Bitcoin - Wikipedia, The Free Encyclopedia

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en.wikipedia.org/wiki/Bitcoin

Bitcoin

A digital bitcoin wallet

217 Not designated. Not recognized as a currency by SIX Interbank Clearing.

al bank The majority of the bitcoinpeer-to-peernetwork regulates transactions and balances.[1][2]

of

uction

3 January 2009

e Bitcoin Genesis Block(http://blockexplorer.com/block/000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f

s) International

ion Limited release

e Total BTC in Circulation (http://blockchain.info/charts/total-bitcoins)

d The rate of inflation will be halved every 4 years until there are 21 million BTC[3]

it

mBTC (millicoin)

01 BTC (microcoin)

0001 satoshi[4]

ol BTC, , ,[5]

A common bitcoin logo.

BitcoinFrom Wikipedia, the free encyclopedia

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.[1][6][7] Bitcoin

creation and transfer is based on an open source cryptographic

protocol and is not managed by any central authority. Each bitcoinis subdivided into 100 million smaller units called satoshis, defined

by eight decimal places.[4] Bitcoins can be transferred through a computer or smartphone without an intermediate

financial institution.[8]

The processing of bitcoin transactions is automated 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 archive

periodically.[2] In addition to archiving transactions each new ledger update creates some newly-minted bitcoins.
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en.wikipedia.org/wiki/Bitcoin 2

The number of new bitcoins created in each update is halved every 4 years until the year 2140 where 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 top out at 21 million bitcoins.[1][9]

Bitcoin is accepted in trade by various merchants and individuals in many parts of the world. A large share of such

commercial use is believed to be for illicit drug and gambling transactions. [10][11][12][13] Although bitcoin is

promoted as a digital currency, many commentators have criticized Bitcoin's volatile market value, relatively

inflexible supply, and minimal use in trade.[14][15][16][17]

Contents

1 Transactions

1.1 Addresses

1.2 Confirmation

1.3 Banknotes and coins

2 History2.1 Timeline

2.1.1 20082009

2.1.2 2010

2.1.3 20112012

2.1.4 2013

2.1.4.1 February

2.1.4.2 March

2.1.4.3 April

2.2 Satoshi Nakamoto

2.2.1 Identity2.3 The fork of March 2013

2.4 FinCEN regulation

2.5 2013 values

3 Distribution

3.1 Exchange

3.1.1 Hedge funds

3.1.2 Derivatives

4 Protocol

4.1 Summary

4.2 Bitcoins

4.2.1 Hashes and signatures

4.3 Timestamps

4.4 Bitcoin mining

4.4.1 Process

4.4.2 Mined bitcoins

4.5 Local system resources

4.6 Payment verification

5 Applications
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A bitcoin transaction log showing addresses.

5.1 Financial haven

5.2 Namecoin DNS

6 Implications

6.1 As a currency

6.2 As an investment

6.3 Privacy

6.4 Botnet mining

6.5 Incidents of theft6.6 Taxation

6.7 Energy use and environmental impact

7 Reception

8 Popular culture

8.1 The Good Wife

9 See also

10 References

11 External links

Transactions

Bitcoins can be sent and received through various websites and apps after being bought on an exchange.

Addresses

Based on digital signatures, payments are made to

bitcoin "addresses" or "public keys": human-

readable strings of numbers and letters around 33characters in length, always beginning with the digit

1 or 3, as in the example of

175tWpb8K1S7NmH4Zx6rewF9WQrcZv245W.

Users obtain new bitcoin addresses as necessary;

these are stored in a wallet file with links to

cryptographic passwords or "private keys" that

enable access to and transfer of bitcoins. A file or

"wallet" containing bitcoin addresses is usually

encrypted with an additional password.

Confirmation

The network's software confirms transactions when it records them in the transaction log or "blockchain" stored

across the peer-to-peer network every 10-minutes. Confirmation of future transaction records makes the ones

before it increasingly permanent. After six confirmed records or "blocks" (usually one hour), a transaction is usuall

considered confirmed beyond reasonable doubt.
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Bitcoin-based

coin

Initiators of a bitcoin transaction may voluntarily pay a transaction fee for the confirmation of these records. Any

fees are collected by the operators of bitcoin servers often called nodes or "bitcoin miners". The transaction fee

acts as an incentive to the miners to expend computational resources verifying 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 the network server operators often rely on

"mined" bitcoins as their only significant revenue.[18]

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.[19]

History

Bitcoin is one of the first implementations of a concept called "crypto-currency". Based on this concept, bitcoin is

designed around the idea of a new form of money that uses cryptography to control its creation and transactions,

rather than relying on central authorities.

Timeline

20082009

In 2008, Satoshi Nakamoto posted a paper describing the bitcoin protocol on the internet. [1][9][20][21]

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.[9][22][23][24]

2010

The initial prices for bitcoins were set by individuals on the bitcointalk forums. One notable transaction

involved a 10,000 BTC pizza.[9]

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 "blockchain" which allowed for users to bypass bitcoin's

economic restrictions and create an indefinite number of bitcoins.[25][26]

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 erase

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.[25][26]
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20112012

In June 2011, Wikileaks[27] and other organizations began to accept bitcoin as donations. The Electronic

Frontier Foundation initially did but has since stopped, citing concerns about a lack of legal precedent abou

new currency systems, and that they "generally don't endorse any type of product or service."[28]

In late-2011, the bitcoin price crashed from $30 to below $2. Some claimed the crash was due to a lower

cost in producing bitcoins through cheaper computing power.[29]

In October 2012, BitPay reported having over 1000 merchants accepting Bitcoin under its payment

processing service.[30]

2013

February

The bitcoin-based payment processor Coinbase reported selling $1 million in bitcoins in a single month at

over $22 per bitcoin.[31]

The Internet Archive announced that it is ready to accept donations in the form of bitcoin and that it intends

to give employees the option to receive portions of their salaries in bitcoin currency. [32]

March

The bitcoin transaction log or "blockchain" temporarily forked into two independent logs with differing rules

on how transactions could be accepted. The Mt.Gox bitcoin exchange briefly halted bitcoin deposits. Bitco

prices briefly dipped by 23% to $37 as the event occurred[33][34] before recovering to their previous level ithe following hours, a price of approximately $48.[35]

In the US, the Financial Crimes Enforcement Network (FinCEN) established regulatory guidelines for

"virtual currencies" such as bitcoin, classifying American "bitcoin miners" who sell their generated bitcoins as

Money Service Businesses (or MSBs), that may now be subject to registration and other legal

obligations.[36][37][38]

April

Payment processor BitInstant and Mt.Gox experienced processing delays due to insufficient capacity.[39]

On the 10th, bitcoin dropped from a price of $266 to $105 before returning to a price of $160 within six

hours.[40]

Satoshi Nakamoto
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Satoshi Nakamoto was the pseudonymous person or group of people who designed the original bitcoin protocol i

2008 and launched the bitcoin network in 2009. Beyond bitcoin, no other links to this identity have been found. H

involvement in the original bitcoin protocol does not appear to extend past mid-2010.[9] Nakamoto was active in

making modifications to the bitcoin network 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 protocol, only rarely accepting contributions.[9]

In April 2011, Satoshi communicated to a bitcoin contributor saying he had moved on to other things.[41]

Identity

Investigations into the real identity of Satoshi Nakamoto have been attempted by The New YorkerandFast

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

(http://patent.ipexl.com/U2S/20100042841.html)) 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.[1] All three inventors explicitly denied being Satoshi Nakamoto.[42][43]

The fork of March 2013

On 12 March 2013, a bitcoin server (also called a "miner") running the more recent "version 0.8.0" of the bitcoin

protocol created a large record in bitcoin's transaction log (called the blockchain) that was incompatible with earlie

versions of the bitcoin protocol due to its size. This created a split or "fork" in the transaction log. Some users ran

the more recent version of the protocol, accepting and building on the diverging log, whereas other users ran older

versions of the bitcoin protocol and rejected it. This split resulted in two separate transaction logs being formed

without clear consensus, which allows for the same funds on both chains to be double-spent. In response, the

Mt.Gox bitcoin exchange temporarily halted bitcoin deposits.[44] The price of a bitcoin fell 23% to $37 on theMt.Gox bitcoin exchange as this event occurred but subsequently rose most of the way back to its prior level of

approximately $48.[33][34]

Developers at bitcoin.org attempted to resolve 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 whe

network consensus was reached.[45] The network reached consensus and continued to operate as normal a few

hours after the split.[46]

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. [38] It classified digital

currencies and other digital payment systems such as bitcoin as "virtual currencies" because they are not legal tend

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 FinCENs 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
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Total bitcoins over time

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 network who may have to register as an MSB and abide by the respective requirements of

being a money transmitter if they sell their generated bitcoins for national currency and are within the United

States.[36]

Additionally, FinCEN claimed regulation over American entities that manage bitcoins in a payment processor settin

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 acceptanc

and transfer of currency, funds, or other value that substitutes for currency."[37][38]

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.[47][48]

Patrick Murck of the Bitcoin Foundation criticized FinCEN's testament as an "overreach" and claimed that FinCEN

"cannot rely on this guidance in any enforcement action".[49]

2013 values

The USD value of a bitcoin increased ten-fold in early 2013 from $13/BTC on 1 January to $190/BTC on 9 Apri

three months later. Suggested reasons for the rise in price included the European sovereign-debt crisis particular

the 20122013 Cypriot financial crisis statements by FinCEN improving the currency's legal standing and rising

media and Internet interest.[50][51][52][53]

As the market value of the total bitcoin supply approached $1 billion USD, financial commentators described

bitcoin prices as a bubble.[54][55][56] On 10 April 2013, Bitcoin dropped from a price of $266 to $105 before

returning to a value of $160 within six hours.

[40]

istribution

Unlike fiat currency, bitcoin has no centralized issuing

authority.[57][58][59] The network is programmed to increase

the money supply as a geometric series until the total

number of bitcoins reaches 21 million BTC, by issuing them

to nodes that verify transaction records through intense

bruteforce hashing with computing power.[3] These nodes

can then sell their earned bitcoins on exchanges or tradethem at their discretion.

Currently, 25 bitcoins are generated every 10 minutes. This

will be halved to 12.5 BTC within the year 2017 and halved

continuously every 4 years after until a hard-limit of 21

million bitcoins is reached within the year 2140.[1][9] As of

March 2013 over 10.5 million of the total 21 million BTC

had been created; the current total number created is

available online.[60] In November 2012, half of the total
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supply was generated, and by end of 2016, three-quarters will have been generated. By 2140, all bitcoins will hav

been generated with the last one consisting of fractional parts.

To ensure this granularity of the money supply, clients can divide each BTC unit down to eight decimal places (a

total of 2.1 1015 or 2.1 quadrillion units).[61]

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 BTC 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.[62][63]

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.[64]

Hedge funds

Financial laws can limit the type 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

authorized and regulated by the Malta Financial Services Authority. As of March 2013, Exante holds $3.2 million

(2.5 million) in bitcoin assets.[65]

Derivatives

Derivatives on bitcoins are thinly available:

iCBIT [1] (https://icbit.se/) offers futures contracts on bitcoins against multiple currencies.[66]

In April 2013, IG Group began to offer binary options on the price of bitcoins at a given date.[67]

Protocol

Summary

Bitcoin is a solution to the double-spending problem of using a peer-to-peer network to manage transactions. The

network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a

record or chain that cannot be changed without redoing the proof-of-work. The longest chain of records (called

blocks) serves not only as proof of the sequence of events witnessed but also as proof that it came from the larges

pool of computing power. As long as a majority of computing power is controlled by nodes that are not

cooperating to attack the network, they'll generate the longest chain of records and outpace attackers.
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A diagram of a bitcoin transfer.

The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave

and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they

were gone.[1][2]

Bitcoins

A bitcoin is defined by its chain of ECDSA digital signatures. Each owner transfers the coin to the next by digitally

signing a hash of the previous transaction and the public key (or address) of the next owner and adding these to thend of the coin. A payee can verify the signatures to verify the chain of ownership.

Although it would be possible to handle coins individually, it would be

unwieldy to make a separate transaction for every cent in a transfer. To

allow value to be split and combined, transactions contain multiple inputs

and outputs. Normally there will be 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.

It should be noted that fan-out, where a transaction depends on severaltransactions, and those transactions depend on many more, is not a

problem here. There is never the need to extract a complete standalone

copy of a transaction's history.

Hashes and signatures

Two SHA-256 hashes on top of each are used for transaction verification; however, RIPEMD-160 is used on top

of a SHA256 hash for bitcoin digital signatures or "addresses". A bitcoin address is specifically the hash of an

ECDSA public-key, computed this way:

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 a timestamp. A timestamp server works by taking a SHA256 hash function of

block of items to be timestamped 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, obviously, in order to get into the hash. Eachtimestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing

the ones before it.

Bitcoin mining

To implement a distributed timestamp server on a peer-to-peer basis, bitcoin uses a proof-of-work system similar

to Adam Back's Hashcash, rather than newspaper or Usenet posts.[2] This is often called bitcoin mining.
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A GPU-based bitcoin miner

The main chain(black) consists

of the longest

series of

transaction

records from the

genesis block

(green) to the

current block or

record.

Orphanedrecords (purple)

exist outside of

the main chain.

The mining process or proof-of-work process involves scanning for a value that when hashed with SHA-256, the

hash begins with a number of zero bits. The average work required is

exponential in the number of zero bits required, but can always be

verified by executing a single hash.

For the bitcoin timestamp network, it implements the mining process or

"proof-of-work" by incrementing a nonce in the record or "block" until a

value is found that gives the block's hash the required zero bits. Once the

hashing effort has been expended to make it satisfy the proof-of-work,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 all the blocks after it.

The majority decision is represented by the longest chain, which has the greatest proof-of-

work effort invested in it. If a majority of computing power is controlled by honest nodes, the

honest chain will grow the fastest and outpace any competing chains. To modify a past

block, an attacker would have to redo the proof-of-work of the block and all blocks after it

and then catch up with and surpass the work of the honest nodes. The probability of a

slower attacker catching up diminishes exponentially as subsequent blocks are added.[2]

To compensate for increasing hardware speed and varying interest in running nodes over

time, the proof-of-work difficulty is determined by a moving average targeting an average

number of blocks per hour. If they're generated too fast, the difficulty increases. [2]

Today, bitcoin mining is a competitive field. An arms race has been observed through the

various hashing technologies that are used to mine bitcoins and confirm transactions: 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. The newest addition, ASICS, are built into specialized rigs that sell for $2499USD each.[68]

Computing power is often bundled together from various servers or "pooled" into a central

server to more effectively confirm blocks of transactions. Single servers often have to wait

relatively long periods of time to confirm a block of transactions and receive payment for

their "work" or hashing. When resources are "pooled", all participating servers receive a

proportional number of the bitcoins earned every time any one participating server resolves a

block.[69]

Process

The steps to run the network and generate or "mine" bitcoins are:[2]

1. New transactions are broadcast to all nodes.

2. Each node collects new transactions into a block.

3. Each 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. 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.
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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 always consider the longest chain to be the correct one and will keep working on extending it. If two node

broadcast different versions of the next block simultaneously, some nodes may receive one or the other first. In tha

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 th

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, they

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 starts a new coin owned by the creator o

the block. This adds an incentive for nodes to support the network,

[2]

and provides a way to initially distribute coiinto 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.[2] 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 valu

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, the spent transactions which preceded it can b

discarded in order to save disk space. To facilitate this without breaking the block's hash, transactions are hashed

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

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 he can get by querying network nodes until he is

convinced he has the longest chain, and obtain the Merkle branch linking the transaction to the block it is

timestamped in. He can not check the transaction for himself, but by linking it to a place in the chain, he can see th

a network node has accepted it, and blocks added after it further confirm the network has accepted it.
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Diagram showing how bitcoin transactions are verified.

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 overpow

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 quick

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 usagein Spain and the 20122013 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.[70][71][72] 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 syste

for multimillion dollar transactions...[73]

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.[74] 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

The large fluctuations in the dollar value of bitcoin has evoked criticism of bitcoin's economic suitability and

legitimacy as a currency.[17][75] 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. [76] Forbes contributor

Louis Woodhill stated that bitcoins are the cyber equivalent of rare postage stamps, or collectibles and can never

be money.[77] 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[78]) and is used by Iranians to evade foreign
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How many euros it took to buy asingle bitcoin, FebruaryMarch 2013

x-axis ranges from 1to 60

currency sanctions.[79]

Conversely, there is also some evidence that it is being accepted by some

mainstream businesses[80] and hoarded by some individuals.[81] 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.

[13][82]

Bitcoins have gained traction in Argentina as analternative to the official currency.[83]

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[84] and accused of being a form of investment fraud known as a Ponzi scheme.[64][85] 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 als

has characteristics of its own which contradict several common aspects of Ponzi schemes.[86]

In contrast, The Bitcoin Project describes bitcoin exclusively as an "experimental digital currency" and does not

refer to it as an investment.[87] 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.[88] Bitcoins, as an investment, have been described as lacking intrinsic value because their value depends

only on the willingness of users to accept it.[89][90][91]

Privacy

Bitcoin transactions are seen as relatively anonymous.[92] Bitcoin is the medium of exchange on the Silk Road, an

online black market.[93][94] Some proponents of Bitcoin are concerned that such an association may bring about a

negative perception of the currency.[95]

The privacy of Bitcoin is a field of active academic research.[96] 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.[97][98] Unlike regular banking,[99] which preserves customer

privacy by keeping transaction records private, loose transactional privacy is accomplished in Bitcoin by using ma

unique addresses for every wallet, while at the same time publishing all transactions. An IEEE paper proposing a

cryptographic extension to Bitcoin, Zerocoin, has been published.[100][101]

Botnet mining

In June 2011, Symantec warned about the possibility of botnets engaging in covert "mining" of bitcoins,[102][103]

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.[104]

Later that month, the Australian Broadcasting Corporation caught an employee using the company's servers to

generate Bitcoins without permission.[105]
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In mid-August 2011, Bitcoin miner botnets were found again,[106] less than three months later bitcoin-mining trojan

infecting Mac OS X were also discovered.[107]

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 tfraudulently 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 minute

the price corrected to its correct user-traded value.[108][109][110][111][112][113] Accounts with the equivalent

of more than USD 8,750,000 were affected.[110]

In July 2011, the operator of Bitomat, the third largest bitcoin exchange, announced that he lost access to hi

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.[114]

In August 2011, MyBitcoin, a now defunct bitcoin transaction processor, declared that it was hacked, whic

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.[115][116]

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.[117][118]

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.[119][120][121][122] In September 2012, it was reported that U.S. Securities and Exchange

Commission has started an investigation on the case.[123]

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.[124][125] 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.[126]

On 3 April 2013, Instawallet, a web-based wallet provider, was hacked,[127] resulting in the theft of over

35,000 bitcoins[128] ($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."[129] 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
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realization event."[129] 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 fo

the service provided."[129]

Energy use and environmental impact

An April 2013 estimate[130] 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 aboutUSD $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 isnt to make people holding money rich; we want it to facilitate

transactions and make the economy as a whole rich. And thats not at all what is happening in [bitcoin]."[17] 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.[131] He also stated that it is unnecessarily wasteful to consume re

resources, such as electric power, on the creation of bitcoins.[132]

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."[133]

In April 2013, an analysis by financial journalist Felix Salmonformerly ofPortfolio Magazine,Euromoney and

a blogging editor for Reutersconsidered 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."[134]

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).[135] While other assets used as

currencysuch as gold, tobacco and U.S. dollarshave 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 cant happen.

Heidi Moore, US finance and economics editor at The Guardian stated that Bitcoin is not a legitimate

currency.[136] She writes:
http://en.wikipedia.org/wiki/Bitcoin#cite_note-Guardian-136http://en.wikipedia.org/wiki/The_Guardianhttp://en.wikipedia.org/wiki/Bitcoin#cite_note-QuigginNI-135http://en.wikipedia.org/wiki/Efficient_Markets_Hypothesishttp://en.wikipedia.org/wiki/John_Quigginhttp://en.wikipedia.org/wiki/Bitcoin#cite_note-134http://en.wikipedia.org/wiki/News_mediahttp://en.wikipedia.org/wiki/Economic_bubblehttp://en.wikipedia.org/wiki/Reutershttp://en.wikipedia.org/wiki/Euromoneyhttp://en.wikipedia.org/wiki/Conde_Nast_Portfoliohttp://en.wikipedia.org/wiki/Felix_Salmonhttp://en.wikipedia.org/wiki/Bitcoin#cite_note-BIConvergEx-133http://en.wikipedia.org/wiki/Bank_of_New_York_Mellonhttp://en.wikipedia.org/wiki/Bitcoin#cite_note-132http://en.wikipedia.org/wiki/Bitcoin#cite_note-131http://en.wikipedia.org/wiki/Bitcoin#cite_note-Krugman1-17http://en.wikipedia.org/wiki/Paul_Krugmanhttp://en.wikipedia.org/wiki/Bitcoin#cite_note-130http://en.wikipedia.org/wiki/Bitcoin#cite_note-BitCoin_Tax_issues_Oct_2012-129http://en.wikipedia.org/wiki/Bitcoin#cite_note-BitCoin_Tax_issues_Oct_2012-129


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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.[136]

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.[10] 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.[137] Online arms merchant Executive Outcomes, which deals i

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.[138]

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'sMad Money, Jim Cramer, played himself in a

courtroom scene where he testifies that he doesnt consider bitcoin a true currency, saying Theres no central ban

to regulate it; its digital and functions completely peer to peer.[139]

See also

Anonymous Internet banking

Complementary currencyCrypto-anarchism

Digital currency exchanger

Internet privacy

Private currency

Litecoin

PPCoin

Ripple monetary system

Ven (currency)

References

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38. ^ abc "Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies"

(http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2013-G001.pdf). Department of the Treasury Financial

Crimes Enforcement Network. Retrieved 19 March 2013.

39. ^ Roose, Kevin (8 April 2013) "Inside the Bitcoin Bubble: BitInstants CEO Daily Intelligencer"

(http://nymag.com/daily/intelligencer/2013/04/inside-the-bitcoin-bubble-bitinstants-ceo.html). Archived

(http://archive.is/yAyxl) from the original on 2013-04-29.. Nymag.com. Retrieved on 20 April 2013.

40. ^ ab Farivar, Cyrus (11 April 2013). "Bitcoin crashes, losing nearly half of its value in six hours

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