Bitcoin

What Is Bitcoin?
Bitcoin is a cryptocurrency, a virtual currency designed to act as money and a
form of payment outside the control of any one person, group, or entity, and
thus removing the need for third-party involvement in financial transactions. It
is rewarded to blockchain miners for the work done to verify transactions and
can be purchased on several exchanges.

Bitcoin was introduced to the public in 2009 by an anonymous developer or

group of developers using the name Satoshi Nakamoto.

It has since become the most well-known cryptocurrency in the world. Its
popularity has inspired the development of many other cryptocurrencies.
These competitors either attempt to replace it as a payment system or are
used as utility or security tokens in other blockchains and emerging financial
technologies.

Learn more about the cryptocurrency that started it all—the history behind it,
how it works, how to get it, and what it can be used for.

KEY TAKEAWAYS
● Launched in 2009, Bitcoin is the world's largest cryptocurrency by
market capitalization.
● Unlike fiat currency, Bitcoin is created, distributed, traded, and stored
using a decentralized ledger system known as a blockchain.
● Bitcoin's history as a store of value has been turbulent; it has gone
through several boom and bust cycles over its relatively short lifespan.
● As the earliest virtual currency to meet widespread popularity and
success, Bitcoin has inspired a host of other cryptocurrencies in its
wake.

Understanding Bitcoin
In August 2008, the domain name Bitcoin.org was registered. 1 Today, at least,
this domain is WhoisGuard Protected, meaning the identity of the person who
registered it is not public information.

In October 2008, a person or group using the name Satoshi Nakamoto

announced the Cryptography Mailing List at metzdowd.com: "I've been
working on a new electronic cash system that's fully peer-to-peer, with no
trusted third party." This now-famous white paper published on Bitcoin.org,
entitled "Bitcoin: A Peer-to-Peer Electronic Cash System," would become the
Magna Carta for how Bitcoin operates today.2

On Jan.3, 2009, the first Bitcoin block was mined—Block 0. This is also known
as the "genesis block" and contains the text: "The Times 03/Jan/2009
Chancellor on brink of second bailout for banks," perhaps proof that the block
was mined on or after that date, and maybe also as relevant political
commentary.3

On Jan. 8, 2009, the first version of the Bitcoin software was

announced to the Cryptography Mailing List, and on Jan. 9, 2009,
Block 1 was mined, and Bitcoin mining commenced in earnest.

Bitcoin rewards are halved every 210,000 blocks. For example, the block
reward was 50 new bitcoins in 2009. On May 11, 2020, the third halving
occurred, bringing the reward for each block discovery down to 6.25 bitcoins.4

One bitcoin is divisible to eight decimal places (100 millionths of one bitcoin),
and this smallest unit is referred to as a satoshi.5 If necessary, and if the
participating miners accept the change, Bitcoin could eventually be made
divisible to even more decimal places.
Bitcoin, as a form of currency, isn't too complicated to understand. For
example, if you own a bitcoin, you can use your cryptocurrency wallet to send
smaller portions of that bitcoin as payment for goods or services. However, it
becomes very complex when you try to understand how it works.

Bitcoin's Blockchain Technology

Cryptocurrencies are part of a blockchain and the network required to power
it. A blockchain is a distributed ledger, a shared database that stores data.
Data within the blockchain are secured by encryption methods. When a
transaction takes place on the blockchain, information from the previous block
is copied to a new block with the new data, encrypted, and the transaction is
verified by validators—called miners—in the network. When a transaction is
verified, a new block is opened, and a Bitcoin is created and given as a
reward to the miner(s) who verified the data within the block—they are then
free to use it, hold it, or sell it.

Bitcoin uses the SHA-256 hashing algorithm to encrypt the data stored in the
blocks on the blockchain. Simply put, transaction data stored in a block is
encrypted into a 256-bit hexadecimal number. That number contains all of the
transaction data and information linked to the blocks before that block.

Data linked between blocks is what led to the ledger being called a
blockchain.

Transactions are placed into a queue to be validated by miners within the

network. Miners in the Bitcoin blockchain network all attempt to verify the
same transaction simultaneously. The mining software and hardware work to
solve the nonce, a four-byte number included in the block header that miners
are attempting to solve. The block header is hashed, or randomly regenerated
by a miner repeatedly until it meets a target number specified by the
blockchain. The block header is "solved," and a new block is created for more
transactions to be encrypted and verified.
How to Mine Bitcoin
A variety of hardware and software can be used to mine Bitcoin. When Bitcoin
was first released, it was possible to mine it competitively on a personal
computer. However, as it became more popular, more miners joined the
network, which lowered the chances of being the one to solve the hash. You
can still use your personal computer as a miner if it has newer hardware, but
the chances of solving a hash are individually are minuscule.

This is because you're competing with a network of miners that generate

around 220 quintillion hashes (220 exa hashes) per second.6 Machines, called
Application Specific Integrated Circuits (ASICs), have been built specifically
for mining—can generate around 255 trillion hashes per second. In contrast, a
computer with the latest hardware hashes around 100 mega hashes per
second (100 million).7

To successfully become a Bitcoin miner, you have several options. You can
use your existing personal computer to use mining software compatible with
Bitcoin and join a mining pool. Mining pools are groups of miners that combine
their computational power to compete with the large ASIC mining farms.

You increase your chances of being rewarded by joining a pool, but rewards
are significantly decreased because they are shared.
If you have the financial means, you could also purchase an ASIC miner. You
can generally find a new one for around $20,000, but used ones are also sold
by miners as they upgrade their systems. There are some significant costs
such as electricity and cooling to consider if you purchase one or more ASICs.

There are several mining programs to choose from and many pools you can
join. Two of the most well-known programs are CGMiner and BFGMiner.
When choosing a pool, it's important to make sure you find out how they pay
out rewards, what any fees might be, and read some mining pool reviews.
How Do You Buy Bitcoin?
If you don't want to mine bitcoin, it can be bought using a cryptocurrency
exchange. Most people will not be able to purchase an entire BTC because of
its price, but you can buy portions of BTC on these exchanges in fiat currency
like U.S. dollars. For example, you can buy bitcoin on Coinbase by creating an
account and funding it. You can fund your account using your bank account,
credit card, or debit card. The following video explains more about buying
bitcoin.

How Is Bitcoin Used?

Bitcoin was initially designed and released as a peer-to-peer payment
method. However, its use cases are growing due to its increasing value and
competition from other blockchains and cryptocurrencies.

Payment
To use your Bitcoin, you need to have a cryptocurrency wallet. Wallets hold
the private keys to the bitcoin you own, which need to be entered when you're
conducting a transaction. Bitcoin is accepted as a means of payment for
goods and services at many merchants, retailers, and stores.

Brick-and-mortar stores that accept cryptocurrencies will generally display a

sign that says “Bitcoin Accepted Here”; the transactions can be handled with
the requisite hardware terminal or wallet address through QR codes and
touchscreen apps. An online business can easily accept Bitcoin by adding this
payment option to its other online payment options: credit cards, PayPal, etc.

Investing and Speculating

Investors and speculators became interested in Bitcoin as it grew in popularity.
Between 2009 and 2017, cryptocurrency exchanges emerged that facilitated
bitcoin sales and purchases. Prices began to rise, and demand slowly grew
until 2017, when its price broke $1,000. Many people believed Bitcoin prices
would keep climbing and began buying them to hold. Traders began using
cryptocurrency exchanges to make short-term trades, and the market took off.

Risks of Investing in Bitcoin

Speculative investors have been drawn to Bitcoin after its rapid price
appreciation in recent years. Bitcoin had a price of $7,167.52 on Dec. 31,
2019, and a year later, it had appreciated more than 300% to $28,984.98. It
continued to surge in the first half of 2021, trading at a record high of over
$69,000 in November 2021—it then fell over the next few months to hover
around $40,000.9

9
Bitcoin's all-time high price is $69,000, reached on Nov. 9, 2021.
Thus, many people purchase Bitcoin for its investment value rather than its
ability to act as a medium of exchange. However, the lack of guaranteed value
and its digital nature means its purchase and use carry several inherent risks.
For example, many investor alerts have been issued by the Securities and
Exchange Commission (SEC), the Financial Industry Regulatory Authority
(FINRA), and the Consumer Financial Protection Bureau (CFPB) regarding
Bitcoin investing.

● Regulatory risk: The lack of uniform regulations about Bitcoin (and

other virtual currencies) raises questions over their longevity, liquidity,
and universality.
● Security risk: Most individuals who own and use Bitcoin have not
acquired their tokens through mining operations. Rather, they buy and
sell Bitcoin and other digital currencies on popular online markets,
known as cryptocurrency exchanges. Bitcoin exchanges are entirely
 digital and—as with any virtual system—are at risk from hackers,
malware, and operational glitches.
● Insurance risk: Bitcoin and cryptocurrencies are not insured through
the Securities Investor Protection Corporation (SIPC) or the Federal
Deposit Insurance Corporation (FDIC). Some exchanges provide
insurance through third parties. In 2019, prime dealer and trading
platform SFOX announced it would be able to offer Bitcoin investors
with FDIC insurance, but only for the portion of transactions involving
cash.10
● Fraud risk: Even with the security measures inherent within a
blockchain, there are still opportunities for fraudulent activity. For
instance, in July 2013, the SEC brought legal action against an operator
of a Bitcoin-related Ponzi scheme.11
● Market risk: As with any investment, Bitcoin values can fluctuate.
Indeed, the value of the currency has seen wild swings in price over its
short existence. Subject to high volume buying and selling on
exchanges, it is highly sensitive to any newsworthy events. According to
the CFPB, the price of Bitcoin fell by 61% in a single day in 2013, while
the one-day price drop record in 2014 was as big as 80%.12

How Long Does It Take to Mine 1 Bitcoin?

It takes an average of 10 minutes for the mining network to validate a block
and create the reward. The Bitcoin reward is 6.25 BTC per block. This works
out to be about 100 seconds for 1 BTC to be mined.

Is Bitcoin a Good Investment?

Bitcoin has a short investing history filled with very volatile prices. Whether it
is a good investment depends on your financial profile, investing portfolio, risk
tolerance, and investing goals. You should always consult a financial
professional for advice before investing in cryptocurrency to ensure it is right
for your circumstances.

How Does Bitcoin Make Money?

The Bitcoin network of miners make money from Bitcoin by successfully
validating blocks and being rewarded. Bitcoins are exchangeable for fiat
currency via cryptocurrency exchanges and can be used to make purchases
from merchants and retailers that accept them. Investors and speculators can
make money from buying and selling bitcoins.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly

risky and speculative, and this article is not a recommendation by
Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since
each individual's situation is unique, a qualified professional should always be
consulted before making any financial decisions. Investopedia makes no
representations or warranties as to the accuracy or timeliness of the
information contained herein.

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