Bitcoin

Bitcoin
A digital Bitcoin wallet
ISO 4217 code	Not designated. Not recognized as a currency by SIX Interbank Clearing.
Central bank	The majority of the Bitcoin peer-to-peer network regulates transactions and balances.
Date of introduction	3 January 2009
Source	Bitcoin Genesis Block
User(s)	International
Inflation	Limited release
Source	Total BTC in Circulation
Method	The rate of inflation will be halved every 4 years until there are 21 million BTC
Subunit
.001	mBTC (millicoin)
.000001	μBTC (microcoin)
.00000001	satoshi
Symbol	BTC, , ฿, Ƀ

A common Bitcoin logo.

Bitcoin (BTC) is a digital currency first described in a 2008 paper by pseudonymous developer Satoshi Nakamoto, who called it a peer-to-peer, electronic cash system. Bitcoin creation and transfer is based on an open source cryptographic protocol and is not managed by any central authority. Each bitcoin is subdivided down to eight decimal places, forming 100 million smaller units called satoshis. Bitcoins can be transferred through a computer or smartphone without an intermediate financial institution.

The processing of Bitcoin transactions is secured by servers called Bitcoin miners. These servers communicate over an internet-based network and confirm transactions by adding them to a ledger which is updated and archived periodically. In addition to archiving transactions each new ledger update creates some newly-minted bitcoins. The number of new bitcoins created in each update is halved every 4 years until the year 2140 when this number will round down to zero. At that time no more bitcoins will be added into circulation and the total number of bitcoins will have reached a maximum of 21 million.

Bitcoin is accepted in trade by merchants and individuals in many parts of the world. Similar to other currencies, illicit drug and gambling transactions constitute some of its commercial usage. Although Bitcoin is promoted as a digital currency, many commentators have criticized Bitcoin's volatile exchange rate, relatively inflexible supply, and minimal use in trade.

Transactions

Bitcoins can be sent and received through various websites and applications.

Addresses

A bitcoin transaction log showing addresses.

Based on digital signatures, payments are made to Bitcoin "addresses" or "public keys": human-readable strings of numbers and letters around 33 characters in length, always beginning with the digit 1, as in the example of 175tWpb8K1S7NmH4Zx6rewF9WQrcZv245W. Addresses on the Bitcoin testnet begin with 3 instead of 1.

Users can obtain new Bitcoin addresses as necessary and often store them in a wallet file. Each address is created from a cryptographic password or "private key" that enables access to transfer bitcoins held by that address. A "wallet" file that contains Bitcoin addresses and private keys is usually encrypted with an additional password. Many services provide addresses associated with a user's account on that service to enable the service to hold funds on the user's behalf.

Confirmation

The network's software confirms transactions when it records them in new blocks in the global ledger known as the "block chain". A block of transactions is created roughly every ten minutes and is shared across the peer-to-peer network immediately. Since each block builds upon previous blocks, all previous transactions are made more secure and permanent with each additional block. After six confirmations (one hour on average), a transaction is usually considered to be reasonably irreversible.

Since miners are not required to include transactions in their blocks, initiators of a Bitcoin transaction may pay a transaction fee for faster confirmation. The Bitcoin miner who finds a block that includes a transaction is awarded the fee that went with that transaction. Therefore, the transaction fee acts as an incentive to miners verify and include transactions; without it the miners could choose not to do so and the transaction would not go through. However, transaction fees may not cover the cost of electrical power required to operate a bitcoin miner. As a result miners often rely on "mined" bitcoins as their only significant revenue.

Bitcoin-based coin

Banknotes and coins

Various vendors offer banknotes and coins denominated in bitcoins; a Bitcoin private key is sold as part of a coin or banknote. Usually, a seal has to be broken to access the key, while the receiving address remains visible on the outside so that the balance can be verified.^{[citation needed]}

A 1-BTC Casascius Coin was shown in the British Museum in London to represent Bitcoin.

History

Bitcoin is one of the first implementations of a concept called cryptocurrency. Cryptocurrency or math-based currency is a new form of money that uses cryptography to control its creation and management, rather than relying on central authorities.

Timeline

2008–2009

• In 2008, Satoshi Nakamoto posted a paper describing the Bitcoin protocol on the internet.
• In 2009, the Bitcoin network came into existence with the release of the first open source Bitcoin client and the issuance of the first bitcoins.

2010

• The prices for the first bitcoin transactions were negotiated by individuals on the bitcointalk forums. One notable transaction involved a 10,000 BTC pizza.
• On 6 August, a major vulnerability in the Bitcoin protocol was found. Transactions weren't properly verified before they were included in the transaction log or "block chain" which allowed for users to bypass Bitcoin's economic restrictions and create an indefinite number of bitcoins.
• On 15 August, the major vulnerability was exploited. Over 184 billion bitcoins were generated in a transaction, and sent to two addresses on the network. Within hours, the transaction was spotted and erased from the transaction log after the bug was fixed and the network forked to an updated version of the Bitcoin protocol. This was the only major security flaw found and exploited in Bitcoin's history.

2011–2012

• In June 2011, Wikileaks and other organizations began to accept Bitcoin for donations. The Electronic Frontier Foundation suspended Bitcoin acceptance, citing concerns about a lack of legal precedent about new currency systems, and that they "generally don't endorse any type of product or service."
• In late-2011, the Bitcoin exchange rate crashed from over $30 in June to below $2 in October.
• In October 2012, BitPay reported having over 1000 merchants accepting Bitcoin under its payment processing service.

2013

February

• The Bitcoin-based payment processor Coinbase reported selling $1 million in bitcoins in a single month at over $22 per bitcoin.
• The Internet Archive announced that it is ready to accept donations as bitcoins and that it intends to give employees the option to receive portions of their salaries in Bitcoin currency.

March

• The Bitcoin transaction log or "block chain" temporarily forked into two independent logs with differing rules on how transactions could be accepted. The Mt.Gox exchange briefly halted Bitcoin deposits and the exchange rate briefly dipped by 23% to $37 as the event occurred before recovering to previous level of approximately $48 in the following hours.
• In the US, the 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 (or MSBs), that may be subject to registration and other legal obligations.

April

• Payment processor BitInstant and Mt.Gox experienced processing delays due to insufficient capacity.
• On the 10th, the Bitcoin exchange rate dropped from $266 to $76 before returning to $160 within six hours.

Satoshi Nakamoto

Satoshi Nakamoto is a pseudonymous person or group of people who designed the original Bitcoin protocol in 2008 and launched the network in 2009. Except in connection with Bitcoin, no other links to this identity have been found. Nakamoto's involvement in the original Bitcoin protocol does not appear to extend past mid-2010. Nakamoto was active in making modifications to the Bitcoin software and posting technical information on the BitcoinTalk Forum until his contact with Bitcoin users began to fade. Until a few months before he left, he was responsible for creating the majority of the Bitcoin software, only rarely accepting contributions from other developers.

In April 2011, Nakamoto communicated to a Bitcoin contributor saying he had “moved on to other things.”

Identity

Investigations into the real identity of Satoshi Nakamoto have been attempted by The New Yorker and Fast Company. Fast Company's investigation brought up circumstantial evidence that indicated a link between an encryption patent application filed by Neal King, Vladimir Oksman and Charles Bry on 15 August 2008, and the bitcoin.org domain name which was registered 72 hours later. The patent application (#20100042841) contained networking and encryption technologies similar to Bitcoin's. After textual analysis, the phrase "...computationally impractical to reverse" was found in both the patent application and bitcoin's whitepaper. All three inventors explicitly denied being Satoshi Nakamoto.

The fork of March 2013

On 12 March 2013, a Bitcoin miner running version 0.8.0 of the Bitcoin software created a large block that was incompatible with earlier versions of the Bitcoin software due to its size. This created a split or "fork" in the block chain since older versions of the software did not accept this block as valid. Computers with the recent version of the software accepted the block and continued to build on the diverging chain, whereas older versions of the software rejected it and continued extending the block chain without the offending block. This split resulted in two separate transaction logs being formed without clear consensus, which allowed for the same funds to be spent differently on each chain. In response, the Mt.Gox exchange temporarily halted Bitcoin deposits. The exchange rate fell 23% to $37 on the Mt.Gox exchange as this event occurred but subsequently rose most of the way back to its prior level of approximately $48.

Developers at bitcoin.org resolved the split by recommending that users downgrade to "version 0.7", which utilized the oldest transaction log in the split. User funds largely remained unaffected and were available when network consensus was reached. The network reached consensus and continued to operate as normal a few hours after the split.

FinCEN regulation

On 18 March 2013, the Financial Crimes Enforcement Network (or FinCEN), a bureau of the United States Department of the Treasury, issued a report regarding centralized and decentralized "virtual currencies" and their legal status within "money services business" (MSB) and Bank Secrecy Act regulations. It classified digital currencies and other digital payment systems such as Bitcoin as "virtual currencies" because they are not legal tender under any sovereign jurisdiction. FinCEN cleared American users of Bitcoin of legal obligations by saying, "A user of virtual currency is not an MSB under FinCEN’s regulations and therefore is not subject to MSB registration, reporting, and recordkeeping regulations." However, it held that American entities who generate "virtual currency" such as bitcoins are money transmitters or MSBs if they sell their generated currency for national currency: "...a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter." This specifically extends to "miners" of the Bitcoin currency who may have to register as MSBs and abide by the legal requirements of being a money transmitter if they sell their generated bitcoins for national currency and are within the United States.

Additionally, FinCEN claimed regulation over American entities that manage bitcoins in a payment processor setting or as an exchanger: "In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency."

In summary, FinCEN's decision would require Bitcoin exchanges where bitcoins are traded for traditional currencies to disclose large transactions and suspicious activity, comply with money laundering regulations, and collect information about their customers as traditional financial institutions are required to do.

Patrick Murck of the Bitcoin Foundation criticized FinCEN's report as an "overreach" and claimed that FinCEN "cannot rely on this guidance in any enforcement action".

2013 bitcoin prices

The USD price of a bitcoin increased ten-fold in early 2013 from $13 on 1 January to $190 on 9 April, three months later. Among the factors which may have contributed to this rise were the European sovereign-debt crisis – particularly the 2012–2013 Cypriot financial crisis – statements by FinCEN improving the currency's legal standing and rising media and Internet interest.

As the market valuation of the total stock of Bitcoins approached $1 billion USD, some commentators called Bitcoin prices a bubble. In early April 2013, the price per bitcoin dropped from $266 to around $50 and then rose to stabilize around $100 over the succeeding several weeks.

Distribution

Total bitcoins over time

Unlike fiat currency, Bitcoin has no central issuing authority. Nodes on the network are programmed to increase the money supply according to a pre-determined schedule until the total number of bitcoins reaches 21 million. Operators of these miner nodes can then hold their new bitcoins, sell them on exchanges or trade them for other goods and services at their discretion.

Currently, 25 bitcoins are generated with each block found which occurs every 10 minutes on average. This amount, called the block reward, will be halved to 12.5 bitcoins within the year 2017 and halved periodically roughly every 4 years after until a hard-limit of 21 million bitcoins is reached around the year 2140. As of March 2013 over 10.5 million of the total 21 million bitcoins had been created; the current total number created is available online. In November 2012, half of the total supply was generated, and by end of 2016, three-quarters will have been generated. By around 2140, all bitcoins will have been generated with the final years producing only fractional units.

To ensure sufficient granularity of the money supply, clients can divide each bitcoin down to eight decimal places (providing a total of 2.1 × 10¹⁵ or 2.1 quadrillion units).

Exchange

Through various exchanges, bitcoins are bought and sold at a variable price against the value of other currency. Bitcoin has appreciated rapidly in relation to existing fiat currencies including the US dollar, euro and British pound.^{[citation needed]}

In April 2013, 1 bitcoin traded from $100–$260. Taking into account the total number of bitcoins mined, the monetary base of the bitcoin network stands at over $1 billion USD.

According to Reuters, undisclosed documents indicate that banks such as Morgan Stanley and Goldman Sachs have visited Bitcoin exchanges as often as 30 times a day. Employees of international banks and major financial organizations have shown interest in the Bitcoin markets as well.

Hedge funds

Financial laws can limit the types of assets institutional investors can buy, including alternative assets like Bitcoin. However, assets stored in a licensed product can usually be bought by regulated entities. Exante Ltd., a Malta-based investment firm, launched a Bitcoin hedge fund marketed towards institutional investors and high net-worth individuals. Bitcoin shares are currently traded through the Exante Hedge Fund Marketplace platform and are authorized and regulated by the Malta Financial Services Authority. As of March 2013, Exante holds $3.2 million (2.5€ million) in Bitcoin assets.

Derivatives

Derivatives on bitcoins are thinly available:

• iCBIT [1] offers futures contracts on bitcoins against multiple currencies.
• In April 2013, IG Group began to offer binary options on the price of bitcoins at a given date.

Protocol

Summary

Bitcoin provides a number of solutions to the problem of creating a decentralized currency and payment network. Key among them is the use of a block chain to achieve consensus and to solve the double-spending problem. The network timestamps transactions by including them blocks that form an ongoing chain called the block chain. Such blocks cannot be changed without redoing the work that was required to create each block since the modified block. The longest block chain serves not only as proof of the sequence of events but also records that this sequence of events was verified by a majority of the Bitcoin network's computing power. As long as a majority of computing power is controlled by nodes that are not cooperating to attack the network, they will generate the longest chain of records and outpace attackers.

The network itself requires minimal structure to share transactions. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will. Upon reconnection, a node will download and verify new blocks from other nodes to compete its local copy of the block chain.

Bitcoins

A bitcoin is defined by a chain of digitally-signed transactions that began with its creation as a block reward. Each owner transfers a some number of bitcoins to the next by digitally signing them over to the next owner in a Bitcoin transaction. A payee can then verify each previous transaction to verify the chain of ownership.

A diagram of a bitcoin transfer.

Although it would be possible to handle coins individually, it would be unwieldy to make a separate transaction for every cent in a transfer. Transactions are therefore allowed contain multiple inputs and outputs which allow bitcoins to be split and combined. Common transactions will have either a single input from a larger previous transaction or multiple inputs combining smaller amounts, and at most two outputs: one for the payment, and one returning the change, if any, back to the sender. Any difference between the total input and output amounts of a transaction is offered to miners as a transaction fee.

It should be noted that fan-out, where a transaction depends on several transactions, and those transactions depend on many more, is not a problem here. Since the network verifies every transaction along the way, there is never the need to extract a complete standalone copy of a transaction's history.

Hashes and signatures

Two consecutive SHA-256 hashes are used for transaction verification. RIPEMD-160 is used after a SHA-256 hash for Bitcoin digital signatures or "addresses". A Bitcoin address is the hash of an ECDSA public-key, computed as follows:

Bitcoin address/Public-key = Version concatenated with RIPEMD-160(SHA-256(public key))
Checksum = 1st 4 bytes of SHA-256(SHA-256(Key hash))
Bitcoin Address = Base58Encode(Key hash concatenated with Checksum)

Timestamps

The Bitcoin specification starts with the concept of a distributed timestamp server. A timestamp server works by taking a SHA256 hash function of a some data and widely publishing the hash, such as in a newspaper or Usenet post. The timestamp proves that the data must have existed at the time, in order to produce the hash. For Bitcoin, each timestamp includes the previous timestamp hash as input for its own hash. This dependency of one hash on another is what forms a chain, with each additional timestamp providing evidence that each of the previous timestamp hashes existed.

Bitcoin mining

To form a distributed timestamp server as a peer-to-peer network, Bitcoin uses a proof-of-work system similar to Adam Back's Hashcash and the internet rather than newspaper or Usenet posts. The work in this system is what is often referred to as Bitcoin mining.

A GPU-based bitcoin miner

The mining process involves scanning for a value that when hashed twice with SHA-256, begins with a number of zero bits. While the average work required increases exponentially with the number of leading zero bits required, a hash can always be verified by executing a single round of double SHA-256.

For the Bitcoin timestamp network, a valid "proof-of-work" is found by incrementing a nonce until a value is found that gives the block's hash the required number of leading zero bits. Once the hashing has produced a valid result, the block cannot be changed without redoing the work. As later records or "blocks" are chained after it, the work to change the block would include redoing the work for each subsequent block.

The best chain (black) consists of the longest series of transaction records from the genesis block (green) to the current block or record. Orphaned records (purple) exist outside of the best chain.

Majority consensus in Bitcoin is represented by the longest chain, which required the greatest amount of effort to produce it. If a majority of computing power is controlled by honest nodes, the honest chain will grow fastest and outpace any competing chains. To modify a past block, an attacker would have to redo the proof-of-work of that block and all blocks after it and then surpass the work of the honest nodes. The probability of a slower attacker catching up diminishes exponentially as subsequent blocks are added.

To compensate for increasing hardware speed and varying interest in running nodes over time, the difficulty of finding a valid hash is adjusted roughly every 2 weeks. If blocks were generated too fast, the difficulty increases and more hashes are required to find a block and to generate new bitcoins.

Bitcoin mining is a competitive endeavor. An arms race has been observed through the various hashing technologies that have been used to mine bitcoins: basic CPUs, High-end GPUs (Graphical Processing Units) common in many gaming computers, FPGAs (Field Programmable Gate Arrays) and ASICs (Application-specific integrated circuits) all have been used with the latter reducing profitability of each former technology. The newest addition, ASICs, are built into devices that are specialized for Bitcoin mining and that sell for $2499 USD each.

Computing power is often bundled together or "pooled" into a central server to reduce variance in miner income. Individual mining rigs often have to wait relatively long periods of time to confirm a block of transactions and receive payment. When miners cooperate in a pool, all participating miners receive a number of the bitcoins every time a participating server solves a block. This payment is proportional to the amount of work an individual miner contributed to help find that block.

Process

A rough overview of the process to mine bitcoins is:

1. New transactions are broadcast to all nodes.
2. Each miner node collects new transactions into a block.
3. Each miner node works on finding a difficult proof-of-work for its block.
4. When a node finds a proof-of-work, it broadcasts the block to all nodes.
5. New bitcoins are successfully collected or "mined" by the receiving node which found the proof-of-work.
6. Nodes accept the block only if all transactions in it are valid and not already spent.
7. Nodes express their acceptance of the block by working on creating the next block in the chain, using the hash of the accepted block as the previous hash.
8. Repeat.

Nodes are incentivized to work on extending the longest chain or risk their work being wasted. If two nodes broadcast different versions of the next block simultaneously, some nodes may receive one or the other first. In that case, they work on the first one they received, but save the other branch in case it becomes longer. The tie will be broken when the next proof-of-work is found and one branch becomes longer; the nodes that were working on the other branch will then switch to the longer one.

New transaction broadcasts do not necessarily need to reach all nodes. As long as they reach many nodes, however, transactions will get into a block before long. Block broadcasts are also tolerant of dropped messages. If a node does not receive a block, it will request it when it receives the next block and realizes it missed one.

Mined bitcoins

By convention, the first transaction in a block is a special transaction that produces new bitcoins owned by the creator of the block. This adds an incentive for nodes to support the network, and provides a way to initially distribute coins into circulation, since there is no central authority to issue them.

The continual and steady addition of new coins is analogous to gold miners expending resources to add gold to circulation. In this case, it is computing power and electricity that is expended.

The incentive can also be funded with transaction fees. If the output value of a transaction is less than its input value, the difference is a transaction fee that is added to the incentive value of the block containing the transaction.

Local system resources

Once the latest transaction of a coin is buried under enough blocks, fully spent transactions which preceded it can be discarded in order to save disk space. To facilitate this without breaking the block's hash, transactions are hashed in a Merkle tree, with only the root included in the block's hash. Old blocks can then be compacted by stubbing off branches of the tree. The interior hashes need not be stored.

A block header with no transactions would be about 80 bytes. Supposing that blocks are generated every 10 minutes, 80 bytes × 6 × 24 × 365 = 4.2 MB per year. With computer systems typically selling with 2 GB of RAM as of 2008, and Moore's law predicting current growth of 1.2 GB per year, storage should not be a problem even if the block headers need to be kept in memory.

Payment verification

Diagram showing how bitcoin transactions are verified.

It is possible to verify Bitcoin payments without running a full network node. A user only needs to keep a copy of the block headers of the longest proof-of-work chain, which are available by querying network nodes until it's apparent that the longest chain has been obtained. Then, get the Merkle branch linking the transaction to the block it is timestamped in. One can not check the transaction for oneself, but by linking it to a place in the chain, one can see that a network node has accepted it, and blocks added after it further confirm the network has accepted it.

As such, the verification is reliable as long as honest nodes control the network, but is more vulnerable if the network is overpowered by an attacker. While network nodes can verify transactions for themselves, the simplified method can be fooled by an attacker's fabricated transactions for as long as the attacker can continue to overpower the network. To protect against this, alerts from network nodes detecting an invalid block prompt the user's software to download the full block and verify alerted transactions to confirm their inconsistency. Businesses that receive frequent payments will probably still want to run their own nodes for more independent security and quicker verification.

Applications

The bitcoin protocol introduces various technologies and economic properties that have numerous applications.

Financial haven

Financial journalists and analysts have speculated that there was a correlation between higher bitcoin usage in Spain and the 2012–2013 Cypriot financial crisis, through which bank deposit levies as high as 40% could have been placed on bank deposits; conceding that bitcoin is serving as a sort of financial haven for some European savers. Nick Colas, a financial analyst, claimed a rally in the price of bitcoins was “One hundred percent...due to Cyprus,” and that “It means the Europeans are getting involved.”

In contrast, as of 2013, the use of bitcoin as a haven is limited for large amounts. As Colas also claims, “Bitcoin is good if you want to make a deposit of between $1,000 and $10,000. But the liquidity is just not there in the system for multimillion dollar transactions...”

Namecoin DNS

Namecoin is an alternative peer-to-peer Domain Name System that is based on the open-source bitcoin protocol. Like bitcoin, the Namecoin network reaches consensus every few minutes as to which names/values have been reserved or updated. Each user has its own copy of the full database, which attempts to reduce censorship on the DNS level. The use of public-key cryptography also means that only the owner is allowed to modify a name in the distributed database. For name resolution Namecoin uses .bit as pseudo-top-level domain.

Implications

As a currency

How many euros it took to buy a single bitcoin, February–March 2013; x-axis ranges from €1to €60

The large fluctuations in the dollar value of bitcoin has evoked criticism of bitcoin's economic suitability and legitimacy as a currency. An April 2013 article in The Atlantic stated that although bitcoin is purported to be a currency, it cannot be a currency due to its deflationary bias, which encourages hoarding. Forbes contributor Louis Woodhill stated that bitcoins are the cyber equivalent of rare postage stamps, or collectibles and can never be money. It has been noted that as a currency not under sovereign control, bitcoin is currently being used on the black-market Silk Road website (despite bitcoin's volatility) and is used by Iranians to evade foreign currency sanctions.

Conversely, there is also some evidence that it is being accepted by some mainstream businesses and hoarded by some individuals. There has also been growing awareness of its usage in black market transactions, frustrating its promoters. In 2013, the U.S. Treasury extended its anti-money laundering regulations to processors of bitcoin transactions. Bitcoins have gained traction in Argentina as an alternative to the official currency.

As an investment

Although it is considered by supporters to be a digital currency, virtual currency, or "payment scheme", it is often traded as an investment and accused of being a form of investment fraud known as a Ponzi scheme. On this subject, a report by the European Central Bank, using the U.S. Securities and Exchange Commission's definition of a Ponzi scheme, found that the use of bitcoins shares some characteristics with Ponzi schemes, but also has characteristics of its own which contradict several common aspects of Ponzi schemes.

In contrast, The Bitcoin Project describes bitcoin exclusively as an "experimental digital currency" and does not refer to it as an investment. Like many things considered to be investments, Bitcoins are also subject to theft. In addition, a study indicated that 45 percent of Bitcoin exchanges end up closing with many customers losing their money. Bitcoins, as an investment, have been described as lacking intrinsic value because their value depends only on the willingness of users to accept it.

Privacy

Bitcoin transactions are seen as relatively anonymous. Bitcoin is the medium of exchange on the Silk Road, an online black market. Some proponents of Bitcoin are concerned that such an association may bring about a negative perception of the currency.

The privacy of Bitcoin is a field of active academic research. Because Bitcoin transactions are broadcast to the entire network, they are inherently public. Using external information, it is possible, though usually difficult, to associate Bitcoin identities with real-life identities. Unlike regular banking, which preserves customer privacy by keeping transaction records private, loose transactional privacy is accomplished in Bitcoin by using many unique addresses for every wallet, while at the same time publishing all transactions. An IEEE paper has been published proposing a cryptographic extension to Bitcoin called Zerocoin, which would make Bitcoin anonymous and untraceable.

Botnet mining

In June 2011, Symantec warned about the possibility of botnets engaging in covert "mining" of bitcoins, consuming computing cycles, using extra electricity and possibly increasing the temperature of the computer. Some malware also used the parallel processing capabilities of the GPUs built into many modern-day video cards.

Later that month, the Australian Broadcasting Corporation caught an employee using the company's servers to generate Bitcoins without permission.

In mid-August 2011, Bitcoin miner botnets were found again, less than three months later bitcoin-mining trojans infecting Mac OS X were also discovered.

Incidents of theft

There have been incidents of theft of bitcoin balances:

• On 19 June 2011, a security breach of the Mt.Gox bitcoin exchange caused the nominal price of a bitcoin to fraudulently drop to one cent on the Mt.Gox exchange, after a hacker allegedly used credentials from a Mt.Gox auditor's compromised computer illegally to transfer a large number of bitcoins to himself. He used the exchange's software to sell them all nominally, creating a massive "ask" order at any price. Within minutes the price corrected to its correct user-traded value. Accounts with the equivalent of more than USD 8,750,000 were affected.
• In July 2011, the operator of Bitomat, the third largest bitcoin exchange, announced that he lost access to his wallet.dat file with about 17,000 bitcoins (roughly equivalent to 220,000 USD at that time). He announced that he would sell the service for the missing amount, aiming to use funds from the sale to refund his customers.
• In August 2011, MyBitcoin, a now defunct bitcoin transaction processor, declared that it was hacked, which resulted in it being shut down, with paying 49% on customer deposits, leaving more than 78,000 bitcoins (roughly equivalent to 800,000 USD at that time) unaccounted for.
• In early August 2012, a lawsuit was filed in San Francisco court against Bitcoinica — a bitcoin trading venue — claiming about 460,000 USD from the company. Bitcoinica was hacked twice in 2012, which led to allegations of neglecting the safety of customers' money and cheating them out of withdrawal requests.
• In late August 2012, an operation titled Bitcoin Savings and Trust was shut down by the owner, allegedly leaving around $5.6 million in bitcoin-based debts; this led to allegations of the operation being a Ponzi scheme. In September 2012, it was reported that U.S. Securities and Exchange Commission has started an investigation on the case.
• In September 2012, Bitfloor, a bitcoin exchange, also reported being hacked, with 24,000 bitcoins (roughly equivalent to 250,000 USD) stolen. As a result, Bitfloor suspended operations. The same month, Bitfloor resumed operations, with its founder saying that he reported the theft to FBI, and that he is planning to repay the victims, though the time frame for such repayment is unclear.
• On 3 April 2013, Instawallet, a web-based wallet provider, was hacked, resulting in the theft of over 35,000 bitcoins ($129.90 at the time of trade, or nearly $4.6 million USD.) Instawallet suspended operations.

Taxation

Matthew Elias, founder of the Cryptocurrency Legal Advocacy Group (CLAG) published "Staying Between the Lines: A Survey of U.S. Income Taxation and its Ramifications on Cryptocurrencies", which discusses "the taxability of cryptocurrencies such as bitcoin." CLAG "stressed the importance for taxpayers to determine on their own whether taxes are due on a bitcoin-related transaction based on whether one has "experienced a realization event." Such examples are "when a taxpayer has provided a service in exchange for bitcoins, a realization event has probably occurred, and any gain or loss would likely be calculated using fair market values for the service provided."

Energy use and environmental impact

An April 2013 estimate showed that the amount of energy being used every day to mine bitcoins was equivalent to the amount capable of powering about 31,000 American homes. This was estimated to be about USD $147,000 worth of energy. In comparison, profits made from a day's worth of bitcoin mining were given at about $681,000.

Reception

In 2011, economist Paul Krugman, wrote that "[bitcoin] has fluctuated sharply, but overall it has soared. So buying into [bitcoin] has, at least so far, been a good investment. But does that make the experiment a success? Um, no. What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in [bitcoin]." In 2013, Krugman stated that unlike gold or paper fiat currencies, bitcoin derives its value solely from a self-fulfilling expectation that others will accept it as payment. He also stated that it is unnecessarily wasteful to consume real resources, such as electric power, on the creation of bitcoins.

In March 2013, Nick Colas a Chief Market Strategist at ConvergEx Group, a Bank of New York Mellon investment firm – analyzed bitcoin, saying "there is much to learn from [bitcoin] in the world of stateless currencies," and that "confidence in money as a store of value is the ultimate driver of its value, both in the cyber and real worlds. I have no idea which way [bitcoins] will trade in the next 2 days or 2 years, but the whole process of starting a new Internet currency is a great case study in how real people use real currency."

In April 2013, an analysis by financial journalist Felix Salmon—formerly of Portfolio Magazine, Euromoney and a blogging editor for Reuters—considered the current of price of bitcoins to be a bubble. He noted that while the value of bitcoins is strongly affected by news media exposure and that they are an "uncomfortable combination of commodity and currency," Bitcoin was "in many ways the best and cleanest payments mechanism the world has ever seen."

Economist John Quiggin has claimed that "Bitcoin is perhaps the finest example of a pure bubble", and that it provides a conclusive refutation of the Efficient Markets Hypothesis (EMH). While other assets used as currency—such as gold, tobacco and U.S. dollars—have value independent of people's willingness to accept them as payment, Quiggin argues that "in the case of Bitcoin there is no source of value whatsoever" and that:

Since Bitcoins do not generate any actual earnings, they must appreciate in value to ensure that people are willing to hold them. But an endless appreciation, with no flow of earnings or liquidation value, is precisely the kind of bubble the EMH says can’t happen.

Heidi Moore, US finance and economics editor at The Guardian stated that Bitcoin is not a legitimate currency. She writes:

An obscure digital currency, used mostly for running drugs and laundering money for dictators... Bitcoin is a currency created years ago by an obscure hacker in the spirit of subversion, to trade goods while dodging the gimlet eye of financial regulators. While theoretically it can be used for respectable online purchases, it is too complicated to buy and maintain for people who aren't online 18 hours a day, so it is used primarily to fuel a shadow economy of vice.

Carnegie Mellon Professor Nicholas Christin studied online black market Silk Road and concluded that law enforcement authorities could stop it by disrupting its use of bitcoin for anonymous transactions. As of September 2012, Christin estimated that on Silk Road, where all transactions are required to use bitcoin, volume amounted to approximately $1.9 million per month. Online arms merchant Executive Outcomes, which deals in illicit goods, accepts only bitcoin in payment to ensure anonymity according to its site administrator. Christin stated that bitcoin increases the level of anonymity in such transactions, possibly making it more difficult to identify the buyer of a weapon used to commit a crime.

Popular culture

The Good Wife

Bitcoin was featured as a subject within a fictionalized trial on the CBS legal drama The Good Wife in the third season episode "Bitcoin for Dummies". The host of CNBC's Mad Money, Jim Cramer, played himself in a courtroom scene where he testifies that he doesn’t consider bitcoin a true currency, saying “There’s no central bank to regulate it; it’s digital and functions completely peer to peer.”

See also

• Anonymous Internet banking
• Complementary currency
• Crypto-anarchism
• Digital currency exchanger
• Internet privacy
• Private currency
• Litecoin
• PPCoin
• Ripple monetary system
• Ven (currency)

External links

• Satoshi Nakamoto's original paper, Bitcoin: A Peer-to-Peer Electronic Cash System
• A cogent critique of Bitcoin, with suggestions for an improved cryptocurrency
• An illustrated history of Bitcoin crashes from Forbes
• An appreciation from The Economist of Bitcoin as a new specie
• A paper from Stanford University
• Bitcoin Wiki