What is Bitcoin?

What is Bitcoin?

Bitcoin is a cryptocurrency and a digital payment system invented by a programmer or a group of programmers, under the name of Satoshi Nakamoto.   It was released as open-source software in 2009.

The system is peer-to-peer with the transactions executed directly between users  without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called the blockchain. Since the system works without a central repository or single administrator, bitcoin is called the
first decentralized digital currency.

The blockchain is a distributed database.   In order to achieve independent verification of the chain of ownership of any and every bitcoin (amount), each network node stores its own copy of the blockchain.  Approximately six times per hour, a new group of accepted transactions (a block) is created, added to the blockchain, and quickly published to all nodes. This allows bitcoin software to determine when a particular bitcoin amount has been spent, which is necessary in order to prevent double-spending in an environment without central oversight.

Bitcoin Storage and Access

A wallet stores the information necessary to transact bitcoins.  A  wallet is something that stores the digital credentials for your bitcoin holdings and allows you to access and spend them. Bitcoin uses public-key cryptography, in which two cryptographic
keys, one public and one private, are generated.  A wallet is a collection of these keys.

There are different types of wallets.  Software wallets connect to the network and allow spending bitcoins in addition to holding the credentials that prove ownership.  Online wallets offer similar functionality but may be easier to use.  In this case your credentials to access funds are stored with the online wallet provider rather than on the user’s hardware.  As a result, the user must have complete trust in the wallet provider.  A malicious provider or a breach in server security may cause entrusted bitcoins to be stolen. An example of such security breach occurred with Mt. Gox in 2011.

Ownership of bitcoins implies that a user can spend bitcoins associated with a specific address.  To do so, a payer must digitally sign the transaction using the corresponding private key.  Without knowledge of the private key, the transaction cannot be signed and bitcoins cannot be spent.  The network verifies the signature
using the public key.

If the private key is lost, the bitcoin network will not recognize any other evidence of ownership.  The coins are then unusable, and thus effectively lost.  For example, in 2013 one user claimed to have lost 7,500 bitcoins, worth $7.5 million at the time, when he accidentally discarded a hard drive containing his private key.

In early February 2014, one of the largest bitcoin exchanges, Mt. Gox, suspended withdrawals citing technical issues.  By the end of the month, Mt. Gox had filed for bankruptcy protection in Japan amid reports that 744,000 bitcoins had been stolen.  Months before the filing, the popularity of Mt. Gox had declined as users experienced difficulties withdrawing funds.

Less than one year after the collapse of Mt. Gox, United Kingdom-based exchange Bitstamp announced that their exchange would be taken offline while they investigate a hack which resulted in about 19,000 bitcoins (equivalent to roughly US$5 million at that time) being stolen from their hot wallet.  The exchange remained offline
for several days amid speculation that customers had lost their funds. Bitstamp resumed trading on 9 January after increasing security measures and assuring customers that their account balances would not be impacted.

The bitcoin exchange service Coinbase launched the first regulated bitcoin exchange in 25 U.S states on 26 January 2015.

On  March 2, 2017 the price of 1 bitcoin surpassed the price of an ounce of gold for the first time.

The U.S. Treasury categorizes bitcoin as a decentralized virtual currency.  The Commodity Futures Trading Commission classifies bitcoin as a commodity, and the Internal Revenue Service classifies it as an asset.

The Growth of Bitcoin

As of 2016 it was estimated there were over 800 bitcoin ATMs operating globally, the majority (500+) being in the United States.
Bitcoin machines are not however traditional ATMs.  Bitcoin kiosks are machines connected to the Internet, allowing the insertion of cash in exchange for bitcoins.  Bitcoin kiosks do not connect to a bank and may also charge transaction fees as high as 7%.

Various journalists, economists, and the central bank of Estonia have voiced concerns that bitcoin is a Ponzi scheme.  Eric Posner, a law
professor at the University of Chicago, stated in 2013 that “a real Ponzi scheme takes fraud; bitcoin, by contrast, seems more like a collective delusion.”  In 2014 reports by both the World Bank and the Swiss Federal Council examined the concerns and came to the conclusion that bitcoin is not a Ponzi scheme.

In 2015, the number of merchants accepting bitcoin exceeded 100,000.

According to a research produced by Cambridge University in 2017, there are between 2.9 million and 5.8 million unique users actively using a cryptocurrency wallet, most of them using bitcoin.  The number of active users has grown significantly since 2013.  In 2013 there were 300 thousand to 1.3 million unique users.

 

Get your own Bitcoin Wallet here at Coinbase!

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