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 buy precious metals with bitcoin 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.