Bitcoin is a virtual currency. It’s not in the kind of physical form where the currency and coin we used to use. These are electrons – not molecules.
But think about how much personal management you have. You can get a paycheck that you take to the bank – or it’s autodeposited without you seeing the paper without it being printed. Then you use a debit card (or checkbook, if you’re old school) to access the funds. At best, you can find 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 funds in the US (or in any country you’re from), safe in the bank and guaranteed in full FDIC trust up to about $ 250K per account, right? Well, not exactly. Your financial institution may only need to keep 10% of its deposits on deposit. In some cases, it is smaller. It lends the rest of your money to other people for up to 30 years. It charges them for debt, and you are paid for the privilege of lending to them.
How to generate money?
Your bank can make money by lending it.
Say you deposit $ 1,000 in your bank. Then they lent $ 900 of it. Suddenly you have $ 1000 and others have $ 900. Surprisingly, there was $ 1900 floating around where there used to be only one grand.
Now let’s say your bank lends 900 of your dollars to another bank. That bank in turn lent $ 810 to another bank, which then lent $ 720 to a customer. Poof! $ 3,430 all of a sudden – almost $ 2500 made from the left – as long as the bank follows your government’s central bank rules.
Creating Bitcoin is rather different from creating bank funds than money from electrons. It is not controlled by the central government bank, but by the consensus of its users and nodes. It was not created with the limited mint of 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 was never worth it at first. It’s just a cryptographer’s game based on a paper published two months ago by Nakomoto. Nakotmoto is obviously a fictional name – no one knows who he or they are.
Who is tracking all this?
When Genesis Block was created, BitCoins has since done so by doing the work of keeping track of all transactions for all BitCoins as a kind of public ledger. The nodes / computers that perform the ledger calculations are rewarded for doing so. For each set of successful calculations, the node is rewarded with a specific amount of BitCoin (“BTC”), which is newly generated in the BitCoin ecosystem. Hence the term, “BitCoin Miner” – because the process creates a new BTC. As the supply of BTC increases, and as transactions increase, the work required to update the public ledger becomes more difficult and complicated. 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 on the rise, so is the complexity of the mathematical problem (which, in fact, also requires a specific amount of prediction), or “proof” required by mining. BitCoin and to settle transactional books at any time. So the system can still only generate 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 each BitCoin.
How many are there and where are they?
There is a maximum amount of BitCoin that can be made, and that number is 21 million. According to Khan Academy, the number is expected to increase around the year 2140.
This morning there were 12.1 million BTC in circulation
Your own BitCoin is stored 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 work with you on a mobile device.
If that file with the cryptographic key in 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 amount at a certain level, it can vary even more dynamically. The first BTC was basically worthless at the time, but that BTC was 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. As of November 27, 2013 it was worth more than $ 1,000.00 US per BTC. So it’s a quick change for now, but it’s expected to settle.
The total value of all BitCoin – at the time of the end of this sentence – was about 11 billion US dollars.
How do I get some?
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 on Bloomberg TV. One way is to buy others 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 beyond the scope of this article. But if you have a few thousand extra dollars around, you can get a rig.
How do I spend?
There are hundreds of merchants of all sizes taking BitCoin for 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 in length. Recent legend tells us that Manhattan Island was bought for wampum – shellfish and so on. 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 some good money on the beautiful island. The common theme among them is a trust agreement among its users that a particular money has value. Sometimes that value is directly tied to something solid and physical, such as gold. In 1900 the US tied its currency directly to gold (the “Gold Standard”) and in 1971, that tie ended.
Now money is sold like any other product, even if the amount of money in a particular country can be increased or decreased through the actions of their central bank. BitCoin is an alternative currency that is also traded and its value, like other commodities, is determined by trade, but is not constrained or reduced by the action of any bank, but directly by the actions of its users. Its supply is limited and known though, and (unlike physical money) so is the history of every BitCoin. Its perceived value, like all other currencies, is based on its use and reliability.
As a form of money, BitCoin isn’t exactly a new thing in Creation, but it’s certainly a new way to make money.