Bitcoin is a digital currency created in January 2009. It takes up the ideas laid out in a white paper by Satoshi Nakamoto . The identity of the person or persons who created this technology remains a mystery. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms, and unlike government-issued currencies, it is managed by a decentralized authority.
Bitcoin is a type of cryptocurrency . There is no physical bitcoin, only balances kept in a public ledger that everyone has transparent access to. All bitcoin transactions are verified by a massive amount of computing power. Bitcoin is not issued or backed by any bank or government, and an individual bitcoin has no value as a commodity. Although not legal tender in most parts of the world, bitcoin is hugely popular and has sparked the launch of hundreds of other cryptocurrencies, collectively known as altcoins. Bitcoin is commonly abbreviated as “BTC”.
KEY POINTS TO REMEMBER
- Launched in 2009, bitcoin is the world’s largest cryptocurrency by market capitalization.
- Unlike fiat currency, bitcoin is created, distributed, traded, and stored using a decentralized ledger system, called blockchain .
- The history of bitcoin as a store of value has been checkered; it went through several boom and bust cycles during its relatively short lifespan.
- The first virtual currency to achieve great popularity and success, bitcoin has inspired a host of other cryptocurrencies in its wake.
The bitcoin system is a collection of computers (also called “nodes” or “miners”) that all run bitcoin’s code and store its blockchain. Metaphorically, a blockchain can be thought of as a collection of blocks. Within each block is a collection of transactions. Since all computers running the blockchain have the same list of blocks and transactions, and can transparently see these new blocks filled with new bitcoin transactions, no one can cheat the system.
Anyone – whether running a bitcoin “node” or not – can see these transactions happening in real time. To perform a nefarious act, a bad actor would have to harness 51% of the computing power that makes up bitcoin. Bitcoin has about 10,000 nodes, as of June 2021, and that number keeps growing, making such an attack quite unlikely.
But if an attack were to occur, bitcoin miners — the people who participate in the bitcoin network with their computers — would likely branch off to a new blockchain, rendering the efforts of the bad actor to carry out the attack useless.
Bitcoin token balances are maintained using public and private “keys,” which are long strings of numbers and letters linked by the mathematical encryption algorithm that was used to create them. The public key (comparable to a bank account number) serves as a globally published address to which others can send bitcoins.
The private key (comparable to an ATM PIN) is meant to be kept secret and is only used to authorize bitcoin transmissions. Bitcoin keys should not be confused with a bitcoin wallet, which is a physical or digital device that facilitates the exchange of bitcoins and allows users to track coin ownership. The term “wallet” is a bit misleading, as the decentralized nature of bitcoin means that it is never stored “in” a wallet, but rather decentralized on a blockchain.
Bitcoin is one of the first digital currencies to use peer-to-peer technology to facilitate instant payments. The independent people and companies who own the ruling computing power and participate in the bitcoin network – the bitcoin “miners” – are responsible for processing transactions on the blockchain and are driven by the rewards (the release of new bitcoins) and the rewards. transaction fees paid in bitcoins.
These miners can be seen as the decentralized authority that provides credibility to the bitcoin network. New bitcoins are released to miners at a fixed, but periodically decreasing rate. There are only 21 million bitcoins that can be mined in total. As of June 2021, there are over 18 million bitcoins in circulation and less than 3 million bitcoins to be mined.
Thus, bitcoin and other cryptocurrencies work differently than fiat money; in centralized banking systems, money is released at a rate corresponding to the growth of goods; this system aims to maintain price stability. A decentralized system, like bitcoin, fixes the release rate in advance and according to an algorithm.
Bitcoin mining is the process by which bitcoins are brought into circulation. In general, mining requires solving hard-to-calculate puzzles to discover a new block, which is added to the blockchain.
Bitcoin mining adds and verifies network transaction records. Miners are rewarded with a few bitcoins; the reward is halved every 210,000 blocks. The block reward was 50 new bitcoins in 2009. On May 11, 2020, the third halving took place, bringing the reward for each block discovery down to 6.25 bitcoins.
Various hardware can be used to mine bitcoins. However, some give higher rewards than others. Certain computer chips, called application-specific integrated circuits (ASICs), and more advanced processing units, like graphics processing units (GPUs), provide better rewards. These elaborate mining processors are known as “mining rigs”.
A bitcoin is divisible into eight decimal places (100 millionths of a bitcoin), and this smallest unit is called a Satoshi. If necessary, and if the participating miners agree to the change, bitcoin could potentially be split into even more decimal places.
history of bitcoin
August 18, 2008
The domain name bitcoin.org is registered. Today, at least, this domain is “protected by WhoisGuard”, which means that the identity of the person who registered it is not public information.
October 31, 2008
Satoshi Nakamoto makes an announcement on cryptography at metzdowd.com: “I have been working on a new e-money system that is entirely peer-to-peer, without trusted third parties. This now famous white paper published on bitcoin.org, entitled “Bitcoin: A Peer-to-Peer Electronic Cash System”, will become the bible of how bitcoin works today.
January 3, 2009
The first bitcoin block is mined – block 0. It is also known as the “genesis block”.
January 8, 2009
The first version of bitcoin software is announced at the crypto newsletter.
January 9, 2009
Block 1 is mined and bitcoin mining begins in earnest.
Who is Satoshi Nakamoto?
No one knows who invented bitcoin, or at least not conclusively. Satoshi Nakamoto is the name associated with the person or group of people who published the original bitcoin white paper in 2008 and worked on the original bitcoin software that was released in 2009. In the years that followed, many many people have claimed to be or have been suggested to be the actual people behind the alias, but as of June 2021, Satoshi’s true identity (or identities) remains obscure.
While it’s tempting to believe the media version that Satoshi Nakamoto is a lonely, pipe-dreaming genius who created bitcoin out of thin air, such innovations don’t usually happen in a vacuum. All major scientific discoveries, as original as they may seem, are based on existing research.
Several reasons can explain the decision of the inventor of bitcoin to keep his identity secret. The first is privacy: As bitcoin grew in popularity, becoming something of a global phenomenon, Satoshi Nakamoto would likely have caught the attention of the media and governments.
Another reason could be bitcoin’s potential to cause major disruption to current banking and monetary systems. If bitcoin were to gain mass adoption, the system could overtake nations’ sovereign fiat currencies. This threat to the existing currency could make governments want to take legal action against the creator of bitcoin.
The other reason is security. Looking at 2009 alone, 32,489 blocks were mined; at the reward rate of 50 bitcoins per block, the total payout in 2009 was 1,624,500 bitcoins. It can be concluded that only Satoshi and maybe a few other people mined blocks in 2009 and they own the majority of this bitcoin stash.
A person in possession of such a large amount of bitcoin could become a target for criminals, especially since bitcoin is less like stocks and more like cash, where the private keys needed to authorize spending could be printed and literally kept under a mattress. While it’s likely that the inventor of bitcoin would take precautions to make any transfer induced by extortion traceable, remaining anonymous is a good way for Satoshi to limit his exposure.
Bitcoin as a means of payment
Bitcoins may be accepted as payment for products sold or services provided. Physical stores may display a sign saying “Bitcoin Accepted Here”; transactions can be processed with the required hardware terminal or wallet address through QR codes and touchscreen apps. An online business can easily accept bitcoins by adding this payment option to their other online payment options: credit cards, PayPal, etc.
El Salvador became the first country to officially adopt bitcoin as legal tender in June 2021.
Bitcoin Job Opportunities
Freelancers can be paid for bitcoin-related work. There are several ways to achieve this, such as creating any internet service and adding your bitcoin wallet address to the site as a payment method.
Invest in bitcoin
Many bitcoin supporters believe that digital currency is the future. Many people who endorse bitcoin believe that it facilitates a much faster and cheaper payment system for transactions around the world. Although not backed by any government or central bank, bitcoin can be exchanged for traditional currencies; in fact, its exchange rate against the dollar attracts potential investors and traders interested in currency games. Indeed, one of the main reasons for the growth of digital currencies like bitcoin is that they can serve as an alternative to national fiat currency and traditional commodities like gold.
In March 2014, the IRS declared that all virtual currencies, including bitcoin, would be taxed as property rather than currency. Gains or losses from bitcoins held as equity will be realized as capital gains or losses, while bitcoins held as inventory will result in ordinary gains or losses. Selling bitcoins that you have mined or purchased from another party, or using bitcoins to pay for goods or services, are examples of transactions that may be taxed.
Like any other asset, the principle of buying low and selling high applies to bitcoin. The most popular way to amass currency is to buy on a bitcoin exchange, but there are many other ways to earn and own bitcoins.
Types of Risks Associated with Bitcoin Investment
Although bitcoin was not designed as a normal equity investment (no shares were issued), some speculative investors were drawn to the digital currency after it exploded rapidly in May 2011 and again in November 2013. Thus, many people buy bitcoin for its investment value rather than its ability to serve as a medium of exchange.
However, the lack of guaranteed value and its digital nature means that buying and using bitcoin carries several inherent risks.
The concept of virtual currency is still new, and compared to traditional investments, bitcoin doesn’t have much of a long-term track record or credibility to back it up. With its growing popularity, bitcoin is becoming less experimental every day; yet, after only a decade, all digital currencies remain in a development phase.
Investing money in bitcoin, in all its forms, is beyond the reach of risk averse people. Bitcoin is a national currency rival and can be used for black market transactions, money laundering, illegal activities or tax evasion. Therefore, governments may seek to regulate, restrict or prohibit the use and sale of bitcoins (and some have already done so). Others are implementing various rules.
For example, in 2015, the New York State Department of Financial Services finalized regulations that would require companies dealing with the purchase, sale, transfer, or storage of bitcoins to record customer identities, having a compliance officer and maintaining capital reserves. Any transaction worth $10,000 or more will need to be recorded and reported.
The lack of uniform regulation regarding bitcoin (and other virtual currencies) raises questions about their longevity, liquidity, and universality.
Most people who own and use bitcoins did not acquire their tokens through mining. Instead, they buy and sell bitcoins and other digital currencies on one of the most popular online marketplaces called bitcoin exchanges or cryptocurrency exchanges.
Bitcoin exchanges are completely digital, and like any virtual system, they are prone to hackers, malware, and malfunctions. If a thief gains access to a bitcoin owner’s computer hard drive and steals their private encryption key, they can transfer the stolen bitcoins to another account. (Users can only avoid this if their bitcoins are stored on a computer that is not connected to the internet, or by choosing to use a paper wallet – by printing out the private keys and bitcoin addresses, and not keeping them on a computer at all).
Hackers can also attack bitcoin exchanges and gain access to thousands of accounts and digital wallets where bitcoins are stored. A particularly notorious hacking incident took place in 2014, when Mt. Gox, a bitcoin exchange in Japan, had to shut down after millions of dollars worth of bitcoins were stolen.
This is particularly problematic given that all bitcoin transactions are permanent and irreversible. It’s like cash: Any transaction made with bitcoins can only be reversed if the person who received them pays them back. There is no third party or payment processor like there is with a credit card so no source of protection or recourse in case something goes wrong.
Risk of fraud
Although bitcoin uses private key encryption to verify owners and record transactions, fraudsters and scammers may attempt to sell fake bitcoins. For example, in July 2013, the SEC filed a lawsuit against an operator of a bitcoin-related Ponzi scheme.
There have also been documented cases of bitcoin price manipulation, another common form of fraud.
As with any investment, the value of bitcoins can fluctuate. Indeed, the value of the currency has experienced strong price fluctuations during its short existence. Subject to a high volume of buying and selling on the stock markets, it is very sensitive to any event worthy of interest. For example, the price of bitcoin fell 61% in a single day in 2013, while the record single-day price drop in 2014 was 80%.
If fewer people start accepting bitcoin as currency, these digital units may lose value and could become worthless. Indeed, there has been speculation that the “bitcoin bubble” burst when the price fell from its all-time high during the cryptocurrency rush in late 2017 and early 2018.
There’s plenty of competition already, and while bitcoin has a huge lead over the hundreds of other digital currencies that have sprung up due to brand recognition and venture capital money, a breakthrough technology in the form of a better virtual coin is always a threat.
Splits in the Cryptocurrency Community
In the years since the launch of bitcoin, there have been many instances where disagreements between miners and developers have caused large-scale splits in the cryptocurrency community. In some of these cases, groups of bitcoin users and miners have changed the protocol of the bitcoin network itself.
This process is known as “forking” and usually results in the creation of a new type of bitcoin with a new name. This split can be a “hard fork”, in which a new coin shares transaction history with bitcoin until a decisive split point, from which a new token is created. Examples of cryptocurrencies that have been created as a result of hard forks include bitcoin cash (created in August 2017), bitcoin gold (created in October 2017), and bitcoin SV (created in November 2017).
A “soft fork” is a modification of the protocol which remains compatible with the rules of the previous system. For example, bitcoin soft forks have increased the total block size.