of your money to another bank. That bank in turn lends $810 to another bank, which then lends $720 to the customer. Poof! $3,430 in an instant – almost $2,500 created out of nothing – as long as the bank follows your government’s central bank rules.
The creation of Bitcoin is different from the creation of bank assets such as cash from electrons. It is not controlled by the central bank of the government, but by the consensus of its users and nodes. It is not created by a limited mint in a building, but by distributed open source software and computing. And creation requires a form of real work. More on that soon.
Who invented BitCoin?
The first bitcoins were in blocks of 50 (the “Genesis Block”) created by Satoshi Nakomoto in January 2009. At first it had no value. It was just a toy cryptographer based on a paper published two months earlier by Nakomoto. Nakotmoto is obviously a made up name – no one seems to know who he or she is.
Who keeps track of all that?
Once the Genesis Block was created, bitcoins were generated from then on by doing the job of keeping track of all transactions for all bitcoins as a sort of public ledger. Nodes/computers that perform calculations in the ledger are rewarded for doing so. For each set of successful calculations, a node is rewarded with a certain amount of bitcoins (“BTC”), which are then regenerated in the bitcoin ecosystem. Hence the term “BitCoin Miner” – because the process creates new BTC. As the supply of BTC increases 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 around 50 BTC (one block) every 10 minutes, worldwide.
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 guesswork), or “proof” required to mine BitCoin and to settle transaction ledgers at any time. So the system still only generates one block of 50 BTC every 10 minutes, or 2106 blocks every 2 weeks.
So, in a way, everyone keeps track of it – that is, all the nodes in the network keep a record of the history of every single BitCoin.
How much is there and where is it?
There is a maximum number of bitcoins that can ever be generated, and that number is 21 million. According to the Khan Academy, the number is expected to peak around 2140.
As of this morning, there were 12.1 million BTC in circulation
Your own BitCoins are stored in a file (your BitCoin wallet) in your own storage – your computer. The file itself is proof of the number of BTC you have and can move with you on your mobile device.
If that cryptographic key file in your wallet is lost, so is your supply of BitCoin funds. And you can’t get it back.
How much is it worth?
The value varies depending on what people think it’s worth – just like in the exchange of “real money”. But since there is no central body trying to keep the value at a certain level, it can vary more dynamically. The first BTC were basically worth nothing at the time, but those BTC still exist. As of 11 AM on December 11, 2013, the public value was $906.00 per bitcoin. When I finished writing this sentence, it was $900.00. Around early 2013, the value was around $20.00. On November 27, 2013, it was valued at more than $1,000.00 per BTC. So it’s a little volatile right now, but it’s expected to calm down.
The total value of all bitcoins – as of the period at the end of this sentence – is about US$11 billion.
How do I get some?
First, you must have a BitCoin wallet. This article contains download links.
Then one way is to buy something from another private party, like these guys at Bloomberg TV. One way is to buy something on the stock 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 beyond the scope of this article. But if you have a few thousand extra dollars lying around, you can get some pretty decent gear.
How do 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 a long history – millennia. A slightly more 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, British Columbia, I spent currency that was only good on the beautiful island. The common theme among them was the trust agreement among the users that the currency has value. Sometimes that value was directly tied to something solid and physical, like gold. In 1900, the US pegged its currency directly to gold (the “Gold Standard”) and broke that link in 1971.
Currency is now traded like any other commodity, although the value of a 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 through trade, but is not retained or diminished by the actions 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 individual BitCoin. Its perceived value, like all other currencies, is based on its utility and trust.
As a form of currency, BitCoin is not exactly a new thing in Creation, but it is certainly a new way of creating money.