Bitcoin is a type of digital currency. It can be exchanged for goods and services in a similar way to traditional currencies, such as the dollar and the pound. Unlike traditional currencies, however, bitcoin exists only in sequences of computer code. This code is transferred from one computer to another using peer-to-peer (P2P) software. Peer-to-peer software enables computer code to be shared directly among users’ computers, rather than being stored on a special network computer called a server. Bitcoin, and other digital currencies like it, are called cryptocurrencies.
Bitcoin is not bought or sold through banks. Acquiring bitcoins requires a digital “wallet.” The wallet is a computer program that enables secure sales and purchases over the internet. Bitcoins may be acquired by selling goods or services. They can also be purchased through a bitcoin exchange or a special automated teller machine (ATM).
The supply of bitcoin is linked to publicly distributed computer files called blocks. Each block contains a record of recently verified bitcoin transactions, as well as a mathematical problem. New blocks are added to a permanent sequence of blocks in a database known as a blockchain. A copy of the blockchain is stored on each computer in the bitcoin network. People can “mine” bitcoins by using these computers to find solutions to the mathematical problems contained in each block. Doing so unlocks a new block and awards the miner a certain number of bitcoins. The system makes more bitcoins available to miners approximately every 10 minutes.
The total supply of bitcoins is designed to have a natural limit, much like the supply of traditional means of exchange such as gold. The number of bitcoins awarded by new blocks will decrease over time. The total number of bitcoins in circulation can never exceed 21 million. The system also makes the math problems progressively harder to solve, based on past activity. Bitcoin miners may work in groups called mining pools and distribute any acquired bitcoins among the group members. In some cases, people have built entire data centers filled with computers designed to only mine bitcoins.
Bitcoin was invented by a person or group using the pseudonym (fictitious name) Satoshi Nakamoto. The first bitcoins were created in 2009. At first, few transactions were made in bitcoin. Over the next few years, some on line retailers and eventually some traditional stores began accepting bitcoin.
Since its introduction, the value of bitcoin has fluctuated wildly. Initially, one bitcoin was worth a few cents, at most. Spurred by increasing adoption, media coverage, and speculation, the price of a single bitcoin rose to more than $1,000 in early 2017. Since then, its value has reached tens of thousands of dollars at times.
Some critics claim that bitcoin’s popularity rose mainly through the investment of speculators hoping for a quick profit as the currency increased in value. In early 2014, Mt. Gox, then the largest bitcoin exchange in the world, claimed that its massive supply of bitcoins was stolen and suddenly declared bankruptcy, further fueling criticism of the cryptocurrency as unstable. In addition, because bitcoins do not pass through banks, they may be used with the intention of concealing illegal activity. In 2017, hackers used ransomware (software that blocks access to data until ransom money is paid) to execute a massive international cyber attack. They demanded that computer users around the world pay a ransom in bitcoin to unlock their data. Studies have also shown that an enormous amount of electrical power is needed to mine bitcoin and many other cryptocurrencies. During bitcoin’s rise in popularity, many people expressed concern about the amount of electrical power that bitcoin miners were consuming.
Supporters of the currency note that exchanges made in bitcoin generally have lower transaction fees than those made with credit cards. They have also argued that an independent currency with a limited supply is preferable to a fiat currency, such as the dollar, that can be printed by a government at will. National governments have explored various approaches for regulating and taxing bitcoins. For example, some countries treat bitcoins as financial assets or property rather than as currency. Many countries have yet to adopt official positions on cryptocurrency.
