WHAT IS BITCOIN – THE BASICS
Bitcoin is a digital asset and a payment system invented by Satoshi Nakamoto, who published the invention in 2008 and released it as open-source software in 2009.
The system is peer-to-peer and transactions take place between users directly, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called the blockchain, which uses bitcoin as its unit of account. Since the system works without a central repository or single administrator, the U.S. Treasury categorizes bitcoin as a decentralized virtual currency. Bitcoin is often called the first cryptocurrency, although prior systems existed and it is more correctly described as the first decentralized digital currency. Bitcoin is the largest of its kind in terms of total market value.
Bitcoins are created as a reward for payment processing work in which users offer their computing power to verify and record payments into a public ledger. This activity is called mining and miners are rewarded with transaction fees and newly created bitcoins. Besides being obtained by mining, bitcoins can be exchanged for other currencies, products, and services.
In February 2015, the number of merchants accepting bitcoin for products and services passed 100,000. Instead of 2–3% fee typically imposed by credit card processors, merchants accepting bitcoins often pay fees in the range from 0% to less than 2%. The European Banking Authority and other sources have warned that bitcoin users are not protected by chargebacks. Countries such as the United States also recognize that bitcoin can provide legitimate financial services.
Funds are not tied to real-world!
Bitcoin is a pseudonymous currency, meaning that funds are not tied to real-world entities but rather bitcoin addresses. Owners of bitcoin addresses are not explicitly identified, but all transactions on the block chain are public. In addition, transactions can be linked to individuals and companies through “idioms of use” (e.g., transactions that spend coins from multiple inputs indicate that the inputs may have a common owner) and corroborating public transaction data with known information on owners of certain addresses. Additionally, bitcoin exchanges, where bitcoins are traded for traditional currencies, may be required by law to collect personal information.
To heighten financial privacy, a new bitcoin address can be generated for each transaction. For example, hierarchical deterministic wallets generate pseudorandom “rolling addresses” for every transaction from a single seed, while only requiring a single passphrase to be remembered to recover all corresponding private keys. Additionally, “mixing” services aggregate multiple users coins and output them to fresh addresses to increase privacy. Researchers at Stanford University and Concordia University have also shown that bitcoin exchanges and other entities can prove assets, liabilities, and solvency without revealing their addresses using zero-knowledge proofs.
Overall, without additional privacy-preserving measures, it has been suggested that bitcoin payments should not be considered more private than credit card payments.