What is Bitcoin? What is it used for and how to get it? Here is all you need to know if you are new to the world of digital currency.
Bitcoin (₿) is a cryptocurrency.
A cryptocurrency is a decentralized digital currency without a central bank or single administrator. It can be sent from user-to-user on the peer-to-peer Bitcoin network without the need for intermediaries.
Read more on What is cryptocurrency and why do we need it?
Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain. Bitcoin was invented by an unknown person or group of people using the name Satoshi Nakamoto and released as open-source software in 2009.
Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services.
Research produced by the University of Cambridge estimates that in 2017, there were 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using Bitcoin.
Bitcoin has been criticized for its use in illegal transactions, its high electricity consumption, price volatility, thefts from exchanges, and the possibility that Bitcoin is an economic bubble. Bitcoin has also been used as an investment, although several regulatory agencies have issued investor alerts about Bitcoin.
When was Bitcoin created?
The domain name “bitcoin.org” was registered on 18 August 2008. In November 2008, a link to a paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list. Satoshi implemented the Bitcoin software as open source code and released it in January 2009. Satoshi’s identity remains unknown.
Read the Bitcoin: A Peer-to-Peer Electronic Cash System whitepaper.
In January 2009, the Bitcoin network was created when Satoshi mined the first block of the chain, known as the genesis block. Embedded in the coinbase of this block was the following text: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” This note has been interpreted as both a timestamp and a comment on the instability caused by fractional-reserve banking.
The receiver of the first Bitcoin transaction was cypherpunk Hal Finney, who created the first reusable proof-of-work system (RPOW) in 2004. Finney downloaded the bitcoin software on its release date, and on 12 January 2009 received ten Bitcoins from Nakamoto. Other early cypherpunk supporters were creators of Bitcoin predecessors: Wei Dai, creator of b-money, and Nick Szabo, creator of bit gold.
In 2010, the first known commercial transaction using Bitcoin occurred when programmer Laszlo Hanyecz bought two Papa John’s pizzas for 10,000 Bitcoin.
Satoshi is estimated to have mined one million bitcoins before disappearing in 2010, when he handed the network alert key and control of the code repository over to Gavin Andresen. Andresen later became lead developer at the Bitcoin Foundation. Andresen then sought to decentralize control. This left opportunity for controversy to develop over the future development path of Bitcoin.
First Bitcoin years
After early “proof-of-concept” transactions, the first major users of Bitcoin were black markets, such as Silk Road. During its 30 months of existence, beginning in February 2011, Silk Road exclusively accepted Bitcoins as payment, transacting 9.9 million in Bitcoins, worth about $214 million.
In 2011, the price started at $0.30 per Bitcoin, growing to $5.27 for the year. The price rose to $31.50 on 8 June. Within a month the price fell to $11.00. The next month if fell to $7.80, and in another month to $4.77.
Litecoin, an early Bitcoin spin-off or altcoin, appeared in October 2011. Many altcoins have been created since then.
In 2012 Bitcoin prices started at $5.27 growing to $13.30 for the year. By 9 January the price had risen to $7.38, but then crashed by 49% to $3.80 over the next 16 days. The price then rose to $16.41 on 17 August, but fell by 57% to $7.10 over the next three days.
The Bitcoin Foundation was founded in September 2012 to promote Bitcoin’s development and uptake.
The rising of Bitcoin
In 2013 prices started at $13.30 rising to $770 by 1 January 2014.
In March 2013 the blockchain temporarily split into two independent chains with different rules. The two blockchains operated simultaneously for six hours, each with its own version of the transaction history. Normal operation was restored when the majority of the network downgraded to version 0.7 of the Bitcoin software.
The Mt. Gox exchange briefly halted Bitcoin deposits and the price dropped by 23% to $37 before recovering to the previous level of approximately $48 in the following hours. The US Financial Crimes Enforcement Network (FinCEN) established regulatory guidelines for “decentralized virtual currencies” such as bitcoin, classifying American bitcoin miners who sell their generated bitcoins as Money Service Businesses (MSBs), that are subject to registration or other legal obligations.
In April, exchanges BitInstant and Mt. Gox experienced processing delays due to insufficient capacity resulting in the bitcoin price dropping from $266 to $76 before returning to $160 within six hours. The Bitcoin price rose to $259 on 10 April, but then crashed by 83% to $45 over the next three days.
On 15 May 2013, US authorities seized accounts associated with Mt. Gox after discovering it had not registered as a money transmitter with FinCEN in the US. On 23 June 2013, the US Drug Enforcement Administration (DEA) listed 11.02 Bitcoins as a seized asset in a United States Department of Justice seizure notice pursuant to 21 U.S.C. § 881.
This marked the first time a government agency had seized Bitcoin. The FBI seized about 26,000 Bitcoins in October 2013 from the dark web website Silk Road during the arrest of Ross William Ulbricht. Bitcoin’s price rose to $755 on 19 November and crashed by 50% to $378 the same day. On 30 November 2013 the price reached $1,163 before starting a long-term crash, declining by 87% to $152 in January 2015.
On 5 December 2013, the People’s Bank of China prohibited Chinese financial institutions from using Bitcoins.
After the announcement, the value of bitcoins dropped, and Baidu no longer accepted bitcoins for certain services. Buying real-world goods with any virtual currency had been illegal in China since at least 2009.
In 2014 prices started at $770 and fell to $314 for the year. In February 2014 the Mt. Gox exchange, the largest bitcoin exchange at the time, said that 850,000 bitcoins had been stolen from its customers, amounting to almost $500 million. Bitcoin’s price fell by almost half, from $867 to $439 (a 49% drop). Prices remained low until late 2016.
In 2015 prices started at $314 and rose to $434 for the year. In 2016 prices rose to $998 on 1 January 2017.
2017 – The year when everybody found out about Bitcoin
Prices started at $998 in 2017 and rose to $13,412.44 on 1 January 2018. On 17 December bitcoin’s price reached an all-time high of $19,666.
China banned trading in Bitcoin, with the first steps taken in September 2017, and a complete ban starting 1 February 2018. Bitcoin prices then fell from $9,052 to $6,914 on 5 February 2018. The percentage of Bitcoin trading in Chinese yuan fell from over 90% in September 2017 to less than 1% in June.
Throughout the rest of the first half of 2018, Bitcoin’s price fluctuated between $11,480 and $5,848. On 1 July 2018 Bitcoin’s price was $6,469.
Bitcoin prices were negatively affected by several hacks or thefts from cryptocurrency exchanges, including thefts from Coincheck in January 2018, Coinrail and Bithumb in June, and Bancor in July. For the first six months of 2018, $761 million worth of cryptocurrencies was reported stolen from exchanges. Bitcoin’s price was affected even though other cryptocurrencies were stolen at Coinrail and Bancor, as investors worried about the security of cryptocurrency exchanges.