Bitcoin logos made by Satoshi Nakamoto in 2009 (left) and 2010 (right).
The domain name bitcoin.org was registered on 18 August 2008.[14] On 31 October 2008, a link to a white paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list.[15] Nakamoto implemented the bitcoin software as open-source code and released it in January 2009.[7] Nakamoto's identity remains unknown.[6] According to computer scientist Arvind Narayanan, all individual components of bitcoin originated in earlier academic literature.[11] Nakamoto's innovation was their complex interplay resulting in the first decentralized, Sybil resistant, Byzantine fault tolerant digital cash system, that would eventually be referred to as the first blockchain.[11][16] Nakamoto's paper was not peer reviewed and was initially ignored by academics, who argued that it could not work.[11]
On 3 January 2009, the bitcoin network was created when Nakamoto mined the starting block of the chain, known as the genesis block.[17] Embedded in this block was the text "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks", which is the date and headline of an issue of The Times newspaper.[7] Nine days later, Hal Finney received the first bitcoin transaction: ten bitcoins from Nakamoto.[18] Wei Dai and Nick Szabo were also early supporters.[17] On May 22, 2010, the first known commercial transaction using bitcoin occurred when programmer Laszlo Hanyecz bought two Papa John's pizzas for ₿10,000, in what would later be celebrated as "Bitcoin Pizza Day".[19]
After early "proof-of-concept" transactions, the first major users of bitcoin were black markets, such as the dark webSilk Road. During its 30 months of existence, beginning in February 2011, Silk Road exclusively accepted bitcoins as payment, transacting ₿9.9 million, worth about $214 million.[24]: 222
2013–2014: First regulatory actions
In March 2013, the US Financial Crimes Enforcement Network (FinCEN) established regulatory guidelines for "decentralized virtual currencies" such as bitcoin, classifying American bitcoin miners who sell their generated bitcoins as money services businesses, subject to registration and other legal obligations.[25] In May 2013, US authorities seized the unregistered exchangeMt. Gox.[26] In June 2013, the US Drug Enforcement Administration seized ₿11.02 from a man attempting to use them to buy illegal substances. This marked the first time a government agency had seized bitcoins.[27] The FBI seized about ₿30,000 in October 2013 from Silk Road, following the arrest of its founder Ross Ulbricht.[28]
In December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoin.[29] After the announcement, the value of bitcoin dropped,[30] and Baidu no longer accepted bitcoins for certain services.[31] Buying real-world goods with any virtual currency had been illegal in China since at least 2009.[32]
In February 2018, the price crashed after China imposed a complete ban on bitcoin trading.[37] The percentage of bitcoin trading in the Chinese renminbi fell from over 90% in September 2017 to less than 1% in June 2018.[38] During the same year, bitcoin prices were negatively affected by several hacks or thefts from cryptocurrency exchanges.[39]
2020–present
Bitcoin price in US dollars on Coinbase exchange from December 1, 2014, through September 29, 2024[40]
In 2023, ordinals—non-fungible tokens (NFTs)—on bitcoin, went live.[52] In January 2024, the first 11 US spot bitcoin ETFs began trading, offering direct exposure to bitcoin for the first time on American stock exchanges.[53][54] As of June 2023, River Financial estimated that bitcoin had 81.7 million users, about 1% of the global population.[55]
The unit of account of the bitcoin system is the bitcoin. It is most commonly represented with the symbol ₿[1] and the currency code BTC. However, the BTC code does not conform to ISO 4217 as BT is the country code of Bhutan,[56] and ISO 4217 requires the first letter used in global commodities to be 'X'.[56] XBT, a code that conforms to ISO 4217 though not officially part of it,[56] is used by Bloomberg L.P.[57]
One bitcoin is divisible to eight decimal places.[8]: ch. 5 Units for smaller amounts of bitcoin are the millibitcoin (mBTC), equal to 1⁄1000 bitcoin, and the satoshi[a] (sat), representing 1⁄100000000 (one hundred millionth) bitcoin, the smallest amount possible.[2] 100,000 satoshis are one mBTC.[61]
As a decentralized system, bitcoin operates without a central authority or single administrator,[62] so that anyone can create a new bitcoin address and transact without needing any approval.[8]: ch. 1 This is accomplished through a specialized distributed ledger called a blockchain that records bitcoin transactions.[63]
The blockchain is implemented as an ordered list of blocks. Each block contains a SHA-256hash of the previous block,[63] chaining them in chronological order.[8]: ch. 7 [63] The blockchain is maintained by a peer-to-peer network.[24]: 215–219 Individual blocks, public addresses, and transactions within blocks are public information, and can be examined using a blockchain explorer.[64]
Nodes validate and broadcast transactions, each maintaining a copy of the blockchain for ownership verification.[65] A new block is created every 10 minutes on average, updating the blockchain across all nodes without central oversight. This process tracks bitcoin spending, ensuring each bitcoin is spent only once. Unlike a traditional ledger that tracks physical currency, bitcoins exist digitally as unspent outputs of transactions.[8]: ch. 5
Addresses and transactions
Simplified chain of ownership. In practice, a transaction can have more than one input and more than one output.[66]
In the blockchain, bitcoins are linked to specific addresses that are hashes of a public key. Creating an address involves generating a random private key and then computing the corresponding address. This process is almost instant, but the reverse (finding the private key for a given address) is nearly impossible.[8]: ch. 4 Publishing a bitcoin address does not risk its private key, and it is extremely unlikely to accidentally generate a used key with funds. To use bitcoins, owners need their private key to digitally sign transactions, which are verified by the network using the public key, keeping the private key secret.[8]: ch. 5
Bitcoin transactions use a Forth-like scripting language,[8]: ch. 5 involving one or more inputs and outputs. When sending bitcoins, a user specifies the recipients' addresses and the amount for each output. This allows sending bitcoins to several recipients in a single transaction. To prevent double-spending, each input must refer to a previous unspent output in the blockchain.[66] Using multiple inputs is similar to using multiple coins in a cash transaction. As in a cash transaction, the sum of inputs can exceed the intended sum of payments. In such a case, an additional output can return the change back to the payer.[66] Unallocated input satoshis in the transaction become the transaction fee.[66]
Losing a private key means losing access to the bitcoins, with no other proof of ownership accepted by the protocol.[24] For instance, in 2013, a user lost ₿7,500, valued at US$7.5 million, by accidentally discarding a hard drive with the private key.[67] It is estimated that around 20% of all bitcoins are lost.[68] The private key must also be kept secret as its exposure, such as through a data breach, can lead to theft of the associated bitcoins.[8]: ch. 10 [69] As of December 2017[update], approximately ₿980,000 had been stolen from cryptocurrency exchanges.[70]
Bitcoin mining facility with large amounts of mining hardware
The mining process in bitcoin involves maintaining the blockchain through computer processing power. Miners group and broadcast new transactions into blocks, which are then verified by the network.[63] Each block must contain a proof of work (PoW) to be accepted,[63] involving finding a nonce number that, combined with the block content, produces a hash numerically smaller than the network's difficulty target.[8]: ch. 8 This PoW is simple to verify but hard to generate, requiring many attempts.[8]: ch. 8 PoW forms the basis of bitcoin's consensus mechanism.[71]
The difficulty of generating a block is deterministically adjusted based on the mining power on the network by changing the difficulty target, which is recalibrated every 2,016 blocks (approximately two weeks) to maintain an average time of ten minutes between new blocks. The process requires significant computational power and specialized hardware.[8]: ch. 8 [72]
Miners who successfully find a new block can collect transaction fees from the included transactions and a set reward in bitcoins.[73] To claim this reward, a special transaction called a coinbase is included in the block, with the miner as the payee. All bitcoins in existence have been created through this type of transaction.[8]: ch. 8 This reward is halved every 210,000 blocks until ₿21 million,[b] with new bitcoin issuance slated to end around 2140. Afterward, miners will only earn from transaction fees. These fees are determined by the transaction's size and the amount of data stored, measured in satoshis per byte.[74][66][8]: ch. 8
The proof of work system and the chaining of blocks make blockchain modifications very difficult, as altering one block requires changing all subsequent blocks. As more blocks are added, modifying older blocks becomes increasingly challenging.[75][63] In case of disagreement, nodes trust the longest chain, which required the greatest amount of effort to produce.[71] To tamper or censor the ledger, one needs to control the majority of the global hashrate.[71] The high cost required to reach this level of computational power secures the bitcoin blockchain.[71]
Bitcoin is pseudonymous, with funds linked to addresses, not real-world identities. While the owners of these addresses are not directly identified, all transactions are public on the blockchain. Patterns of use, like spending coins from multiple inputs, can hint at a common owner. Public data can sometimes be matched with known address owners.[81]Bitcoin exchanges might also need to collect personal data as per legal requirements.[82] For enhanced privacy, users can generate a new address for each transaction.[83]
In the bitcoin network, each bitcoin is treated equally, ensuring basic fungibility. However, users and applications can choose to differentiate between bitcoins. While wallets and software treat all bitcoins the same, each bitcoin's transaction history is recorded on the blockchain. This public record allows for chain analysis, where users can identify and potentially reject bitcoins from controversial sources.[84] For example, in 2012, Mt. Gox froze accounts containing bitcoins identified as stolen.[85]
A paper wallet with the address as a QR code while the private key is hidden
A hardware wallet which processes bitcoin transactions without exposing private keys
Bitcoin wallets were the first cryptocurrency wallets, enabling users to store the information necessary to transact bitcoins.[86][8]: ch. 1, glossary The first wallet program, simply named Bitcoin, and sometimes referred to as the Satoshi client, was released in 2009 by Nakamoto as open-source software.[7]Bitcoin Core is among the best known clients. Forks of Bitcoin Core exist such as Bitcoin Unlimited.[87] Wallets can be full clients, with a full copy of the blockchain to check the validity of mined blocks,[8]: ch. 1 or lightweight clients, just to send and receive transactions without a local copy of the entire blockchain.[88] Third-party internet services called online wallets store users' credentials on their servers, making them susceptible of hacks.[89] Cold storage protects bitcoins from such hacks by keeping private keys offline, either through specialized hardware wallets or paper printouts.[90][8]: ch. 4
Research shows a trend towards centralization in bitcoin as miners join pools for stable income.[24]: 215, 219–222 [93]: 3 If a single miner or pool controls more than 50% of the hashing power, it would allow them to censor transactions and double-spend coins.[62] In 2014, mining pool Ghash.io reached 51% mining power, causing safety concerns, but later voluntarily capped its power at 39.99% for the benefit of the whole network.[94] A few entities also dominate other parts of the ecosystem such as the client software, online wallets, and simplified payment verification (SPV) clients.[62]
According to the European Central Bank, the decentralization of money offered by bitcoin has its theoretical roots in the Austrian school of economics, especially with Friedrich von Hayek's book The Denationalization of Money, in which he advocates a complete free market in the production, distribution and management of money to end the monopoly of central banks.[95]: 22 Sociologist Nigel Dodd argues that the essence of the bitcoin ideology is to remove money from social, as well as governmental, control.[96]The Economist describes bitcoin as "a techno-anarchist project to create an online version of cash, a way for people to transact without the possibility of interference from malicious governments or banks".[97] These philosophical ideas initially attracted libertarians and anarchists.[98] Economist Paul Krugman argues that cryptocurrencies like bitcoin are only used by bank skeptics and criminals.[99]
Money serves three purposes: a store of value, a medium of exchange, and a unit of account.[100] According to The Economist in 2014, bitcoin functions best as a medium of exchange.[100] In 2015, The Economist noted that bitcoins had three qualities useful in a currency: they are "hard to earn, limited in supply and easy to verify".[101] However, a 2018 assessment by The Economist stated that cryptocurrencies met none of these three criteria.[97] Per some researchers, as of 2015[update], bitcoin functions more as a payment system than as a currency.[24] In 2014, economist Robert J. Shiller wrote that bitcoin has potential as a unit of account for measuring the relative value of goods, as with Chile's Unidad de Fomento, but that "Bitcoin in its present form... doesn't really solve any sensible economic problem".[102] François R. Velde, Senior Economist at the Chicago Fed, described bitcoin as "an elegant solution to the problem of creating a digital currency".[103] David Andolfatto, Vice President at the Federal Reserve Bank of St. Louis, stated that bitcoin is a threat to the establishment, which he argues is a good thing for the Federal Reserve System and other central banks, because it prompts these institutions to operate sound policies.[104]
The legal status of bitcoin varies substantially from one jurisdiction to another. Because of its decentralized nature and its global presence, regulating bitcoin is difficult. However, the use of bitcoin can be criminalized, and shutting down exchanges and the peer-to-peer economy in a given country would constitute a de facto ban.[105] The use of bitcoin by criminals has attracted the attention of financial regulators, legislative bodies, and law enforcement.[106] Nobel-prize winning economist Joseph Stiglitz says that bitcoin's anonymity encourages money laundering and other crimes.[107] This is the main justification behind bitcoin bans.[10] As of November 2021[update], nine countries applied an absolute ban (Algeria, Bangladesh, China, Egypt, Iraq, Morocco, Nepal, Qatar, and Tunisia) while another 42 countries had an implicit ban.[108][needs update] Bitcoin is only legal tender in El Salvador.[4]
As of 2018[update], bitcoin is rarely used in transactions with merchants,[109] but it is popular to purchase illegal goods online.[110][111] Prices are not usually quoted in bitcoin and trades involve conversions into fiat currencies.[24] Commonly cited reasons for not using bitcoin include high costs, the inability to process chargebacks, high price volatility, long transaction times, and transaction fees (especially for small purchases).[109][112]Bloomberg reported that bitcoin was being used for large-item purchases on the site Overstock.com and for cross-border payments to freelancers.[113] As of 2015[update], there was little sign of bitcoin use in international remittances despite high fees charged by banks and Western Union who compete in this market.[24][114] Despite associated risks and costs, in 2022, a growing use of bitcoin, alongside cash and cards, was reported in restaurant business.[115]
Bitcoin is also used by some governments. For instance, the Iranian government initially opposed cryptocurrencies, but later saw them as an opportunity to circumvent sanctions.[121] Since 2020, Iran has required local bitcoin miners to sell bitcoin to the Central Bank of Iran, allowing the central bank to use it for imports.[122] Some constituent states also accept tax payments in bitcoin, including Colorado (US)[123] and Zug (Switzerland).[124] As of 2023, the US government owned more than $5 billion worth of seized bitcoin.[125][126]
Use for investment and status as an economic bubble
Economists, investors, and the central bank of Estonia have described bitcoin as a potential Ponzi scheme.[145][146][147] Legal scholar Eric Posner disagrees, however, as "a real Ponzi scheme takes fraud; bitcoin, by contrast, seems more like a collective delusion".[148] A 2014 World Bank report also concluded that bitcoin was not a deliberate Ponzi scheme.[149]
^ abcAlexander, Carol; Imeraj, Arben (2019). "Introducing the BITIX: The Bitcoin Fear Gauge". SSRN Electronic Journal. doi:10.2139/ssrn.3383734. ISSN1556-5068. XBT satisfies the norm 'ISO 4217' by the International Organisation for Standardisation (ISO) as BTC goes against the name of Bhutan's currency. In general, transaction instruments that are not national currencies, like gold or silver, begin with an X. However, the symbol XBT is not officially recognised by ISO.
^Sparkes, Matthew (9 June 2014). "The coming digital anarchy". The Daily Telegraph. Archived from the original on 23 January 2015. Retrieved 7 January 2015.
^ abcdeKroll, Joshua A.; Davey, Ian C.; Felten, E. (11–12 June 2013). The Economics of Bitcoin Mining, or Bitcoin in the Presence of Adversaries. The Twelfth Workshop on the Economics of Information Security (WEIS 2013). Washington, DC. S2CID2794725.
^Stoll, Christian; Klaaßen, Lena; Gallersdörfer, Ulrich; Neumüller, Alexander (June 2023). Climate Impacts of Bitcoin Mining in the U.S. (Report). Working Paper Series. MIT Center for Energy and Environmental Policy Research. Archived from the original on 18 November 2023. Retrieved 24 November 2023.
^Anderson, Ross; Shumailov, Ilia; Ahmed, Mansoor (24 November 2018). "Making Bitcoin Legal". In Matyáš, Vashek; Švenda, Petr; Stajano, Frank; Christianson, Bruce (eds.). Security Protocols XXVI. Lecture Notes in Computer Science. Vol. 11286. Springer. pp. 243–253. doi:10.1007/978-3-030-03251-7_29. ISBN978-3-030-03250-0. Archived from the original on 24 November 2023. Retrieved 24 November 2023.
^Vigna, Paul (17 January 2016). "Is Bitcoin Breaking Up?". The Wall Street Journal. Archived from the original on 20 August 2016. Retrieved 8 November 2016.
^Alvarez, Fernando; Argente, David; Van Patten, Diana (2022). Are Cryptocurrencies Currencies? Bitcoin as Legal Tender in El Salvador (Report). Cambridge, MA: National Bureau of Economic Research. doi:10.3386/w29968.
