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What is Bitcoin and how does it work?

Bitcoin () is a crtptocurrency and worldwidepayment system. It is the first decentralizeddigital currency, as the system works without a central bank or single administrator.The network ispeer-to-peer and transactions take place between users directly, without an intermediary.Bitcoins are created as a reward for a process known as mining.

The system enables payments to be sent between users without passing through a central authority, such as a bank or payment gateway. It is created and held electronically. Bitcoins aren’t printed, like dollars or euros – they’re produced by computers all around the world, using free software.

It was the first example of what we today call cryptocurrencies, a growing asset class that shares some characteristics of traditional currencies, with verification based on cryptography.

Bitcoin Creator

A pseudonymous software developer going by the name of Satoshi Nakamoto  proposed bitcoin in 2008, as an electronic payment system based on mathematical proof.

Nakamoto implemented the bitcoin software as open  source code and released it in January 2009 on source forge. The identity of Nakamoto remains unknown.

In January 2009, the bitcoin network came into existence after Satoshi Nakamoto mined the first ever block on the chain, known as the genesis block.] Embedded in the coin base of this block was the following text:

Cryptocurrency

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.

In what ways is it different from traditional currencies?

Bitcoin can be used to pay for things electronically, if both parties are willing. In that sense, it’s like conventional dollars, euros, or yen, which are also traded digitally.

1.Decentralization

Bitcoin was designed not to need a central authority and the bitcoin network is considered to be decentralized. However, researchers have pointed out a visible “trend towards centralization” by the means of miners joining large  mining pools to minimise the variance of their income.

2.Divisibility

The smallest unit of a bitcoin is called a satoshi. It is one hundred millionth of a bitcoin (0.00000001) – at today’s prices, about one hundredth of a cent. This could conceivably enable microtransactions that traditional electronic money cannot.

3.Fungibility

Wallets and similar software technically handle all bitcoins as equivalent, establishing the basic level of fungibility. Researchers have pointed out that the history of each bitcoin is registered and publicly available in the blockchain ledger, and that some users may refuse to accept bitcoins coming from controversial transactions, which would harm bitcoin’s fungibility.

4.Limited supply

Fiat currencies (dollars, euros, yen, etc.) have an unlimited supply – central banks can issue as many as they want, and can attempt to manipulate a currency’s value relative to others. Holders of the currency (and especially citizens with little alternative) bear the cost.

5.Privacy

Bitcoin is Pseudonym, 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 blockchain are public.

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Legal status, tax and regulation

Because of bitcoin’s decentralized nature, nation-states cannot shut down the network or alter its technical rules. However, the use of bitcoin can be criminalized, and shutting down exchanges and the peer-to-peer economy in a given country would constitute a “de facto ban”. 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. Regulations and bans that apply to bitcoin probably extend to similar cryptocurrency systems.

Criminal activity

The use of bitcoin by criminals has attracted the attention of financial regulators, legislative bodies, law enforcement, and the media. In the United States, the FBI prepared intelligence assessment,  the SEC issued a pointed warning about investment schemes using virtual currencies, and the  United States Senate. held held a hearing on virtual currencies in November 2013.

Several news outlets have asserted that the popularity of bitcoins hinges on the ability to use them to purchase illegal goods. In 2014, researchers at the University of Kentucky found “robust evidence that computer programming enthusiasts and illegal activity drive interest in bitcoin, and find limited or no support for political and investment motives”.

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