Bitcoin: Technical Background and Data Analysis Federal Reserve Board

Broadly speaking, Bitcoin is a scheme designed to facilitate the transfer of value be- tween parties. Unlike traditional payment systems, which transfer funds denominated in sovereign currencies, Bitcoin has its own metric for value called bitcoin (with lowercase letter \b", and abbreviated as BTC1). Bitcoin is a complex scheme, and its implementa- tion involves a combination of cryptography, distributed algorithms, and incentive driven behaviour. Moreover, recent developments suggest that Bitcoin operations may involve risks whose nature and proportion are little, if at all, understood. In light of these con- siderations, the purpose of this paper is to provide the necessary technical background to understand basic Bitcoin operations and document a set of empirical regularities related to Bitcoin usage. We present the micro-structure of the Bitcoin transaction process and highlight the use of cryptography for the purposes of transaction security and distributed maintenance of a ledger.