What Is Bitcoin?
Bitcoin (BTC) 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. This removes the need for trusted third-party involvement (e.g., a mint or bank) in financial transactions. It is rewarded to blockchain miners who 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.
Read on to 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 and its ledger are secured by the number of participants in its network and in the way the system confirms and verifies transactions.
- Bitcoin can be purchased on various cryptocurrency exchanges.
- Bitcoin’s history as a store of value has been turbulent; it has undergone several boom and bust cycles over its relatively short lifespan.
Julie Bang
Understanding Bitcoin
In August 2008, the domain name Bitcoin.org was registered. It was created by Satoshi Nakamoto and Martti Malmi, who worked with the anonymous Nakamoto to develop Bitcoin.
Origin
In October 2008, a person or group using the false name Satoshi Nakamoto announced to 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.” The 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.
First Block
On Jan. 3, 2009, the first Bitcoin block was mined. Called 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.
Rewards
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. The next halving is expected to occur sometime in 2024, bringing the reward down to 3.125 bitcoins.
Denominations
One bitcoin is divisible to eight decimal places (100 millionths of one bitcoin), and this smallest unit is referred to as a satoshi.
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 began.
Bitcoin’s Blockchain Technology
The btc meaning as a form of digital currency isn’t hard 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. By contrast, the way Bitcoin actually works is very complex.
Blockchain
A blockchain is a distributed ledger, a shared database of information that is chained together via cryptographic techniques. “Distributed” means that it is stored on many computers rather than on a centralized server, as is typical of data storage.
A network of automated programs installed on these computers maintains the blockchain and performs the functions necessary for it to operate.
A block on a blockchain can be compared to a cell in a spreadsheet that contains a block header, transaction counter, and the transactions recorded in the block. The transaction counter lists how many transactions are in the block, while the block header is made up of several elements:
- Software version: Which version the blockchain is running
- Previous block hash: The encrypted information from the previous block
- Merkle root: A single hash (encrypted information) that contains all the hashed information from previous transactions
- Timestamp: The time the block was opened
- Difficulty target: The current network difficulty problem miners are attempting to solve for
- Nonce: Short for “number used once,” which is used to solve the mining problem and open the block.
As noted, each block contains the hashed information of the previous block. This creates a chain of encrypted blocks that contains information from all those blocks, going back to the first block of the blockchain.
Data that was linked—or chained—from block to block led to the distributed ledger being called a blockchain.
Encryption
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 (78-digit) hexadecimal number. That number contains all the transaction data and information linked to the blocks before that block.
How To Mine Bitcoin
A variety of hardware and software can be used to mine bitcoin. When the Bitcoin blockchain 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 individually using a home computer are minuscule.
This is because you’re competing with a network of miners that generate around 560 quintillion hashes (as of Feb. 24, 2024) per second. Machines—called Application Specific Integrated Circuits (ASICs) built specifically for mining—can generate more than 300 trillion hashes per second. In contrast, a computer with the latest hardware hashes around 100 megahashes per second (100 million).
Options for Successful Mining
To become a successful bitcoin miner, you have several options.
1. You can use your existing computer and mining software compatible with Bitcoin software and join a mining pool. Mining pools are groups of miners that combine their computational power to compete with large ASIC mining farms.
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. Some of the most popular pools are Foundry Digital, Antpool, F2Pool, ViaBTC, and Binance.com.
2. If you have the financial means, you could purchase an ASIC miner. You can generally find a new one for around $10,000, 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. Keep in mind using one or two ASICs is still no guarantee of rewards as you’re competing with large mining farms of hundreds, if not thousands, of ASICs.
You can increase your chances of being rewarded bitcoins by joining a pool, but rewards are significantly decreased because they are shared. When choosing a pool, it’s important to make sure to find out how it pays out rewards, what any fees might be, and to read some mining pool reviews.
How To Buy Bitcoin
If you don’t want to mine bitcoin, you can buy it using a cryptocurrency exchange. Most people will be unable to purchase an entire BTC because of its price, but you can buy portions of one BTC on these exchanges in fiat currency, such as U.S. dollars.
For example, you can buy bitcoin on Coinbase by creating and funding an account using your bank account, credit card, or debit card. The following video explains more about buying bitcoin.
How To Use Bitcoin
Bitcoin was initially designed and released as a peer-to-peer payment method. However, its use cases are growing due to its increasing value, competition from other blockchains and cryptocurrencies, and developments on blockchains that process information for the Bitcoin blockchain.
Payment
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.
To use your bitcoin, you need to have a cryptocurrency wallet. Wallets are your blockchain interface and can hold the private keys to the bitcoins that you own. These keys must be entered when you’re conducting a transaction.
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 as long-term investments. Traders began using cryptocurrency exchanges to make short-term trades, and the market took off.
After reaching a high of about $69,000 in November 2021, bitcoin’s price crashed in 2022. In March 2022, it was as high as $47,454 but by November it was $15,731. It then recovered in 2023, seeing a price as high as $31,474 before dropping back below $30,000.
In early 2024, bitcoin’s price jumped into the mid $40,000s as expectations grew for Bitcoin Spot ETFs’ approval. By mid-February 2024, after the ETFs were approved, bitcoin’s price climbed to more than $50,000.
Bitcoin prices tend to follow stock market trends because bitcoin is treated the same way that investors treat other investments. However, bitcoin price movements are greatly exaggerated and sometimes are prone to movements of thousands of dollars. Many bitcoin investors tend to “trade the news,” as demonstrated by the fluctuations that occur whenever there is a significant news event.
Risks of Investing in Bitcoin
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 $69,000 in November 2021. It then fell over the next few months to hover around $40,000.
As a result of such price movements, 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 mean its purchase and use carry several inherent risks.
In fact, many investor alerts issued by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the Consumer Financial Protection Bureau (CFPB) concern bitcoin investing.
Here are some of the risks that you’re exposed to when trading or investing in bitcoin:
- Regulatory risk: The continuous battle between cryptocurrency-related projects and regulators makes longevity and liquidity an unknown. As of February 2024, bitcoin is not considered a security by the authorities, but that stance could change in the future.
- 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 cryptocurrency exchanges. These exchanges are entirely digital and are at risk from hackers, malware, and operational glitches.
- Insurance risk: Bitcoin and other cryptocurrencies are not insured by the Securities Investor Protection Corporation (SIPC) or the Federal Deposit Insurance Corporation (FDIC). However, some exchanges provide insurance through third parties. For instance, Gemini and Coinbase offer cryptocurrency insurance, but only for failures in their systems or cybersecurity breaches. Any cash deposits you’ve made at either exchange might be eligible for “pass-through” FDIC coverage.
- Fraud risk: Even with the security measures inherent within a blockchain, there are still opportunities for fraudulent activity.
- Market risk: As with any investment, bitcoin values can fluctuate. Indeed, the currency’s value has seen wild price swings over its short existence. Subject to high volume buying and selling on exchanges, it is highly sensitive to any newsworthy events.
Regulating Bitcoin
As with any new technology, it has been difficult to regulate bitcoin. The U.S. administration seeks to impose regulations on bitcoin but, at the same time, walks a tightrope in trying not to throttle a growing and economically beneficial industry.
Enforcement agencies in the U.S. continue to rely on existing securities, commodities, and tax laws, but as of February 2024, no attempts from legislators have gained much attention from the country’s law-making bodies.
The European Commission put its long-anticipated Markets in Crypto Assets legislation into force in 2023, setting the stage for cryptocurrency regulations in the European Union.
India banned several exchanges in December 2023 and continues to push back reviews of any legislation regarding bitcoin and other cryptocurrencies.
How Long Does It Take To Mine One 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. The block reward halves every four years, so when the next halving occurs in mid-2024, the reward will be 3.125 BTC every 10 minutes.
Is Bitcoin a Good Investment?
Bitcoin has a short investment history that is 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 consider consulting with a financial professional before investing in cryptocurrency to ensure that it is right for your circumstances.
How Does Bitcoin Make Money?
Miners on the Bitcoin network can be rewarded by successfully opening blocks. Bitcoins are exchangeable for fiat currency via cryptocurrency exchanges. Investors and speculators can make money from trading bitcoins.
How Many Bitcoins Are Left?
The total number of bitcoins in existence was 19.64 million on Feb. 24, 2024. At that time, the number left to be mined was about 1.36 million.
The Bottom Line
Bitcoin was the first cryptocurrency introduced to the public and is intended to be used as a form of payment outside of legal tender. Since its introduction in 2009, bitcoin’s popularity has surged, and its blockchain uses have expanded.
Though the process of generating bitcoin is complex, investing in it is more straightforward. Investors and speculators can buy and sell bitcoin on crypto exchanges. As with any investment, particularly one as new and volatile as bitcoin, investors should carefully consider if bitcoin is the right investment for them.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.
