Whats BTC ?
Bitcoin is a payment system introduced as open-source software in 2009 by developer Satoshi Nakamoto.[4] The payments in the system are recorded in a public ledger using its own unit of account,[5] which is also called bitcoin.[note 1] Payments work peer-to-peer without a central repository or single administrator, which has led the US Treasury to call bitcoin a decentralized virtual currency.[8] Although its status as a currency is disputed, media reports often refer to bitcoin as a cryptocurrency or digital currency.[9]
Bitcoins are created as a reward for payment processing work in which users offer their computing power to verify and record payments into the public ledger. Called mining, individuals or companies engage in this activity in exchange for transaction fees and newly created bitcoins.[10] Besides mining, bitcoins can be obtained in exchange for fiat money, products, and services.[11] Users can send and receive bitcoins electronically for an optional transaction fee[12] using wallet software on a personal computer, mobile device, or a web application.
Bitcoin as a form of payment for products and services has seen growth,[13] and merchants have an incentive to accept the digital currency because fees are lower than the 2–3% typically imposed by credit card processors.[14] The European Banking Authority has warned that bitcoin lacks consumer protections.[15] Unlike credit cards, any fees are paid by the purchaser not the vendor. Bitcoins can be stolen and chargebacks are impossible.[16] Commercial use of bitcoin is currently small compared to its use by speculators, which has fueled price volatility.[17]
Bitcoin has been a subject of scrutiny amid concerns that it can be used for illegal activities.[18] In October 2013 the US FBI shut down the Silk Road online black market and seized 144,000 bitcoins worth US$28.5 million at the time.[19] The US is considered bitcoin-friendly compared to other governments.[20] In China, buying bitcoins with yuan is subject to restrictions, and bitcoin exchanges are not allowed to hold bank accounts.
Overview
The most important part of the bitcoin system is a public ledger that records financial transactions in bitcoins. Recording transactions is accomplished without the intermediation of any single, central authority. Instead, multiple intermediaries exist in the form of computer servers running bitcoin software. By connecting over the Internet, these servers form a network that anyone can join. Transactions of the form payer X wants to send Y bitcoins to payee Z are broadcast to this network using readily available software applications. Bitcoin servers can validate these transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other servers.[21]
The block chain ledger
All bitcoin transfers are recorded in a computer file that acts as a public ledger called the block chain, which everyone can examine. Where a conventional ledger records the transfer of actual bills or promissory notes that exist apart from it, bitcoins are simply entries in the block chain and do not exist outside of it.
Mining
Obsolete bitcoin mining hardware common in early and mid-2013. Called USB Erupter, each can calculate 333 megahashes per second. The block chain ledger
All bitcoin transfers are recorded in a computer file that acts as a public ledger called the block chain, which everyone can examine. Where a conventional ledger records the transfer of actual bills or promissory notes that exist apart from it, bitcoins are simply entries in the block chain and do not exist outside of it.[22]Mining
As of 2013 mining has become quite competitive, and the process has been compared to an arms race as ever more specialized technology is utilized. The most efficient mining hardware makes use of custom designed application-specific integrated circuits, which outperform general purpose CPUs and use less power as well.[26] Without access to these purpose built machines, a bitcoin miner is unlikely to earn enough to even cover the cost of the electricity used in his or her efforts.[27]
- Mining pools
Anonymity
The public nature of bitcoin means that, while those who use it are not identified by name, transactions can be linked to individuals and companies.[29] All transactions are recorded into a public ledger, the block chain, and are viewable by everyone. Additionally, many jurisdictions require exchanges, where people can buy and sell bitcoins for cash, to collect personal information.[30] The privacy concerns of some who use bitcoins are sufficient to cause them to take additional steps to cover their tracks. In order to obfuscate the link between individual and transaction, a different bitcoin address for each transaction can be used, and others rely on so-called mixing services that allow users to trade bitcoins whose transaction history implicates them for coins with different transaction histories.[31]It has further been suggested that bitcoin payments should not be considered more anonymous than credit card payments.[32]
Buying and selling
Bitcoins can be bought and sold with many different currencies from individuals and companies. Bitcoins may be purchased in person or at a bitcoin ATM in exchange for cash currency.[33] Participants in online exchanges offer bitcoin buy and sell bids. Using an online exchange to obtain bitcoins entails some risk, and according to one study, 45% of exchanges fail and take client bitcoins with them.[34] Since bitcoin transactions are irreversible, sellers of bitcoins must take extra measures to ensure they have received traditional funds from the buyer.Wallets
See also: Digital wallet and Online wallet
While wallets are often described as being a place to hold or store bitcoins,[36]
due to the nature of the system, bitcoins are inseparable from the
block chain transaction ledger. Perhaps a better way to define a wallet
is something "that stores the digital credentials for your bitcoin
holdings"[37] and allows you to access (and spend) them. Bitcoin uses public-key cryptography, in which two cryptographic keys, one public and one private, are generated.[38]
The public key can be thought of as an account number or name and the
private key, ownership credentials. At its most basic, a wallet is a
collection of these keys. Most bitcoin software also includes the
ability to make transactions, however.
Perhaps better termed physical wallets, physical bitcoins are ubiquitous in media coverage and combine a novelty coin with a private key printed on paper, metal,[39] wood,[40] or plastic. Physical bitcoins aren't widely seen outside of pictures in news article[citation needed], but for those serious about security, storing private keys on paper printouts or in offline data storage devices is the best option.[37]
- Software
Main article: Bitcoin network
- Ownership
- Security, theft, and loss
Bitcoins can be lost. In 2013 one user said he lost 7,500 bitcoins, worth $7.5m at the time, when he discarded a hard drive containing his private key.[46] Bitcoins can also be found. In March 2014, former bitcoin exchange Mt. Gox reported it found an "old wallet, which was used before June 2011 [that] held about 200,000 bitcoins".[47]
History
Main article: History of Bitcoin
Bitcoin was first mentioned in a 2008 research paper published under the name Satoshi Nakamoto. It is unknown who Satoshi Nakamoto is. In 2009, an exploit in an early bitcoin client was found that allowed large numbers of bitcoins to be created.[48]In March 2013, a technical glitch caused a fork in the block chain, with one half of the network adding blocks to one version of the chain and the other half adding to another. For six hours two bitcoin networks operated at the same time, each with its own version of the transaction history. The core developers called for a temporary halt to transactions, sparking a sharp sell-off. Normal operation was restored when the majority of the network downgraded to version 0.7 of the bitcoin software.[48]
Some mainstream websites began accepting bitcoins c. 2013. WordPress started in November 2012[49] followed by OKCupid in April 2013,[50] Atomic Mall in November 2013,[51] TigerDirect[52] and Overstock.com in January 2014[53] and Expedia in June 2014.[54] Certain non-profit or advocacy groups such as the Electronic Frontier Foundation allow bitcoin donations.[55] (Although this organization stopped accepting bitcoins in 2011 and began again in 2013.[56])
The first law enforcement events occurred in May 2013. Assets belonging to the Mt. Gox exchange were seized by Department of Homeland Security,[57] and the Silk Road drug market website was shut down by the FBI.[58]
In October 2013, Chinese internet giant Baidu had allowed clients of website security services to pay with bitcoins.[59] During November 2013, the China-based bitcoin exchange BTC China overtook the Japan-based Mt. Gox and the Europe-based Bitstamp to become the largest bitcoin trading exchange by trade volume.[60] On 19 November 2013, the value of a bitcoin on the Mt. Gox exchange soared to a peak of US$900 after a United States Senate committee hearing was told that virtual currencies were a legitimate financial service.[61] On the same day, one bitcoin traded for over RMB¥6780 (US$1100) in China.[62] On 5 December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoins.[63] After the announcement, the value of bitcoins dropped[64] and Baidu no longer accepted bitcoins for certain services.[65] Buying real-world goods with any virtual currency had been illegal in China since at least 2009.[66]
The first bitcoin ATM was installed in October 2013 in Vancouver, British Columbia, Canada.[67]
With roughly 12 million existing bitcoins as of November 2013,[68] the new price increased the market cap for bitcoin to at least US$7.2 billion.[69] By 23 November 2013, the total market capitalization of bitcoin exceeded US$10 billion for the first time.[70]
In the US two men were arrested in January 2014 on charges of money-laundering using bitcoins including Charlie Shrem, the head of defunct bitcoin exchange BitInstant and a vice chairman of the Bitcoin Foundation. Shrem allegedly allowed the other arrested party to purchase large quantities of bitcoins for use on black-market websites.[71]
In early February 2014, one of the largest bitcoin exchanges, Mt. Gox, suspended withdrawals citing technical issues.[72] By the end of the month, Mt. Gox had filed for bankruptcy protection in Japan amid reports that 744,000 bitcoins had been stolen.[73] Originally a site for trading Magic: The Gathering cards, Mt. Gox once was the dominant bitcoin exchange although prior to the collapse its popularity had waned.[74]
Economics
Classification as money
Bitcoin is often referred to as a currency, but it does not conform to widely used definitions of money. Economists generally agree that to qualify as money, something must be a store of value, a medium of exchange, and a unit of account.[75] Bitcoin has some way to go if it wants to meet these criteria.[75] It does best as a medium of exchange.[75] (About 1,000 bricks and mortar businesses were willing to accept payment in bitcoins as of November 2013[76] in addition to more than 35,000 online merchants.[77]) The bitcoin market currently suffers from volatility, limiting the ability of bitcoins to act as a stable store of value,[75] and, although bitcoins are the unit of account for the block chain, bitcoin does not see use as a unit of account outside of it. Where people are allowed to buy with bitcoins, prices are not denominated in bitcoins.[75] As there are some exceptions to the above, it could be argued that bitcoin is a store of value (although a very poor one) and that it is a unit of account (although a very rarely used one).[citation needed]Others feel being a widely accepted or common medium of exchange is sufficient for something to be considered money.[78] Still more believe money must be both a medium of exchange and a unit of account.[79] Others think money has four characteristics. It must be: a medium of exchange, a unit of account, a store of value, and a standard of deferred payments.[80]
The People's Bank of China has stated that bitcoin "is fundamentally not a currency".[81] According to the director of the Institute for Money, Technology and Financial Inclusion at the University of California-Irvine there is "an unsettled debate about whether bitcoin is a currency or payment protocol".[9] Despite this, in the media bitcoin is commonly referred to with terms that include the word currency such as digital currency, digital cash, virtual currency, electronic money, or cryptocurrency. Some media outlets do make a distinction between "real" money and bitcoins, however.[82]
Price and volatility
To improve access to price information and increase transparency, on 30 April 2014 Bloomberg LP announced plans to list prices from bitcoin companies Kraken and Coinbase on its 320.000 subscription financial data terminals.[83]According to Mark T. Williams of Boston University, the volatility of bitcoin is over seven times that of gold and over eight times that of the S&P 500.[84] The Bitcoin Foundation contends that high volatility is due to insufficient liquidity[85] while a Forbes journalist claims that it is related to the uncertainty of its long-term value.[86] As of 2014, pro-bitcoin venture capitalists argue the greatly increased trading volume that planned high-frequency trading exchanges are hoped to bring will decrease price volatility.[83] Volatility has little effect on the utility of bitcoin as a payment processing system.[87]
The price of bitcoins has gone through various cycles of appreciation and depreciation referred to by some as bubbles and busts.[88] In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2.[89] In the latter half of 2012 and during the 2012-2013 Cypriot Financial Crisis, the bitcoin price[90] began to rise, reaching a peak of US$266 on 10 April 2013, before crashing to around US$50.[91] At the end of 2013, the cost of one bitcoin rose to the all-round peak of US$1135, but fell to the price of US$693 three days later.[92] In 2014 the price fell sharply, and as of April remained depressed at little more than half that of 2013.[83]
Alternative to national currencies
Speculative bubble
Bitcoin has been labelled a speculative bubble by many including Former Federal Reserve Chairman Alan Greenspan[96] and economist John Quiggin.[97] Two lead software developers of bitcoin, Gavin Andresen and Mike Hearn, have warned that bubbles may occur.[98] Nobel Laureate Robert Shiller said that bitcoin "exhibited many of the characteristics of a speculative bubble."[99] Others reject the label and see bitcoin's quick rise in price as nothing more than normal economic forces at work.[100]As investment
One way of investing in bitcoins is to buy and hold them as a long-term, high-risk investment.[101] FINRA, a United States self-regulatory organization, warns that investing in bitcoins carries significant risks.[102] The European Banking Authority warns that the risks of investment go beyond a potential fall in the value of bitcoins.[103] Bitcoins may be of limited value to unsophisticated investors.[104] Risk hasn't deterred some such as the Winklevoss twins, who made a US$1.5 million personal investment[105] and attempted to launch a bitcoin ETF.[17] Other investors, like Peter Thiel's Founders Fund, which invested US$3 million, don't purchase bitcoins themselves instead funding bitcoin infrastructure like companies that provide payment systems to merchants, exchanges, and wallet services, etc.[105] Investors also invest in bitcoin mining.[106]Supply
Growth of the bitcoin supply is predefined by the bitcoin protocol.[24] Currently there are over twelve million bitcoins in circulation with an approximate creation rate of 25 every ten minutes. The total supply is capped at an arbitrary limit of 21 million,[10] and every four years the creation rate is halved. This means new bitcoins will continue to be released for more than a hundred years.Value forecasts
Financial journalists and analysts, economists, and investors have attempted to predict the possible future value of bitcoin. Economist John Quiggin stated, "bitcoins will attain their true value of zero sooner or later, but it is impossible to say when."[97] In 2013, Bank of America FX and Rate Strategist David Woo forecast a maximum fair value per bitcoin of $1,300.[107] Bitcoin investor Cameron Winklevoss stated in 2013 that the "[s]mall bull case scenario for bitcoin is... 40,000 USD a coin".[108] In late 2013, finance professor Mark Williams forecast a bitcoin would be worth less than ten US dollars by July 2014.[109]Reception
Some economists have responded positively to bitcoin, including François R. Velde, Senior Economist at the Chicago Fed, who described it as "an elegant solution to the problem of creating a digital currency."[110] Paul Krugman and Brad DeLong have found fault with bitcoin questioning why it should act as a reasonably stable store of value or whether there is a floor on their value.[111] Economist John Quiggin has criticized bitcoin as "the final refutation of the efficient-market hypothesis".[97]David Andolfatto, a Vice President at the Federal Reserve Bank of St. Louis, stated that bitcoin is a threat to the establishment, which he argues is a good thing for the Federal Reserve System and other central banks because it prompts these institutions to operate sound policies.[112]
Free software movement activist Richard Stallman has criticized the lack of anonymity and called for reformed development.[113] PayPal President David A. Marcus calls bitcoin a "great place to put assets" but claims it will not be a currency until price volatility is reduced.[114] As bitcoins proved popular, they have been increasingly covered by comics around the world.[115]
Acceptance by merchants
Established firms that accept bitcoins include Atomic Mall,[116] Clearly Canadian,[117] Dish Network, Overstock.com,[53] the Sacramento Kings,[118] TigerDirect,[52] Virgin Galactic,[119] and Zynga.[120]In late 2013 the University of Nicosia became the first university in the world to accept it.[121]
Financial institutions
As of 2014, bitcoin companies have had difficulty opening traditional bank accounts because lenders have been leery of bitcoin's links to illicit activity.[122] According to a co-founder of one such company, BitPay, "banks are scared to deal with bitcoin companies, even if they really want to".[122] Yet, some financial institutions have been bullish on bitcoin. In a 2013 report, Bank of America Merrill Lynch stated that "we believe bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money-transfer providers. As a medium of exchange, bitcoin has clear potential for growth and that in a long-term fair-value analysis maximum market capitalization for bitcoins could be $15 billion."[123] In June 2014, the first bank that converts deposits in currencies instantly to Bitcoin without any fees, for further transactions, was opened in Boston.[124]Concurrent with Bloomberg LP, 33% owned by Merrill Lynch launching pricing information is the development of high-frequency trading firms by Atlas ATS in New York and Hong Kong and one from London-based Coinfloor, claiming to be the first auditable bitcoin exchange, and a SecondMarket project of an exchange for institutional investors.[83]
Legal and journalistic opinions
Bitcoins have been evaluated and treated in various ways around the world.[5] While it may appear that a lively debate over the nature of bitcoins is occurring, the different classifications are likely more reflective of what rules apply to bitcoin in a specific jurisdiction than what bitcoin really is. Magistrate Judge Amos Maazant of a Texas court classified bitcoins as currency.[125] A German court found bitcoin to be a unit of account.[5] The Finnish Government judged it to be a commodity.[126] The People's Bank of China has stated that bitcoin "is fundamentally not a currency".[81]A WSJ journalist declared bitcoins a commodity in December 2013.[127] A Forbes journalist referred to bitcoins as digital collectible.[128] Two University of Amsterdam computer scientists proposed the term 'money-like informational commodity' in order "to allow for a systematic discussion of its development through all stages including an initial stage and a possible demise without being constrained by the implications of it being a money or a near-money".[129]
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