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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.1 The identity of the person or persons who 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.

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.5 If necessary, and if the participating miners accept the change, bitcoin could eventually be made divisible to even more decimal places.

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