Let’s travel back to when Bitcoin was first invented. Back then it was a system of computers connected over the internet, running software which verifies and records every transaction that occurs within it.

As we all now know — Bitcoin software bundles transactions into a block and blocks into a chain of blocks. Each block is unique and is “connected” to a previous one. To create a new block and “chain” it with other blocks any computer on the network has to perform calculations to find some unique number. The computer that finds that number first and thus “creates” the next block gets rewarded some amount of Bitcoins which are transferred to the “winner” over the network. This means that the system has at least one transaction going on at all times, even when there are no Bitcoins moving around between members of the network.

So there you have it — a bunch of people running some software on their computers at home, just as a proof of concept.

How does one put a price tag on a single Bitcoin then?

The obvious answer is that the price should be at least equal to the cost of production.

A block is “created” every 10 minutes. There are 50 Bitcoins rewarded with each block to whoever created it, meaning that one gets at most 6*50=300 coins an hour. Therefore in this scenario the minimum cost of production of 1 Bitcoin equals to the cost of leaving one’s computer up and running for an hour, divided by 300.

If we assume that at the time the cost of running computer for an hour rounded up to 3 cents (which includes electricity, equipment, maintenance cost etc.), then the minimum cost of producing one Bitcoin would equal to 0.01 cent /hour.

All is good, but there are still no “real” transactions happening, which means there is a product that costs 0.01 cent to produce with no demand for it.

How does one sell something like that?

Enter use case.

Let’s assume there are two friends — Walter and Pablo, who are both running Bitcoin software.

Pablo lives in some village in Mexico and Walter lives somewhere in the US.

Walter has a neighbor, named Jessie, who lives next door.

Jessie has “a cousin”, let’s call him Gustavo, who happens to live in Mexico.

At some point Jessie wants to transfer $1,000 cash to his “cousin Gustavo”.

The tricky part is that both Jessie and Gustavo only use cash and do NOT use any other means to exchange money, especially those which would require them to reveal their identities, not even PayPal.

Walter suggests a solution:

1) Jessie should give his $1,000 to him (Walter), along with some extra money, say 30$, to compensate Walter for his service.

2) In the mean time, Jessie’s “cousin Gustavo”, in Mexico, should install Bitcoin software.

3) Walter will then send $1,000 worth of coins to that Gustavo guy ( which at 0.01 cent per coin would be 100,000 coins)

4) Gustavo can then sell his Bitcoins back to Walter’s friend for cash.

That’s it.

Each coin is unique and Walter knows that Gustavo can’t “print” more than he receives. It is also impossible to spend Bitcoins more than once.

Action!

Walter sends his Mexican friend Pablo $1,010 (let’s say via Venmo), then calls him and asks to spend $1,000 of these dollars to buy 100,000 Bitcoins from some guy who will come by his house (Gustavo).

Long story short, Gustavo receives 100,000 Bitcoins from Walter, then sends them to Pablo. Later that day Gustavo comes over to Pablo’s house and collects his $1,000.

Profit!

1) Jessie → ($1,030) → Walter

2) Walter → (100,000 Bitcoins) → Gustavo

3) Walter → ($1,020) → Pablo

4) Pablo → ($1,000) → Gustavo

At the end of the day everybody’s happy — Walter earns $20, Pablo gets to keep $10, along with 100,000 Bitcoins all for practically doing nothing.

Jessie made a cross border transfer of $1,000 to Gustavo without any oversight or regulation whatsoever and Gustavo is now also part of the Bitcoin network.

Transaction complete.

This is how Bitcoin made two of it’s users their first $30. Everybody else on the network are still earning nothing and 1 Bitcoin is still worth $0.0001

Chapter 2.

Next thing you know Jessie is knocking on Walter’s door again, wanting to buy some more of them Bitcoins to transfer them to Gustavo…

To be continued…