Bitcoin works through the collaboration of computers, each of which acts as anode in thepeer-to-peerbitcoin network. Each node maintains an independent copy of a publicdistributed ledger of transactions, called ablockchain, without central oversight. Transactions are validated through the use ofcryptography, making it practically impossible for one person to spend another person's bitcoin, as long as the owner of the bitcoin keeps certain sensitive data secret.[7]: ch. 5
Consensus between nodes about the content of the blockchain is achieved using a computationally intensive process based onproof of work, calledmining, which is typically performed by purpose-built computers called miners. These miners don't directly act as nodes, but do communicate with nodes. The mining process is primarily intended to preventdouble-spending and get all nodes to agree on the content of the blockchain, but it also has desirable side-effects such as making it infeasible for adversaries to stifle valid transactions or alter the historical record of transactions, since doing so generally requires the adversary to have access to more mining power than the rest of the network combined.[7]: ch. 12 It is also used to regulate the rate at which new bitcoin is issued and enters circulation. Mining consumes large quantities of electricity and has been criticized forits environmental impact.[10]
Bitcoin logos made by Satoshi Nakamoto in 2009 (left) and 2010 (right).
The domain namebitcoin.org was registered on 18 August 2008.[15] On 31 October 2008, a link to awhite paper authored bySatoshi Nakamoto titledBitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list.[16] Nakamoto implemented the bitcoin software asopen-source code and released it in January 2009.[6] Nakamoto's identity remains unknown.[5] According to computer scientistArvind 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][17] Nakamoto's paper was notpeer 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 thegenesis block.[18] Embedded in this block was the text "The Times 03/Jan/2009 Chancellor on brink ofsecond bailout for banks", which is the date and headline of an issue ofThe Times newspaper.[6] Nine days later, Hal Finney received the first bitcoin transaction: ten bitcoins from Nakamoto.[19] Wei Dai and Nick Szabo were also early supporters.[18] On May 22, 2010, the first knowncommercial transaction using bitcoin occurred when programmer Laszlo Hanyecz bought twoPapa John's pizzas for ₿10,000, in what would later be celebrated as "Bitcoin Pizza Day".[20]
After early "proof-of-concept" transactions, the first major users of bitcoin wereblack markets, such as thedark 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.[25]: 222
2013–2014: First regulatory actions
In March 2013, the USFinancial Crimes Enforcement Network (FinCEN) established regulatory guidelines for "decentralized virtual currencies" such as bitcoin, classifying American bitcoin miners who sell their generated bitcoins asmoney services businesses, subject to registration and other legal obligations.[26] In May 2013, US authorities seized the unregisteredexchangeMt. Gox.[27] In June 2013, the USDrug Enforcement Administration seized ₿11.02 from an individual attempting to use them to purchase illicit drugs. This marked the first time a government agency had seized bitcoins.[28] The FBI seized about ₿30,000 in October 2013 from Silk Road, following the arrest of its founderRoss Ulbricht.[29]
In December 2013, thePeople's Bank of China prohibited Chinese financial institutions from using bitcoin.[30] After the announcement, the value of bitcoin dropped,[31] andBaidu no longer accepted bitcoins for certain services.[32] Buying real-world goods with any virtual currency had been illegal in China since at least 2009.[33]
In February 2018, the price crashed after China imposed a complete ban on bitcoin trading.[38] The percentage of bitcoin trading in the Chineserenminbi fell from over 90% in September 2017 to less than 1% in June 2018.[39] During the same year, bitcoin prices were negatively affected by several hacks or thefts from cryptocurrency exchanges.[40]
In early 2022, during theCanadian trucker protests opposingCOVID-19 vaccine mandates, organizers turned to bitcoin to receive donations after traditional financial platforms restricted access to funding.[50][51] Proponents highlighted bitcoin's use as a tool for fundraising in situations where access to conventional financial systems may be restricted.[52][53] In May and June 2022, the bitcoin price fell following the collapses ofTerraUSD, astablecoin,[54] and theCelsius Network, a cryptocurrency loan company.[55][56]
In 2023, ordinals—non-fungible tokens (NFTs)—on bitcoin, went live.[57] As of June 2023, River Financial estimated that bitcoin had 81.7 million users, about 1% of the global population.[58] In January 2024, the first 11 USspot bitcoinETFs began trading, offering direct exposure to bitcoin for the first time on American stock exchanges.[59][60] In December 2024, bitcoin price reached $100,000 for the first time, asUS president-electDonald Trump promised to make the US the "crypto capital of the planet" and to stockpile bitcoin.[61] The same month,BlackRock, the world's largestasset manager, recommended investors to allocate up to 2% of theirportfolio to bitcoin.[62]
Theunit of account of the bitcoin system is thebitcoin. It is most commonly represented with thesymbol ₿[1] and thecurrency code BTC. However, the BTC code does not conform toISO 4217 as BT is the country code of Bhutan,[64] and ISO 4217 requires the first letter used in global commodities to be 'X'.[64] XBT, a code that conforms toISO 4217 though not officially part of it,[64] is used byBloomberg L.P.[65]
One bitcoin is divisible to eight decimal places.[7]: ch. 5 Units for smaller amounts of bitcoin are the millibitcoin (mBTC), equal to1⁄1000 bitcoin, and the satoshi[a] (sat), representing1⁄100000000 (one hundred millionth) bitcoin, the smallest amount possible.[2] 100,000 satoshis are one mBTC.[69]
As adecentralized system, bitcoin operates without a central authority or single administrator,[70] so that anyone can create a new bitcoin address and transact without needing any approval.[7]: ch. 1 This is accomplished through a specializeddistributed ledger called ablockchain that records bitcoin transactions.[71]
The blockchain is implemented as an ordered list ofblocks. Each block contains aSHA-256hash of the previous block,[71] chaining them in chronological order.[7]: ch. 7 [71] The blockchain is maintained by apeer-to-peer network.[25]: 215–219 Individual blocks, public addresses, and transactions within blocks are public information, and can be examined using a blockchain explorer.[72]
Nodes validate and broadcast transactions, each maintaining a copy of the blockchain for ownership verification.[73] 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 isspent only once. Unlike a traditional ledger that tracks physical currency, bitcoins exist digitally asunspent outputs of transactions.[7]: ch. 5
Addresses and transactions
Simplified chain of ownership. In practice, a transaction can have more than one input and more than one output.[74]
In the blockchain, bitcoins are linked to specificstrings called addresses. Most often, an address encodes ahash of a singlepublic key. Creating such 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.[7]: ch. 4 Publishing such 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 todigitally sign transactions, which are verified by the network using the public key, keeping the private key secret.[7]: ch. 5 An address may encode the hash of a bitcoin script that specifies more complex requirements to spend the funds. One common example is "multisig", in which multiple distinct private keys must mutually sign any transaction that attempts to spend the funds.[7]: ch. 7
Bitcoin transactions use aForth-likescripting language,[7]: 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.[74] 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.[74] Unallocated input satoshis in the transaction become the transaction fee.[74]
Losing a private key means losing access to the bitcoins, with no other proof of ownership accepted by theprotocol.[25] For instance, in 2013, a user lost ₿7,500, valued at US$7.5 million, by accidentally discarding ahard drive with the private key.[75] It is estimated that around 20% of all bitcoins are lost.[76] The private key must also be kept secret as its exposure, such as through adata breach, can lead to theft of the associated bitcoins.[7]: ch. 10 [77] As of December 2017[update], approximately ₿980,000 had been stolen fromcryptocurrency exchanges.[78]
Bitcoin miningfacility with large amounts of mining hardware
The mining process in bitcoin involves maintaining the blockchain through computerprocessing power. Miners group and broadcast new transactions into blocks, which are then verified by the network.[71] Each block must contain a proof of work (PoW) to be accepted,[71] involving finding anonce number that, combined with the block content, produces ahash numerically smaller than the network'sdifficulty target.[7]: ch. 8 This PoW is simple to verify but hard to generate, requiring many attempts.[7]: ch. 8 PoW forms the basis of bitcoin'sconsensus mechanism.[79]
The difficulty of generating a block isdeterministically adjusted based on themining 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 specializedhardware.[7]: ch. 8 [80]
Miners who successfully create a new block with a valid nonce can collect transaction fees from the included transactions and a fixed reward in bitcoins.[81] To claim this reward, a special transaction called acoinbase is included in the block, with the miner as the payee. All bitcoins in existence have been created through this type of transaction.[7]: ch. 8 This reward is halved every 210,000 blocks until ₿21 million[b] have been issued in total, which is expected to occur around the year 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.[82][74][7]: 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.[83][71] In case of disagreement, nodes trust the longest chain, which required the greatest amount of effort to produce.[79] To tamper or censor the ledger, one needs to control the majority of the globalhashrate.[79] The high cost required to reach this level of computational powersecures the bitcoin blockchain.[79]
Bitcoin ispseudonymous, 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.[89]Bitcoin exchanges might also need to collect personal data as per legal requirements.[90] For enhancedprivacy, users can generate a new address for each transaction.[91]
In the bitcoin network, each bitcoin is treated equally, ensuring basicfungibility. 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 forchain analysis, where users can identify and potentially reject bitcoins from controversial sources.[92] For example, in 2012, Mt. Gox froze accounts containing bitcoins identified as stolen.[93]
A paper wallet with the address as aQR code while the private key is hidden
A hardware wallet which processes bitcoin transactions without exposing private keys
Bitcoin wallets were the firstcryptocurrency wallets, enabling users to store the information necessary to transact bitcoins.[94][7]: ch. 1, glossary The first wallet program, simply namedBitcoin, and sometimes referred to as theSatoshi client, was released in 2009 by Nakamoto asopen-source software.[6]Bitcoin Core is among the best knownclients.Forks of Bitcoin Core exist such asBitcoin Unlimited.[95] Wallets can be full clients, with a full copy of the blockchain to check the validity of mined blocks,[7]: ch. 1 or lightweight clients, just to send and receive transactions without a local copy of the entire blockchain.[96] Third-party internet services, called online wallets or hot wallets, store users' credentials on their servers, making them susceptible of hacks.[97] Cold storage protects bitcoins from such hacks by keeping private keys offline, either through specialized hardware wallets or paper printouts.[98][7]: ch. 4
Nakamoto limited the block size to onemegabyte.[99] The limited block size and frequency can lead to delayed processing of transactions, increased fees and a bitcoin scalability problem.[100] TheLightning Network,second-layerrouting network, is a potential scaling solution.[7]: ch. 8
Research shows a trend towards centralization in bitcoin as miners joinpools for stable income.[25]: 215, 219–222 [101]: 3 If a single miner or pool controls more than 50% of thehashing power, it would allow them to censor transactions and double-spend coins.[70] In 2014, mining poolGhash.io reached 51% mining power, causing safety concerns, but later voluntarily capped its power at 39.99% for the benefit of the whole network.[102] A few entities also dominate other parts of the ecosystem such as the client software, online wallets, and simplified payment verification (SPV) clients.[70]
According to theEuropean Central Bank, the decentralization of money offered by bitcoin has its theoretical roots in theAustrian school of economics, especially withFriedrich Hayek'sThe Denationalisation of Money, in which he advocates a completefree market in the production, distribution and management of money to end the monopoly ofcentral banks.[103]: 22 SociologistNigel Dodd argues that the essence of the bitcoin ideology is to remove money from social, as well as governmental, control.[104]The Economist describes bitcoin as "atechno-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".[105] These philosophical ideas initially attractedlibertarians andanarchists.[106] EconomistPaul Krugman argues that cryptocurrencies like bitcoin are only used by bank skeptics and criminals.[107]
Money serves three purposes: astore of value, amedium of exchange, and aunit of account.[108] According toThe Economist in 2014, bitcoin functions best as a medium of exchange.[108] 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".[109] However, a 2018 assessment byThe Economist stated that cryptocurrencies met none of these three criteria.[105] Per some researchers, as of 2015[update], bitcoin functions more as apayment system than as a currency.[25] In 2014, economistRobert J. Shiller wrote that bitcoin has potential as a unit of account for measuring the relative value of goods, as with Chile'sUnidad de Fomento, but that "Bitcoin in its present form... doesn't really solve any sensible economic problem".[110] François R. Velde, Senior Economist at theChicago Fed, described bitcoin as "an elegant solution to the problem of creating a digital currency".[111] David Andolfatto, Vice President at theFederal Reserve Bank of St. Louis, stated that bitcoin is a threat to the establishment, which he argues is a good thing for theFederal Reserve System and othercentral banks, because it prompts these institutions to operate sound policies.[112]
Thelegal 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 ade facto ban.[113] Theuse of bitcoin by criminals has attracted the attention of financial regulators, legislative bodies, and law enforcement.[114] Nobel-prize winning economistJoseph Stiglitz says that bitcoin's anonymity encouragesmoney laundering and other crimes.[115] This is the main justification behind bitcoin bans.[9] 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.[116][needs update] Bitcoin is onlylegal tender inEl Salvador.[4]
As of 2018[update], bitcoin is rarely used in transactions with merchants,[117] but it is popular topurchase illegal goods online.[118][119] Prices are not usually quoted in bitcoin and trades involve conversions intofiat currencies.[25] Commonly cited reasons for not using bitcoin include high costs, the inability to processchargebacks, highprice volatility, long transaction times, andtransaction fees (especially for small purchases).[117][120]Bloomberg reported that bitcoin was being used for large-item purchases on the siteOverstock.com and for cross-border payments tofreelancers.[121] As of 2015[update], there was little sign of bitcoin use in internationalremittances despite high fees charged by banks andWestern Union who compete in this market.[25][122] Despite associated risks and costs, in 2022, a growing use of bitcoin, alongside cash and cards, was reported in restaurant business.[123]
Bitcoin is also used by some governments. For instance, theIranian government initially opposed cryptocurrencies, but later saw them as an opportunity to circumventsanctions.[129] Since 2020, Iran has required local bitcoin miners to sell bitcoin to theCentral Bank of Iran, allowing the central bank to use it for imports.[130] Someconstituent states also accept tax payments in bitcoin, includingColorado (US)[131] andZug (Switzerland).[132] As of 2023, the US government owned more than $5 billion worth of seized bitcoin.[133][134]
Use for investment and status as an economic bubble
Bitcoin, along with other cryptocurrencies, has been described as aneconomic bubble by several economists, includingNobel Prize in Economics laureates, such asJoseph Stiglitz,[148]James Heckman,[8] andPaul Krugman.[107] Another recipient of the prize,Robert Shiller, argues that bitcoin is rather afad that may become anasset class. He describes its price growth as an "epidemic", driven bycontagious narratives.[149] In 2024,Jean Tirole, also Nobel laureate, described bitcoin as a "pure bubble" as itsintrinsic value is zero. According to him, some bubbles are long-lasting such as gold and fiat currencies, and it's impossible to predict whether bitcoin will collapse like other financial bubbles or become the new gold.[150] The same year,Federal Reserve ChairJerome Powell described bitcoin as a digital competitor to gold but not to the dollar as he argued it is a highly volatilespeculative asset not used as a form of payment.[151]
Other economists, investors, and thecentral bank of Estonia have described bitcoin as a potentialPonzi scheme.[156][157][158] Legal scholarEric Posner disagrees, however, as "a real Ponzi scheme takes fraud; bitcoin, by contrast, seems more like a collectivedelusion".[159] A 2014World Bank report also concluded that bitcoin was not a deliberate Ponzi scheme.[160]
^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. Retrieved7 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. Retrieved24 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. Retrieved24 November 2023.
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^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.
^"Bitcoin breaks $100,000 barrier amid post-election cryptocurrency surge".Washington Post. Retrieved5 December 2024."People use bitcoin as a speculative asset. It's like gold, it's just like gold, only it's virtual, it's digital. People are not using it as a form of payment or a store of value," he said. "It's highly volatile. It's not a competitor for the dollar; it's really a competitor for gold."
