Bitcoin

AAA

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. 

INVESTOPEDIA EXPLAINS '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. 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.
  2. Forex Education

    Hedging With Currency Swaps

    The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it.
  3. Forex Education

    Harmonic Patterns In The Currency Markets

    Learn how to take geometric price patterns to the next level by using Fibonacci numbers to predict movements in the forex market.
  4. Forex Education

    Tiger Trading: Long-Term Charts For Short-Term Currency Trades

    Stock traders can add currencies to their portfolios by using this patient investing strategy.
  5. Forex Education

    Currency Swap Basics

    Find out what makes currency swaps unique and slightly more complicated than other types of swaps.
  6. Forex Education

    How Forex Speculators Profited From Famous Currency Meltdowns

    Studying currency meltdowns shows traders how they can avoid big losses (or make big money) when global politics tilt the forex market.
  7. Forex Education

    The Forex Market: Who Trades Currency And Why

    The forex market has a lot of unique attributes that may come as a surprise for new traders.
  8. Forex Education

    How Inflation-Fighting Techniques Affect The Currency Market

    Central banks use these strategies to calm inflation, but they can also provide longer-term clues for forex traders.
  9. Forex Education

    History Of Coinage In The U.S.

    From the barter system to commemorative coins, we look at the history of U.S. money.
  10. Forex Education

    The U.S. Dollar's Unofficial Status as World Currency

    Discover how and why the U.S. dollar emerged as official currency in many foreign countries.

You May Also Like

Hot Definitions
  1. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  2. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  3. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  4. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  5. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  6. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
Trading Center