What Is Bitcoin?

 What Is Bitcoin?

Bitcoin is a digital currency 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 is no physical bitcoin, 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. Bitcoin is not issued or backed by any banks or governments, nor is an individual bitcoin valuable as a commodity. Despite it not being legal tender in most parts of the world, 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; it has gone through several cycles of boom and bust over its relatively short lifespan.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 have 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 in real-time. To achieve a nefarious act, a bad actor would need to operate 51% of the computing power that makes up bitcoin. Bitcoin has around 10,000 nodes, as of June 2021, and this number is growing, making such an attack quite unlikely.2

But if an attack were to happen, bitcoin miners—the people who take part in the bitcoin network with their computers—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 published to the world and to which others may send bitcoin.

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 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 are 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 June 2021, there are over 18 million bitcoin in existence and less than 3 million bitcoin left to be mined.3

In this way, bitcoin and other cryptocurrencies operate differently from fiat currency; in centralized banking systems, the 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 bitcoin is released into circulation. Generally, mining requires solving computationally difficult puzzles to discover a new block, which is added to the blockchain.

Bitcoin mining adds and verifies transaction records across the network. Miners are rewarded with some bitcoin; 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.