What is Bitcoin, what makes it different "Real" Money and how to get it?

Bitcoin is a virtual currency. They do not exist in a physical form like the currency and coins we are used to existing in. They don’t even exist in a physical form like Monopoly money. These are electrons, not molecules.

But think about how much money you personally have. You get the wages you take to the bank – or it’s automatically deposited without you even seeing the paper it’s not printed on. You then use your debit card (or checkbook if you’re old school) to access those funds. At best, you see 10% of it in cash in your pocket or passbook. So it turns out that 90% of the funds you manage are virtual – electrons in a spreadsheet or database.

But wait – those are US (or whatever country you’re from) funds that are safe in the bank and guaranteed by the FDIC up to about $250k per account, right? Well, not quite. Your financial institution may only require you to keep 10% of your deposits in escrow. In some cases it is less. It lends the rest of your money to other people for up to 30 years. It charges them a fee 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 into your bank. They then borrow $900 from them. All of a sudden you have $1,000 and someone else has $900. Magically, $1,900 swirls around where only a thousand used to be.

Now let’s say your bank lends your $900 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 from nothing – provided 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 a government central bank, but rather by a consensus of its users and nodes. It is not created by a confined 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 a block of 50 (the “Genesis Block”) created by Satoshi Nakamoto in January 2009. At first it was of no value. It was just a game of cryptographer based on an article published two months ago by Nakamoto. Nakotmoto – apparently a fictitious name – no one seems to know who he or she or they are.

Who is watching all this?

Once the Genesis block was created, Bitcoins were created by 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 number of Bitcoins (“BTC”), which are then re-created in the Bitcoin ecosystem. Hence the term “Bitcoin Miner” because this 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 complex and difficult. As a result, the number of new BTC in the system should be about 50 BTC (one block) every 10 minutes worldwide.

Although the computing power for mining bitcoins (and for updating the public ledger) is currently growing exponentially, so is the complexity of the mathematical problem (which, by the way, also requires a certain number of assumptions), or “proofs ” needed to mine BitCoin and settle transaction books at any time. So the system still only creates one block of 50 BTC every 10 minutes or 2106 blocks every 2 weeks.

So, in a sense, everyone is tracking it – that is, all the nodes on the network are tracking the history of every single bitcoin.

How much is there and where is it?

There is a maximum number of Bitcoins that can be generated and that number is 21 million. The number is expected to peak around 2140, according to the Khan Academy.

As of 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 – on your computer. The file itself is proof of the amount of BTC you have and it can move with you on your mobile device.

If this cryptographic key file in your wallet is lost, your BitCoin supply will also be lost. And you won’t return it.

How much does it cost?

The price varies based on how much people think it’s worth – just like when exchanging “real money”. But because there is no central body trying to maintain the value at a certain level, it can change more dynamically. At the time, the first BTCs were worth almost nothing, but these BTCs still exist. As of 11:00 AM on December 11th, 2013, the public value of Bitcoin was $906.00 USD. When I finished writing this sentence, it was $900.00. Around early 2013, the price was around $20.00 USD. On November 27, 2013, it was valued at over $1,000.00 USD per BTC. So it’s volatile at the moment, but it’s expected to calm down.

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

How do I get it?

First, you must have a BitCoin wallet. This article has links to get one.

Then one way is to buy from another private group, like these guys at Bloomberg TV. One way is to buy from an exchange such as the Mt.Gox exchange.

And finally, one way is to devote a lot of computer power and electricity to this process and become a Bitcoin Miner. This is way beyond the scope of this article. But if you have a few thousand extra dollars lying around, you can get quite a lot.

How can I spend it?

There are hundreds of merchants of all sizes that accept Bitcoin as payment, from cafes to car dealerships. Vancouver, BC even has a BitCoin ATM to convert your BTC to cash.

And so?

Money has a long history – thousands of years. A recent legend tells us that the island of Manhattan was bought for wampum – sea shells 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 useful on that beautiful island. A common theme among them was the trust agreement 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 United States pegged its currency directly to gold (the “Gold Standard”), and in 1971 ended this peg.

Currency is now traded like any other commodity, although the value of a particular country’s currency can be strengthened or weakened by the actions of their central bank. Bitcoin is an alternative currency that is also traded, and its value, like other commodities, is determined through trading, but is not delayed 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) the history of each individual bitcoin is also known. Its perceived value, like any other currency, is based on its utility and trustworthiness.

As a form of currency, Bitcoin is not exactly a new thing in Creation, but it is certainly a new way of creating money.