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What Is Bitcoin
Bitcoin is a decentralized digital currency created in January 2009. … Bitcoin is known as a type of crypto currency because it uses cryptography to keep it secure. There are no physical bitcoins, only balances kept on a public ledger that everyone has transparent access to (although each record is encrypted).
The first public record of Bitcoin dates to October 2008, when a pseudonymous person or organization known as Satoshi Nakamoto published a white paper with the technical outlines for a new, decentralized cryptocurrency. Nakamoto’s identity remains unknown, although speculation centers on a handful of U.S.-based individuals (or various groupings thereof) who were active in the cryptocurrency movement of the 1990s and 2000s. Nakamoto released Bitcoin’s open-source code in January 2009, marking the beginning of public mining and trading, and ceased public communication shortly thereafter.
Bitcoin was built on the theoretical and technical foundations of Bit Gold and b-money, a contemporaneous cryptocurrency model that was never developed. Aside from being the first cryptocurrency to gain widespread traction outside the cloistered ultra-libertarian movement, its biggest claim to fame is as the first cryptocurrency marked by totally decentralized control. In the realm of Bitcoin, no user is more influential than any other.
Bitcoin experienced some growing pains in its first few years of life. In 2010, a coding flaw resulted in the creation of huge numbers of un-mined Bitcoin, temporarily crashing the currency’s value. A subsequent fix repaired the blockchain and erased the unauthorized Bitcoin. Something similar occurred in 2013, although the effects were less drastic. Bitcoin’s open source code has been modified to make such systemic flaws less likely in the future.
How Bitcoin Works
Bitcoin is a cryptocurrency, meaning it’s supported by a source code that uses highly complex algorithms to prevent unauthorized duplication or creation of Bitcoin units. The code’s underlying principles, known as cryptography, are based on advanced mathematical and computer engineering principles. It’s virtually impossible to break Bitcoin’s source code and manipulate the currency’s supply.
When a cryptocurrency is released, the creator(s) can set its parameters (how much there is, rules for buying and selling, how new Bitcoins are added to the marketplace, etc.), which cannot be changed after the fact. Locked in from the start, these rules effectively make Bitcoin a truly scarce resource, with a ceiling on the total amount that will ever be available.
Although it was preceded by other virtual currencies, Bitcoin is known as the first modern cryptocurrency. That’s because Bitcoin is the first to blend certain key features shared by most subsequently created cryptocurrencies
- User Anonymity. Bitcoin users are identified by public keys, or numerical codes that identify them to other users, and sometimes pseudonymous handles or usernames. Additional protections allow users to further conceal the source and flow of Bitcoin. For instance, special computer programs available to all Bitcoin users called mixing services or tumblers privately swap a specific Bitcoin unit for another Bitcoin unit of identical value, and thereby obscure the source of the owner’s holdings.
- Cryptocurrency Exchanges. Bitcoin exchanges allow users to exchange Bitcoin units for fiat currencies, such as the U.S. dollar and euro, at variable exchange rates. Many Bitcoin exchanges also exchange Bitcoin units for other cryptocurrencies, including less popular alternative coins that can’t directly be exchanged for fiat currencies. Most Bitcoin exchanges take a cut of each transaction’s value, typically less than 1%. Due to its popularity, Bitcoin is more liquid than most other cryptocurrencies on these exchanges.
- Blockchain Technology. The block chain is a distributed public ledger of all prior Bitcoin transactions, which are stored by all machines in the Bitcoin network in groups known as blocks. It is also the sole arbiter of Bitcoin ownership; no complete record exists anywhere else. Because new Bitcoin transactions constantly occur, the Bitcoin blockchain grows over time. As long as miners continue their work and record recent transactions, the Bitcoin blockchain will always be a work in progress.
- Facilitation of Bitcoin Transactions. A Bitcoin transaction hasn’t technically occurred until it’s added to the blockchain, at which point it becomes irreversible — unlike traditional payment processors, Bitcoin doesn’t have any standardized facility for chargebacks or refunds. During the window between the transaction itself and the moment it’s added to the blockchain, the relevant Bitcoin units are essentially held in escrow — they can’t be used by either party to the transaction. This prevents duplicate transactions, known as double-spending, and protects the system’s integrity.
- Two-Key System. Bitcoin uses a “two-key” system in which every user has at least one private and public key. A private key — basically, a password — is required to send Bitcoin; a public key is required to receive it. Keys can be stored online (either in private cloud storage or on public Bitcoin exchanges); on physical storage media (such as thumb drives); or on paper, and only entered online during transactions. Secure storage is critical because Bitcoin essentially derives its value from user keys. If a key is permanently lost, the corresponding holdings move into a sort of permanent limbo and can’t be recovered.
- Cryptocurrency Wallets. Actual Bitcoin units are stored in “wallets or secure cloud storage locations with special information confirming their owners (Bitcoin users) as the guardians of the Bitcoin units contained within. Although wallets like Coinbase theoretically protect against the theft of Bitcoin units that aren’t currently being used, they’re vulnerable to hacking. Indeed, hackers often target public wallets that store users’ private keys, enabling them to spend the stolen BTC. Ars Technica has a good rundown of Bitcoin hacks large and small.
That’s where the comparison to gold falls a little flat, because gold is constantly entering the market as new ores and pockets are discovered, making it only a relatively scarce resource. Bitcoin is also much more transferable and more easily stored compared to a resource like gold. If you want to move gold, it’ll cost a lot of money (armored transport, security, cost of storage in a secure facility, etc.). Bitcoin can essentially be stored on a USB stick — in something known as a cold or hard wallet.
Bitcoin is decentralized thus
- Bitcoin does not have a central authority.
- The bitcoin network is peer-to-peer, without central servers.
- The network also has no central storage; the bitcoin ledger is distributed.
- The ledger is public; anybody can store it on a computer.
- There is no single administrator, the ledger is maintained by a network of equally privileged miners.
- Anyone can become a miner.
- The additions to the ledger are maintained through competition. Until a new block is added to the ledger, it is not known which miner will create the block.
- The issuance of bitcoins is decentralized. They are issued as a reward for the creation of a new block.
- Anybody can create a new bitcoin address (a bitcoin counterpart of a bank account) without needing any approval.
- Anybody can send a transaction to the network without needing any approval; the network merely confirms that the transaction is legitimate.
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