Bitcoin (BTC) is the first decentralized cryptocurrency and payment system that was founded in 2009 and uses Blockchain technology. Invented by a single (or potentially a group of programmers) under Satoshi Nakamoto's name, on October 31, 2008, Bitcoin was introduced to a cryptography mailing list and released as open-source software in 2009. Bitcoin is known to be decentralized, censorship-resistant, secure, and borderless. It provides users with the ability to send and receive digital money (BTC) via a peer-to-peer immutable network.
There have been various claims and speculation concerning the identity of Nakamoto, none of which are confirmed. The system is peer-to-peer, and transactions occur between users directly, without an intermediary. These transactions are verified by network nodes and recorded in a publicly distributed ledger called the blockchain, which uses Bitcoin as its unit of account. Since the system works without a central repository or single administrator, the U.S. Treasury categorized Bitcoin as a decentralized virtual currency.
In February 2015, the number of merchants accepting Bitcoin for products and services passed 100,000. As of October 2022, 15,174 businesses worldwide accepted Bitcoin and approximately 328,000 Bitcoin transactions went through every day. Instead of the 2–3% charge typically imposed by credit card processors, merchants accepting bitcoins often pay fees in the range from 0% to less than 2%. Despite the fourfold increase in the number of merchants accepting Bitcoin in 2014, the cryptocurrency did not have much momentum in retail transactions. The European Banking Authority and other sources have warned that Bitcoin users are not protected by refund rights or chargebacks.
The first known Bitcoin commercial transaction occurred on May 22, 2010, when programmer Laszlo Hanyecz traded 10,000 Bitcoins for two pizzas. In 2018, the entire crypto market plunged into what is now known as the “crypto winter” a yearlong ear market. It wasn’t until December 2020, that the market rose further 239%.
In September 2021 Nayib Bukele, the president of El Salvador announced and implemented the decision of using bitcoin as a legal tender.
In May 2021, the Chinese government declared that all crypto-related transactions are illegal. This led to a heavy crackdown on Bitcoin mining operations, forcing many crypto-related businesses to flee to friendlier regions.
As of August 30, 2022, MicroStrategy has by far the largest Bitcoin portfolio, holding about 129,699 Bitcoins in its reserve, equivalent to just over $2.5 billion.
Bitcoin is often called the first cryptocurrency, or the mother of all cryptocurrencies, although, prior systems existed so, it is more correctly described as the first decentralized digital currency. It is a consensus network that enables a new payment system and completely digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen.
Bitcoin utilizes blockchain technology to keep track of all the transactions on its network. Every Bitcoin transaction ever done on a block is recorded in a blockchain, which is a publicly distributed ledger. When a block's memory is filled, another block in the chain is added (sequentially). This ledger, which is publicly accessible on any computer in the Bitcoin network and serves as a node for relaying transactions to other nodes, records the blockchain and verifies Bitcoin transactions.
Bitcoin was created, according to Nakamoto’s own words, to allow “online payments to be sent directly from one party to another without going through a financial institution.” While there is a limited supply of Bitcoin, not all of them are now in circulation. Bitcoin is limited to a total supply of 21,000,000 coins that will ever exist, and the only way to create new coins is by Mining, a unique technique designed for adding data to the blockchain. The protocol limits the total supply of Bitcoin to twenty-one million coins. More than 90% of them have already been created as of 2022 with an additional 328,500 bitcoins mined in 2022. but it will take more than a century to create the remaining ones. This is a result of halving, which are periodic occurrence that steadily lowers the mining reward.
Though ideas for a similar kind of decentralized electronic currency existed before BTC, it is still the only cryptocurrency to be used in real transactions. Many see bitcoin as digital gold, due to a finite supply of coins available, while others see it as a store of value.
Early Beginnings (2008-2013)
Bitcoin was created by Satoshi Nakamoto, who published the invention on 31 October 2008 to a cryptography mailing list in a research paper called "Bitcoin: A Peer-to-Peer Electronic Cash System". It was implemented as open-source code and released in January 2009. Bitcoin is often called the first cryptocurrency although prior systems existed. Bitcoin is more correctly described as the first decentralized digital currency.
Satoshi Nakamoto mined the first block on January 03, 2009, with a reward of 50 bitcoins. He then sent 10 BTC to Hal Finney nine days later in the first-ever Bitcoin transaction. Finney downloaded the Bitcoin software the day it was released and received 10 bitcoins from Nakamoto. Other early supporters were Wei Dai, creator of Bitcoin predecessor b-money, and Nick Szabo, creator of Bitcoin predecessor bit gold.
In the early days, Nakamoto is estimated to have mined 1 million bitcoins. Before disappearing from any involvement in Bitcoin, Nakamoto in a sense handed over the reins to developer Gavin Andresen, who then became the Bitcoin lead developer at the Bitcoin Foundation, the 'anarchic' Bitcoin community's closest thing to an official public face. On May 22, 2010, Bitcoin still had a price of less than $0.01, and based on Bitcoin's open-source code, other cryptocurrencies started to emerge in 2011.
In March 2013, a technical glitch caused a fork in the blockchain, with one-half of the network adding blocks to one version of the chain and the other half adding to another. For six hours two bitcoin networks operated at the same time, each with its version of the transaction history. The core developers called for a temporary halt to transactions, sparking a sharp sell-off. Normal operation was restored when the majority of the network was downgraded to version 0.7 of the Bitcoin software.
In 2013 some mainstream websites began accepting bitcoins. WordPress started in November 2012, followed by OkCupid in April 2013, TigerDirect and Overstock.com in January 2014, Expedia in June 2014, Newegg and Dell in July 2014, and Microsoft in December 2014. The Electronic Frontier Foundation, a non-profit group, started accepting bitcoins in January 2011, stopped accepting them in June 2011, and began again in May 2013.
In May 2013, the Department of Homeland Security seized assets belonging to the Mt. Gox exchange. The U.S. Federal Bureau of Investigation (FBI) shut down the Silk Road website in October 2013.
In October 2013, Chinese internet giant Baidu allowed clients of website security services to pay with bitcoins. In November 2013, the China-based bitcoin exchange BTC China overtook the Japan-based Mt. Gox and the Europe-based Bitstamp to become the largest bitcoin trading exchange by trade volume. On 19 November 2013, the value of a bitcoin on the Mt. Gox exchange soared to a peak of US$900 after a United States Senate committee hearing was told by the FBI that virtual currencies are a legitimate financial service. On the same day, one bitcoin traded for over RMB ¥6780 (US$1,100) in China. On 5 December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoins. After the announcement, the value of bitcoins dropped, and Baidu no longer accepted bitcoins for certain services. Buying real-world goods with any virtual currency has been illegal in China since at least 2009.
The first Bitcoin ATM was installed in October 2013 in Vancouver, British Columbia, Canada.
With about 12 million existing bitcoins in November 2013, the new price increased the market cap for bitcoin to at least US$7.2 billion. By 23 November 2013, the total market capitalization of Bitcoin exceeded US$10 billion for the first time.
In December 2013, By the end of the year, Bitcoin experienced an almost 10-times price increase between October and December. At the beginning of October, BTC was trading at $125 before reaching its peak of $1,160. By December 18, the price had once again crashed to $380.
In the U.S., two men were arrested in January 2014 on charges of money laundering using bitcoins; one was Charlie Shrem, the head of now-defunct bitcoin exchange BitInstant and a vice chairman of the Bitcoin Foundation. Shrem allegedly allowed the other arrested party to purchase large quantities of bitcoins for use on black-market websites.
The Mt. Gox exchange hack (2014)
In early February 2014, one of the largest bitcoin exchanges, Mt. Gox, suspended withdrawals citing technical issues. At the time, the Tokyo-based crypto exchange was the largest on the market, with a trading volume of roughly 70% of Bitcoin’s total supply. Since its creation in 2010, Mt. Gox has been the victim of numerous hacks but has continued to survive.
By the end of the month, Mt. Gox had filed for bankruptcy protection in Japan amid reports that 850,000 bitcoins had been stolen. Months before the filing, the popularity of Mt. Gox had waned as users experienced difficulties withdrawing funds which led to an approximately 20% decrease in Bitcoin’s price to around $680 after trading at $850 for most of the week.
On 18 June 2014, it was announced that Bitcoin payment service provider BitPay would become the new sponsor of the St. Petersburg Bowl under a two-year deal, renamed the Bitcoin St. Petersburg Bowl. Bitcoin was to be accepted for ticket and concession sales at the game as part of the sponsorship, and the sponsorship itself was also paid for using Bitcoin.
Less than one year after the collapse of Mt. Gox, United Kingdom-based exchange Bitstamp announced that their exchange would be taken offline while they investigate a hack that resulted in about 19,000 bitcoins (equivalent to roughly US$5 million at that time) being stolen from their hot wallet. The exchange remained offline for several days amid speculation that customers had lost their funds. Bitstamp resumed trading on 9 January after increasing security measures and assuring customers that their account balances would not be impacted.
Further Adoption (2015-2022)
The bitcoin exchange service Coinbase launched the first regulated bitcoin exchange in 25 US states on 26 January 2015. At the time of the announcement, CEO Brian Armstrong stated that Coinbase intends to expand to thirty countries by the end of 2015. A spokesperson for Benjamin M. Lawsky, the superintendent of New York State's Department of Financial Services, stated that Coinbase is operating without a license in the state of New York. Lawsky is responsible for the development of the so-called 'BitLicense', which companies need to acquire to legally operate in New York.
In August 2015 Barclays announced that they would become the first UK high street bank to start accepting bitcoin, with a plan to facilitate users to make charitable donations using the cryptocurrency outside their systems. They partnered in April 2016 with mobile payment startup Circle Internet Financial.
In April 2013, Bitcoin experienced its first bull run of the year, rising to $260 on April 10, 2013. The price then crashed over the next two days down to $45.
Bitcoin has experienced five significant peaks in price since its creation in 2009. On March 2nd, 2017 the price of 1 bitcoin surpassed the spot price of an ounce of gold for the first time.
On April 14, 2021, its market capitalization surpassed the $1 trillion mark, after Bitcoin price hit an all-time high of $64,863.10.
In June 2022, Bitcoin fell to a 19-month low of $17,708.62, and as of October 2022, it struggled to maintain a position above $20,000, as it traded sideways.
As markets prepare for the release of U.S. retail sales figures, Bitcoin rose to its highest level since September 2022. It rose above the key resistance level at $21,400 on January 19, 2023, hitting a fresh multi-month high in the process.
The blockchain is a public ledger that records Bitcoin transactions. A novel solution accomplishes this without any trusted central authority: maintenance of the blockchain is performed by a network of communicating nodes running Bitcoin software. Transactions of the form payer X send Y bitcoins to payee Z and are broadcast to this network using readily available software applications. Network nodes can validate transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes. The blockchain is a distributed database – to achieve independent verification of the chain of ownership of any and every bitcoin (amount), each network node stores its copy of the blockchain.
Approximately six times per hour, a new group of accepted transactions, a block, is created, added to the blockchain, and quickly published to all nodes. This allows Bitcoin software to determine when a particular Bitcoin amount has been spent, which is necessary to prevent double-spending in an environment without central oversight. Whereas a conventional ledger records the transfers of actual bills or promissory notes that exist apart from it, the blockchain is the only place where bitcoins can be said to exist in the form of unspent outputs of transactions.
A valid transaction must have one or more inputs. Every input must be an unspent output of a previous transaction. The transaction must carry the digital signature of every input owner. The use of multiple inputs corresponds to the use of multiple coins in a cash transaction.
A transaction can also have multiple outputs, allowing one to make multiple payments in one go. A transaction output can be specified as an arbitrary multiple of Satoshi. As in a cash transaction, the sum of inputs (coins used to pay) can exceed the intended sum of payments. In such a case, an additional output is used, returning the change to the payer. Any input Satoshi's not accounted for in the transaction outputs becomes the transaction fee.
Paying a transaction fee is optional. Miners can choose which transactions to process and prioritize those that pay higher fees. Fees are based on the storage size of the transaction generated, which in turn is dependent on the number of inputs used to create the transaction. Furthermore, priority is given to older unspent inputs.
The unit of account of the Bitcoin system is Bitcoin. As of 2014, symbols used to represent bitcoin are BTC, XBT, and small amounts of bitcoin used as alternative units are millibitcoin (mBTC), microbitcoin (µBTC, sometimes referred to as bit), and Satoshi. Named in homage to bitcoin's creator, a Satoshi is the smallest amount of bitcoin representing 0.00000001 bitcoin, one hundred millionths of a bitcoin. A millibitcoin is equal to 0.001 bitcoin, one-thousandth of a bitcoin. One microbitcoin equals 0.000001 bitcoin, one-millionth of a bitcoin.
A proposal was submitted to the Unicode Consortium in October 2015 to add a code point for the symbol. As of November 2016, it is in the pipeline for position 20BF (₿) in the Currency Symbols block.
Bitcoins are created as a reward in a competition in which users offer their computing power to verify and record Bitcoin transactions onto the blockchain. This activity is referred to as "mining", and successful miners are rewarded with transaction fees and newly created bitcoins.
Mining is a record-keeping service. Miners keep the blockchain consistent, complete, and unalterable by repeatedly verifying and collecting newly broadcast transactions into a new group of transactions called a block. Each block contains a cryptographic hash of the previous block, using the SHA-256 hashing algorithm, which links it to the previous block, thus giving the blockchain its name.
To be accepted by the rest of the network, a new block must contain proof of work. The proof of work requires miners to find a number called a nonce, such that when the block content is hashed along with the nonce, the result is numerically smaller than the network's difficulty target. This proof is easy for any node in the network to verify, but extremely time-consuming to generate, as for a secure cryptographic hash, miners must try many different nonce values (usually the sequence of tested values is 0, 1, 2, 3,...: ch. 8) before meeting the difficulty target.
For every 2016 block (approximately 14 days), the difficulty target is adjusted based on the network's recent performance, to keep the average time between new blocks at ten minutes. In this way, the system automatically adapts to the total amount of mining power on the network.
Between 1 March 2014 and 1 March 2015, the average number of nonce miners had to try before creating a new block increased from 16.4 quintillions to 200.5 quintillions.
The proof-of-work system, alongside the chaining of blocks, makes modifications of the blockchain extremely hard, as an attacker must modify all subsequent blocks for the modifications of one block to be accepted. As new blocks are mined all the time, the difficulty of modifying a block increase increases passes, and the number of subsequent blocks (also called confirmations of the given block) increases.
As of mid-September 2021, the Bitcoin mining reward is capped at 6.25 BTC after the 2020 halving, which is roughly $299,200 in Bitcoin price today.
It has become common for miners to join mining pools, which combine the computational resources of their members to increase the frequency of generating new blocks. The reward for each block is then split proportionately among the members, creating a more predictable stream of income for each miner without necessarily changing their long-term average income, although a fee may be charged for the service.
The competitive nature of mining has led to ever-more-specialized technology being utilized. The most efficient mining hardware makes use of custom-designed application-specific integrated circuits, which outperform general-purpose CPUs while using less power. As of 2015, a miner who is not using purpose-built hardware is unlikely to earn enough to cover the cost of the electricity used in their efforts, even if they are a member of a pool.
In 2013, Mark Gimein estimated electricity use to be about 40.9 megawatts (982 megawatt-hours a day). In 2014, Hass McCook estimated 80.7 megawatts (80,666 kW). As of 2015, The Economist estimated that even if all miners used modern facilities, the combined electricity consumption would be 166.7 megawatts (1.46 terawatt-hours per year).
Journalist Matt O'Brien opined that it was not obvious whether Bitcoin was lowering transaction costs since the costs were transformed into pollution costs, which he characterized as "environmental spillovers on everyone else, or what economists call negative externalities."
To lower the costs, bitcoin miners have set up in places like Iceland where geothermal energy is cheap and cooling Arctic air is free. Chinese bitcoin miners are known to use hydroelectric power in Tibet to reduce electricity costs. There are also projects in green energy or renewable energy to use in powering mining machines to reduce total dependence on hydrocarbon-sourced energy.
There has been a lot of talk about whether Bitcoin is reducing the electricity supply in most areas, but studies have shown that it is not true since most bank operations consume more than the energy requirement of Bitcoin. In January 2018, a publication was released after the Bitcoin bubble of Dec 2017, which saw it rise to an All-Time High price of $20089. It consumes about 0.25% of the entire world's energy supply.
A wallet stores the information necessary to transact bitcoins. While wallets are often described as a place to hold or store bitcoins, due to the nature of the system, bitcoins are inseparable from the blockchain transaction ledger. A better way to describe a wallet is something that "stores the digital credentials for your Bitcoin holdings" and allows you to access (and spend) them. Bitcoin uses public-key cryptography, in which two cryptographic keys, one public and one private, are generated. At its most basic, a wallet is a collection of these keys.
There are several types of wallets. Software wallets connect to the network and allow spending bitcoins in addition to holding the credentials that prove ownership. Software wallets can be split further into two categories: full clients and lightweight clients.
- Full clients verify transactions directly on a local copy of the blockchain (over 80 GB as of November 2016), or a subset of the blockchain (around 2 GB). Because of its size/complexity, the entire blockchain is not suitable for all computing devices.
- Lightweight clients, on the other hand, consult a full client to send and receive transactions without requiring a local copy of the entire blockchain (see simplified payment verification – SPV). This makes lightweight clients much faster to set up and allows them to be used on low-power, low-bandwidth devices such as smartphones. When using a lightweight wallet, however, the user must trust the server to a certain degree. When using a lightweight client, the server cannot steal bitcoins, but it can report faulty values back to the user. With both types of software wallets, the users are responsible for keeping their private keys in a secure place.
Besides software wallets, Internet services called online wallets offer similar functionality but may be easier to use. In this case, credentials to access funds are stored with the online wallet provider rather than on the user's hardware. As a result, the user must have complete trust in the wallet provider. A malicious provider or a breach of server security may cause entrusted bitcoins to be stolen. An example of such a security breach occurred with Mt. Gox in 2011.
The credentials needed to spend bitcoins offline are kept in physical wallets. Some examples only consist of paper prints, while others include a novelty coin with these credentials printed on metal. A hardware wallet is another sort of wallet that allows transactions while keeping credentials offline.
It is often recommended for investors of Bitcoin to buy a hardware wallet as they are the most secure wallets for safely storing your Bitcoins. Find many popular hardware wallets like Ledger, Trezor, and Keepkey.
The first wallet program was released in 2009 by Satoshi Nakamoto as open-source code. Sometimes referred to as the "Satoshi client," this is also known as the reference client because it serves to define the Bitcoin protocol and acts as a standard for other implementations. In version 0.5 the client moved from the wxWidgets user interface toolkit to Qt, and the whole bundle was referred to as Bitcoin-Qt. After the release of version 0.9, the software bundle was renamed Bitcoin Core to distinguish itself from the network. Today, other forks of Bitcoin Core exist such as Bitcoin XT, Bitcoin Classic, Bitcoin Unlimited, and Bitcoin 2.
Ownership of bitcoins implies that a user can spend bitcoins associated with a specific address. To do so, a payer must digitally sign the transaction using the corresponding private key. Without knowledge of the private key, the transaction cannot be signed and bitcoins cannot be spent. The network verifies the signature using the public key.
If the private key is lost, the Bitcoin network will not recognize any other evidence of ownership; the coins are then unusable, and thus effectively lost. For example, in 2013 one user claimed to have lost 7,500 bitcoins, worth $7.5 million at the time, when he accidentally discarded a hard drive containing his private key. With the saved seed phrase that was generated during the creation of the account, lost private keys could be restored.
Bitcoin creator Satoshi Nakamoto designed it to not need a central authority. Per sources such as the academic Mercatus Center, U.S. Treasury, Reuters, The Washington Post, The Daily Herald, The New Yorker, and others, Bitcoin is decentralized.
There is also a minority opinion published in an article that appeared in IEEE Security & Privacy magazine, in which it is stated that "contrary to widespread belief, it isn’t truly decentralized as it's deployed and implemented today."
Bitcoin is open-source software that was initially led by Satoshi Nakamoto. Nakamoto stepped back in 2010 and handed the network alert key to Gavin Andresen. Andresen stated he subsequently sought to decentralize control stating: "As soon as Satoshi stepped back and threw the project onto my shoulders, one of the first things I did was try to decentralize that. So, if I get hit by a bus, it would be clear that the project would go on." This left an opportunity for controversy to develop over the future development path of Bitcoin. The reference implementation of the Bitcoin protocol called Bitcoin Core obtained competing versions that propose to solve various governance and blockize debates; the alternatives are called Bitcoin XT, Bitcoin Classic, and Bitcoin Unlimited.
Bitcoin is pseudonymous, meaning that funds are not tied to real-world entities but rather to Bitcoin addresses. Owners of bitcoin addresses are not explicitly identified, but all transactions on the blockchain are public. In addition, transactions can be linked to individuals and companies through "idioms of use" (e.g., transactions that spend coins from multiple inputs indicate that the inputs may have a common owner) and corroborating public transaction data with known information on owners of certain addresses. Additionally, bitcoin exchanges, where bitcoins are traded for traditional currencies, may be required by law to collect personal information.
To heighten financial privacy, a new Bitcoin address can be generated for each transaction. For example, hierarchical deterministic wallets generate pseudorandom "rolling addresses" for every transaction from a single seed, while only requiring a single passphrase to be remembered to recover all corresponding private keys. Additionally, "mixing" and CoinJoin services aggregate multiple users' coins and output them to fresh addresses to increase privacy. Researchers at Stanford University and Concordia University have also shown that Bitcoin exchanges and other entities can prove assets, liabilities, and solvency without revealing their addresses using zero-knowledge proofs.
According to Dan Blystone, "Ultimately, bitcoin resembles cash as much as it does credit cards."
Wallets and similar software technically handle all bitcoins as equivalent, establishing the basic level of fungibility. Researchers have pointed out that the history of each bitcoin is registered and publicly available in the blockchain ledger, and that some users may refuse to accept bitcoins coming from controversial transactions, which would harm bitcoin's fungibility. Projects such as Zerocoin and Dark Wallet aim to address these privacy and fungibility issues.
Bitcoin rewards are halved every 210,000 blocks. For example, the block reward was 50 new bitcoins in 2009. On May 11, 2020, the third halving occurred, bringing the reward for each block discovery down to 6.25 bitcoins.
One bitcoin is divisible to eight decimal places (100 millionths of one bitcoin), and this smallest unit is referred to as a satoshi. If necessary, and if the participating miners accept the change, Bitcoin could eventually be made divisible to even more decimal places.
Legal Status, Tax, and Regulations
The legal status of Bitcoin varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed its use and trade, others have banned or restricted it. Likewise, various government agencies, departments, and courts have classified bitcoins differently. Regulations and bans that apply to Bitcoin probably extend to similar cryptocurrency systems.
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