What is Bitcoin?

Our guide to the world's most funded cryptocurrency

Despite the recent downturn in the cryptocurrency market, Bitcoin remains the most well-funded and most traded digital currency in the world.

Though it's just one of thousands of cryptocurrencies available, it's regarded as the token that brought the phenomenon to wider public attention, and much of the market's success hinges on the fortunes of Bitcoin.

Cryptocurrencies provide an alternative means to traditional banking and investment methods. As is the case with other digital currencies, Bitcoin operates entirely decentralised from institutional oversight, deviating markedly from fiat currencies that operate under strict financial regulation. Bitcoins are entirely virtual, existing in what many see as an unregulated wild west.

Spawned from the chaos that was the 2008 financial crash, cryptocurrencies offered disillusioned investors the opportunity to put their cash into something other than the banks that had lost the trust of millions of customers. Investors wanted to support something beyond the reach of financial institutions, whether that was out of genuine belief that a market could emerge, or simply to send a message to those that had wronged them.

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Despite the sudden growth, Bitcoin spent its early days in relative obscurity, with each full token worth only a few hundred dollars. Even after rising to $950 in early 2016, Bitcoin had yet to hit the mainstream media or capture the public's imagination.

It was in mid-2017 that Bitcoin really took off, with steady growth quickly accelerating to massive jumps in value. At this point, investors - both the big boys and those wanting to make quick money from their bedrooms - began to make thousands of dollars overnight and this meant an extremely lucrative way of making money outside of a day job. It was the same story across all digital currencies, with budding investors jumping on the opportunity to make money from nothing.

The biggest increase in Bitcoin's value happened in December 2017, with the leading digital currency rising to more than $19,800 per coin, overnight. This represented an increase of 1000% compared to the same period the previous year, meaning people could make serious short-term gains, with an almost guaranteed return on even the smallest investments.

But this quick rush to make money resulted in an extremely volatile period of investment and the dramatic rise in late 2017 led to a huge slump in mid-January 2017, with the value falling to $10,000 and then decreasing steadily over the following months. At the time of writing (late February 2019), the currency's value has fallen to less than $4,000 - its lowest rate for quite some time.

Who invented Bitcoin?

It's widely believed that the idea for Bitcoin was first proposed in 2008 by software developer Satoshi Nakamoto (most likely a pseudonym), who wanted to create a payment system based on mathematics. Nakamoto envisioned a currency that was designed specifically for online transactions, allowing for almost instantaneous transfers at a fraction of the cost.

How are bitcoins acquired?

Users are able to acquire Bitcoins in one of four ways:

1) As payment for sold goods or services 2) As a transfer from one person to another 3) Bought through a Bitcoin exchange 4) Competitive 'mining'

Unlike paper money, which is printed and distributed by government services, Bitcoin is 'mined' using software that solves complex mathematical problems. Every time a problem is solved, the network adds a new 'block' to a chain that is set at 1MB in size. With each solution, the miner is rewarded a number of bitcoins that remains constant. The number of Bitcoins generated per block started at 50, and has halved every 210,000 blocks, or every four years.

Today the reward is set at 12.5 Bitcoins, set to drop again in 2020. This represents a problem for Bitcoin miners, as hardware costs and substantial electricity bills are increasingly making mining unprofitable as the equations get increasingly complex.

Another problem facing Bitcoin is that as more people decide to join the mining community, the more difficult the mathematical problems need to be. An indeterminate number of new miners makes it impossible to accurately predict how long it will take to mine Bitcoin each month.

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Although 'mining' is the only way to actually create Bitcoins, today users will most likely purchase Bitcoins at a Bitcoin exchange. A number of marketplaces have popped up since the currency became popular, allowing people to buy and sell Bitcoins using other conventional currencies.

How is Bitcoin used?

Bitcoins are stored in a digital wallet that is saved to a user's PC or in the cloud. The wallet acts like a virtual bank account, allowing users to pay for goods and services by sending Bitcoins to another wallet.

The details of every Bitcoin transaction ever made are stored using blockchain, a system designed specifically for the use of Bitcoin that has since become widely popular for other services. The advantage of blockchain is that it provides a means to store information in a series of connected 'blocks' that update in real time. It's maintained by a peer-to-peer network, free of centralised management, and is almost impossible to edit. For more information head to our blockchain explainer.

Bitcoin is also incredibly easy to use, and there is no need to go through bank applications to set up an account. You are able to send and receive Bitcoins from anywhere in the world at any time, processed in minutes by the Bitcoin network. Transactions are also entirely anonymous, as you are not required to tie personal details to a Bitcoin account.

Where is Bitcoin accepted?

The list of services accepting the cryptocurrency is slowly expanding, particularly given its strong performance over the past year. There are a number of particularly high profile companies already making use of Bitcoin, including the Microsoft Windows and Xbox stores, Subway, Reddit, Expedia.com, gaming service Steam, and technology companies such as Dell and Tesla. 

Are there problems with using Bitcoin?

Despite using the highly robust blockchain system, security remains an issue. There have been a number of high profile hacks of Bitcoin services over the past few years, most notably the breach of one of the largest Bitcoin exchange services, Mt Gox, which lost almost 750,000 Bitcoins worth $350 million. As the transfer of Bitcoins is irreversible, breaches of this kind make it impossible to recover funds. 

The main issue with Bitcoin is its volatility. As it is almost impossible to predict the value of the currency in the long term, or to judge how difficult it will be to mine, there are still too many uncertainties for some. There is also concern that the network will become oversaturated and unusable, as more people flood the mining community and make Bitcoin mining too difficult.

What are Bitcoin forks?

Bitcoin's rise has been far from smooth. As the cryptocurrency is decentralised, its development is decided by reaching a consensus within its community. Over the past year two major 'forks' in Bitcoin, where community groups had different ideas about how to make improvements to Bitcoin's underlying blockchain, leading to the creation of new cryptocurrencies based on Bitcoin.

In August, a split over ways to improve Bitcoin transaction speeds resulted in the creation of Bitcoin Cash, a now separate cryptocurrency. Similarly, in October we saw the creation of Bitcoin Gold, conceived by a splinter group of developers that wanted to make it cheaper to mine the currency.

You would think these turbulent splits would've proved disastrous for Bitcoin, yet all signs suggest they did little to impede its momentum. Prices barely moved after the creation of Bitcoin Cash, and Bitcoin Gold has had even less impact so far. What's more, as each split allows Bitcoin to improve its blockchain, and as long as it's able to weather the fallout, these turbulent episodes are actually proving worthwhile.

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