>> Bitcoin was launched in 2009 and is the world's biggest cryptocurrency measured by market capitalization.
>> Unlike centralized fiat currencies (Dollars, Sterling, Euros, etc.) which can be issued in unlimited quantity, the total amount of Bitcoin can't exceed 21 million.
>> Unlike centralized fiat currencies Bitcoin is created, distributed, traded and stored using a decentralized ledger system known as a blockchain.
>> Bitcoin's price history has increased significantly from a medium to long-term perspective but displays extreme short-term volatility. E.g. Its price trebled between November and December 2017 reaching nearly $20,000 but fell swiftly to about $7,000 in February 2018.
>> Bitcoin was the earliest virtual currency to get widespread public success and has since inspired the creation of many other cryptocurrencies.
What Is Bitcoin?
Bitcoin is a digital currency created in early 2009. Its ideas were set out in a white paper by an unknown person or possibly a group of people known as "Satoshi Nakamoto". The identity of the person or persons remains a mystery.
Bitcoin offers lower transaction fees than traditional online payment systems and unlike government-issued fiat currencies (Dollars, Sterling, Euros, etc.), is operated on a decentralized basis.
Being a cryptocurrency, there are no physical Bitcoins you can hold in your hand. There are just balances which are kept on a public ledger to which everybody has access. All Bitcoin transactions are verified by computers. Bitcoins aren't issued by any governments or banks.
Despite not being legal tender, Bitcoin has beome very popular and has triggered the launch of many other cryptocurrencies, which are collectively called Altcoins. Bitcoin is commonly abbreviated as "BTC."
How Does Bitcoin Work?
The Bitcoin system consists of a group of computers, known as "nodes" or "miners", running Bitcoin's code and storing its blockchain. A blockchain can be thought of, metaphorically speaking, as a collection of blocks with each block being a collection of transactions.
Due to all the computers running the blockchain having the same list of blocks & transactions and together seeing all new blocks being filled with new Bitcoin transactions, no one is able to cheat the system.
Whether they are running a Bitcoin "node" or not, anybody is able to see these transactions occurring live. In order to cheat the system a bad actor would need to operate 51% of the total computing power making up Bitcoin. At the start of 2021 Bitcoin had about 12'000 nodes and this number is continually growing thus making an attack very unlikely.
However, in the unlikely event of an attack, the Bitcoin miners i.e. the people forming part of the Bitcoin network with their computers, would very likely move over ("fork") to a new blockchain thus thwarting the efforts to cheat the system.
Bitcoin balances are maintained by using public and private "keys". Keys are long strings of numbers and letters linked together through the mathematical encryption algorithm that was used to create them. The "public key" - comparable to a bank account number - serves as the public address which is published to the world. Others can send Bitcoins to a public key.
The private key - comparable to an ATM PIN - is intended to be a guarded secret and is only used to authorize bitcoin transmissions. Bitcoin keys shouldn't be confused with a Bitcoin wallet. A Bitcoin wallet is a digital or physical device facilitating Bitcoin trading and allowing users to track Bitcoin ownership. Actually the term "wallet" is misleading because Bitcoin, being decentralized, means it is never stored in a wallet, but instead is stored on a decentralized blockchain.
Decentralized Peer-to-Peer Technology
Bitcoin was one of the first digital currencies to use peer-to-peer technology in order to facilitate instant payments. The "miners", consisting of companies as well as independent individuals owning the computing power and participating in the bitcoin network, process the transactions on the blockchain and in return they are rewarded with new bitcoin and transaction fees.
The miners can be considered as the decentralized authority that is enforcing the credibility of the Bitcoin network. New bitcoin is mined by the miners at a fixed, but periodically declining value. There is a grand total of 21 million Bitcoin that can be mined and by the end of January 2021 about 18'614'806 Bitcoins existed with about 2'385'193 Bitcoins remaining to be mined.
Note that Bitcoin AND other cryptocurrencies operate differently from fiat currencies, e.g. Dollars, Sterlind, Euros, Yen, etc.. In centralized fiat banking systems, currency is issued at a rate matching the growth in goods or as the central bank or government sees fit. But in a decentralized system like Bitcoin, there is a limit to how much can be created and the release rate is set ahead of time and according to an algorithm.
Bitcoin mining is the process in which Bitcoins are created and released into circulation. Mining generally requires solving difficult puzzles by computers in order to discover a new block, which is then added to the blockchain.
Mining adds as well as verifies transaction records across the network. As recompense for adding blocks to the blockchain miners are rewarded with some Bitcoins. This reward is halved every 210'000 blocks. E.g. In 2009 the block reward was 50 new Bitcoins and in May 2020 the third halving brought the reward per block discovery down to just 6.25 Bitcoins.
There is a variety of hardware that can be used to mine Bitcoin, but some yield higher rewards than others. There are computer chips called Application Specific Integrated Circuits (ASIC) as well as more advanced processing units, like Graphic Processing Units (GPUs), that can achieve more rewards. These mining processors are called "mining rigs."
Each Bitcoin is divided into eight decimal places - 100 millionths of one Bitcoin - and this smallest unit is called a Satoshi. It may be in future that Bitcoin could be made divisible to even more decimal places.
Origin of Bitcoin
The domain name bitcoin.org is registered. At the time of writing, the domain bitcoin.org is "WhoisGuard Protected," meaning that the identity of the person who registered it is not publicly available.
A person or group of people going by the name Satoshi Nakamoto announces at metzdowd.com
: "I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party." This now-famous whitepaper published on bitcoin.org, titled "Bitcoin: A Peer-to-Peer Electronic Cash System," has since become the Magna Carta for how Bitcoin operates today.
January 2009 >> Block 0 - also known as the "genesis block" - is the first mined Bitcoin block. It contains the text: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks". >> The first version of Bitcoin software is announced on the Cryptography Mailing list. >> Block 1 is mined.
Satoshi Nakamoto - Who Is He?
Satoshi Nakamoto is the name associated with the person, or more likely the group of people, who released the original bitcoin white paper in 2008 and who developed the original Bitcoin software released in 2009. Since then many have either claimed to be the real-life person or people behind the pseudonym but as of January 2021 the true identity or identities behind Satoshi Nakamoto remains obscure.
Although it's tempting to believe that Satoshi Nakamoto is/was a solitary genius who created Bitcoin from nothing, let's remember that all major scientific innovation has always been built on previously existing research. Bitcoin's precursors have been Adam Back’s 1997 Hashcash, Wei Dai’s b-money, Nick Szabo’s bit gold and Hal Finney’s Reusable Proof of Work.
The bitcoin whitepaper does mention Hashcash and b-money as well as various other works in various research fields. Unsurprisingly there has been speculation that several of the individuals mentioned above may have had a part in creating Bitcoin.
There are some understandable reasons why Bitcoin's inventor(s) decided to keep their identity/ies secret. E.g. Privacy: As Bitcoin gained popularity to become a worldwide phenomenon, Satoshi Nakamoto would obviously attract much attention from the media and from governments round the world.
Another reason might be the potential for governments to focus on Bitcoin in case of a major disruption in the current world banking and monetary systems. If Bitcoin gained mass adoption, it could surpass nations' sovereign fiat currencies. This threat to existing fiat currencies could motivate governments to take legal action against Bitcoin's creator(s) if they were known.
A further possible reason for anonymity is security because in 2009 alone about 32'400 Bitcoin blocks were mined with a reward rate of 50 Bitcoins per block and the 2009 total payout was 1'624'500 Bitcoins! Probably only Satoshi and maybe a few others were mining during 2009 and consequently they possess the majority of those Bitcoins.
Someone possessing that much Bitcoin could obviously become targeted by criminals, particularly because Bitcoins are less like stocks and more like cash, where the private keys needed to authorize spending can be printed out and kept under a mattress. While the inventor(s) of Bitcoin would likely take precautions against extortion-induced transfers, staying anonymous is a pretty good way to limit exposure.
Using Bitcoin For Payments
Bitcoins can be used as a means of payment for products and services. Traditional bricks and mortar stores can display signs like “Bitcoin Accepted Here” and the transactions can be handled with the necessary hardware terminal or wallet address via QR codes and touch-screen applications. And an online business can easily accept Bitcoin by adding the payment option to its other online payment options: i.e. credit cards, PayPal, and so on.
Self-employed people can get paid for a job related to bitcoin. E.g. they can create an internet related service and add their Bitcoin wallet address to the site as a payment method. There are also some web sites and job boards dedicated to digital currencies: Cryptogrind brings together work seekers and potential employers. Coinality features jobs—freelance, part-time and full-time offering payment in Bitcoins and other cryptocurrencies such as Dogecoin and Litecoin. Jobs4Bitcoins, part of reddit.com. BitGigs describes itself as a kickass Bitcoin job board. Bitwage offers a way to choose a percentage of your work paycheck to be converted into bitcoin and sent to your bitcoin address.
There are an increasing number of people who endorse Bitcoin and other cryptocurrencies because they believe that it is facilitating a faster, low-fee payment system for transactions world-wide.
Despite not yet being supported by any government or any central bank, Bitcoin can be exchanged for traditional fiat currencies (Dollars, Sterling, Euros, Yen, etc.). Its exchange rate against tradional currencies attracts potential investors and traders.
In fact a primary reason for the growth of digital currencies like Bitcoin is that they act as an alternative to tradional fiat money as well as traditional precious metal commodities like gold and silver.
In March 2014 the USA tax authorities (IRS) stated that they would tax all virtual currencies, including Bitcoin, as property rather than as currency. Therefore Bitcoin gains or losses held as capital are realized as capital gains or losses, while Bitcoins held as inventory incurs ordinary gains or losses.
The sale of Bitcoin mined or purchased from another party, or the use of Bitcoin to pay for goods and/or services, are examples of transactions that can be taxed.
Risks With Bitcoin Investing
Although Bitcoin wasn't designed to be a normal equity investment (i.e. no shares have been issued), some investors have been drawn to the digital currency following its rapid increase in May 2011 and in November 2013. So there are many people who purchase Bitcoin as a store of value against inflation.
But the lack of guaranteed value as well as its digital nature means that the purchase and use of Bitcoin carries with it a number of risks. Many investor warnings have been issued by the US Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Consumer Financial Protection Bureau (CFPB) as well as other authorities.
The concept of virtual currency is still novel and, compared to traditional investments, Bitcoin does not yet have a long-term history of credibility. With increasing popularity over time, Bitcoin and other cryptocurrencies are becoming less experimental.
But after little more than a decade all digital currencies remain in a development phase and it can be said that it is pretty much the highest-risk, highest-return investment that you can possibly make.
Investing in Bitcoin by whatever method is very risky. Apart from its extreme price volatility, Bitcoin is a rival to government currencies and while governments cannot stop Bitcoin outright due to its decentralized nature, they may at any time regulate, restrict or introduce various rules. E.g.
In 2015 the New York State Department of Financial Services introduced regulations requiring companies dealing with the purchase, sale, transfer or storage of Bitcoin to record the identity of customers as well as having a compliance officer and maintain capital reserves. Any transactions of $10'000 or more have to be reported and recorded.
The lack of uniform international regulation concerning Bitcoin and other virtual currencies also raises doubts concerning their longevity, liquidity and universality.
Most Bitcoin owners have not acquired tokens through mining but rather by buying and trading Bitcoin and other digital currencies on various popular online markets known as exchanges. Bitcoin exchanges, being digital, are at risk from hackers, malware and various operational glitches.
If a thief is able to gain access to a Bitcoin owner's computer and steals their private encryption key, they can easily transfer the stolen bitcoin to another account.
The solution is for users to store their Bitcoin on a computer that is NOT connected to the internet or, better still, by not keeping them on a computer at all, using a paper wallet and printing out the bitcoin private keys and addresses on paper, which is obviously kept in a safe place.
Bitcoin exchanges can also be targetted and hacked, thus gaining access to thousands of accounts and digital wallets where Bitcoin is stored. One example occurred in 2014 when the Mt. Gox Bitcoin exchange in Japan was forced to close after millions of dollars worth of Bitcoin were stolen.
Similar to dealing with cash, all Bitcoin transactions are permanent and irreversible. Any Bitcoin transaction can only be reversed if the person who received the coins agrees to refund.
Conventional investments in usa are often insured via the Securities Investor Protection Corporation and US bank accounts are generally insured up to a certain amount depending on the jurisdiction by the Federal Deposit Insurance Corporation (FDIC).
In contrast Bitcoin exchanges and accounts aren't insured by any US federal or government program. However, in 2019 the trading platform SFOX announced it would provide Bitcoin investors with FDIC insurance but only for transactions involving cash.
Despite Bitcoin using private key encryption to verify owners and register transactions, scammers and fraudsters may try to sell false bitcoins. E.g. In 2013 the USA Securities Exchange Commission brought legal action against a bitcoin-related Ponzi scheme operator. There have also been cases of fraudulent Bitcoin price manipulation.
The Bitcoin price can fluctuate like any other investment but since its introduction Bitcoin's price has been signigicantly more volatile than almost all conventional investments. For example, in 2013 the Bitcoin price fell by 61% in a single day and in 2014 the one-day price drop record was 80%.
Consequently this volatility makes it extremely risky for investors unless they are investing for the medium to long term (3-5 years or more) and don't ever invest more than they can afford to lose.
If, in future, fewer people accept Bitcoin as a currency, it may lose value and could even become worthless. Indeed, there was speculation of a "Bitcoin bubble" when the price tumbled from its all-time high in late 2017.
Although Bitcoin has a very big lead over the multitude of other digital currencies, a new technological breakthrough in the form of a better virtual coin is always a threat.
Disunity in the Cryptocurrency Community
Since Bitcoin was launched there have been several cases where disagreements between groups of miners and developers resulting in large-scale splits of the cryptocurrency community. Groups of miners and Bitcoin users in some of these cases have changed the protocol of the bitcoin network itself.
These protocol changes are known as "forking" and it has usually resulted in the creation of new types of Bitcoin with new names. This split can be a "hard fork" where a new coin shares transaction history with Bitcoin up to a decisive split point when a new token is created.
E.g. Cryptocurrencies that have been created as a result of hard forks include Bitcoin Cash in August 2017, Bitcoin Gold in October 2017 and Bitcoin SV November 2017.
A "soft fork" is a protocol change that remains compatible with the previous system rules. E.g. Bitcoin soft forks have increased the total size of blocks.
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