Bitcoin is a digital currency created in January It follows the ideas set out in a whitepaper by the mysterious and pseudonymous developer Satoshi Nakamoto, whose true identity has yet to be verified. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies.
There are no physical bitcoins, only balances kept on a public ledger in the cloud, that — along with all Bitcoin transactions — is verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity. Despite it not being legal tender , Bitcoin charts high on popularity, and has triggered the launch of hundreds of other virtual currencies collectively referred to as Altcoins.
Balances of Bitcoin tokens are kept using public and private "keys," which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them. The public key comparable to a bank account number serves as the address which is published to the world and to which others may send bitcoins. Bitcoin keys should not be confused with a Bitcoin wallet, which is a physical or digital device which facilitates the trading of Bitcoin and allows users to track ownership of coins.
The term "wallet" is a bit misleading, as Bitcoin's decentralized nature means that it is never stored "in" a wallet, but rather decentrally on a blockchain. Style notes: according to the official Bitcoin Foundation, the word "Bitcoin" is capitalized in the context of referring to the entity or concept, whereas "bitcoin" is written in the lower case when referring to a quantity of the currency e.
The plural form can be either "bitcoin" or "bitcoins. Bitcoin is one of the first digital currencies to use peer-to-peer technology to facilitate instant payments. The independent individuals and companies who own the governing computing power and participate in the Bitcoin network, also known as " miners ," are motivated by rewards the release of new bitcoin and transaction fees paid in bitcoin. These miners can be thought of as the decentralized authority enforcing the credibility of the Bitcoin network.
New bitcoin is being released to the miners at a fixed, but periodically declining rate, such that the total supply of bitcoins approaches 21 million. Currently, there are roughly 3 million bitcoins which have yet to be mined. In this way, Bitcoin and any cryptocurrency generated through a similar process operates differently from fiat currency; in centralized banking systems, currency is released at a rate matching the growth in goods in an attempt to maintain price stability, while a decentralized system like Bitcoin sets the release rate ahead of time and according to an algorithm.
Generally, mining requires the solving of computationally difficult puzzles in order to discover a new block , which is added to the blockchain. In contributing to the blockchain, mining adds and verifies transaction records across the network. For adding blocks to the blockchain, miners receive a reward in the form of a few bitcoins; the reward is halved every , blocks. The block reward was 50 new bitcoins in and is currently As more and more bitcoins are created, the difficulty of the mining process — that is, the amount of computing power involved — increases.
The mining difficulty began at 1. As of October , the mining difficulty is over 12 trillion. Once, an ordinary desktop computer sufficed for the mining process; now, to combat the difficulty level, miners must use expensive, complex hardware like Application-Specific Integrated Circuits ASIC and more advanced processing units like Graphic Processing Units GPUs. These elaborate mining processors are known as "mining rigs. One bitcoin is divisible to eight decimal places 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. Bitcoin's price is quite dependent on the size of its mining network, since the larger the network is, the more difficult — and thus more costly — it is to produce new bitcoins. As a result, the price of bitcoin has to increase as its cost of production also rises. The Bitcoin mining network's aggregate processing power is known as the "hash rate," referring to the number of times per second the network can attempt to complete a hashing puzzle necessary before a block can be added to the blockchain.
As of October 23, , the network reached a record high quintillion hashes per second. No one knows who invented Bitcoin, or at least not conclusively. In the years since that time, many individuals have either claimed to be or have been suggested as the real-life people behind the pseudonym, but as of October , the true identity or identities behind Satoshi remains obscured.
Though it is tempting to believe the media's spin that Satoshi Nakamoto is a solitary, quixotic genius who created Bitcoin out of thin air, such innovations do not typically happen in a vacuum. All major scientific discoveries, no matter how original-seeming, were built on previously existing research. Perhaps unsurprisingly, many of the individuals behind the other projects named above have been speculated to have also had a part in creating Bitcoin.
There are two primary motivations for keeping Bitcoin's inventor keeping his or her or their identity secret. One is privacy. The other reason is safety. One may conclude that only Satoshi and perhaps a few other people were mining through and that they possess a majority of that stash of BTC. Major media outlets, cryptocurrency experts and other enthusiasts have ventured guesses as to the individual or group behind the persona of Satoshi Nakamoto.
On Oct. More recently, Australian computer scientist and cryptocurrency proponent Craig Wright has claimed to be Satoshi Nakamoto — although Wright also has claimed that Nakamoto plagiarized his thesis on the topic of crypocurrencies. After a decade of Bitcoin, the world still does not know who is behind the world's top digital currency, and it's possible that the mystery will never be solved. That could come in the form of linking the party behind the domain registration of bitcoin.
Bitcoins can be accepted as a means of payment for products sold or services provided. An online business can easily accept bitcoins by just adding this payment option to the others it offers, like credit cards, PayPal, etc. Online payments will require a Bitcoin merchant tool an external processor like Coinbase or BitPay. Those who are self-employed can get paid for a job in bitcoins. Of course, the pros and cons and risks that apply to any sort of gambling and betting endeavors are in force here too.
There are many Bitcoin supporters who believe that digital currency is the future. Many of those who endorse Bitcoin believe that it facilitates a much faster, no-fee payment system for transactions across the globe. Indeed, one of the primary reasons for the growth of digital currencies like Bitcoin is that they can act as an alternative to national fiat money and traditional commodities like gold.
In March , the IRS stated that all virtual currencies, including bitcoins, would be taxed as property rather than currency. Gains or losses from bitcoins held as capital will be realized as capital gains or losses, while bitcoins held as inventory will incur ordinary gains or losses. The sale of bitcoins that you mined or purchased from another party, or the use of bitcoins to pay for goods or services are examples of transactions which can be taxed.
Like any other asset, the principle of buying low and selling high applies to bitcoins. The most popular way of amassing the currency is through buying on a Bitcoin exchange, but there are many other ways to earn and own bitcoins. Though Bitcoin was not designed as a normal equity investment no shares have been issued , some speculative investors were drawn to the digital money after it appreciated rapidly in May and again in November Thus, many people purchase bitcoin for its investment value rather than as a medium of exchange.
However, their lack of guaranteed value and digital nature means the purchase and use of bitcoins carries several inherent risks. The concept of a virtual currency is still novel and, compared to traditional investments, Bitcoin doesn't have much of a long-term track record or history of credibility to back it. With their increasing popularity, bitcoins are becoming less experimental every day; still, after 10 years, they like all digital currencies remain in a development phase and are consistently evolving.
Investing money into Bitcoin in any of its many guises is not for the risk-averse. Bitcoins are a rival to government currency and may be used for black market transactions, money laundering, illegal activities or tax evasion.
As a result, governments may seek to regulate, restrict or ban the use and sale of bitcoins, and some already have. Others are coming up with various rules. For example, in , the New York State Department of Financial Services finalized regulations that would require companies dealing with the buy, sell, transfer or storage of bitcoins to record the identity of customers, have a compliance officer and maintain capital reserves.
The lack of uniform regulations about bitcoins and other virtual currency raises questions over their longevity, liquidity, and universality. Most individuals who own and use Bitcoin have not acquired their tokens through mining operations.
Rather, they buy and sell Bitcoin and other digital currencies on any of a number of popular online markets known as Bitcoin exchanges. Bitcoin exchanges are entirely digital and, as with any virtual system, are at risk from hackers, malware and operational glitches. If a thief gains access to a Bitcoin owner's computer hard drive and steals his private encryption key, he could transfer the stolen Bitcoins to another account.
Users can prevent this only if bitcoins are stored on a computer which is not connected to the internet, or else by choosing to use a paper wallet — printing out the Bitcoin private keys and addresses, and not keeping them on a computer at all. Hackers can also target Bitcoin exchanges, gaining access to thousands of accounts and digital wallets where bitcoins are stored.
One especially notorious hacking incident took place in , when Mt. Gox, a Bitcoin exchange in Japan, was forced to close down after millions of dollars worth of bitcoins were stolen. This is particularly problematic once you remember that all Bitcoin transactions are permanent and irreversible. It's like dealing with cash: Any transaction carried out with bitcoins can only be reversed if the person who has received them refunds them.
There is no third party or a payment processor, as in the case of a debit or credit card — hence, no source of protection or appeal if there is a problem.
Some investments are insured through the Securities Investor Protection Corporation. Generally speaking, Bitcoin exchanges and Bitcoin accounts are not insured by any type of federal or government program. In , prime dealer and trading platform SFOX announced it would be able to provide Bitcoin investors with FDIC insurance, but only for the portion of transactions involving cash. While Bitcoin uses private key encryption to verify owners and register transactions, fraudsters and scammers may attempt to sell false bitcoins.
There have also been documented cases of Bitcoin price manipulation, another common form of fraud. Like with any investment, Bitcoin values can fluctuate. Indeed, the value of the currency has seen wild swings in price over its short existence. If fewer people begin to accept Bitcoin as a currency, these digital units may lose value and could become worthless. Indeed, there was speculation that the "Bitcoin bubble" had burst when the price declined from its all-time high during the cryptocurrency rush in late and early As bitcoin is ineligible to be included in any tax-advantaged retirement accounts, there are no good, legal options to shield investments from taxation.
In the years since Bitcoin launched, there have been numerous instances in which disagreements between factions of miners and developers prompted large-scale splits of 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 "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 up until a decisive split point, at which point a new token is created.
Examples of cryptocurrencies that have been created as a result of hard forks include Bitcoin Cash created in August , Bitcoin Gold created in October and Bitcoin SV created in November A "soft fork" is a change to protocol which is still compatible with the previous system rules. Bitcoin soft forks have increased the total size of blocks, as an example.
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The cryptocurrency one of many is at the center of a complex intersection of privacy, banking regulations, and technological innovation. Today, some retailers accept bitcoin, while in other jurisdictions, bitcoin is illegal. Cryptocurrencies are lines of computer code that hold monetary value. These lines of code are created by electricity and high-performance computers. Cryptocurrency is also known as digital currency.