Though transaction fees are optional, miners can choose which transactions to process and prioritize those that pay higher fees. Miners may choose transactions based on the fee paid relative to their storage size, not the absolute amount of money paid as a fee. These fees are generally measured in satoshis per byte (sat/b). The size of transactions is dependent on the number of inputs used to create the transaction, and the number of outputs.:ch. 8
Bitcoin is the first cryptocurrency, a concept that was discussed in the late 90s. The first Bitcoin specification and proof of concept was published in 2009 in a cryptography mailing list. The concept was presented by a person or group known as Satoshi Nakamoto. The real identity of Nakamoto has been a mystery since that time, with various theories on who the individual or group may be.
Bitcoin's most important characteristic is that it is decentralized. No single institution controls the bitcoin network. It is maintained by a group of volunteer coders, and run by an open network of dedicated computers spread around the world. This attracts individuals and groups that are uncomfortable with the control that banks or government institutions have over their money.
At this point, the actual mining begins. In essence, each miner now tries to demonstrate to the rest of the network that his or her block of verified payments is the one true block, which will serve as the permanent record of those 2,000 or so transactions. Miners do this by, essentially, trying to be the first to guess their block’s numerical password. It’s analogous to trying to randomly guess someone’s computer password, except on a vastly larger scale. Carlson’s first mining computer, or “rig,” which he ran out of his basement north of Seattle, could make 12 billion “guesses” every second; today’s servers are more than a thousand times faster.
The Bitcoin protocol was designed to encourage the distribution of hashing power among miners rather than its concentration. The reason? Miners wield power not only over which transactions get added to the Bitcoin blockchain but over the evolution of the Bitcoin software itself. When updates are made to the protocol, it is the miners, largely, who enforce these changes. If the miners band together and choose not to deploy an update from Bitcoin’s core developers, they can stall transactions or even cause the currency to split into competing versions.
The unit of account of the bitcoin system is a bitcoin. Ticker symbols used to represent bitcoin are BTC[b] and XBT.[c] Its Unicode character is ₿.:2 Small amounts of bitcoin used as alternative units are millibitcoin (mBTC), and satoshi (sat). Named in homage to bitcoin's creator, a satoshi is the smallest amount within bitcoin representing 0.00000001 bitcoins, one hundred millionth of a bitcoin. A millibitcoin equals 0.001 bitcoins, one thousandth of a bitcoin or 100,000 satoshis.
Bitcoin mining is the process by which transactions are verified and added to the public ledger, known as the block chain, and also the means through which new bitcoin are released. Anyone with access to the internet and suitable hardware can participate in mining. The mining process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle. The participant who first solves the puzzle gets to place the next block on the block chain and claim the rewards. The rewards, which incentivize mining, are both the transaction fees associated with the transactions compiled in the block as well as newly released bitcoin. (Related: How Does Bitcoin Mining Work?)
In March 2013 the blockchain temporarily split into two independent chains with different rules. The two blockchains operated simultaneously for six hours, each with its own version of the transaction history. Normal operation was restored when the majority of the network downgraded to version 0.7 of the bitcoin software. The Mt. Gox exchange briefly halted bitcoin deposits and the price dropped by 23% to $37 before recovering to previous level of approximately $48 in the following hours. The US Financial Crimes Enforcement Network (FinCEN) established regulatory guidelines for "decentralized virtual currencies" such as bitcoin, classifying American bitcoin miners who sell their generated bitcoins as Money Service Businesses (MSBs), that are subject to registration or other legal obligations. In April, exchanges BitInstant and Mt. Gox experienced processing delays due to insufficient capacity resulting in the bitcoin price dropping from $266 to $76 before returning to $160 within six hours. The bitcoin price rose to $259 on 10 April, but then crashed by 83% to $45 over the next three days. On 15 May 2013, US authorities seized accounts associated with Mt. Gox after discovering it had not registered as a money transmitter with FinCEN in the US. On 23 June 2013, the US Drug Enforcement Administration (DEA) listed 11.02 bitcoins as a seized asset in a United States Department of Justice seizure notice pursuant to 21 U.S.C. § 881. This marked the first time a government agency had seized bitcoin. The FBI seized about 26,000 bitcoins in October 2013 from the dark web website Silk Road during the arrest of Ross William Ulbricht. Bitcoin's price rose to $755 on 19 November and crashed by 50% to $378 the same day. On 30 November 2013 the price reached $1,163 before starting a long-term crash, declining by 87% to $152 in January 2015. On 5 December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoins. After the announcement, the value of bitcoins dropped, and Baidu no longer accepted bitcoins for certain services. Buying real-world goods with any virtual currency had been illegal in China since at least 2009.