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Before bitcoin, several digital cash technologies were released, starting with David Chaum's ecash in the 1980s.[12] The idea that solutions to computational puzzles could have some value was first proposed by cryptographers Cynthia Dwork and Moni Naor in 1992.[12] The concept was independently rediscovered by Adam Back who developed Hashcash, a proof-of-work scheme for spam control in 1997.[12] The first proposals for distributed digital scarcity-based cryptocurrencies came from cypherpunks Wei Dai (b-money) and Nick Szabo (bit gold) in 1998.[13] In 2004, Hal Finney developed the first currency based on reusable proof-of-work.[14] These various attempts were not successful:[12] Chaum's concept required centralized control and no banks wanted to sign on, Hashcash had no protection against double-spending, while b-money and bit gold were not resistant to Sybil attacks.[12]

The domain name bitcoin.org was registered on 18 August 2008.[15] On 31 October 2008, a link to a white paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list.[16] Nakamoto implemented the bitcoin software as open-source code and released it in January 2009.[8] Nakamoto's identity remains unknown.[7] All individual components of bitcoin originated in earlier academic literature.[12] Nakamoto's innovation was their complex interplay resulting in the first decentralized, Sybil resistant, Byzantine fault tolerant digital cash system, that would eventually be referred to as the first blockchain.[12][17] Nakamoto's paper was not peer-reviewed and initially ignored by academics, who argued that it could not work, based on theoretical models, even though it was working in practice.[12]

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Blockchain analysts estimate that Nakamoto had mined about one million bitcoins[21] before disappearing in 2010 when he handed the network alert key and control of the code repository over to Gavin Andresen. Andresen later became lead developer at the Bitcoin Foundation,[22][23] an organization founded in September 2012 to promote bitcoin.[24]

In December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoin.[30] After the announcement, the value of bitcoin dropped,[31] and Baidu no longer accepted bitcoins for certain services.[32] Buying real-world goods with any virtual currency had been illegal in China since at least 2009.[33]

Research produced by the University of Cambridge estimated that in 2017, there were 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using bitcoin.[34] In August 2017, the SegWit software upgrade was activated. Segwit was intended to support the Lightning Network as well as improve scalability.[35] SegWit opponents, who supported larger blocks as a scalability solution, forked to create Bitcoin Cash, one of many forks of bitcoin.[36]

In February 2018, price crashed after China imposed a complete ban on Bitcoin trading.[37] The percentage of bitcoin trading in the Chinese renminbi fell from over 90% in September 2017 to less than 1% in June 2018.[38] During the same year, Bitcoin prices were negatively affected by several hacks or thefts from cryptocurrency exchanges.[39]

In 2020, some major companies and institutions started to acquire bitcoin: MicroStrategy invested $250 million in bitcoin as a treasury reserve asset,[40] Square, Inc., $50 million,[41] and MassMutual, $100 million.[42] In November 2020, PayPal added support for bitcoin in the US.[43]

The proof-of-work system and the chaining of blocks make blockchain modifications very difficult, as altering one block requires changing all subsequent blocks. As more blocks are added, modifying older blocks becomes increasingly challenging.[70][58] In case of disagreement, nodes trust the longest chain, which required the greatest amount of effort to produce.[66] To tamper or censor the ledger, one needs to control the majority of the global hashrate.[66] The high cost required to reach this level of computational power guarantees the security of the bitcoin blockchain.[66]

Bitcoin mining's environmental impact is significant and has attracted the attention of regulators, leading to restrictions or bans in various jurisdictions.[71] As of 2022[update], bitcoin mining is estimated to represent 0.4% of global electricity consumption[72] and to be responsible for 0.2% of world greenhouse gas emissions,[73] as about half of the electricity used is generated through fossil fuels.[74] Moreover, mining hardware's short lifespan results in electronic waste.[75] The amount of electrical energy and e-waste generated by bitcoin mining is often compared with countries like Greece or the Netherlands.[75][73]

In the Bitcoin network, each bitcoin is treated equally, ensuring basic fungibility. However, users and applications can choose to differentiate between bitcoins. While wallets and software treat all bitcoins the same, each bitcoin's transaction history is recorded on the blockchain. This public record allows for chain analysis, where users can identify and potentially reject bitcoins from controversial sources.[79] For example, in 2012, Mt. Gox froze accounts containing bitcoins identified as stolen.[80]

Money serves three purposes: a store of value, a medium of exchange, and a unit of account.[95] According to The Economist in 2014, bitcoin functions best as a medium of exchange.[95] In 2015, The Economist noted that bitcoins had three qualities useful in a currency: they are "hard to earn, limited in supply and easy to verify".[96] However, a 2018 assessment by The Economist stated that cryptocurrencies met none of these three criteria.[92] Per some researchers, as of 2015[update], bitcoin functions more as a payment system than as a currency.[25] In 2014, economist Robert J. Shiller wrote that bitcoin has potential as a unit of account for measuring the relative value of goods, as with Chile's Unidad de Fomento, but that "Bitcoin in its present form ... doesn't really solve any sensible economic problem".[97] Franois R. Velde, Senior Economist at the Chicago Fed, described bitcoin as "an elegant solution to the problem of creating a digital currency".[98] David Andolfatto, Vice President at the Federal Reserve Bank of St. Louis, stated that bitcoin is a threat to the establishment, which he argues is a good thing for the Federal Reserve System and other central banks, because it prompts these institutions to operate sound policies.[99]

The legal status of bitcoin varies substantially from one jurisdiction to another. Because of its decentralized nature and its global presence, regulating bitcoin is difficult. However, the use of bitcoin can be criminalized, and shutting down exchanges and the peer-to-peer economy in a given country would constitute a de facto ban.[100] The use of bitcoin by criminals has attracted the attention of financial regulators, legislative bodies, and law enforcement.[101] Nobel-prize winning economist Joseph Stiglitz says that bitcoin's anonymity encourages money laundering and other crimes.[102] This is the main justification behind bitcoin bans.[11] As of November 2021[update], nine countries applied an absolute ban (Algeria, Bangladesh, China, Egypt, Iraq, Morocco, Nepal, Qatar, and Tunisia) while another 42 countries had an implicit ban.[103][needs update] Bitcoin is only legal tender in El Salvador.[4]

As of 2018[update], Bitcoin is rarely used in transactions with merchants,[104] but it is popular to purchase illegal goods online.[105][106] Prices are not usually quoted in bitcoin and trades involve conversions into fiat currencies.[25] Commonly cited reasons for not using Bitcoin include high costs, the inability to process chargebacks, high price volatility, long transaction times, transaction fees (especially for small purchases).[104][107] Bloomberg reported that bitcoin was being used for large-item purchases on the site Overstock.com and for cross-border payments to freelancers.[108] As of 2015[update], there was little sign of bitcoin use in international remittances despite high fees charged by banks and Western Union who compete in this market.[25][109]

In September 2021, the Bitcoin Law made bitcoin legal tender in El Salvador, alongside the US dollar.[4] The adoption has been criticized both internationally and within El Salvador.[4][110] In particular, in 2022, the International Monetary Fund (IMF) urged El Salvador to reverse its decision.[111] As of 2022[update], the use of Bitcoin in El Salvador remains low: 80% of businesses refused to accept it despite being legally required to.[112] In April 2022, the Central African Republic (CAR) adopted Bitcoin as legal tender alongside the CFA franc,[113] but repealed the reform one year later.[114]

Bitcoin is also used by some governments. For instance, the Iranian government initially opposed cryptocurrencies, but later saw them as an opportunity to circumvent sanctions.[115] Since 2020, Iran has required local bitcoin miners to sell bitcoin to the Central Bank of Iran, allowing the central bank to use it for imports.[116] Some constituent states also accept tax payments in bitcoin, including Colorado (US)[117] and Zug (Switzerland).[118]

As of 2018[update], the overwhelming majority of bitcoin transactions took place on cryptocurrency exchanges.[104] Since 2014, regulated bitcoin funds also allow exposure to the asset or to futures as an investment.[119][120] Individuals and companies such as the Winklevoss twins[121] and Elon Musk's companies SpaceX and Tesla have massively invested in Bitcoin.[122][123] Bitcoin wealth is highly concentrated, with 0.01% holding 27% of in-circulation currency, as of 2021.[124] As of September 2023[update], El Salvador had $76.5 million worth of bitcoin in its international reserves.[125]

In 2018, research published in the Journal of Monetary Economics concluded that price manipulation occurred during the Mt. Gox bitcoin theft and that the market remained vulnerable to manipulation.[126] Research published in The Journal of Finance also suggested that trading associated with increases in the amount of the Tether cryptocurrency and associated trading at the Bitfinex exchange accounted for about half of the price increase in bitcoin in late 2017.[127][128] 2351a5e196