What is Bitcoin? Bitcoin is a digital currency that uses an open-source, peer-to-peer protocol to conduct, verify and record transactions. It is a decentralized form of currency not backed by any government or financial institution, or pegged to the value of any hard commodity such as gold.

Bitcoins are digitally generated according to an algorithm that creates a new block of bitcoins [i] around every 10 minutes. These new bitcoins are “mined” by participants in the bitcoin network who contribute their computing power to validate every transaction by solving a series of cryptographic puzzles. Every transaction is archived in a log known as a “blockchain.” By providing a publicly available, network-distributed ledger of all transactions for every bitcoin, the blockchain prevents users from being able to double-spend the currency.

The blockchain-verified, peer-to-peer basis of the currency enables users to exchange bitcoin funds across a global network without the need for third-party processing or verification services (banks or credit-card companies, for example), which typically take a percentage for enabling transactions using other currencies such as dollars, euros, pounds, yen or yuan.

Bitcoin: In the beginning

Source Code (small)First described on a cryptography listserv in November 2008, the Bitcoin concept originated with a person or organization going by the name of Satoshi Nakamoto whose true identity has never been revealed. (Some theorize Nakamoto, who made his last public statement online in late 2010, could be the pseudonym for a group working at the US National Security Agency or even Google.) Nakamoto mined the first batch of 50 bitcoins – known as the “genesis block” – on Jan. 3, 2009.

According to Nakamoto’s algorithm, the number of new bitcoins generated every 10 minutes will be cut in half every four years or so, which ensures that only a finite supply of the currency will come into existence. (As of 2013, for example, every new batch mined totals 25 bitcoins.) The hard limit for bitcoins is expected to be reached by 2140, by which time there will be at most 21 million bitcoins in circulation. This hard limit prevents what many see as a flaw with traditional fiat currencies, where central banks such as the US Federal Reserve can essentially create new money to manipulate monetary supply and the economy.

Each bitcoin is divisible in value down to eight decimal places. The smallest possible unit – 1/100,000,000th of a bitcoin – is called a “satoshi.” Those in the bitcoin community say that, if the currency ever needed to be further subdivided into even smaller units, the protocol could be changed, though not without difficulty.

Bitcoin’s decentralized appeal

Bitcoin 2 (small)Bitcoin’s decentralized nature, with no overarching central authority, has given it a special appeal to people who advocate a laissez faire or libertarian approach toward the economy. They see the currency as an ideal vehicle for person-to-person, global commerce free from interference or added fees by third parties, whether those are banks, regulatory agencies or payment processors.

The ongoing economic difficulties across the United States, European Union and other regions have also contributed to the growing interest in bitcoin. In light of the visible failures in traditional, fiat monetary systems since the near-meltdown of the global economy in 2007-2008, for example, a growing number of people are calling for new, more efficient or more equitable means of managing and distributing wealth.

In fact, bitcoin’s most recent “bump” in public recognition has been tied in part to plans to impose a “haircut” on bank deposits in Cyprus as a condition for a bailout of that country by the European Union, the European Central Bank and the International Monetary Fund.

Other advantages of Bitcoin

Bitcoin supporters also cite several other advantages of the currency. As a purely digital currency, bitcoins can be stored on a laptop, thumb-drive, cellphone, browser-based wallet or even a paper wallet (considered “one of the safest ways possible” to store bitcoins, according to the Bitcoin Wiki). Users can even choose to secure their bitcoins via a “brain wallet,” which involves committing to memory a unique phrase that can be converted through hashing into a private key that is then used to calculate a bitcoin address. In this way, there is no record of a person’s bitcoin holdings except in his or her own mind.

Storage strategies like these in theory prevent the ability of banks or other institutions from freezing or confiscating funds. And the unique blockchain for each bitcoin avoids the need for additional identification requirements in transactions, which provides a perception of (though not necessarily actual) anonymity.

(Storage methods for bitcoins can also prove to be a drawback, however, as bitcoins that are lost, either through loss of a storage device or via hacking, can’t be traced back to the rightful owner. In fact, it’s recognized that the hard limit of 21 million bitcoins will likely never be reached as a certain number of bitcoins will “disappear” through device losses, misplaced paper records, computer crashes and forgetfulness.)

The accepted abbreviation for bitcoins is BTC. One hundred bitcoins, for example, can be written as 100 BTC.


[i] Note: Although terminology in the bitcoin economy is not yet standardized, some have advocated a style in which the currency concept system is referred to in upper-case – Bitcoin – while the actual currency is referred to in lower-case – bitcoin. That is the style we follow here.

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