Bitcoin is a payment system invented by Satoshi Nakamoto in 2008 and introduced as open-source software in 2009. The system is peer-to-peer, all nodes verifying transactions in a public distributed ledger called the blockchain, and uses its own unit of account also called bitcoin. It works without a central repository or single administrator, which has led the US Treasury to categorize bitcoin as a decentralized virtual currency. Bitcoin was not the first virtual currency. Bitcoin is the first decentralized digital currency. 1 and the first cryptocurrency. Media reports often refer to bitcoin as a cryptocurrency or digital currency. It is the largest in terms of total market value although others such as Litecoin and Dogecoin also exist.
Bitcoins are created as a reward for payment processing work in which users offer their computing power to verify and record payments into the public ledger. This activity is called mining and is rewarded by transaction fees and newly created bitcoins. Besides mining, bitcoins can be obtained in exchange for fiat money, products, and services. Users can send and receive bitcoins electronically for an optional transaction fee.
Bitcoin as a form of payment for products and services has grown, and merchants have an incentive to accept it because fees are lower than the 2–3% typically imposed by credit card processors. The European Banking Authority has warned that bitcoin lacks consumer protections. Unlike credit cards, any fees are paid by the purchaser, not the vendor. Additionally, bitcoins can be stolen, and chargebacks are impossible. As of July 2013, the commercial use of bitcoin was small compared to its use by speculators, which has contributed to price volatility.
Bitcoins are sometimes used to purchase illicit items—including child pornography, credit card details, and drugs—at deep web black markets and are seized by authorities when such sites are shut down. This fact has garnered bitcoin attention from the media and government.
The United States is considered more bitcoin-friendly than some other governments. US law enforcement officials and financial regulators, who had emphasized the role of bitcoin in criminal activities prior, recognized at a November 2013 U.S. Senate hearing on virtual currencies that cryptocurrencies such as bitcoin can provide legitimate financial services to customers. Tennessee Department of Financial Institutions Commissioner Greg Gonzales said “(Digital) currency is defined as an electronic medium of exchange that does not have all the attributes of real currencies,” a clear warning sign that bitcoin is risky. Developing countries are less receptive. For example, in China buying bitcoins with yuan is subject to restrictions, and bitcoin exchanges are not allowed to hold bank accounts.