What is Bitcoin? The Complete WIRED Guide | WIRED

Bitcoin is a digital currency. Like other currencies, you can use it to buy things from merchants that accept it, such as Overstock.com, or, as is more often the case, hold on to it in hopes that it will increase in value. Unlike traditional currencies, which rely on governments and central banks, no single entity controls bitcoin. Rather, it is supervised by a worldwide network of volunteers who maintain computers running specialized software. As long as people run bitcoin software, the currency will keep working, because everything needed to keep it working is stored in a distributed ledger called the blockchain. And even though it's all digital, bitcoin is scarce.

Its most wild-eyed proponents believe bitcoin's decentralized, cryptographic approach to currency can yield a host of benefits: limiting central bankers ability to damage economies by printing too much money; eliminating credit-card fraud; bringing the unbanked masses into the modern economy; giving people in unstable economies a safe place to park their money; and making it cheap and easy to transfer funds. But bitcoin has yet to realize these goals, and critics argue it may never live up to the hype.

When you send or receive bitcoin, your bitcoin software, referred to as a wallet, records the transaction in the blockchain. The blockchain is maintained by, and distributed across, the roughly 200,000 computers running bitcoin software. If someone tries to alter the ledger to make it look like they have more bitcoin than theyre supposed to, the tampering will be apparent because it won't match the other copies of the blockchain.

People who commit the computing resources to processing bitcoin transactions are paid in bitcoin, but only if the computers they operate are first to complete complex cryptographic puzzles in a process called "mining. New bitcoins are created automatically by the software and awarded to the winners of the race to solve these puzzles. As of February 2018, that award is 12.5 bitcoins. By design, only 21 million bitcoins will ever be created. Those who process transactions can also collect fees; the fees are optional and set by the person who initiates a transaction. The larger the fee, the faster the transaction will likely be completed. This system keeps bitcoin scarce while rewarding people for investing in the infrastructure required to keep a global payment-processing system running. But the mining process comes with a big catch: It uses an enormous amount of electricity.

Bitcoin is attracting more and more investors. In 2018, Goldman Sachs revealed that it plans to open a bitcoin trading unit, and the New York Stock Exchange is reportedly considering a bitcoin trading platform as well. But adoption of the cryptocurrency has been hobbled by a series of scandals, high-tech heists, and disputes over the software's design, all of which illustrate why financial regulations were created in the first place. The bitcoin community has solved some mind-boggling technological problems. But making bitcoin a true replacement for, or even adjunct to, the global financial system requires more than just great tech.

On Halloween 2008, someone using the name Satoshi Nakamoto sent an email to a crytography mailing list with a link to an academic paper about peer-to-peer currency. It didn't make much of a splash. Nakamoto was unknown in cryptography circles, and other cryptographers had proposed similar schemes before. Two months later, however, Nakamoto announced the first release of bitcoin software, proving it was more than just an idea. Anyone could download the software and start using it. And people did.

In the early days, bitcoin was used almost exclusively by cryptography geeks. A bitcoin sold for less than a penny. But the idea slowly caught on. Bitcoin emerged in the aftermath of the 2008 financial crisis when some peopleespecially free-market libertariansworried the Federal Reserve's attempts to increase the money supply would lead to runaway inflation.

Nakamoto disappeared from the internet before bitcoin attracted much mainstream attention. He handed control of the project to an early contributor named Gavin Andresen in December 2010 and quit posting to the public bitcoin forum. To this day, Nakamotos identity remains a mystery.

Before Satoshi disappeared, he handed control of bitcoin's source code to one of the project's earliest contributors, a Princeton alum and former 3D-graphics-software programmer based in Massachusetts named Gavin Andresen. Many have speculated that Andresen was Satoshi all along, but Andresen has repeatedly denied it.

One of the first attempts at identifying Satoshi was published in the New Yorker in 2011, In 2011when journalist Joshua Davis suggested that an Irish cryptographer named Michael Clear had the right mathematical and programming chops to build bitcoin. Clear denied being Satoshi and no other evidence has emerged to support the theory.

The most high-profile attempt at unmasking Satoshi came in March 2014, when a Newsweek cover story identified retired engineer Dorian Satoshi Nakamoto. Reporters swarmed Nakamoto's Temple City, California, home, but he soon explained that the article was based on a misunderstanding. Nakamoto, whose writing style is completely different from that of bitcoin's creator, had apparently confirmed to the magazine that hed been involved in bitcoin. But he later said he was unfamiliar with bitcoin and thought Newsweek was asking him about work he'd done for the US government decades prior.

Hal Finney, who died in August 2014, was the second bitcoin user after Satoshi himself, having received the first test transmission of the currency. He also happened to live just a few blocks from Dorian Nakamoto. But Finney convinced then-Forbes reporter and current WIRED reporter Andy Greenberg that he wasn't Satoshiand that Finney's proximity to Dorian Nakamoto was just a bizarre coincidenceby sharing a series of email exchanges he had with bitcoin's creator in 2009.

Another common theory is that Satoshi is Nick Szabo, a cryptographer who created a bitcoin predecessor called Bit Gold, thanks in part to a widely cited linguistic analysis conducted by researchers at Aston University in Birmingham, England. Like all but one other person on this list, Szabo denies that he is Satoshi.

In December 2015, WIRED reported that Australian academic Craig Steven Wright either created Bitcoin, or he is a brilliant hoaxer who desperately wanted the world to believe that he had. At one point, Wright even persuaded Andresen, who wrote that he was "convinced beyond a reasonable doubt" that Wright was Satoshi. But as skepticism mounted, Wright eventually gave up trying to prove that he was in fact the inventor of bitcoin.

The value of a bitcoin first hit $1 shortly after this transition, in February 2011. Then the price jumped to $29.60 in June 2011 after a Gawker story about the now-defunct black-market site Silk Road, where users could use bitcoin to pay for illegal drugs. But the price fell again after Mt. Gox, the most popular site at the time for buying bitcoin with traditional currency and storing them online, was hacked and temporarily went offline.

The price fluctuated over the next few years, soaring after a financial crisis in Cyprus in 2013, and sinking after Mt. Gox went bankrupt in 2014. But the overall trajectory was up. By January 2017, bitcoin was trading at nearly $1,000. The price soared in 2017, reaching an all-time high of nearly $20,000 in December. The reasons for this rally are unclear, but it seems to have been driven by a mixture of wild speculation and regulatory changes (the US approved trading bitcoin futures on major exchanges in December). Prices dropped back below $10,000 in early 2018, but remain well above the early-2017 prices.

Bitcoins price surged last year despite discord among its adherents over the currency's future. Many prominent members of the bitcoin community, including Andresen, who handed control of the software to Dutch coder Wladimir van der Laan in 2014, believe bitcoin transactions are too slow and too expensive. Although transaction fees are optional, failing to include a high enough fee could mean your transaction wont be processed for hours or days. In December 2017, transaction fees averaged $20 to $30, according to the site BitInfoCharts. That makes bitcoin impractical for many daily transactions, such as buying lunch.

Developers have proposed technical solutions for this problem. But the plan favored by Andresen and company would require bitcoin users to switch to a new version of the software, and so far miners have been reluctant to do so. That's led to the creation of several alternate versions of the bitcoin software, known as "hard forks," each competing to lure both miners and users away from official version. Some, like Bitcoin Cash, have attracted miners and investors, but none is close to displacing the original. Meanwhile, many other "cryptocurrencies" have emerged, borrowing heavily from the core ideas behind bitcoin but with many differences (see The WIRED Guide to Blockchain).

The future of bitcoin depends on three major questions. First, whether any of the hard forks or the hundreds of competing cryptocurrencies will supplant it, and, if so, when. Second, whether the sky-high valuations can last. And third, whether bitcoins will ever be used as currency for day-to-day transactions. The answer to the third question hinges in large part on the first two.

One thing holding bitcoin back as a currency is the expense and time lag involved in processing transactions. Emin Gun Sirer, a professor and cryptography researcher at Cornell University, estimates that the bitcoin network typically processes a little more than three transactions per second. By comparison, the Visa credit-card network processes around 3,674 transactions per second. Worse, bitcoin transaction confirmations can take hours or even days.

There were few places to spend bitcoin during its early years, before the black markets that made the currency famous emerged. The first time someone actually used bitcoin to buy something is widely considered to have been May 22, 2010. Programmer Laszlo Hanyecz paid 10,000 bitcoin (worth around $41 at the time) to have two pizzas delivered to his house. Those 10,000 bitcoin are worth millions now. I dont feel bad about it, Hanyecz told WIRED in 2011, when the coins would have sold for $272,329. The pizza was really good.

In addition to the hard forks of bitcoin, there are now countless alternative cryptocurrencies, sometimes called alt-coins, that aim to solve some of bitcoins shortcomings. Litecoin, for example, is designed to process transactions more quickly than bitcoin, while Monero focuses on creating a more private alternative. None trade for as much as bitcoin, but several sell for hundreds of dollars.

If one of the bitcoin variants or alternatives can solve its main problems, and win over users and miners, that currency would become much more suitable for day-to-day use. It's also possible that the developers behind the official version of bitcoin will find a way to make the network cheaper and faster while maintaining compatibility with old versions of the software. The maintainers of the original bitcoin software platform are working on a solution called the Lightning Network that would shift many transactions to private channels, to boost speed and reduce costs. Bitcoin wallets and exchanges are starting to adopt the system, but it's still too early to judge its success.

And then there's the environmental impact. Critics argue that mining bitcoin is an enormous waste of electricity because they don't have any intrinsic value.

Even if the technical issues of cost and performance are solved, there's still the question of volatility. Businesses and consumers can exchange dollars for goods and services with the confidence that those dollars will be worth the same amount in three weeks when the rent is due. But bitcoin has proven far more volatile than most other assets, according to a study conducted by the bitcoin wallet company Coinbase. For example, On November 29, bitcoin surged from just under $10,000 to well over $11,000 before sinking back to about where it started the day.

The founders of Coinbase have argued that derivative markets could help users cope with the volatility by allowing participants to essentially buy insurance that pays out if the price of bitcoin drops. That might not reduce the volatility, but it might reduce the risk of accepting bitcoin as payment. In 2017, US regulators cleared the Chicago Mercantile Exchange and the Chicago Board Options Futures Exchange, the worlds largest derivatives exchanges, to offer bitcoin futures. Yet again, it's too early to tell if it will make bitcoin more acceptable to retailers.

Bitcoin has come an enormous way since its origins as a paper by a pseudonymous author. But it still has a long way to go to fulfill its creators dream.

-How To Be a Bitcoin Thought LeaderStill confused? Just want to fake your way through a bitcoin conversation at a cocktail party? Our guide will have you dropping buzzwords with the best of 'em in no time.

-Where Could Bitcoin Succeed as a Currency? In a Failed StateVenezuela launched its own controversial digital currency called the "petro" in 2018. But its citizens are starting to adopt bitcoin instead. That makes sense because high inflation and widespread distrust in the government make Venezuela an ideal place for cryptocurrencies.

The Rise and Fall of Silk Road, part 1 and part 2Bitcoin isnt always, or even primarily, used for shady purposes. But the online, illegal drug marketplace Silk Road is what put it on the map.

The Inside Story of Mt. Gox, Bitcoin's $460 Million DisasterMt. Goxs bankruptcy caused the first major bitcoin crash and served as a hard reminder that banks are regulated and insured for a reason. This is the Mt. Gox story, from its beginnings as a planned Magic: The Gathering card-trading site to its emergence as the biggest bitcoin trading platform to its downfall.

I Forgot My PIN: An Epic Tale of Losing $30,000 in BitcoinMark Frauenfelder forgot the PIN for his digital bitcoin wallet. The story of recovering his $30,000 worth of cryptocurrency illustrates both the perils of a decentralized network where no one can reset your passwords.

This guide was last updated on May 8, 2018.

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What is Bitcoin? The Complete WIRED Guide | WIRED

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