Bitcoin is a type of cryptocurrency.
Balances of Bitcoin tokens are kept using public and private “keys,”
which are long strings of numbers and letters linked through the mathematical
encryption algorithm that was used to create them. The public key (comparable
to a bank account number) serves as the address which is published to the world
and to which others may send bitcoins. The private key (comparable to an ATM
PIN) is meant to be a guarded secret and only used to authorize Bitcoin
transmissions. Bitcoin keys should not be confused with a Bitcoin wallet, which
is a physical or digital device which facilitates the trading of Bitcoin and
allows users to track ownership of coins. The term “wallet” is a bit
misleading, as Bitcoin’s decentralized nature means that it is never stored
“in” a wallet, but rather decentrally on a blockchain.
Style notes: according to the official
Bitcoin Foundation, the word “Bitcoin” is capitalized in the context
of referring to the entity or concept, whereas “bitcoin” is written
in the lower case when referring to a quantity of the currency (e.g. “I
traded 20 bitcoin”) or the units themselves. The plural form can be either
“bitcoin” or “bitcoins.” Bitcoin is also commonly
abbreviated as “BTC.”
How Bitcoin Works
Bitcoin is one of the first digital
currencies to use peer-to-peer technology to facilitate instant payments. The
independent individuals and companies who own the governing computing power and
participate in the Bitcoin network, also known as “miners,” are
motivated by rewards (the release of new bitcoin) and transaction fees paid in
bitcoin. These miners can be thought of as the decentralized authority
enforcing the credibility of the Bitcoin network. New bitcoin is being released
to the miners at a fixed, but periodically declining rate, such that the total
supply of bitcoins approaches 21 million. Currently, there are roughly 3
million bitcoins which have yet to be mined. In this way, Bitcoin (and any
cryptocurrency generated through a similar process) operates differently from
fiat currency; in centralized banking systems, currency is released at a rate
matching the growth in goods in an attempt to maintain price stability, while a
decentralized system like Bitcoin sets the release rate ahead of time and
according to an algorithm.
Bitcoin mining is the process by which
bitcoins are released into circulation. Generally, mining requires the solving
of computationally difficult puzzles in order to discover a new block, which is
added to the blockchain. In contributing to the blockchain, mining adds and
verifies transaction records across the network. For adding blocks to the
blockchain, miners receive a reward in the form of a few bitcoins; the reward
is halved every 210,000 blocks. The block reward was 50 new bitcoins in 2009
and is currently 12.5. As more and more bitcoins are created, the difficulty of
the mining process – that is, the amount of computing power involved –
increases. The mining difficulty began at 1.0 with Bitcoin’s debut back in
2009; at the end of the year, it was only 1.18. As of October 2019, the mining
difficulty is over 12 trillion. Once, an ordinary desktop computer sufficed for
the mining process; now, to combat the difficulty level, miners must use
expensive, complex hardware like Application-Specific Integrated Circuits
(ASIC) and more advanced processing units like Graphic Processing Units (GPUs).
These elaborate mining processors are known as “mining rigs.”
One bitcoin is divisible to eight decimal
places (100 millionths of one bitcoin), and this smallest unit is referred to
as a Satoshi. If necessary, and if the participating miners accept the change,
Bitcoin could eventually be made divisible to even more decimal places.
What’s a Bitcoin Worth?
In 2017 alone, the price of Bitcoin rose
from a little under $1,000 at the beginning of the year to close to $19,000,
ending the year more than 1,400% higher. More recently, the cryptocurrency has
declined in value and more-or-less plateaued, save for a few periods of
relatively lower price figures (the early portion of 2019, when prices hovered
around $3500) and relatively higher ones (June and July of 2019, when prices
briefly peaked at over $13,000). As of October 2019, Bitcoin seems to have
found a new price point in the range of $8,000 to $9,000.
Bitcoin’s price is quite dependent on the
size of its mining network, since the larger the network is, the more difficult
– and thus more costly – it is to produce new bitcoins. As a result, the price
of bitcoin has to increase as its cost of production also rises. The Bitcoin
mining network’s aggregate processing power is known as the “hash
rate,” referring to the number of times per second the network can attempt
to complete a hashing puzzle necessary before a block can be added to the
blockchain. As of October 23, 2019, the network reached a record high 114
quintillion hashes per second.
Who Invented Bitcoin?
No one knows who invented Bitcoin, or at
least not conclusively. Satoshi Nakamoto is the name associated with the person
or group of people who released the original Bitcoin white paper in 2008 and
worked on the original Bitcoin software that was released in 2009. The Bitcoin
protocol requires users to enter a birthday upon signup, and we know that an
individual named Satoshi Nakamoto registered and put down April 5 as a birth
date. In the years since that time, many individuals have either claimed to be
or have been suggested as the real-life people behind the pseudonym, but as of
October 2019, the true identity (or identities) behind Satoshi remains
Though it is tempting to believe the
media’s spin that Satoshi Nakamoto is a solitary, quixotic genius who created
Bitcoin out of thin air, such innovations do not typically happen in a vacuum.
All major scientific discoveries, no matter how original-seeming, were built on
previously existing research. There are precursors to Bitcoin: Adam Back’s Hashcash,
invented in 1997, and subsequently Wei Dai’s b-money, Nick Szabo’s bit gold and
Hal Finney’s Reusable Proof of Work. The Bitcoin whitepaper itself cites
Hashcash and b-money, as well as various other works spanning several research
fields. Perhaps unsurprisingly, many of the individuals behind the other
projects named above have been speculated to have also had a part in creating
Why Is Satoshi Anonymous?
There are two primary motivations for
keeping Bitcoin’s inventor keeping his or her or their identity secret. One is
privacy. As Bitcoin has gained in popularity – becoming something of a
worldwide phenomenon – Satoshi Nakamoto would likely garner a lot of attention
from the media and from governments.
The other reason is safety. Looking at 2009
alone, 32,489 blocks were mined; at the then-reward rate of 50 BTC per block,
the total payout in 2009 was 1,624,500 BTC, which is worth $13.9 billion as of
October 25, 2019. One may conclude that only Satoshi and perhaps a few other
people were mining through 2009 and that they possess a majority of that stash
of BTC. Someone in possession of that much Bitcoin could become a target of
criminals, especially since bitcoins are less like stocks and more like cash,
where the private keys needed to authorize spending could be printed out and
literally kept under a mattress. While it’s likely the inventor of Bitcoin
would take precautions to make any extortion-induced transfers traceable,
remaining anonymous is a good way for Satoshi to limit exposure.
Major media outlets, cryptocurrency experts
and other enthusiasts have ventured guesses as to the individual or group
behind the persona of Satoshi Nakamoto. On Oct. 10, 2011, The New Yorker
published an article speculating that Nakamoto might be Irish cryptography
student Michael Clear or economic sociologist Vili Lehdonvirta. A day later,
Fast Company suggested that Nakamoto could be a group of three people – Neal
King, Vladimir Oksman and Charles Bry – who together appear on a patent related
to secure communications that were filed two months before bitcoin.org was
registered. A Vice article published in May 2013 added more suspects to the
list, including Gavin Andresen, the Bitcoin project’s lead developer; Jed
McCaleb, co-founder of now-defunct Bitcoin exchange Mt. Gox; and famed Japanese
mathematician Shinichi Mochizuki.
In December 2013, Techcrunch published an
interview with researcher Skye Grey who claimed textual analysis of published
writings shows a link between Satoshi and bit-gold creator Nick Szabo. And
perhaps most famously, in March 2014, Newsweek ran a cover article claiming
that Satoshi is actually an individual named Satoshi Nakamoto – a 64-year-old
Japanese-American engineer living in California. More recently, Australian computer
scientist and cryptocurrency proponent Craig Wright has claimed to be Satoshi
Nakamoto – although Wright also has claimed that Nakamoto plagiarized his 2008
thesis on the topic of crypocurrencies.
After a decade of Bitcoin, the world still
does not know who is behind the world’s top digital currency, and it’s possible
that the mystery will never be solved.
Can Satoshi’s Identity Be Proven?
It would seem even early collaborators on
the project don’t have verifiable proof of Satoshi’s identity. To reveal
conclusively who Satoshi Nakamoto is, a definitive link would need to be made
between his/her activity with Bitcoin and his/her identity. That could come in
the form of linking the party behind the domain registration of bitcoin.org,
email and forum accounts used by Satoshi Nakamoto, or ownership of some portion
of the earliest mined bitcoins. Even though the bitcoins Satoshi likely
possesses are traceable on the blockchain, it seems he/she has yet to cash them
out in a way that reveals his/her identity. If Satoshi were to move his/her
bitcoins to an exchange today, this might attract attention, but it seems
unlikely that a well-funded and successful exchange would betray a customer’s
Receiving Bitcoins As Payment
Bitcoins can be accepted as a means of
payment for products sold or services provided. If you have a brick and mortar
store, just display a sign saying “Bitcoin Accepted Here” and many of your
customers may well take you up on it; the transactions can be handled with the
requisite hardware terminal or wallet address through QR codes and touch screen
apps. An online business can easily accept bitcoins by just adding this payment
option to the others it offers, like credit cards, PayPal, etc. Online payments
will require a Bitcoin merchant tool (an external processor like Coinbase or
Working For Bitcoins
Those who are self-employed can get paid
for a job in bitcoins. There are several websites/job boards which are
dedicated to the digital currency:
Cryptogrind brings together work seekers
and prospective employers through its website
Coinality features jobs – freelance,
part-time and full-time – that offer payment in bitcoins, as well as other
cryptocurrencies like Dogecoin and Litecoin
Jobs4Bitcoins, part of reddit.com
Bitcoins From Gambling
It’s possible to play at casinos that cater
to Bitcoin aficionados, with options like online lotteries, jackpots, spread
betting, and other games. Of course, the pros and cons and risks that apply to
any sort of gambling and betting endeavors are in force here too.
How to Buy Bitcoin
Investing in Bitcoins
There are many Bitcoin supporters who
believe that digital currency is the future. Many of those who endorse Bitcoin
believe that it facilitates a much faster, no-fee payment system for
transactions across the globe. Although it is not backed by any government or
central bank, bitcoin can be exchanged for traditional currencies; in fact, its
exchange rate against the dollar attracts potential investors and traders
interested in currency plays. Indeed, one of the primary reasons for the growth
of digital currencies like Bitcoin is that they can act as an alternative to
national fiat money and traditional commodities like gold.
In March 2014, the IRS stated that all
virtual currencies, including bitcoins, would be taxed as property rather than
currency. Gains or losses from bitcoins held as capital will be realized as
capital gains or losses, while bitcoins held as inventory will incur ordinary
gains or losses. The sale of bitcoins that you mined or purchased from another
party, or the use of bitcoins to pay for goods or services are examples of
transactions which can be taxed.
Like any other asset, the principle of
buying low and selling high applies to bitcoins. The most popular way of
amassing the currency is through buying on a Bitcoin exchange, but there are
many other ways to earn and own bitcoins.
Risks of Bitcoin Investing
Though Bitcoin was not designed as a normal
equity investment (no shares have been issued), some speculative investors were
drawn to the digital money after it appreciated rapidly in May 2011 and again
in November 2013. Thus, many people purchase bitcoin for its investment value
rather than as a medium of exchange.
However, their lack of guaranteed value and
digital nature means the purchase and use of bitcoins carries several inherent
risks. Many investor alerts have been issued by the Securities and Exchange
Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the
Consumer Financial Protection Bureau (CFPB), and other agencies.
The concept of a virtual currency is still
novel and, compared to traditional investments, Bitcoin doesn’t have much of a
long-term track record or history of credibility to back it. With their
increasing popularity, bitcoins are becoming less experimental every day;
still, after 10 years, they (like all digital currencies) remain in a
development phase and are consistently evolving. “It is pretty much the
highest-risk, highest-return investment that you can possibly make,” says Barry
Silbert, CEO of Digital Currency Group, which builds and invests in Bitcoin and
Bitcoin Regulatory Risk
Investing money into Bitcoin in any of its
many guises is not for the risk-averse. Bitcoins are a rival to government
currency and may be used for black market transactions, money laundering,
illegal activities or tax evasion. As a result, governments may seek to
regulate, restrict or ban the use and sale of bitcoins, and some already have.
Others are coming up with various rules. For example, in 2015, the New York
State Department of Financial Services finalized regulations that would require
companies dealing with the buy, sell, transfer or storage of bitcoins to record
the identity of customers, have a compliance officer and maintain capital
reserves. The transactions worth $10,000 or more will have to be recorded and
The lack of uniform regulations about
bitcoins (and other virtual currency) raises questions over their longevity,
liquidity, and universality.
Security Risk of Bitcoins
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 any of a number of popular online
markets known as Bitcoin exchanges. Bitcoin exchanges are entirely digital and,
as with any virtual system, are at risk from hackers, malware and operational
glitches. If a thief gains access to a Bitcoin owner’s computer hard drive and
steals his private encryption key, he could transfer the stolen Bitcoins to
another account. (Users can prevent this only if bitcoins are stored on a
computer which is not connected to the internet, or else by choosing to use a
paper wallet – printing out the Bitcoin private keys and addresses, and not
keeping them on a computer at all.) Hackers can also target Bitcoin exchanges,
gaining access to thousands of accounts and digital wallets where bitcoins are
stored. One especially notorious hacking incident took place in 2014, when Mt.
Gox, a Bitcoin exchange in Japan, was forced to close down after millions of
dollars worth of bitcoins were stolen.
This is particularly problematic once you
remember that all Bitcoin transactions are permanent and irreversible. It’s
like dealing with cash: Any transaction carried out with bitcoins can only be
reversed if the person who has received them refunds them. There is no third
party or a payment processor, as in the case of a debit or credit card – hence,
no source of protection or appeal if there is a problem.
Some investments are insured through the
Securities Investor Protection Corporation. Normal bank accounts are insured
through the Federal Deposit Insurance Corporation (FDIC) up to a certain amount
depending on the jurisdiction. Generally speaking, Bitcoin exchanges and
Bitcoin accounts are not insured by any type of federal or government program.
In 2019, prime dealer and trading platform SFOX announced it would be able to
provide Bitcoin investors with FDIC insurance, but only for the portion of
transactions involving cash.
Risk of Bitcoin Fraud
While Bitcoin uses private key encryption
to verify owners and register transactions, fraudsters and scammers may attempt
to sell false bitcoins. For instance, in July 2013, the SEC brought legal
action against an operator of a Bitcoin-related Ponzi scheme. There have also
been documented cases of Bitcoin price manipulation, another common form of
Like 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 has a high sensitivity to “news.” According to the CFPB, the
price of bitcoins fell by 61% in a single day in 2013, while the one-day price
drop record in 2014 was as big as 80%.
If fewer people begin to accept Bitcoin as
a currency, these digital units may lose value and could become worthless.
Indeed, there was speculation that the “Bitcoin bubble” had burst
when the price declined from its all-time high during the cryptocurrency rush
in late 2017 and early 2018. There is already plenty of competition, and though
Bitcoin has a huge lead over the hundreds of other digital currencies that have
sprung up, thanks to its brand recognition and venture capital money, a
technological break-through in the form of a better virtual coin is always a
Bitcoin’s Tax Risk
As bitcoin is ineligible to be included in
any tax-advantaged retirement accounts, there are no good, legal options to
shield investments from taxation.
years since Bitcoin launched, there have been numerous instances in which
disagreements between factions of miners and developers prompted large-scale
splits of the cryptocurrency community. In some of these cases, groups of
Bitcoin users and miners have changed the protocol of the Bitcoin network
itself. This process is known “forking” and usually results in the
creation of a new type of Bitcoin with a new name. This split can be a
“hard fork,” in which a new coin shares transaction history with
Bitcoin up until a decisive split point, at which point a new token is created.
Examples of cryptocurrencies that have been created as a result of hard forks
include Bitcoin Cash (created in August 2017), Bitcoin Gold (created in October
2017) and Bitcoin SV (created in November 2017). A “soft fork” is a
change to protocol which is still compatible with the previous system rules.
Bitcoin soft forks have increased the total size of blocks, as an example.