What is Bitcoin?

Bitcoin is a cryptocurrency, a form of electronic cash. It is a digital currency without a government or central bank behind it. Bitcoins can be sent from user to user directly, without the need for intermediaries. 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 using the name Satoshi Nakamoto and released as open-source software in 2009. Central banks decide how much of a currency to print but with Bitcoin no-one can just decide to make Bitcoins – they are created as a reward for a complex process known as “mining”.

There are millions of bitcoins in circulation and millions of users of Bitcoin.

Bitcoin has a bad reputation as the currency of criminals and a major use of Bitcoin is in buying and selling on the Dark web

The Origin of Bitcoin

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. Nakamoto implemented the Bitcoin software as open source code and released it in January 2009. The identity of Nakamoto is unknown.

Nakamoto mined the first block of the chain, known as the genesis block to crate the first bitcoins.

The receiver of the first bitcoin transaction was Hal Finney. Finney downloaded the bitcoin software on its release date, and received 10 bitcoins from Nakamoto.

Nakamoto is estimated to have mined (i.e. created) 1 million bitcoins before disappearing in 2010, when he handed the network alert key and control of the code repository over to Gavin Andresen who later became lead developer at the Bitcoin Foundation.

The Early Years

The first major users of bitcoin were black markets, such as Silk Road which exclusively accepted bitcoins as payment, transacting 9.9 million in bitcoins, worth about $214 million before it was shutdown by the FBI.

Bitcoins have no intrinsic value, are not linked to the value of any other currency or commodity and the price has been highly volatile since its inception.

In 2012 bitcoin prices started at $5.27 and the price rose to $7.38, but then crashed $3.80 within days. The roller-coaster ride for the price continued and it ended that year at $13.30

The Bitcoin Foundation was founded in September 2012 to promote its development and uptake.

Recent Years

In 2013 prices started at $13.30 rising to $770 by 1 January 2014, but by January 2015 was back down to $152.

In December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoins and that caused the price of Bitcoin to drop.

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. Prices remained low until late 2016.

In 2017 the price of Bitcoin went crazy, rising from $998 in January to $13,412.44 on 1 January 2018.

A Bitcoin mining operation Nicehash was broken into and $64 million in Bitcoins stolen. This is one of many significant thefts and some were large enough to drag down the value of Bitcoin.  In 2018 Coinrail, Bithumb and Bancor were broken into and Bitcoin stolen – hundreds of millions of dollars worth of Bitcoin. It might seem strange that a virtual currency can be stolen but the anonymity of Bitcoin means that anyone acquiring the private keys can take Bitcoin and the original  owner can do nothing about it.

Units

The unit of account of the bitcoin system is a bitcoin and two smaller amounts of bitcoin are defined.

The millibitcoin (mBTC) 0.001 bitcoins i.e. one thousandth of a bitcoin

The satoshi (sat) which was named in homage to bitcoin's creator, is the smallest amount within bitcoin representing 0.00000001 bitcoins, i.e. one hundred millionth of a bitcoin. 

Recent Years

In 2013 prices started at $13.30 rising to $770 by 1 January 2014, but by January 2015 was back down to $152.

In December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoins and that caused the price of Bitcoin to drop.

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. Prices remained low until late 2016.

In 2017 the price of Bitcoin went crazy, rising from $998 in January to $13,412.44 on 1 January 2018.

A Bitcoin mining operation Nicehash was broken into and $64 million in Bitcoins stolen. This is one of many significant thefts and some were large enough to drag down the value of Bitcoin.  In 2018 Coinrail, Bithumb and Bancor were broken into and Bitcoin stolen – hundreds of millions of dollars worth of Bitcoin. It might seem strange that a virtual currency can be stolen but the anonymity of Bitcoin means that anyone acquiring the private keys can take Bitcoin and the original  owner can do nothing about it.

Units

The unit of account of the bitcoin system is a bitcoin and two smaller amounts of bitcoin are defined.

The millibitcoin (mBTC) 0.001 bitcoins i.e. one thousandth of a bitcoin

The satoshi (sat) which was named in homage to bitcoin's creator, is the smallest amount within bitcoin representing 0.00000001 bitcoins, i.e. one hundred millionth of a bitcoin.

Mining

Mining is the process by which new Bitcoins can be created. It requires huge amounts of computer processing power and is not explained here. It is designed so that the more coins are in existence, the more difficult it becomes to create any more, so as to limit the number of Bitcoins that can be created and hence create a scarcity value for them.   

Total Bitcoins in Circulation.

Bitcoin's inventor Nakamoto set a monetary policy based on artificial scarcity at bitcoin's inception that there would only ever be 21 million bitcoins in total. Their numbers are being released roughly every ten minutes and the rate at which they are generated would drop by half every four years until all were in circulation.

If a private key is lost then the Bitcoins are effectively lost.  It is estimated that 20% of all Bitcoins created have been “lost”.

Approximately 1 million bitcoins have been stolen, which would have a value of about $7 billion at July 2018 prices.

Shopping with Bitcoin or Investing in Bitcoin

Few major retailers will accept Bitcoin as the price is too volatile.  However there are some companies that claim to accept Bitcoin although you may have problems actually trying to buy with Bitcoin. These companies include Subway, Virgin Atlantic, Expedia, Microsoft and others plus some individual retailers including coffee shops, pizza places etc. say they can accept Bitcoin.  

Investing in Bitcoin is highly speculative although it has made many millionaires.

Legal Status

Cyber currency is still fairly new and law makers are struggling to cope with the circumstances of Bitcoin and other cyber currencies.  Its decentralised nature makes regulation difficult.

The legal status of bitcoin varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed its use and trade, others have banned or restricted it.

Regulatory Warnings

The U.S. Commodity Futures Trading Commission, The U.S. Securities and Exchange Commission  and The European Banking Authority amongst others, have issued various warnings  to people about Bitcoin investments, trading in Bitcoin or having any dealings in Bitcoin.  Concerns include:-

l  the exchanges are not regulated or supervised by a government agency

l  the exchanges may lack system safeguards and customer protections

l  large price swings and "flash crashes"

l  market manipulation

l  theft and hacking

l  self-dealing by the exchanges

Advertising Bans

Bitcoin and other cryptocurrency advertisements are banned on Facebook, Google, Twitter, Bing, Snapchat, LinkedIn and MailChimp. Chinese internet platforms Baidu, Tencent, and Weibo have also prohibited bitcoin advertisements. The Japanese platform Line and the Russian platform Yandex have similar prohibitions.

Bitcoin Scams

There are numerous scams involving Bitcoin such as The Bitcoin Code scam – see https://fightback.ninja/the-bitcoin-code-scam/

For further information on Bitcoin refer to https://en.wikipedia.org/wiki/Bitcoin

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