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Bitcoin is a digital currency and payment system founded by Satoshi Nakamoto, an anonymous individual or group. The idea of bitcoin was first introduced in 2008 to a cryptography mailing list before being released as an open-sourced software in 2009.
Unlike conventional financial transactions involving currency, bitcoin operates on a consensus network using completely digital money. It is often referred to as a cryptocurrency because it requires encryption techniques to regulate the creation of new bitcoins, a process called mining. Bitcoin mining refers specifically to the computing power needed to process transactions, secure the network and verifying all previous bitcoin transactions on the network.
Since its introduction in January 2009, bitcoin has become a worldwide currency and is widely considered to be the world’s first decentralized digital currency. This essentially means that no single institution or government owns the bitcoin network or controls its supply.
While the size of the bitcoin market varies depending on the digital currency’s price, it currently boasts a market capitalization of around $10 billion. Since its inception, bitcoin’s price has been subject to significant volatility, which reflects the market’s nascent state. Since 2009, bitcoin’s value has fluctuated from just a few dollars to more than $1,200.
Bitcoins are created as a reward for verifying and recording payments into a public ledger, which is referred to as a blockchain. The blockchain is a permanent record of every bitcoin transaction ever processed. These transactions are protected by digital signatures that correspond to the sending addresses. Anyone with the computing power to process bitcoin payments can mine new coins.
Mining work is just one way users can acquire bitcoins. Users can also purchase bitcoins at a digital currency exchange, trade bitcoin with other users, and receive payment for goods and services through bitcoin. While there is no fee to receive bitcoins, higher fees incentivize faster confirmation and processing of transactions. Since fees are unrelated to the amount being sent, they can often appear inconsistent or unfair. Transaction fees are still being developed and will likely change over time.
In all of these cases, bitcoin ownership indicates that a user can spend bitcoins that are associated with a particular address, which requires the owner to digitally sign the transaction using a private key. Without knowledge of this key, the transaction cannot be signed and therefore no bitcoins can be spent or released.
Supply of Bitcoin
Like any other asset bought and sold in the market, bitcoin is subject to the laws of supply and demand. However, unlike conventional money, bitcoin has a finite supply of 21 million. That’s the total number of bitcoins that will ever be mined. Since there are 1,000,000 bits in one bitcoin, there will never be a limitation, as future transactions can take the form of smaller sub-units.
Since bitcoin’s supply ceiling is already known, the mining protocol has been set to halve the reward for creating new blocks every 210,000 blocks – a period lasting approximately four years. When bitcoin was first introduced, miners received 50 bitcoins for every block they created. Since 2009, bitcoin has undergone two halving events. The first occurred in late-2012, when miners’ reward fell to 25 bitcoins. The second event occurred in July 2016, when the reward for creating new blocks fell to 12.5. This process is expected to continue until the reward decreases to zero.
A bitcoin wallet is a computer program or mobile app that allows users to send and receive the digital currency. In other words, the bitcoin wallet contains the information necessary to send and receive bitcoins, and is the primary means of sending and receiving bitcoins for most users. The wallet does not “hold” or “store” bitcoins as conventional wallets hold money, but rather stores the digital credentials of the bitcoins.
Currently, bitcoin wallets are available on Android, iOS, Windows Phone and Blackberry devices. They are also available on Windows, Mac and Linux desktop computers and over various web applications, such as BitGo, Green Address, Coin.Space and Coinbase.
Bitcoin has been described as a pseudonymous currency, since funds are not associated with persons or entities, but rather bitcoin addresses. However, this does not mean transactions are anonymous. The use of bitcoin leaves an extensive, permanent record that is both traceable and public. Additionally, there is no guarantee of privacy on bitcoin exchanges, which facilitate the trading of bitcoin against traditional currencies, such as the US dollar. Depending on where the exchange is located, the law may require the collection of personal information.
Bitcoin users are ultimately responsible for protecting their privacy, as there is no commonly agreed upon method to ensure the safeguarding of personal information. Privacy standards are continually being updated based on new research and technology.
Since its inception, bitcoin has faced legal and public scrutiny for its association with criminal activity. As such, its legal status varies substantially across the globe. In some parts of the world, bitcoin is explicitly banned or restricted. In other regions, trading and spending bitcoin are considered legal. Part of the challenge has been defining whether bitcoin is actually a currency, commodity or some other financial instrument.
Currently, bitcoin is considered legal to use and trade in the United States, Canada, Australia and the European Union. Bitcoin is currently banned or restricted in places like China, Russia, Bangladesh, Vietnam, Bolivia, Ecuador, Iceland and Kyrgyzstan.
Although regulations concerning bitcoin remain sparse, several countries have warned against using the digital currencies. In most places, bitcoin still operates in a legal grey area, as nations have been slow to recognize or accept the role of digital currency in the economic and financial system.
Modern Views of Digital Currency
Bitcoin’s arrival on the scene has sparked a large public debate about the role of technology in undermining state power. This debate extends far beyond bitcoin, which is only one form of digital currency. Supporters of bitcoin view the digital currency as the dawn of a new era in modern finance, one that may even threaten or undermine the modern state system. Its detractors view it as an enabler of criminal activity. They have been somewhat vindicated in recent years, as bitcoin has been at the centre of several international scandals ranging from money laundering to drug trafficking.
While still subject to scrutiny, bitcoin has also gained in legitimacy over the past three years. Currently, more than 100,000 merchants accept bitcoin payments, including Microsoft, PayPal, Dell and Expedia. National governments such as the United Kingdom and multinational banks such as Goldman Sachs and Barclays have also experimented with blockchain technology.