Bitcoin, How Is It Different Than "Real" Money ?

Bitcoin is a virtual currency. It doesn't exist in the kind of physical form that the currency & coin we're used to exist in. It doesn't even exist in a form as physical as Monopoly money. It's electrons - not molecules.

But consider how much cash you personally handle. You get a paycheck that you take to the bank - or it's autodeposited without you even seeing the paper that it's not printed on. You then use a debit card (or a checkbook, if you're old school) to access those funds. At best, you see 10% of it in a cash form in your pocket or in your pocketbook. So, it turns out that 90% of the funds that you manage are virtual - electrons in a spreadsheet or database.

But wait - those are U.S. funds (or those of whatever country you hail 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 required to keep 10% of its deposits on deposit. In some cases, it's less. It lends the rest of your money out to other people for up to 30 years. It charges them for the loan, and charges you for the privilege of letting them lend it out.

How does money get created?

Your bank gets to create money by lending it out.

Say you deposit $1,000 with your bank. They then lend out $900 of it. Suddenly you have $1000 and someone else has $900. Magically, there's $1900 floating around where before there was only a grand.

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 $2500 created out of nothing - as long as the bank follows your government's central bank rules.

Creation of Bitcoin is as different from bank funds' creation as cash is from electrons. It is not controlled by a government's central bank, but rather by consensus of its users and nodes. It is not created by a limited mint in a building, but rather by distributed open source software and computing. And it requires a form of actual work for creation. More on that shortly.

Who invented BitCoin?

The first BitCoins were in a block of 50 (the "Genesis Block") created by Satoshi Nakomoto in January 2009. It didn't really have any value at first. It was just a cryptographer's plaything based on a paper published two months earlier by Nakomoto. Nakotmoto is an apparently fictional name - no one seems to know who he or she or they is/are.

Who keeps track of it all?

Once the Genesis Block was created, BitCoins have since been generated by doing the work of keeping track of all transactions for all BitCoins as a kind of public ledger. The nodes / computers doing the calculations on the ledger are rewarded for doing so. For each set of successful calculations, the node is rewarded with a certain amount of BitCoin ("BTC"), which are then newly generated into the BitCoin ecosystem. Hence the term, "BitCoin Miner" - because the process creates new BTC. As the supply of BTC increases, and as the number of transactions increases, the work necessary to update the public ledger gets harder and more complex. As a result, the number of new BTC into the system is designed to be about 50 BTC (one block) every 10 minutes, worldwide.

Even though the computing power for mining BitCoin (and for updating the public ledger) is currently increasing exponentially, so is the complexity of the math problem (which, incidentally, also requires a certain amount of guessing), or "proof" needed to mine BitCoin and to settle the transactional books at any given moment. So the system still only generates one 50 BTC block 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 there and where is it?

There is a maximum number of BitCoin that can ever be generated, and that number is 21 million. According to the Khan Academy, the number is expected to top out around the year 2140.

As of, this morning there were 12.1 million BTC in circulation

Your own BitCoin are kept 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 it can move with you on a mobile device.

If that file with the cryptographic key in your wallet gets lost, so does your supply of BitCoin funds. And you can't get it back.

How much is it worth?

The value varies based on how much people think it's worth - just like in the exchange of "real money." But because there is no central authority trying to keep the value around 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 11AM on December 11, 2013, the public value was $906.00 US per BitCoin. When I finished writing this sentence, it was $900.00. Around the beginning of 2013, the value was around $20.00 US. On November 27, 2013 it was valued at more than $1,000.00 US per BTC. So it's kind of volatile at the moment, but it's expected to settle down.

The total value of all BitCoin - as of the period at the end of this sentence - is around 11 billion US dollars.

How can I get me some Bitcoin?

First, you have 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 some on an exchange, like 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's well outside the scope of this article. But if you have a few thousand extra dollars lying around, you can get quite a rig.

How can I spend Bitcoin?

There are hundreds of merchants of all sizes that take BitCoin in payment, from cafes to auto dealerships. There's even a BitCoin ATM in Vancouver, British Columbia for converting your BTC to cash in Vancouver, BC.

Money has had a long history - millennia in length. Somewhat recent legend tells us that Manhattan Island was bought for wampum - seashells & the like. In the early years of the United States, different 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 lovely island. The common theme amongst these was a trust agreement amongst its users that that particular currency held value. Sometimes that value was tied directly to something solid and physical, like gold. In 1900 the U.S. tied its currency directly to gold (the "Gold Standard") and in 1971, ended that tie.

Now currency is traded like any other commodity, although a particular country's currency value can be propped up or diminished through actions of their central bank. BitCoin is an alternate currency that is also traded and its value, like that of other commodities, is determined through trade, but is not held up or diminished by the action of any bank, but rather directly by the actions of its users. Its supply is limited and known however, and (unlike physical currency) so is the history of every single BitCoin. Its perceived value, like all other currency, is based on its utility and trust.