Transactions are put together in groups called blocks. The blocks are organized in a chronological sequence called the blockchain. Blocks are added to the chain using a mathematical process that makes it extremely difficult for an individual user to hijack the blockchain.
The blockchain technology that underpins Bitcoin has attracted considerable attention, even from skeptics of Bitcoin, as a basis for allowing trustworthy record-keeping and commerce without a central authority. New Bitcoins are created by users running the Bitcoin client on their computers. The difficulty of the problem is adjusted so that, no matter how many people are mining Bitcoins, the problem is solved, on average, six times an hour.
When a user solves the problem in a block, that user receives a certain number of Bitcoins. The elaborate procedure for mining Bitcoins ensures that their supply is restricted and grows at a steadily decreasing rate. About every four years, the number of Bitcoins in a block, which began at 50, is halved, and the number of maximum allowable Bitcoins is slightly less than 21 million. As of late there were almost 17 million Bitcoins, and it is estimated that the maximum number will be reached around Because the algorithm that produces Bitcoins makes them at a near-constant rate, early miners of Bitcoins obtained them more often than later miners because the network was small.
An analysis of the first 36, mined blocks showed that one miner, believed to be Nakamoto, had accumulated over 1 million Bitcoins. Defenders of Bitcoin claim that early users should receive some return for investing in an unproven technology. The value of Bitcoins relative to physical currencies fluctuated wildly in the years following its introduction.
Some companies even began building computers optimized for Bitcoin mining. The most spectacular theft was revealed in February when Mt. It was estimated in late that Bitcoin mining consumed 0. Bitcoin Article Media Additional Info. Print Cite verified Cite. While every effort has been made to follow citation style rules, there may be some discrepancies. Please refer to the appropriate style manual or other sources if you have any questions. Facebook Twitter. Give Feedback External Websites.
Let us know if you have suggestions to improve this article requires login. External Websites. Official Site of Bitcoin. Erik Gregersen Erik Gregersen is a senior editor at Encyclopaedia Britannica, specializing in the physical sciences and technology. 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.
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, , there are approximately 18,, bitcoin in existence and 2,, bitcoin left to be mined. 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. 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 , blocks. The block reward was 50 new bitcoins in On May 11th, , the third halving occurred, bringing the reward for each block discovery down to 6. A variety of hardware can be used to mine bitcoin. However, some yield higher rewards than others.
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. The domain name bitcoin. Today, at least, this domain is "WhoisGuard Protected," meaning the identity of the person who registered it is not public information. This now-famous whitepaper published on bitcoin.
The first Bitcoin block is mined, Block 0. 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 January , 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. 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. 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. 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 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. Bitcoins can be accepted as a means of payment for products sold or services provided.
An online business can easily accept bitcoins by adding this payment option to its other online payment options: credit cards, PayPal, etc. 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:.
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. 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 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.
Although Bitcoin was not designed as a normal equity investment no shares have been issued , some speculative investors were drawn to the digital currency after it appreciated rapidly in May and again in November Thus, many people purchase bitcoin for its investment value rather than its ability to act as a medium of exchange.
However, the lack of guaranteed value and its 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 only a decade, all digital currencies still remain in a development phase. 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 their private encryption key, they could transfer the stolen bitcoin to another account. Users can prevent this only if bitcoins are stored on a computer that 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 given 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.
For instance, in July , the SEC brought legal action against an operator of a bitcoin-related Ponzi scheme. Like with any investment, bitcoin values can fluctuate.
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