Bitcoin is the first large-scale digital, decentralized, and trustless system of value. It is also the largest cryptocurrency by market cap and the system on which most other cryptocurrencies are based on.
A distributed process called mining is used to validate transactions on the network as well as to introduce new bitcoins into the economy. Any system running the Bitcoin software can be used for mining. Miners are rewarded for validating transactions with the new bitcoins, with the total number of bitcoins in circulation never to exceed 21 million.
Anyone can use the network to send and receive bitcoins, the unit of value on the peer-to-peer Bitcoin network. Transactions are pseudonymous, meaning every transaction is publically visible on the public ledger, called the blockchain, but no personal user information is tied to any public address.
The price of Bitcoin has experienced substantial fluctuations, which some critics have described as boom and bust cycles. A high point was reached at the end of 2017, and since then the price has stabilized considerably.
The Bitcoin software was released in 2009 by an individual or group named Satoshi Nakamoto. Before this, a whitepaper called Bitcoin: A Peer-to-Peer Electronic Cash System describing how the system would work and what problems with fractional reserve banking it would attempt to solve.
A big early concern with Bitcoin and cryptocurrency was the potential for supporting criminal activity. Because all transactions are pseudonymous, it is relatively easy to mask one’s identity when using the system. One of the early adopters was the dark web marketplace Silk Road. In 2013, 26,000 bitcoins were seized from the founder of Silk Road after his arrest.
Despite the controversy surrounding Bitcoin, interest from investors and innovators continued to grow. Litecoin was the first altcoin based on Bitcoin, and since then technologies based on the software have steadily expanded the cryptocurrency ecosystem.
In December 2017, the price of Bitcoin reached an all-time high of $19,666 following a blitz of media attention and an infusion of new investors in the cryptocurrency. By February 2018 the price had fallen to around $5,000 and had since stabilized to between $6,000 and $8,000.
The main feature of the Bitcoin software is the blockchain. It’s a public record of all transactions made on the peer-to-peer network which takes the form of a chain of blocks. Block are groupings of transactions that are validated by miners and broadcast to all nodes running the Bitcoin software.
Nodes are copies of the ledger that can add new blocks to their chain and broadcast the changes to other network nodes. The distribution of nodes is what creates a consensus about when a coin was spent prevents double spending.
Miners validate transactions by running a proof-of-work algorithm that requires significant processing power to find a correct solution. These solutions are complicated to compute but easy for other nodes on the system to validate once calculated. Every ten minutes, a new block of validated transactions is created, and any miners that successfully confirm a transaction are awarded new bitcoins.
Anyone can be a miner. The system is designed to prevent any single entity from gaining more than 50% control of the system. It allows them to rewrite the history of transactions and double-spend coins.
Ownership of bitcoins is determined by public/private key cryptography. Each user has a private key associated with their ownership of bitcoins on the blockchain. Public keys are generated from the private key, and it is near impossible to determine the private key of a user based on their public key, making these keys very secure. To send a bitcoin, a user must know the public key of the recipient. The user must digitally sign the transaction with their private key. This can be done using a piece of software called a bitcoin wallet.
While some merchants, especially online retailers such as Overstock.com, accept bitcoin as payment, high fees and price volatility make Bitcoin somewhat infeasible as a practical currency.
It is often used as an investment, with many investors making money by trading on the future value increase on the price of Bitcoin or by day trading.
The key innovation of the blockchain has enabled many other cryptocurrencies to build new and exciting ways of using this technology. These new functionalities include smart contracts, energy trading, prediction markets, video content hosting, social networks, and many other implementations.
There are many ways to purchase bitcoins, with varying degrees of security. The most popular method is to use an online or mobile wallet such as Coinbase. This provides the convenience of storing your public and private keys with a central server. But it is less secure because you have to put trust in the service to keep your information safe.
Hardware wallets store your keys offline in an external device such as a USB drive. While this is less convenient, if you are planning on significantly investing in Bitcoin, it is a much more secure method than online wallets. In addition to making it harder to spend your bitcoins, hardware wallets are also expensive.
Software wallets combine the convenience of an online wallet, with some of the security of a hardware wallet. Hackers can still gain access to your computer and thus your private keys. However, using a software wallet is more secure than keeping your keys in the cloud with an online or mobile wallet.
Paper wallets are generally a piece of paper with a QR code printed out that you can scan with a device to access your bitcoin. While considered very secure, there is still the risk of losing the paper wallet and thus losing access to your bitcoin
For those who prefer to deal in cash, you can head on over to your nearest Bitcoin atm. You still need to have some wallet to store your bitcoins after you purchase them from the atm. However, it’s a convenience method for those who don’t like using online payment processors.
Generally considered the grandfather of all cryptocurrencies, Bitcoin has gone through many growing pains. Many criticized the security of the system. There have been many high profile thefts of bitcoins from favorite exchanges and wallet services, as well as from individuals who did not keep their private key secure.
Some have also criticized the trend of centralization in the Bitcoin ecosystem. Online wallet services and payment processors commonly used today. But people are still putting their trust in third-parties to secure their data. This is precisely the issue that the Bitcoin creators were trying to solve.
Since mining is such a large processing power operation, many organizations have formed that group machines and people together to pool their computing resources and share in the rewards for creating valid blocks. If any group controls 51% of the processing power at the same time, there is a risk they could halt valid transactions, rewrite the blockchain, or double-spend coins.
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