Bitcoin is a type of digital money called a cryptocurrency. It uses secret codes to manage how it is created and used, instead of relying on groups like banks or governments. Bitcoin was first made to be used for buying and selling things. Now, it is mainly seen as a way to save money. The history of Bitcoin began with its invention by a person named Satoshi Nakamoto, who used many ideas already shared by experts in secret codes. Over time, Bitcoin grew quickly and became an important way to save money both online and in the real world. Starting in the mid-2010s, some businesses started to accept Bitcoin as payment along with regular money like dollars or euros.

Background

Before Bitcoin was created, several digital cash systems existed. These included the ecash protocols developed by David Chaum and Stefan Brands, which relied on a central issuer. The concept that solving complex computational problems could have value was introduced in 1992 by cryptographers Cynthia Dwork and Moni Naor.

Twelve years before Bitcoin's creation, the NSA released a white paper titled "How To Make A Mint: The Cryptography of Anonymous Electronic Cash."

This idea was later independently developed by Adam Back, who created hashcash in 1997. Hashcash was a proof-of-work system designed to reduce spam. The first proposals for cryptocurrencies based on distributed digital scarcity were Wei Dai's b-money and Nick Szabo's bit gold. Hal Finney later created reusable proof of work (RPOW), using hashcash as its proof-of-work algorithm.

In the bit gold proposal, Nick Szabo introduced a collectible market-based method to control inflation. He also explored a Byzantine fault-tolerant agreement protocol using quorum addresses to store and transfer chained proof-of-work solutions. However, this system was vulnerable to Sybil attacks.

Creation

On August 18, 2008, the domain name bitcoin.org was registered. Later that year, on October 31, a link to a paper written by Satoshi Nakamoto titled "Bitcoin: A Peer-to-Peer Electronic Cash System" was shared on a cryptography mailing list. This paper explained how a peer-to-peer network could be used to create a system for electronic transactions that does not depend on trust. On January 3, 2009, the Bitcoin network was launched when Satoshi Nakamoto mined the first block of Bitcoin (block number 0), which gave a reward of 50 bitcoins. Inside this first block was the text:

"The Times 03/Jan/2009 Chancellor on brink of second bailout for banks"

This text refers to a newspaper headline from The Times published on January 3, 2009. This note is believed to mark the date the network began and also includes a critical remark about the instability caused by a banking system where banks keep only a small amount of cash on hand.

The first open-source Bitcoin software was released on January 9, 2009, and hosted on SourceForge. One of the first people to support, use, and contribute to Bitcoin was programmer Hal Finney. Finney downloaded the software on its release day and received 10 bitcoins from Nakamoto in the first Bitcoin transaction on January 12, 2009 (block 170). Other early supporters included Wei Dai, who created a Bitcoin predecessor called b-money, and Nick Szabo, who created another predecessor called bit gold. One of the first miners was James Howells, who later lost thousands of bitcoins in a landfill in Newport.

Blockchain analyst Sergio Demian Lerner estimated in 2013 that Satoshi Nakamoto mined about 1 million bitcoins during the network's first year, based on a unique pattern in early blocks called the "Patoshi pattern." Other studies, such as a 2018 analysis by BitMEX Research, suggest the number was lower, around 600,000 to 700,000 bitcoins.

Before leaving Bitcoin, Nakamoto passed responsibility to developer Gavin Andresen, who later became the lead developer of Bitcoin at the Bitcoin Foundation, an organization that represents the Bitcoin community.

"Satoshi Nakamoto" is believed to be a pseudonym for the person or people who created the original Bitcoin protocol in 2007, published the whitepaper in 2008, and started the network in 2009. Nakamoto created most of the official Bitcoin software and shared technical details on the Bitcoin forum. The real identity of Satoshi Nakamoto remains unknown and is still debated.

Growth

The first important sale of physical goods using bitcoin happened on May 22, 2010. Laszlo Hanyecz, a programmer in Jacksonville, Florida, posted on the Bitcointalk forum offering 10,000 of his mined bitcoins in exchange for two pizzas. A 19-year-old in California named Jeremy Sturdivant accepted the offer and ordered two Papa John's pizzas for delivery to Hanyecz's home, receiving the 10,000 BTC in exchange. At that time, the bitcoins were worth about $41. This event is celebrated each year as "Bitcoin Pizza Day."

On August 6, 2010, a major weakness in the bitcoin system was discovered. The system checked that the amount of bitcoin used in a transaction did not exceed the amount available, but a transaction that used more than 2^64 units could cause an error, allowing someone to create unlimited bitcoins. On August 15, this weakness was used in a transaction that spent 0.5 bitcoin to send over 92 billion bitcoins to two addresses. Soon after, the error was fixed, and the blockchain was split by miners using an updated version of the system. Because the split happened before the problematic transaction, it no longer appears in the current blockchain used by the Bitcoin network.

Other digital currencies began to appear because bitcoin's code was open for others to use.

In January 2011, the Electronic Frontier Foundation, a non-profit group, started accepting bitcoins for donations but stopped in June 2011 due to concerns about legal rules for new currencies. In May 2013, the group began accepting bitcoins again.

In May 2011, BitPay was created to help businesses accept bitcoins as payment through mobile services.

In June 2011, WikiLeaks and other groups began accepting bitcoins for donations.

In January 2012, bitcoin was the main topic in a fictional trial on the TV show The Good Wife. Jim Cramer, a TV host, appeared in a courtroom scene and said he did not think bitcoin was real money because it had no central bank and worked only between users.

In September 2012, the Bitcoin Foundation was formed to support the growth of bitcoin by creating standards and promoting its use. Founders included Gavin Andresen, Jon Matonis, Mark Karpelès, Charlie Shrem, and Peter Vessenes.

In October 2012, BitPay reported that over 1,000 businesses accepted bitcoins. In November 2012, WordPress began accepting bitcoins.

In February 2013, Coinbase reported selling $1 million worth of bitcoins in one month at over $22 per bitcoin. The Internet Archive announced it would accept bitcoin donations and allow employees to receive part of their pay in bitcoins.

In 2013, a science fiction novel called Neptune's Brood used the name "bitcoin" for a space-based payment system. The author said the name was chosen because it was already known as a digital currency.

In March 2013, the bitcoin transaction record, called the blockchain, temporarily split into two separate systems with different rules. For six hours, two versions of the bitcoin network operated at the same time. Developers asked people to stop transactions, which caused a drop in value. Normal use returned when most users updated their software. The Mt. Gox exchange paused bitcoin deposits, and the price briefly dropped by 23% before recovering. In the U.S., the Financial Crimes Enforcement Network created rules for "decentralized virtual currencies" like bitcoin, requiring some miners to register as money service businesses.

In April 2013, payment processors BitInstant and Mt. Gox faced delays, causing the bitcoin price to drop from $266 to $76 before returning to $160. Bitcoin became more recognized when services like OkCupid and Foodler started accepting it. A law professor said bitcoin seemed like a "collective delusion" rather than a real Ponzi scheme.

On May 15, 2013, U.S. authorities took control of Mt. Gox accounts after finding it had not registered with FinCEN. On May 17, it was reported that BitInstant handled about 30% of bitcoin transactions in April alone.

On June 23, 2013, the U.S. Drug Enforcement Administration listed 11.02 bitcoins as a seized asset, marking the first time a government took bitcoin.

In July 2013, a project in Kenya linked bitcoin with M-Pesa, a mobile payment system, to test new payment methods. Thailand banned bitcoin trading because it had no legal rules. A U.S. judge ruled that bitcoins are a form of money, and Germany classified them as a financial instrument. China banned financial institutions from trading bitcoin.

In October 2013, the FBI took about 26,000 BTC from the Silk Road website during the arrest of its owner. The first bitcoin ATMs were launched in Vancouver, Canada. Baidu, a Chinese company, allowed users to pay with bitcoins.

In November 2013, the University of Nicosia began accepting bitcoin for tuition. A Chinese exchange, BTC China, became the largest bitcoin trading platform. In December 2013, Overstock.com planned to accept bitcoin in 2014. China's central bank banned financial institutions from using bitcoin, causing its value to drop. Baidu stopped accepting bitcoins for some services. Using virtual currency for real goods became less common.

Prices and value history

Several factors may have helped cause the rise in bitcoin's value. These include the European government debt problems, especially the 2012–2013 Cypriot financial crisis, statements from FinCEN that made the currency more legally accepted, and increased interest from the media and the Internet.

Until 2013, most bitcoin markets used United States dollars (US$) for transactions.

As the total value of all bitcoins reached about US$1 billion, some people said bitcoin prices were a bubble. In early April 2013, the price of one bitcoin fell from $266 to about $50, then rose to around $100. Over two weeks starting late June 2013, the price dropped slowly to $70. The price began to rise again, reaching a high of $140 on 1 October. On 2 October, the FBI seized The Silk Road. This event caused a sudden drop in price to $110. The price quickly recovered and returned to $200 within several weeks. The next increase started on 3 November, when the price was $200, and reached $900 by 18 November. On 28 November 2013, bitcoin reached US$1,000 at Mt. Gox.

Forks

A fork in a blockchain can mean either a split into two paths or a change in the rules that govern the network. Accidental forks in the Bitcoin network happen often during mining. This occurs when two miners discover a block at nearly the same time. As a result, the network temporarily splits. The split is later fixed by the software, which automatically selects the longest chain, causing the extra blocks on the shorter chain to be discarded.

On March 12, 2013, a Bitcoin miner using version 0.8.0 of the software created a block that was not accepted by version 0.7 because of a problem that had not yet been discovered between the two versions. This caused a split, or "fork," in the blockchain. Computers with the newer software accepted the invalid block and continued building on that chain, while older software rejected it and continued extending the blockchain without the block. This created two separate transaction logs without clear agreement, allowing the same funds to be used differently on each chain. In response, the Mt. Gox exchange paused Bitcoin deposits. The exchange rate dropped 23% to $37 but later rose mostly back to $48.

Miners fixed the split by switching back to version 0.7, aligning with the official blockchain. User funds were mostly unaffected and became available again once the network reached agreement. The network returned to normal operation a few hours after the split.

Two major forks happened in August. One, called Bitcoin Cash, was a hard fork that separated from the main chain. The other was a soft fork to introduce Segregated Witness.

Taxation and regulation

In 2012, the Cryptocurrency Legal Advocacy Group (CLAG) reminded taxpayers that they must decide if taxes are owed on a Bitcoin-related transaction based on whether a "realization event" has occurred. A realization event happens when a taxpayer provides a service in exchange for Bitcoin. If this happens, any gain or loss would be calculated using the fair market value of the service given.

In April 2012, the FBI noted in an internal report that Bitcoin could be used for illegal activities. The report explained that Bitcoin’s design, which allows users to remain anonymous and avoids central control, made it difficult for law enforcement to track transactions. It mentioned that some cybercriminals were already using Bitcoin, though there was little evidence of widespread misuse. The FBI warned that Bitcoin users faced risks from theft through malware or hacking, but it concluded with low confidence that criminals would likely use Bitcoin for money laundering. The report also pointed out that third-party exchanges were key areas for regulation under U.S. law, marking one of the first times a federal agency acknowledged challenges in enforcing laws related to cryptocurrencies.

In October 2012, the European Central Bank published a study titled Virtual Currency Schemes. It stated that virtual currencies, such as Bitcoin, would likely continue to grow. However, the Bank warned that their unstable prices, lack of strict regulation, and potential for illegal use by anonymous users required regular monitoring to assess risks.

On March 18, 2013, the Financial Crimes Enforcement Network (FinCEN), part of the U.S. Department of the Treasury, released a report about virtual currencies and their legal status under the "money services business" (MSB) and Bank Secrecy Act regulations. FinCEN classified Bitcoin and similar digital payment systems as "virtual currencies" because they are not legal tender in any country. It stated that individual users of Bitcoin are not required to register as MSBs and are not subject to MSB rules. However, it clarified that any U.S. entity that creates virtual currency, such as Bitcoin, and sells it for real money is considered a money transmitter or MSB. This rule applies to Bitcoin miners who sell their mined coins for real money and operate in the United States. Since this guidance was issued, many Bitcoin exchanges and administrators have registered with FinCEN, and the agency has received more reports about suspicious activities from these groups.

FinCEN also stated that any entity managing Bitcoin in a payment processor or exchange role is considered an exchanger and a money transmitter. This includes businesses that accept Bitcoin from one person and send it to another as part of a transaction.

In summary, FinCEN’s rules require Bitcoin exchanges that trade Bitcoin for traditional currencies to report large transactions, follow money laundering laws, and collect customer information, just like traditional financial institutions.

Jennifer Shasky Calvery, director of FinCEN, said, "Virtual currencies are subject to the same rules as other currencies. Basic money-services business rules apply here."

In June 2013, Jon Matonis, a member of the Bitcoin Foundation, wrote in Forbes that he received a warning letter from California’s Department of Financial Institutions, accusing the foundation of operating without a license for money transmission. Matonis denied the claim and saw the situation as a chance to teach state regulators about Bitcoin.

In late July 2013, the industry group Committee for the Establishment of the Digital Asset Transfer Authority began forming to create standards for digital currency, work with regulators, and develop rules to manage risks.

In August 2013, Germany’s Finance Ministry stated that Bitcoin could be used as a unit of account in multilateral clearing systems and that it is subject to capital gains tax if held for less than one year.

On December 5, 2013, China’s People’s Bank of China announced in a press release that individuals in China could freely trade Bitcoin as a commodity, but Chinese banks were not allowed to use Bitcoin, and Bitcoin could not be used as legal tender. Entities dealing with Bitcoin were required to track and report suspicious activity to prevent money laundering. After this announcement, Bitcoin’s value dropped by 11 to 20 percent on exchanges before rising again.

In 2013, the U.S. Treasury expanded its anti-money laundering rules to include Bitcoin transaction processors.

In 2014, the U.S. Securities and Exchange Commission (SEC) filed an administrative case against Erik T. Voorhees for breaking the Securities Act by offering unregistered interests in two Bitcoin websites in exchange for Bitcoin.

On March 25, 2014, the U.S. Internal Revenue Service (IRS) issued Notice 2014-21, stating that for federal tax purposes, virtual currency is treated as property, not currency.

In 2016, the European Parliament began discussing whether to include virtual currency exchanges and custodian wallet providers under the Anti-Money Laundering Directive (AMLD). The proposal was published in July 2016, marking a major step in the EU’s efforts to stop money laundering and terrorist financing.

By December 2017, Bitcoin futures contracts were available, and the U.S. Chicago Board Options Exchange (CBOE) began settling these contracts daily.

By 2019, multiple trading companies were offering services related to Bitcoin futures.

Bitcoin faucets

A Bitcoin faucet was a website or app that gave out small amounts of Bitcoin to users who completed simple tasks, such as solving a CAPTCHA or playing a game. Some faucets also gave out other types of cryptocurrency. The first Bitcoin faucet was named "The Bitcoin Faucet" and was created by Gavin Andresen in 2010. It gave five bitcoins to each person who completed a task.

Rewards were given at set times for completing tasks or winning games. The amount of Bitcoin given often changed based on its value in money. Some faucets occasionally gave larger amounts of Bitcoin randomly. To save on fees from sending many small payments, faucets collected these amounts in their own records and sent them as larger payments to users' Bitcoin addresses.

Bitcoin transactions cannot be changed once made, which is why faucets became targets for hackers who wanted to steal Bitcoin. Most faucets earned money through advertisements, with the promise of free Bitcoin meant to attract visitors. Some ad companies even paid for ads in Bitcoin. Faucets usually made very little profit. Some faucets also used users' computer power to mine cryptocurrency in the background.

Theft and exchange shutdowns

Bitcoin can be stored in a cryptocurrency wallet. Theft of Bitcoin has happened many times. Sometimes, Bitcoin exchanges have closed, taking their users' Bitcoin with them. A study by Wired in April 2013 found that 45% of Bitcoin exchanges eventually shut down.

On June 19, 2011, a security breach at the Mt. Gox exchange caused the listed price of Bitcoin to drop to one cent on the exchange. A hacker used stolen login information from an auditor’s computer to transfer a large number of Bitcoin to their account. The hacker then sold the Bitcoin using the exchange’s software, creating a large order to sell at any price. Within minutes, the price returned to its normal value. More than $8.75 million in user accounts were affected.

In July 2011, the operator of Bitomat, the third-largest Bitcoin exchange, said he lost access to a file containing about 17,000 Bitcoin (worth roughly $220,000 at the time). He announced he would sell the service to cover the missing amount and use the money to refund customers.

In early August 2012, a lawsuit was filed in a San Francisco court against Bitcoinica, a Bitcoin trading platform. The lawsuit claimed about $460,000 from the company. Bitcoinica was hacked twice in 2012, leading to claims that the platform failed to protect users’ money and ignored withdrawal requests.

In August 2011, MyBitcoin, a now-closed Bitcoin transaction service, said it was hacked and shut down. It paid 49% of customer deposits, leaving more than 78,000 Bitcoin (worth about $800,000 at the time) unaccounted for.

In late August 2012, an operation called Bitcoin Savings and Trust was shut down by its owner, leaving about $5.6 million in Bitcoin-based debts. This led to claims that the operation was a Ponzi scheme. In September 2012, the U.S. Securities and Exchange Commission reportedly began an investigation into the case.

In September 2012, Bitfloor, a Bitcoin exchange, reported being hacked, with 24,000 Bitcoin (worth about $250,000) stolen. Bitfloor suspended operations but later resumed. The founder said he reported the theft to the FBI and planned to repay victims, though the timeline for repayment was unclear.

On April 3, 2013, Instawallet, a web-based wallet provider, was hacked, resulting in the theft of over 35,000 Bitcoin. At the time, each Bitcoin was worth about $129.90, totaling nearly $4.6 million. Instawallet suspended operations after the theft.

On August 11, 2013, the Bitcoin Foundation announced that a flaw in a random number generator in the Android operating system was exploited to steal Bitcoin from wallets created by Android apps. Fixes were provided on August 13, 2013.

In October 2013, Inputs.io, an Australian-based Bitcoin wallet provider, was hacked, resulting in the loss of 4,100 Bitcoin (worth over $1 million at the time). The service was run by TradeFortress, and the associated chat room, Coinchat, was taken over by a new administrator.

On October 26, 2013, a Hong Kong-based Bitcoin trading platform owned by Global Bond Limited (GBL) disappeared, taking $5 million from 500 investors.

Mt. Gox, a Japan-based exchange that handled 70% of global Bitcoin transactions in 2013, declared bankruptcy in February 2014. About $390 million in Bitcoin was missing, for unclear reasons. The CEO was later arrested and charged with embezzlement.

On March 3, 2014, Flexcoin announced it was closing because of a hack that occurred the day before. The company stated it had no resources to recover from the loss and shut down immediately. Users could no longer access the site.

In February 2015, the Chinese exchange Bter lost $2.1 million in Bitcoin.

In January 2015, the Slovenian exchange Bitstamp lost $5.1 million in Bitcoin due to a hack.

In January 2016, the U.S.-based exchange Cryptsy declared bankruptcy, reportedly due to a 2014 hacking incident. A court-appointed receiver later claimed the CEO had stolen $3.3 million.

In August 2016, hackers stole about $72 million in Bitcoin from the Hong Kong-based exchange Bitfinex.

In December 2017, hackers stole 4,700 Bitcoin from NiceHash, a platform that sold hashing power. At the time, the stolen Bitcoin was worth about $80 million.

On December 19, 2017, Yapian, the company that owned the Youbit cryptocurrency exchange in South Korea, filed for bankruptcy after a second hack in eight months.

On November 11, 2022, FTX filed for bankruptcy, with an estimated $8 billion in customer funds missing.

Arbitrary blockchain content

Bitcoin's blockchain can contain any type of data. In 2018, researchers from RWTH Aachen University and Goethe University discovered 1,600 files added to the blockchain. Of these, 59 included links to illegal images of child exploitation, politically sensitive material, or privacy violations. "Our analysis shows that certain content, such as illegal pornography, can make it illegal to own a blockchain."

In 2015, Interpol issued a warning stating that the blockchain's design allows for the possibility of malware being added and stored forever, with no current method to remove this data.