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Bitcoin is a payment system introduced as open-source software in 2009 by developer Satoshi Nakamoto. The payments in the system are recorded in a public ledger using its own unit of account, which is also called bitcoin. Payments work peer-to-peer without a central repository or single administrator, which has led the US Treasury to call bitcoin a decentralized virtual currency. Although its status as a currency is disputed, media reports often refer to bitcoin as a cryptocurrency or digital currency.
Bitcoins are created as a reward for payment processing work in which users offer their computing power to verify and record payments into the public ledger. Called mining, individuals or companies engage in this activity in exchange for transaction fees and newly created bitcoins. Besides mining, bitcoins can be obtained in exchange for fiat money, products, and services. Users can send and receive bitcoins electronically for an optional transaction fee using wallet software on a personal computer, mobile device, or a web application.
Bitcoin as a form of payment for products and services has seen growth,and merchants have an incentive to accept the digital currency because fees are lower than the 2-3% typically imposed by credit card processors. The European Banking Authority has warned that bitcoin lacks consumer protections.
Learn MoreBitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part. Through many of its unique properties, Bitcoin allows exciting uses that could not be covered by any previous payment system.
Learn MoreUnlike credit cards, any fees are paid by the purchaser not the vendor. Bitcoins can be stolen and chargebacks are impossible. Commercial use of bitcoin is currently small compared to its use by speculators, which has fueled price volatility.
Bitcoin has been a subject of scrutiny amid concerns that it can be used for illegal activities. In October 2013 the US FBI shut down the Silk Road online black market and seized 144,000 bitcoins worth US$28.5 million at the time. The US is considered bitcoin-friendly compared to other governments. In China, buying bitcoins with yuan is subject to restrictions, and bitcoin exchanges are not allowed to hold bank accounts.
A Satoshi is the smallest fraction of a Bitcoin that can currently be sent: 0.00000001 BTC, that is, a hundredth of a millionth BTC.
Bitcoin mining is the process by which bitcoin's public ledger blockchain is built. Mining operation ensures transactions to be added to the blockchain as well as reward miners with bitcoin. Mining operation is a complex mathematical calculation (known as hashing) which requires computational power (known as hash power) to be solved. More the hash power one has, more is the probability of getting the solution faster than others and thereby winning more bitcoin.
Learn MoreDifficulty is a measure of how difficult it is to find a hash below a given target.
The Bitcoin network has a global block difficulty. Valid blocks must have a hash below this target. Mining pools also have a pool-specific share difficulty setting a lower limit for shares.
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