Bitcoin: Where does it come from?

Updated May 27, 2014

Bitcoin is a peer-to-peer currency that its founders released in 2008, but because of its young lifespan, the virtual currency is extremely volatile. Sometimes valued at 200 USD and other times at 400 USD, how could the everyday consumer get a Bitcoin without spending three or more digits? Mining.

Mining? Yes, mining. We can create new Bitcoins from the old ones. A process called “mining” pulls these Bitcoins back into the economy, but let’s back up for a moment.

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Where did Bitcoins come from?

The creators inserted the Bitcoins into the peer-to-peer network in 2008. How many did they insert? I have no idea. New Bitcoins cannot be created like money can be printed and they cannot be resued. By the end pf 2009, 2,625,000 Bitcoin were in the network.

 What happens to a Bitcoin after it has been used?

When we use Bitcoins, they are sent via a one-way mathematical equation. This equation is irreversible unless it is solved through a hacking pocess. This one-way equation basically locks your Bitcoin in a state that is “spent”. For example, I have used my Bitcoin to buy a product or service from Charlie, for example. Now that I have used it, I cannot use it again, just like using dollars to buy gum. But in the virtual spectrum, the transaction needs to be locked in order to ensure that the currency has been transferred. This lock is the one-way mathematical equation. We can buy more Bitcoins to replace those we’ve spent. We cannot create Bitcoins left and right, or the currency will lose its value. There is no Central Bitcoin Bank to regulate the number of Bitcoins in the economy. If anyone could create Bitcoins, just like anyone can create Bitcoin code, there would eventually be too many Bitcoins in the market for it to be considered a valuable currency in the same sense that printing USD or any other paper currency can create devaluation. Like non-virtual currencies, we can “earn” our Bitcoins to bring more into circulation after spending. This is called mining.

 What exactly is mining?

After a Bitcoin is used, a one-way mathematical equation locks the Bitcoin into a transaction ledger. In order to confirm the use of a Bitcoin, the equations of the ledger must be solved. This ledger is a long “block” of Bitcoins that have been trapped by these equations and solving these equation blocks doesn’t create new Bitcoins or allow for them to be reused, but rather confirms the use of the bitcoin, and the miner is rewarded with new bitcoin.

While solving these blocks sounds easy, it is a process that takes a lot of computer processing power. These computers hack into the transaction ledger in order to solve the block equations. This could take up to a year or longer, depending on the processing ability of the computer, but it is worth the wait. Unlocking a block generates 25 Bitcoins, a value of about $17300 USD at the Feb 10 exchange rate. You can check out the Bitcoin Exchange Rate site to find out just how much that would be worth on any given day. Additionally, the rate at which Bitcoins are rewarded decreases every four years.

 At that exchange rate what we all want to know most is: is mining worth it? We’ll get into that next week.