What Is Bitcoin? Complete History of Bitcoin
Not
only is Bitcoin the first crypto currency, but it’s also the best known of the
more than 5,000 crypto currencies in existence today. Financial media eagerly
covers each new dramatic high and stomach churning decline, making Bitcoin an
inescapable part of the landscape.
While the wild volatility
might produce great headlines, it hardly makes Bitcoin the best choice for
novice investors or people looking for a stable store of value. Understanding
the ins and outs can be tricky—let’s take a closer look at how Bitcoin works.
What Is Bitcoin?
Bitcoin is a digital currency that was created in January 2009. It
follows the ideas set out in a whitepaper by
the mysterious and pseudonymous Satoshi Nakamoto. The identity of the person or
persons whoNot only is Bitcoin the first cryptocurrency, but it’s also the best
known of the more than 5,000 cryptocurrencies in existence today. Financial
media eagerly covers each new dramatic high and stomach churning decline,
making Bitcoin an inescapable part of the landscape.
While the wild
volatility might produce great headlines, it hardly makes Bitcoin the best
choice for novice investors or people looking for a stable store of value.
Understanding the ins and outs can be tricky—let’s take a closer look at how
Bitcoin works. created the technology is still a mystery. Bitcoin offers the
promise of lower transaction fees than traditional online payment mechanisms
and, unlike government-issued currencies, it is operated by a decentralized
authority.
Bitcoin is a type of
cryptocurrency. There are no physical bitcoins, only balances kept on a public
ledger that everyone has transparent access to. All bitcoin transactions are
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 is very popular and has triggered the launch of
hundreds of other cryptocurrencies, collectively referred to as altcoins. Bitcoin is commonly abbreviated as
"BTC."
KEY TAKEAWAYS
- Launched in 2009, bitcoin is
the world's largest cryptocurrency by market capitalization.
- Unlike fiat currency, bitcoin
is created, distributed, traded, and stored with the use of a
decentralized ledger system, known as a blockchain.
- Bitcoin's history as a store of
value has been turbulent; the cryptocurrency skyrocketed up to roughly
$20,000 per coin in 2017, but less than years later, it was trading for
less than half of that.
- As
the earliest virtual currency to meet widespread popularity and success,
bitcoin has inspired a host of other cryptocurrencies in its wake.
How Does Bitcoin Work?
Bitcoin is
built on a distributed digital record called a blockchain. As the name implies,
blockchain is a linked body of data, made up of units called blocks that
contain information about each and every transaction, including date and time,
total value, buyer and seller, and a unique identifying code for each exchange.
Entries are strung together in chronological order, creating a digital chain of
blocks.
“Once a block is added to the blockchain, it becomes
accessible to anyone who wishes to view it, acting as a public ledger of
cryptocurrency transactions,” says Stacey Harris, consultant for Pelicoin, a
network of cryptocurrency ATMs.
Blockchain
is decentralized, which means it’s not controlled by any one organization.
“It’s like a Google Doc that anyone can work on,” says Buchi Okoro, CEO and
co-founder of African cryptocurrency exchange Quidax. “Nobody owns it, but
anyone who has a link can contribute to it. And as different people update it,
your copy also gets updated.”
While the
idea that anyone can edit the blockchain might sound risky, it’s actually what
makes Bitcoin trustworthy and secure. In order for a transaction block to be
added to the Bitcoin blockchain, it must be verified by the majority of all
Bitcoin holders, and the unique codes used to recognize users’ wallets and
transactions must conform to the right encryption pattern.
These
codes are long, random numbers, making them incredibly difficult to
fraudulently produce. In fact, a fraudster guessing the key code to your
Bitcoin wallet has roughly the same odds as someone winning a Powerball lottery
nine times in a row, according to Bryan Lotti of Crypto Aquarium. This level of
statistical randomness blockchain verification codes, which are needed for
every transaction, greatly reduces the risk anyone can make fraudulent Bitcoin
transactions.
How to Use Bitcoin
In the U.S. people generally use Bitcoin as an
alternative investment, helping diversify a portfolio apart from stocks and bonds. You can also use
Bitcoin to make purchases, but the number of vendors that accept the
cryptocurrency is still limited.
Big
companies that accept Bitcoin include Overstock, AT&T and Twitch. You may
also find that some small local retailers or certain websites take Bitcoin, but
you’ll have to do some digging.
That said, PayPal has announced that it will enable cryptocurrency as a funding
source for purchases this year, financing purchases by automatically converting
crypto holdings to fiat currency for users.
“They have
346 million users and they’re connected to 26 million merchants,” says Spencer
Montgomery, founder of Uinta Crypto Consulting. “It’s huge.”
You can
also use a service that allows you to connect a debit card to your crypto
account, meaning you can use Bitcoin the same way you’d use a credit card. This
also generally involves a financial provider instantly converting your Bitcoin
into dollars. “Crypto.com and CoinZoom are two services that have regulation in
the U.S.,” Montgomery says.
In other
countries—particularly those with less stable currencies—people sometimes use
cryptocurrency instead of their own currency.
“Bitcoin
provides an opportunity for people to store value without relying on a currency
that is backed by a government,” Montgomery says. “It gives people an option to
hedge for a worst-case scenario. You’re already seeing people in countries like
Venezuela, Argentina, Zimbabwe—in countries heavily in debt, Bitcoin is getting
tremendous traction.”
That said, when you use Bitcoin as a currency, not an
investment, in the U.S., you do have to be aware of certain tax implications.
How to Buy Bitcoin
Most people buy Bitcoin via exchanges, such as Coinbase. Exchanges allow you to buy, sell and
hold cryptocurrency, and setting up an account is similar to opening a brokerage account—you’ll
need to verify your identity and provide some kind of funding source, such as a
bank account or debit card.
Major
exchanges include Coinbase, Kraken, and Gemini. You can also buy Bitcoin at a
broker like Robinhood.
Regardless
of where you buy your Bitcoin, you’ll need a digital wallet in which to store
it. This might be what’s called a hot wallet or a cold wallet. A hot wallet
(also called an online wallet) is stored by an exchange or a provider in the
cloud. Providers of online wallets include Exodus, Electrum and Mycelium. A
cold wallet (or mobile wallet) is an offline device used to store Bitcoin and
is not connected to the Internet. Some mobile wallet options include Trezor and
Ledger.
A few important notes about buying Bitcoin: While Bitcoin
is expensive, you can buy fractional Bitcoin from some vendors.
You’ll also need to look out for fees, which are generally small percentages of
your crypto transaction amount but can really add up on small-dollar purchases.
Finally, be aware that Bitcoin purchases are not instantaneous like many other
equity purchases seemingly are. Because Bitcoin transactions must be verified
by miners, it may take you at least 10-20 minutes to see your Bitcoin purchase
in your account.
Understanding Bitcoin
The bitcoin system is
a collection of computers (also referred to as "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. In each block is a collection of transactions. Because all the
computers running the blockchain has the same list of blocks and transactions,
and can transparently see these new blocks being filled with new bitcoin
transactions, no one can cheat the system.
Anyone, whether they
run a bitcoin "node" or not, can see these transactions occurring
live. In order to achieve a nefarious act, a bad actor would need to operate
51% of the computing power that makes up bitcoin. Bitcoin has around 12,000
nodes, as of January 2021, and this number is growing, making such an attack
quite unlikely.
But in the event that an attack was to happen,
the bitcoin miners—the people who take part in the bitcoin network with their
computer—would likely fork to a new blockchain making the effort the bad actor
put forth to achieve the attack a waste.
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.
The private key
(comparable to an ATM PIN) is meant to be a guarded secret and 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
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.
Peer-to-Peer Technology
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—bitcoin "miners"—are in charge of processing the transactions
on the blockchain and 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 released to the miners at a fixed, but
periodically declining rate. There are only 21 million bitcoin that can be mined
in total. As of January 30, 2021, there are approximately 18,614,806 bitcoin in
existence and 2,385,193 bitcoin left to be mined.3
In this way, bitcoin
other cryptocurrencies operate differently from fiat currency; in centralized
banking systems, currency is released at a rate matching the growth in goods;
this system is intended to maintain price stability. A decentralized system,
like bitcoin, sets the release rate ahead of time and according to an
algorithm.
Bitcoin Mining
Bitcoin mining is the process by which bitcoins
are released into circulation. Generally, mining requires the solving of
computationally difficult puzzles in order to discover a new block, which is added to the blockchain.
Bitcoin mining adds
and verifies transaction records across the network. For adding blocks to the
blockchain, 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 11th, 2020, the third halving occurred, bringing the reward for
each block discovery down to 6.25 bitcoins.
A variety of hardware
can be used to mine bitcoin. However, some yield higher rewards than others.
Certain computer chips, called Application-Specific Integrated Circuits (ASIC),
and more advanced processing units, like Graphic Processing Units (GPUs), can
achieve more rewards. These elaborate mining processors are known as
"mining rigs."
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.
History of Bitcoin
Aug. 18, 2008
The domain name
bitcoin.org is registered. Today, at least, this domain is
"WhoisGuard Protected," meaning the identity of the person who
registered it is not public information.
Oct. 31, 2008
A person or group
using the name Satoshi Nakamoto makes an announcement on the
Cryptography Mailing list 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, entitled
"Bitcoin: A Peer-to-Peer Electronic Cash System,"
would become the Magna Carta for how Bitcoin operates today.
Jan. 3, 2009
The first Bitcoin
block is mined, Block 0. This is also known as the "genesis
block" and contains the text: "The Times 03/Jan/2009 Chancellor on
brink of second bailout for banks," perhaps as proof that the block was
mined on or after that date, and perhaps also as relevant political commentary.
Jan. 8, 2009
The first version of
the bitcoin software is announced on the
Cryptography Mailing list.
Jan. 9, 2009
Block 1 is mined,
and bitcoin mining commences 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 released the
original bitcoin white paper in 2008 and worked on the
original bitcoin software that was released in 2009. 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 January 2021,
the true identity (or identities) behind Satoshi remains obscured.
Although 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.
There are precursors
to bitcoin: Adam Back’s Hashcash, invented in 1997, and subsequently Wei Dai’s b-money, Nick Szabo’s bit
gold, and Hal Finney’s Reusable Proof of Work. The bitcoin whitepaper itself
cites Hashcash and b-money, as well as various other works spanning
several research fields. 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 a few
possible motivations for bitcoin's inventor deciding to keep their identity
secret. One is privacy: As bitcoin has gained in
popularity—becoming something of a worldwide phenomenon—Satoshi Nakamoto
would likely garner a lot of attention from the media and from governments.
Another reason could
be the potential for bitcoin to cause a major disruption in the current banking
and monetary systems. If bitcoin were to gain mass adoption, the system could
surpass nations' sovereign fiat currencies. This threat to existing currency
could motivate governments to want to take legal action against bitcoin's
creator.
The other reason is
safety. Looking at 2009 alone, 32,489 blocks were mined; at the
reward rate of 50 bitcoin per block, the total payout in 2009 was
1,624,500 bitcoin. One may conclude that only Satoshi and perhaps a few
other people were mining through 2009 and that they possess a majority of that
stash of bitcoin.
Someone in possession
of that much bitcoin could become a target of criminals, especially since
bitcoins are less like stocks and more like cash, where the private keys needed
to authorize spending could be printed out and literally kept under a mattress.
While it's likely the inventor of bitcoin would take precautions to
make any extortion-induced transfers traceable, remaining anonymous is a good
way for Satoshi to limit exposure.
Special Considerations
Bitcoin as a Form of Payment
Bitcoins can be
accepted as a means of payment for products sold or services provided. Brick
and mortar stores can display a sign saying “Bitcoin Accepted Here”; the
transactions can be handled with the requisite hardware terminal or wallet
address through QR codes and touch screen apps. An online business can easily
accept bitcoins by adding this payment option to its other online payment
options: credit cards, PayPal, etc.
Bitcoin Employment Opportunities
Those who are
self-employed can get paid for a job related to bitcoin. There are a number of
ways to achieve this, such as creating any internet service and adding your
bitcoin wallet address to the site as a form of payment. There are also several
websites and job boards that are dedicated to digital currencies:
- Cryptogrind brings together work seekers and prospective
employers through its website
- Coinality features jobs—freelance, part-time and
full-time—that offer payment in bitcoins, as well as other
cryptocurrencies like Dogecoin and Litecoin
- Jobs4Bitcoins, part of reddit.com
- BitGigs
- Bitwage offers
a way to choose a percentage of your work paycheck to be converted into bitcoin
and sent to your bitcoin address
Investing in Bitcoins
There are many bitcoin
supporters who believe that digital currency is the future. Many individuals
who endorse bitcoin believe that it facilitates a much faster, low-fee payment
system for transactions across the globe. Although it is 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 plays. 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 2014,
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 that 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.