Bitcoins are created as a reward for payment processing work in which users offer their computing power to verify and record payments into a public ledger. This activity is called mining and miners are rewarded with transaction fees and newly created bitcoins.[19] Besides being obtained by mining, bitcoins can be exchanged for other currencies,[28] products, and services.[29] Users can send and receive bitcoins for an optional transaction fee.[30]

Bitcoin as a form of payment for products and services has grown,[29] and merchants have an incentive to accept it because fees are lower than the 2–3% typically imposed by credit card processors.[31] Unlike credit cards, any fees are paid by the purchaser, not the vendor. The European Banking Authority[32] and other sources[19]:11 have warned that bitcoin users are not protected by refund rights or chargebacks. Despite a large increase in the number of merchants accepting bitcoin, the cryptocurrency does not have much momentum in retail transactions.[33]

The use of bitcoin by criminals has attracted the attention of financial regulators,[34] legislative bodies,[35] law enforcement,[36] and media.[37]Criminal activities are primarily centered around black markets and theft, though officials in countries such as the United States also recognize that bitcoin can provide legitimate financial services.[38]

Bitcoin has drawn the support of a few politicians, notably U.S. Presidential candidate Rand Paul, who accepts donations in bitcoin

• BLOCK CHAIN

The block chain is a public ledger that records bitcoin transactions. A novel solution accomplishes this without any trusted central authority: maintenance of the block chain is performed by a network of communicating nodes running bitcoin software.[19] Transactions of the form payer X sends Y bitcoins to payee Z are broadcast to this network using readily available software applications. Network nodes can validate transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes.[10]:ch. 8 The block chain is a distributed database; to achieve independent verification of the chain of ownership of any and every bitcoin (amount), each network node stores its own copy of the block chain. Approximately six times per hour, a new group of accepted transactions, a block, is created, added to the block chain, and quickly published to all nodes. This allows bitcoin software to determine when a particular bitcoin amount has been spent, which is necessary in order to prevent double-spending in an environment without central oversight. Whereas a conventional ledger records the transfers of actual bills or promissory notes that exist apart from it, the block chain is the only place that bitcoins can be said to exist in the form of unspent outputs of transactions.

• UNITS

The unit of account of the bitcoin system is bitcoin. As of 2014, symbols used to represent bitcoin are BTC, XBT,[note 3]and .[note 4][40]:2 Small amounts of bitcoin used as alternative units are millibitcoin (mBTC), microbitcoin (µBTC), and satoshi. Named in homage to bitcoin's creator, a satoshi is the smallest amount within bitcoin representing 0.00000001 bitcoin, one hundred millionth of a bitcoin.[4] A millibitcoin equals to 0.001 bitcoin, which is one thousandth of bitcoin.[41] Onemicrobitcoin equals to 0.000001 bitcoin, which is one millionth of bitcoin. A microbitcoin is sometimes referred to as a bit.

On 7 October 2014, the Bitcoin Foundation disseminated a plan to apply for an ISO 4217 currency code for bitcoin,[5] and mentioned BTC and XBT as the leading candidates.

 

• OWNER SHIP

Ownership of bitcoins implies that a user can spend bitcoins associated with a specific address. To do so, a payer must digitally sign the transaction using the corresponding private key. Without knowledge of the private key, the transaction cannot be signed and bitcoins cannot be spent. The network verifies the signature using the public key.[10]:ch. 5 If the private key is lost, the bitcoin network will not recognize any other evidence of ownership;[19] the coins are then unusable, and thus effectively lost. For example, in 2013 one user claimed to have lost 7,500 bitcoins, worth $7.5 million at the time, when he discarded a hard drive containing his private key.

• TRANSICTIONS

A transaction must have one or more inputs. For the transaction to be valid, every input must be an unspent output of a previous transaction. Every input must be digitally signed. The use of multiple inputs corresponds to the use of multiple coins in a cash transaction. A transaction can also have multiple outputs, allowing one to make multiple payments in one go. A transaction output can be specified as an arbitrary multiple of satoshi. As in a cash transaction, the sum of inputs (coins used to pay) can exceed the intended sum of payments. In such case, an additional output is used, returning the change back to the payer. Any input satoshis not accounted for in the transaction outputs become the transaction fee.[10]:ch. 5

To send money to a bitcoin address, users can click links on webpages; this is accomplished with a provisional bitcoin URI scheme using a template registered with IANA. Bitcoin clients like Electrum and Armory support bitcoin URIs. Mobile clients recognize bitcoin URIs in QR codes, so that the user does not have to type the bitcoin address and amount in manually. The QR code is generated from the user input based on the payment amount. The QR code is displayed on the mobile device screen and can be scanned by a second mobile device.[

• MINING

Mining is a record-keeping service.[note 10] Miners keep the block chain consistent, complete, and unalterable by repeatedly verifying and collecting newly broadcast transactions into a new group of transactions called a block. A new block contains information that "chains" it to the previous block thus giving the block chain its name. It is a cryptographic hash of the previous block, using the SHA-256 hashing algorithm.[10]:ch. 7

In order to be accepted by the rest of the network, a new block must contain a so-called proof-of-work. The proof-of-work requires miners to find a number called anonce, such that when the block content is hashed along with the nonce, the result is numerically smaller than the network's difficulty target.[10]:ch. 8 This proof is easy for any node in the network to verify, but extremely time-consuming to generate, as for a secure cryptographic hash, miners must try many different nonce values (usually the sequence of tested values is 0, 1, 2, 3, ...[10]:ch. 8) before meeting the difficulty target.

Every 2016 blocks (approximately 14 days), the difficulty target is adjusted based on the network's recent performance, with the aim of keeping the average time between new blocks at ten minutes. In this way the system automatically adapts to the total amount of mining power on the network.[10]:ch. 8 For example, between 1 March 2014 and 1 March 2015, the average number of nonces miners had to try before creating a new block increased from 16.4 quintillion to 200.5 quintillion.[47]

The proof-of-work system, alongside the chaining of blocks, makes modifications of the block chain extremely hard as an attacker must modify all subsequent blocks in order for the modifications of one block to be accepted. As new blocks are mined all the time, the difficulty of modifying a block increases as time passes and the number of subsequent blocks (also called confirmations of the given block) increases.

• TRANSACTION FEE

Paying a transaction fee is optional, but may speed up confirmation of the transaction.[60] Payers have an incentive to include such fees because doing so means their transaction is more likely to be added to the block chain sooner; miners can choose which transactions to process[30] and prioritize those that pay higher fees. Fees are based on the storage size of the transaction generated, which in turn is dependent on the number of inputs used to create the transaction. Furthermore, priority is given to older unspent inputs.

 

• WALLETS

A wallet stores the information necessary to transact bitcoins. While wallets are often described as a place to hold[62] or store bitcoins,[63] due to the nature of the system, bitcoins are inseparable from the block chain transaction ledger. Perhaps a better way to describe a wallet is something that "stores the digital credentials for your bitcoin holdings"[63] and allows you to access (and spend) them. Bitcoin usespublic-key cryptography, in which two cryptographic keys, one public and one private, are generated.[64] At its most basic, a wallet is a collection of these keys.

There are several types of wallets. Software wallets connect to the network and allow spending bitcoins in addition to holding the credentials that prove ownership.[65] Software wallets can be split further in two categories: full clients and lightweight clients. Full clients find transactions directly on the block chain (over 60GB in 2016[66] and keeps growing, which may be an inconvenience for some users). Lightweight clients on the other hand consult a server to parse the block chain, and get only relevant transactions from the server (transactions to and from the user). When working with lightweight wallets, the user has to trust the server to a certain degree. The server can't steal bitcoins directly, or intercept transactions, but the server can report faulty values back to the user. With both types of software wallets, the users are responsible for keeping their private keys in a secure place.

Next to software wallets, there are also internet services called online wallets, likeBlockchain.info, Circle, Coinbase or CoinCorner. They offer similar functionality but may be easier to use. In these wallets, bitcoin credentials are stored with the online wallet provider rather than on the user's hardware.[67][68] As a result, the user needs to have complete trust in the wallet provider. A malicious provider or a breach in server security may cause all bitcoins to be stolen.

Physical wallets also exist and are more secure, as they store the credentials necessary to spend bitcoins offline.[63] Examples combine a novelty coin with these credentials printed on metal,[69][70]wood, or plastic. Others are simply paper printouts. Another type of wallet called a hardware wallet keeps credentials offline while facilitating transactions.

• PRIVACY

Privacy is achieved by not identifying owners of bitcoin addresses while making other transaction data public. Bitcoin users are not identified by name, but transactions can be linked to individuals and companies.[74] Additionally, bitcoin exchanges, where people buy and sell bitcoins for fiat money, may be required by law to collect personal information.[75] To maintain financial privacy, a different bitcoin address for each transaction is recommended.[76] Transactions that spend coins from multiple inputs reveal that the inputs may have a common owner. Users concerned about privacy can use so-called mixing services that swap coins they own for coins with different transaction histories.[77] It has been suggested that bitcoin payments should not be considered more private than credit card payments.