What is bitcoin, how is it different from "real" Money and how to get it?

Bitcoin is a virtual currency. They do not exist in the kind of physical form that the currency and coin that we are used to exist in. They don’t even exist in a form as physical as Monopoly money. These are electrons – not molecules.

But think about how much money 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. You then use a debit card (or checkbook if you’re old school) to access those funds. At best, you see 10% of it in cash form 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 you’re 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 hold 10% of its deposits on deposit. In some cases it is less. It lends your remaining money to other people for up to 30 years. It charges them for the loan and charges you for the privilege of letting them borrow it.

How is money created?

Your bank can create money by lending it out.

Let’s say you deposit $1,000 in your bank. Then they loan out $900 of it. Suddenly you have $1,000 and someone else has $900. Magically, there’s $1,900 floating around where there used to be just a thousand.

Now say your bank instead 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 an instant – almost $2,500 created out of thin air – as long as the bank follows your government’s central bank rules.

Creating Bitcoin is as different from creating bank funds as money is different from electrons. It is not controlled by the central bank of the government, but rather by the consensus of its users and nodes. It was not created by a limited mint in a building, but rather by distributed open source software and computers. And it takes some form of actual work to create. More on that in a moment.

Who Invented Bitcoin?

The first Bitcoins were in blocks of 50 (the “Genesis Block”), created by Satoshi Nakomoto in January 2009. At first, it didn’t really have any value. It was just a cryptographer’s toy based on an article published two months earlier by Nakomoto. Nakotmo is obviously a made-up name – no one seems to know who he or she or they is.

Who keeps track of all this?

Once the Genesis Block was created, BitCoins have since been generated by doing the job of keeping track of all transactions for all BitCoins as a kind of public ledger. The nodes / computers performing the 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 generated anew 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 harder and more complex. As a result, the number of new BTC in the system is designed to be around 50 BTC (one block) every 10 minutes globally.

Although the computing power to mine BitCoin (and to update the public ledger) is currently growing exponentially, the complexity of the mathematical problem (which by the way also requires a certain amount of guesswork) or “proof” needed to mine BitCoin and to settle is also growing of the transaction books at any given time. So the system still only generates one block of 50 BTC every 10 minutes or 2106 blocks every 2 weeks.

So, in a sense, everyone keeps track of it – that is, all the nodes in the network keep track of the history of every single bitcoin.

How much is it and where is it?

There is a maximum number of Bitcoins that can ever be generated, and that number is 21 million. According to 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 a mobile device.

If that cryptographic key file in your wallet gets lost, so does your supply of Bitcoin funds. And you can’t take it back.

How much does it cost?

The value varies depending on how much people think it’s worth – just like “real money” exchanges. But since there is no central authority trying to keep the value around a certain level, it can fluctuate more dynamically. The first BTCs weren’t really worth anything at the time, but those BTCs 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 the beginning of 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 kind of volatile right now, but it’s expected to settle down.

The total value of all bitcoins – as of the period at the end of this sentence – is about 11 billion US dollars.

How can I get some?

First, you need to have a bitcoin wallet. This article has links to get one.

Then one way is to buy from another private party, like these guys at Bloomberg TV. One way is to buy some on an exchange, like Mount Gox.

Finally, one way is to dedicate a lot of computing 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 bucks laying around, you can get some pretty big gear.

How can I spend it?

There are hundreds of merchants of all sizes that accept 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.

And so?

Money has a long history – millennia long. Somewhat recent legend tells us that Manhattan Island was bought for wampum – clams and the like. In the early years of the United States, various banks printed their own currency. On a recent visit to Salt Spring Island in British Columbia, I spent currency that was only good on the beautiful island. The common theme among them was an agreement of trust between users that this particular currency has value. Sometimes this value was directly linked to something solid and physical, such as gold. In 1900, the US pegged its currency directly to gold (the “Gold Standard”), and in 1971 ended this link.

Currency is now traded like any other commodity, although the value of a country’s currency can be bolstered or depreciated by actions of its central bank. BitCoin is an alternative currency that is also traded and its value, like that of other commodities, is determined by trading, but is not held back or reduced by the actions of any bank, but rather directly by the actions of its users . However, its supply is limited and known, as is (unlike physical currency) 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 is not exactly a new thing in Creation, but it is certainly a new way to create money.