What is Bitcoin, how is it different? "Real" Money and how can I get some money?

Bitcoin is a virtual currency. It does not exist in the physical form of currency and coin that we are used to existing in. It doesn’t even exist in physical form like monopoly money. It’s electrons, not molecules.

But consider how much cash you personally manage. You get a paycheck that you take to the bank, or it’s automatically deposited without even seeing the paper it’s not printed on. Then you 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 pocket. 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 require 10% of the deposit to be held. 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 allowing them to convert it.

How is money created?

Your bank can create money by lending it out.

Say you have $1,000 deposited in your bank. After that they give $900. Suddenly you have $1,000 and someone else has $900. Magically, there’s $1,900 floating around where there used to be 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 the customer. A puff of $3,430 in an instant, almost $2,500 created from nothing, as long as the bank follows your government’s Central Bank rules.

Creating Bitcoin is as different from creating bank funds as cash is from electrons. It is not controlled by the central bank of the government, but by the consent of its users and nodes. It is not created by an in-house confined mint, but rather by distributed open source software and computation. And creativity requires a form of actual work. 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. At first it didn’t really have any value. It was just a cryptographer’s toy based on a paper published two months ago by Nakomoto. Nakotmoto is apparently a fictitious name. no one seems to know who he or they are.

Who’s keeping track of it all?

When the Genesis Block was created, BitCoins have been created ever since, doing the work of tracking all transactions for all BitCoins as a kind 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 BitCoin (“BTC”), which are then newly formed in the BitCoin ecosystem. Hence the term “BitCoin Miner” as the process creates new BTC. As the supply of BTC increases, and as the number of transactions increases, the work required to update the public ledger becomes more 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 worldwide.

Although the computing power for mining BitCoin (and updating 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” is necessary for mining. BitCoin and adjust the transaction books at any time. So the system still only creates one 50 BTC block every 10 minutes, or 2106 blocks every 2 weeks.

So, in a sense, everyone is following it, meaning all nodes on the network are following the history of every BitCoin.

How much and where is it?

There is a maximum number of BitCoin that can ever be created, and that number is 21 million. That number is expected to rise around 2140, according to the Khan Academy.

There were 12.1 million BTC in circulation this morning

Your own BitCoin is stored on file (your BitCoin wallet) in your own storage on your computer. The file itself is a proof of the amount of BTC you have and it can be moved with you on your mobile device.

If that file with your wallet cryptographic key is lost, so is your supply of BitCoin funds. And you can’t get it back.

How much does it cost?

The value fluctuates depending on how much people think it’s worth, just like exchanging “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 is basically worth nothing at the time, but that BTC still exists. As of 11:00 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 cost was around $20.00 US. On November 27, 2013, it was valued at over US$1,000.00 per BTC. So it’s kind of unstable at the moment, but it’s expected to settle.

The total value of all BitCoin as of the time at the end of this sentence is about 11 billion USD.

How can I get me 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 on an exchange such as Mt Gox.

And finally, one way is to commit a lot of computer power and electricity to the process and become a BitCoin miner. That is way beyond the scope of this article. But if you have a few thousand extra dollars, you can get a pretty big rig.

How can I spend it?

There are hundreds of merchants of all sizes that accept BitCoin, 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 – thousands of years. Some recent legend tells us that Manhattan Island was bought for wampum – shrimps, etc. 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. A common theme among them was an agreement of trust among its users that a given currency has value. Sometimes that value was directly tied to something solid and physical, like gold. In 1900, the United States pegged its currency directly to gold (the “Gold Standard”) and ended the peg in 1971.

Currency is now traded like any other commodity, although the value of a particular country’s currency can be strengthened or weakened by central bank actions. BitCoin is an alternative currency that is also traded, and its value, like the value of other commodities, is determined by trading, but is not maintained or reduced 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 BitCoin. Its perceived value, like all other currencies, is based on its utility and trustworthiness.

As a form of currency, BitCoin is nothing new at Creation, but it is certainly a new way of creating money.