Bitcoin

Loading the player...

DEFINITION of 'Bitcoin'

Bitcoin is a digital currency created in 2009. It follows the ideas set out in a white paper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government issued currencies.

There are no physical Bitcoins, only balances associated with public and private keys. These balances are kept on a public ledger, along with all Bitcoin transactions, that is verified by a massive amount of computing power.

BREAKING DOWN 'Bitcoin'

Bitcoin balances are kept using public and private "keys," which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them. The public key (comparable to a bank account number) serves as the address which is published to the world and to which others may send Bitcoin. The private key (comparable to an ATM PIN) is meant to be a guarded secret, and only used to authorize Bitcoin transmissions.

In March 2014, the IRS stated that all virtual currencies, including Bitcoin, would be taxed as property rather than currency. Gains or losses from Bitcoin held as capital will be realized as capital gains or losses, while Bitcoin held as inventory will incur ordinary gains or losses.

The independent individuals and companies who own the governing computing power and participate in the network, also known as "miners," are motivated by mining rewards (the release of new Bitcoin) and transaction fees paid in Bitcoin. These miners can be thought of as the decentralized authority enforcing the credibility of the Bitcoin network. New Bitcoin is being released to the miners at a fixed, but periodically declining rate, such that the total supply of Bitcoin approaches 21 million. One bitcoin is divisible to eight decimal places (100 millionth of one bitcoin), and this smallest unit is referred to as a Satoshi. If necessary, and if the participating miners accept the change, Bitcoin could eventually be made divisible to even more decimal places.

Style notes: According to the official Bitcoin Foundation, the word "Bitcoin" is capitalized in the context of referring to the entity or concept, whereas "bitcoin" is written in the lower case when referring to a quantity of the currency (e.g. "I traded 20 bitcoin"). The currency can be abbreviated to BTC or, less frequently, XBT. The plural form of the word can be either "bitcoin" or "bitcoins."

To learn more about this cryptocurrency, check out How do I buy Bitcoins?

RELATED TERMS
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. ...
  2. Trillion Dollar Coin

    A trillion dollar coin is a theoretical coin that could be legally ...
  3. Bullion Coins

    Coins made from precious metals that are generally used for investment ...
  4. Stroud Pound

    A local, private currency launched in the British town of Stroud, ...
  5. Private Currency

    Units of value issued by private companies or organizations. ...
  6. Bitomat

    A Polish-based bitcoin exchange. Bitomat was the first Bitcoin ...
Related Articles
  1. Retirement

    Top 5 Schwab Funds for Retirement Diversification in 2016

    Find out which Schwab funds are best to create a diversified retirement income portfolio for current income, income growth and capital preservation.
  2. Retirement

    Top 5 TIAA-CREF Funds for Retirement Diversification in 2016

    Discover how to safely diversify your retirement savings and receive excellent investment returns using a selection of TIAA-CREF low-fee mutual funds.
  3. Stock Analysis

    3 Disrupters of Retail Banking

    Understand how the retail banking industry operates and why it's becoming outdated. Learn about three disrupters that are changing the way consumers bank.
  4. Investing Basics

    5 Live Bitcoin Exchanges

    Learn about five of the largest bitcoin exchanges operating around the world in 2015, and discover the issues these exchanges are facing.
  5. Investing Basics

    5 Most Bitcoin-Friendly States

    Learn about five of the most Bitcoin-friendly states in the United States based on its regulatory treatment and the degree to which it is accepted by merchants.
  6. Economics

    What Is Bitcoin's Intrinsic Value?

    What would bitcoin's price look like in the event of widespread adoption?
  7. Active Trading

    What Is Bitcoin

    Bitcoin is the first decentralized digital currency. It is also sometimes referred to as a virtual currency or a crypto-currency.
  8. Investing Basics

    What is Bitcoin Mining?

    How does Bitcoin get released into circulation?
  9. Forex Education

    Bitcoin May Be The Currency Of The Future

    Forget the dollar or the euro. Bitcoin may be the next big currency to hit the world.
  10. Forex Education

    Hedging With Currency Swaps

    The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it.
RELATED FAQS
  1. Is Bitcoin legal in the US?

    The digital currency known as bitcoin was created in 2009 by a person called Satoshi Nakamoto, but whose true identity has ... Read Full Answer >>
  2. How is a block chain network useful for trading goods and assets in virtual currencies?

    Perhaps the most famous quote associated with blockchain technology came from an anonymous virtual currency user, who described ... Read Full Answer >>
  3. What are the advantages of paying with Bitcoin?

    Due to the unique nature of virtual currencies, there are some inherent advantages to transacting through Bitcoin that users ... Read Full Answer >>
  4. How is the value of a pip determined?

    A pip in foreign exchange trading is a measure of a price movement in a currency pair. "Pip" is an acronym for price interest ... Read Full Answer >>
  5. How do I set a strike price in foreign exchange trading?

    In trading with a foreign exchange, a trader can set a strike price for a currency pair by entering a limit order or a stop ... Read Full Answer >>
  6. What does a block chain record in a bitcoin exchange transaction?

    The bitcoin blockchain is essentially an enormous, shared, encrypted list of which addresses hold what bitcoin balances. ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  3. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  4. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  5. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  6. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
Trading Center