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Bitcoin
Prevailing bitcoin logo
Prevailing bitcoin logo
Denominations
Plural bitcoins
Symbol[a]
Ticker symbol BTC, XBT[b]
Subunits
 ​11000 millibitcoin
 ​1100000000 satoshi[2]
Coins Unspent outputs of transactions (in multiples of a satoshi)[3]:ch. 5
Development
Original author(s) Satoshi Nakamoto
White paper "Bitcoin: A Peer-to-Peer Electronic Cash System"[5]
Implementation(s) Bitcoin Core
Initial release 0.1.0 / 9 January 2009 (9 years ago) (2009-01-09)
Latest release 0.16.2 / 29 July 2018 (53 days ago) (2018-07-29)[4]
Website bitcoin.org
Ledger
Ledger start 3 January 2009 (9 years ago) (2009-01-03)
Timestamping scheme Proof-of-work (partial hash inversion)
Hash function SHA-256
Issuance Decentralized (block reward)[7][8]
Block reward ₿12.5[c]
Block time 10 minutes
Block explorer www.blockchain.com
Circulating supply ₿16,858,762 (as of 11 February 2018)
Supply limit ₿21,000,000 [6]
  1. ^ The symbol was encoded in Unicode version 10.0 at position U+20BF BITCOIN SIGN in the Currency Symbols block in June 2017.[1]
  2. ^ Compatible with ISO 4217.
  3. ^ July 2016 to approximately June 2020, halved approximately every four years

Bitcoin () is a cryptocurrency, a form of electronic cash. It is a decentralized digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.[7]

Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain. Bitcoin was invented by an unknown person or group of people using the name Satoshi Nakamoto[9] and released as open-source software in 2009.[10] Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies,[11] products, and services. Research produced by the University of Cambridge estimates that in 2017, there were 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using bitcoin.[12]

Bitcoin has been criticized for its use in illegal transactions, its high electricity consumption, price volatility, thefts from exchanges, and the possibility that bitcoin is an economic bubble.[13] Bitcoin has also been used as an investment, although several regulatory agencies have issued investor alerts about bitcoin.[14]

History

Creation

The domain name "bitcoin.org" was registered on 18 August 2008.[15] In November 2008, a link to a paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System[5] was posted to a cryptography mailing list. Nakamoto implemented the bitcoin software as open source code and released it in January 2009.[16][17][10] The identity of Nakamoto remains unknown.[9]

In January 2009, the bitcoin network was created when Nakamoto mined the first block of the chain, known as the genesis block.[18][19] Embedded in the coinbase of this block was the following text:

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.[10]

This note has been interpreted as both a timestamp and a comment on the instability caused by fractional-reserve banking.[20]:18

The receiver of the first bitcoin transaction was cypherpunk Hal Finney, who created the first reusable proof-of-work system (RPOW) in 2004.[21] Finney downloaded the bitcoin software on its release date, and on January 12, 2009 received 10 bitcoins from Nakamoto.[22][23] Other early cypherpunk supporters were creators of bitcoin predecessors: Wei Dai, creator of b-money, and Nick Szabo, creator of bit gold.[24] In 2010, the first known commercial transaction via bitcoin occurred when programmer Laszlo Hanyecz bought two Papa John's pizzas for 10,000 bitcoin.[25]

Nakamoto is estimated to have mined 1 million bitcoins[26] before disappearing in 2010, when he handed the network alert key and control of the code repository over to Gavin Andresen. Andresen later became lead developer at the Bitcoin Foundation.[27][28] Andresen then sought to decentralize control. This left opportunity for controversy to develop over the future development path of bitcoin.[29][28]

2011–2012

After early "proof-of-concept" transactions, the first major users of bitcoin were black markets, such as Silk Road. During its 30 months of existence, starting in February 2011, Silk Road exclusively accepted bitcoins as payment, transacting 9.9 million in bitcoins, worth about $214 million.[30]:222

In 2011, price started at $0.30 per bitcoin, growing to $5.27 for the year. Price rose to $31.50 on 8 June. Within a month the price fell to $11.00. The next month if fell to $7.80, and in another month to $4.77.[31]

Litecoin was an early bitcoin spin-off or altcoin, starting in October 2011.[32] Many altcoins have been created since.[33]

In 2012 bitcoin prices started at $5.27 growing to $13.30 for the year.[31] By 9 January the price had risen to $7.38, but then crashed by 49% to $3.80 over the next 16 days. The price then rose to $16.41 on 17 August, but fell by 57% to $7.10 over the next three days.[34]

The Bitcoin Foundation was founded in September 2012 to promote Bitcoin's development and uptake.[35]

2013–2016

In 2013 prices started at $13.30 rising to $770 by 1 January 2014.[31]

In March 2013 the blockchain temporarily split into two independent chains with different rules. The two blockchains operated simultaneously for six hours, each with its own version of the transaction history. Normal operation was restored when the majority of the network downgraded to version 0.7 of the bitcoin software.[36] The Mt. Gox exchange briefly halted bitcoin deposits and the price dropped by 23% to $37[37][38] before recovering to previous level of approximately $48 in the following hours.[39]

The US Financial Crimes Enforcement Network (FinCEN) established regulatory guidelines for "decentralized virtual currencies" such as bitcoin, classifying American bitcoin miners who sell their generated bitcoins as Money Service Businesses (MSBs), that are subject to registration or other legal obligations.[40][41][42]

In April, exchanges BitInstant and Mt. Gox experienced processing delays due to insufficient capacity[43] resulting in the bitcoin price dropping from $266 to $76 before returning to $160 within six hours.[44]

The bitcoin price rose to $259 on 10 April, but then crashed by 83% to $45 over the next 3 days.[34]

On 15 May 2013, the US authorities seized accounts associated with Mt. Gox after discovering that it had not registered as a money transmitter with FinCEN in the US.[45][46]

On 23 June 2013, the US Drug Enforcement Administration listed 11.02 bitcoins as a seized asset in a United States Department of Justice seizure notice pursuant to 21 U.S.C. § 881.[47] This marked the first time a government agency seized bitcoin.[48][49]

The FBI seized about 26,000 bitcoins in October 2013 from darknet website Silk Road during the arrest of Ross William Ulbricht.[50][51][52]

Bitcoin's price rose to $755 on 19 November and crashed by 50% to $378 the same day. On 30 November 2013 the price reached $1,163 before starting a long-term crash, declining by 87% to $152 in January 2015.[34]

On 5 December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoins.[53] After the announcement, the value of bitcoins dropped,[54] and Baidu no longer accepted bitcoins for certain services.[55] Buying real-world goods with any virtual currency had been illegal in China since at least 2009.[56]

In 2014 prices started at $770 and fell to $314 for the year.[31]

In February 2014 the Mt. Gox exchange, the largest bitcoin exchange at the time, said that 850,000 bitcoins had been stolen from its customers, amounting to almost $500 million. Bitcoin's price fell by almost half, from $867 to $439 (a 49% drop). Prices remained low until late 2016.

In 2015 prices started at $314 and rose to $434 for the year. In 2016 prices rose to $998 on 1 January 2017.[31]

2017–2018

In 2017 prices started at $998 and rose to $13,412.44 on 1 January 2018.[31] On 17 December bitcoin's price reached an all-time high of $19,666 and then fell 70% to $5,920 on 6 February 2018.[34]

China banned trading in bitcoin, with the first steps taken in September 2017, and a complete ban starting 1 February 2018. Bitcoin prices then fell from $9,052 to $6,914 on 5 February 2018. The percentage of bitcoin trading in renminbi fell from over 90% in September 2017 to less than 1% in June.[57]

Throughout the rest of the first half of 2018, bitcoin's price fluctuated between $11,480 and $5,848. On 1 July 2018 bitcoin's price was $6,469.[58][59]

Bitcoin prices were negatively affected by several hacks or thefts from cryptocurrency exchanges, including thefts from Coincheck in January 2018, Coinrail and Bithumb in June, and Bancor in July. For the first six months of 2018, $761 million worth of cryptocurrencies was reported stolen from exchanges.[60] Bitcoin's price was affected even though other cryptocurrencies were stolen at Coinrail and Bancor, as investors worried about the security of cryptocurrency exchanges.[61][62][63]

Design

Blockchain

The bitcoin blockchain is a public ledger that records bitcoin transactions.[64] It is implemented as a chain of blocks, each block containing a hash of the previous block up to the genesis block[a] of the chain. The maintenance of the blockchain is performed by a network of communicating nodes running bitcoin software.[30]:215–219 Transactions of the form payer X sends Y bitcoins to payee Z are broadcast to this network using readily available software applications.

Network nodes can validate transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes. To achieve independent verification of the chain of ownership each network node stores its own copy of the blockchain.[65] About every 10 minutes, a new group of accepted transactions, called a block, is created, added to the blockchain, and quickly published to all nodes, without requiring a central oversight. This allows bitcoin software to determine when a particular bitcoin was spent, which is needed to prevent double-spending. A conventional ledger records the transfers of actual bills or promissory notes that exist apart from it, but the blockchain is the only place that bitcoins can be said to exist in the form of unspent outputs of transactions.[3]:ch. 5

Transactions

Number of bitcoin transactions per month (logarithmic scale)[66]

Transactions are defined using a Forth-like scripting language.[3]:ch. 5 Transactions consist of one or more inputs and one or more outputs. When a user sends bitcoins, the user designates each address and the amount of bitcoin being sent to that address in an output. To prevent double spending, each input must refer to a previous unspent output in the blockchain.[67] The use of multiple inputs corresponds to the use of multiple coins in a cash transaction. Since transactions can have multiple outputs, users can send bitcoins to multiple recipients in one transaction. As in a cash transaction, the sum of inputs (coins used to pay) can exceed the intended sum of payments. In such a case, an additional output is used, returning the change back to the payer.[67] Any input satoshis not accounted for in the transaction outputs become the transaction fee.[67]

Units

The unit of account of the bitcoin system is a bitcoin. Ticker symbols used to represent bitcoin are BTC[b] and XBT.[c] Its Unicode character is ₿.[72]:2 Small amounts of bitcoin used as alternative units are millibitcoin (mBTC), and satoshi (sat). Named in homage to bitcoin's creator, a satoshi is the smallest amount within bitcoin representing 0.00000001 bitcoins, one hundred millionth of a bitcoin.[2] A millibitcoin equals 0.001 bitcoins, one thousandth of a bitcoin or 100,000 satoshis.[73]

Transaction fees

An actual bitcoin transaction including the fee from a webbased cryptocurrency exchange to a hardware wallet.

Though transaction fees are optional, miners can choose which transactions to process and prioritize those that pay higher fees.[67] Miners may choose transactions based on the fee paid relative to their storage size, not the absolute amount of money paid as a fee. These fees are generally measured in satoshis per byte (sat/b). The size of transactions is dependent on the number of inputs used to create the transaction, and the number of outputs.[3]:ch. 8

Ownership

Simplified chain of ownership.[5] In reality, a transaction can have more than one input and more than one output.

In the blockchain, bitcoins are registered to bitcoin addresses. Creating a bitcoin address is nothing more than picking a random valid private key and computing the corresponding bitcoin address. This computation can be done in a split second. But the reverse (computing the private key of a given bitcoin address) is mathematically unfeasible and so users can tell others and make public a bitcoin address without compromising its corresponding private key. Moreover, the number of valid private keys is so vast that it is extremely unlikely someone will compute a key-pair that is already in use and has funds. The vast number of valid private keys makes it unfeasible that brute force could be used for that. To be able to spend the bitcoins, the owner must know the corresponding private key and digitally sign the transaction. The network verifies the signature using the public key.[3]:ch. 5

If the private key is lost, the bitcoin network will not recognize any other evidence of ownership;[30] the coins are then unusable, and effectively lost. For example, in 2013 one user claimed to have lost 7,500 bitcoins, worth $7.5 million at the time, when he accidentally discarded a hard drive containing his private key.[74] A backup of his key(s) would have prevented this.

About 20% of all bitcoins are believed to be lost. The lost coins would have a market value of about $20 billion at July 2018 prices.[75][76] Approximately 1 million bitcoins have been stolen, which would have a value of about $7 billion at July 2018 prices.[77]

Mining

Amateur bitcoin mining with a small ASIC. This was when difficulty was much lower, and is no longer feasible.
Semi-log plot of relative mining difficulty[d][66]

Mining is a record-keeping service done through the use of computer processing power.[e] Miners keep the blockchain consistent, complete, and unalterable by repeatedly grouping newly broadcast transactions into a block, which is then broadcast to the network and verified by recipient nodes.[64] Each block contains a SHA-256 cryptographic hash of the previous block,[64] thus linking it to the previous block and giving the blockchain its name.[3]:ch. 7[64]

To be accepted by the rest of the network, a new block must contain a so-called proof-of-work (PoW).[64] The system used is based on Adam Back's 1997 anti-spam scheme, Hashcash.[5][79] The PoW requires miners to find a number called a nonce, such that when the block content is hashed along with the nonce, the result is numerically smaller than the network's difficulty target.[3]:ch. 8 This proof is easy for any node in the network to verify, but extremely time-consuming to generate, as for a secure cryptographic hash, miners must try many different nonce values (usually the sequence of tested values is the ascending natural numbers: 0, 1, 2, 3, ...[3]:ch. 8) before meeting the difficulty target.

Every 2,016 blocks (approximately 14 days at roughly 10 min per block), the difficulty target is adjusted based on the network's recent performance, with the aim of keeping the average time between new blocks at ten minutes. In this way the system automatically adapts to the total amount of mining power on the network.[3]:ch. 8 Between 1 March 2014 and 1 March 2015, the average number of nonces miners had to try before creating a new block increased from 16.4 quintillion to 200.5 quintillion.[80]

The proof-of-work system, alongside the chaining of blocks, makes modifications of the blockchain extremely hard, as an attacker must modify all subsequent blocks in order for the modifications of one block to be accepted.[81] As new blocks are mined all the time, the difficulty of modifying a block increases as time passes and the number of subsequent blocks (also called confirmations of the given block) increases.[64]

Pooled mining

Computing power is often bundled together or "pooled" to reduce variance in miner income. Individual mining rigs often have to wait for long periods to confirm a block of transactions and receive payment. In a pool, all participating miners get paid every time a participating server solves a block. This payment depends on the amount of work an individual miner contributed to help find that block.[82]

Supply

Total bitcoins in circulation.[66]

The successful miner finding the new block is rewarded with newly created bitcoins and transaction fees.[83] As of 9 July 2016,[84] the reward amounted to 12.5 newly created bitcoins per block added to the blockchain. To claim the reward, a special transaction called a coinbase is included with the processed payments.[3]:ch. 8 All bitcoins in existence have been created in such coinbase transactions. The bitcoin protocol specifies that the reward for adding a block will be halved every 210,000 blocks (approximately every four years). Eventually, the reward will decrease to zero, and the limit of 21 million bitcoins[f] will be reached c. 2140; the record keeping will then be rewarded by transaction fees solely.[85]

In other words, bitcoin's inventor Nakamoto set a monetary policy based on artificial scarcity at bitcoin's inception that there would only ever be 21 million bitcoins in total. Their numbers are being released roughly every ten minutes and the rate at which they are generated would drop by half every four years until all were in circulation.[86]

Wallets

Bitcoin Core wallet GUI
Electrum bitcoin wallet

A wallet stores the information necessary to transact bitcoins. While wallets are often described as a place to hold[87] or store bitcoins,[88] due to the nature of the system, bitcoins are inseparable from the blockchain transaction ledger. A better way to describe a wallet is something that "stores the digital credentials for your bitcoin holdings"[88] and allows one to access (and spend) them. Bitcoin uses public-key cryptography, in which two cryptographic keys, one public and one private, are generated.[89] At its most basic, a wallet is a collection of these keys.

There are three modes which wallets can operate in. They have an inverse relationship with regards to trustlessness and computational requirements.

  • Full clients verify transactions directly by downloading a full copy of the blockchain (over 150 GB As of January 2018).[90] They are the most secure and reliable way of using the network, as trust in external parties is not required. Full clients check the validity of mined blocks, preventing them from transacting on a chain that breaks or alters network rules.[91] Because of its size and complexity, downloading and verifying the entire blockchain is not suitable for all computing devices.
  • Lightweight clients consult full clients to send and receive transactions without requiring a local copy of the entire blockchain (see simplified payment verification – SPV). This makes lightweight clients much faster to set up and allows them to be used on low-power, low-bandwidth devices such as smartphones. When using a lightweight wallet, however, the user must trust the server to a certain degree, as it can report faulty values back to the user. Lightweight clients follow the longest blockchain and do not ensure it is valid, requiring trust in miners.[92]

Third-party internet services called online wallets offer similar functionality but may be easier to use. In this case, credentials to access funds are stored with the online wallet provider rather than on the user's hardware.[93][94] As a result, the user must have complete trust in the wallet provider. A malicious provider or a breach in server security may cause entrusted bitcoins to be stolen. An example of such a security breach occurred with Mt. Gox in 2011.[95] This has led to the often-repeated meme "Not your keys, not your bitcoin".[96]

Bitcoin paper wallet
Trezor hardware wallet

Physical wallets store offline the credentials necessary to spend bitcoins.[88] One notable example was a novelty coin with these credentials printed on the reverse side.[97] Paper wallets are simply paper printouts.

Another type of wallet called a hardware wallet keeps credentials offline while facilitating transactions.[98]

Implementations

The first wallet program – simply named "Bitcoin" – was released in 2009 by Satoshi Nakamoto as open-source code.[10] In version 0.5 the client moved from the wxWidgets user interface toolkit to Qt, and the whole bundle was referred to as "Bitcoin-Qt".[99] After the release of version 0.9, the software bundle was renamed "Bitcoin Core" to distinguish itself from the underlying network.[100][101] It is sometimes referred to as the "Satoshi client".

Forks

Bitcoin Core is, perhaps, the best known implementation or client. Alternative clients (forks of Bitcoin Core) exist, such as Bitcoin XT, Bitcoin Unlimited,[29] and Parity Bitcoin.[102]

On 1 August 2017, a hard fork of bitcoin was created, known as Bitcoin Cash.[103] Bitcoin Cash has a larger block size limit and had an identical blockchain at the time of fork. On 24 October 2017 another hard fork, Bitcoin Gold, was created. Bitcoin Gold changes the proof-of-work algorithm used in mining, as the developers felt that mining had become too specialized.[104]

Decentralization and centralization

Decentralization

Bitcoin does not have a central authority and the bitcoin network is decentralized:[7]

  • There is no central server, bitcoin network is peer-to-peer.[10]
  • There is no central storage, bitcoin ledger is distributed.[105]
  • The ledger is public, anybody can store it on their computer.[3]:ch. 1
  • There is no single administrator,[7] the ledger is maintained by a network of equally privileged miners.[3]:ch. 1
  • Anybody can become a miner.[3]:ch. 1
  • The additions to the ledger are maintained through competition – until a new block is added to the ledger, it is not known which miner will create the block.[3]:ch. 1
  • The issuance of bitcoins is decentralized – bitcoins are issued as a reward for the creation of a new block.[83]
  • Anybody can create a new bitcoin address (a bitcoin counterpart of a bank account) without needing any approval.[3]:ch. 1
  • Anybody can send a transaction to the network without needing any approval, the network merely confirms that the transaction is legitimate.[106]:32

Trend towards centralization

Although bitcoin can be sent directly to the bitcoin network, in practice intermediaries are widely used.[30]:220–222 Researchers have pointed out at a "trend towards centralization" by the means of miners joining large mining pools to minimize the variance of their income.[30]:215, 219–222[107]:3[108] Because transactions on the network are confirmed by miners, decentralization of the network requires that no single miner or mining pool obtains 51% of the hashing power, which would allow them to double-spend coins, prevent certain transactions from being verified and prevent other miners from earning income.[109] As of 2013 just six mining pools controlled 75% of overall bitcoin hashing power.[109] In 2014 mining pool Ghash.io obtained 51% hashing power which raised significant controversies about the safety of the network. The pool has voluntarily capped their hashing power at 39.99% and requested other pools to act responsibly for the benefit of the whole network.[110]

According to researchers, other parts of the ecosystem are also "controlled by a small set of entities", notably online wallets and simplified payment verification (SPV) clients.[109]

Privacy

Bitcoin is pseudonymous, meaning that funds are not tied to real-world entities but rather bitcoin addresses. Owners of bitcoin addresses are not explicitly identified, but all transactions on the blockchain are public. In addition, transactions can be linked to individuals and companies through "idioms of use" (e.g., transactions that spend coins from multiple inputs indicate that the inputs may have a common owner) and corroborating public transaction data with known information on owners of certain addresses.[111] Additionally, bitcoin exchanges, where bitcoins are traded for traditional currencies, may be required by law to collect personal information.[112]

To heighten financial privacy, a new bitcoin address can be generated for each transaction.[113] For example, hierarchical deterministic wallets generate pseudorandom "rolling addresses" for every transaction from a single seed, while only requiring a single passphrase to be remembered to recover all corresponding private keys.[114] Researchers at Stanford University and Concordia University have also shown that bitcoin exchanges and other entities can prove assets, liabilities, and solvency without revealing their addresses using zero-knowledge proofs.[115] "Bulletproofs," a version of Confidential Transactions proposed by Greg Maxwell, have been tested by Professor Dan Boneh of Stanford.[116] Other solutions such Merkelized Abstract Syntax Trees (MAST), pay-to-script-hash (P2SH) with MERKLE-BRANCH-VERIFY, and "Tail Call Execution Semantics", have also been proposed to support private smart contracts.

Fungibility

Wallets and similar software technically handle all bitcoins as equivalent, establishing the basic level of fungibility. Researchers have pointed out that the history of each bitcoin is registered and publicly available in the blockchain ledger, and that some users may refuse to accept bitcoins coming from controversial transactions, which would harm bitcoin's fungibility.[117]

Scalability

The blocks in the blockchain were originally limited to 32 megabyte in size. The block size limit of one megabyte was introduced by Satoshi Nakamoto in 2010. Eventually the block size limit of one megabyte created problems for transaction processing, such as increasing transaction fees and delayed processing of transactions.[118]

On 24 August 2017 (at block 481,824), Segregated Witness (SegWit) went live. Transactions contain some data which is only used to verify the transaction, and does not otherwise effect the movement of coins. SegWit introduces a new transaction format that moves this data into a new field in a backwards-compatible way. The segregated data, the so-called witness, is not sent to non-SegWit nodes and therefore does not form part of the blockchain as seen by legacy nodes. This lowers the size of the average transaction in such nodes' view, thereby increasing the block size without incurring the hard fork implied by other proposals for block size increases. Thus, per computer scientist Jochen Hoenicke, the actual block capacity depends on the ratio of SegWit transactions in the block, and on the ratio of signature data. Based on his estimate, if the ratio of SegWit transactions is 50%, the block capacity may be 1.25 megabytes. According to Hoenicke, if native SegWit addresses from Bitcoin Core version 0.16.0 are used, and SegWit adoption reaches 90 to 95%, a block size of up to 1.8 megabytes is possible.[citation needed]

Ideology

Satoshi Nakamoto stated in his white paper that "The root problem with conventional currencies is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust."[119]

Austrian economics

According to the European Central Bank, the decentralization of money offered by bitcoin has its theoretical roots in the Austrian school of economics, especially with Friedrich von Hayek in his book Denationalisation of Money: The Argument Refined,[120] in which he advocates a complete free market in the production, distribution and management of money to end the monopoly of central banks.[121]:22

Anarchist and libertarian theories

According to The New York Times, libertarians and anarchists were attracted to the idea. Early bitcoin supporter Roger Ver said "At first, almost everyone who got involved did so for philosophical reasons. We saw bitcoin as a great idea, as a way to separate money from the state."[119] The Economist describes bitcoin as "a techno-anarchist project to create an online version of cash, a way for people to transact without the possibility of interference from malicious governments or banks".[122]

External video
The Declaration Of Bitcoin's Independence, BraveTheWorld, 4:38[123]

Nigel Dodd argues in The Social Life of Bitcoin that the essence of the bitcoin ideology is to remove money from social, as well as governmental, control.[124] Dodd quotes a YouTube video, with Roger Ver, Jeff Berwick, Charlie Shrem, Andreas Antonopoulos, Gavin Wood, Trace Meyer and other proponents of bitcoin reading The Declaration of Bitcoin's Independence. The declaration includes a message of crypto-anarchism with the words "Bitcoin is inherently anti-establishment, anti-system, and anti-state. Bitcoin undermines governments and disrupts institutions because bitcoin is fundamentally humanitarian."[124][123]

David Golumbia says that the ideas influencing bitcoin advocates emerge from right-wing extremist movements such as the Liberty Lobby and the John Birch Society and their anti-Central Bank rhetoric, or, more recently, Ron Paul and Tea Party-style libertarianism.[125] Steve Bannon, who owns a "good stake" in bitcoin, considers it to be "disruptive populism. It takes control back from central authorities. It's revolutionary."[126]

However, researchers looking to uncover the reasons for interest in bitcoin did not find evidence in Google search data that this was linked to libertarianism.[127]

Economics

Bitcoin is a digital asset invented by Satoshi Nakamoto that was designed to work in peer-to-peer transactions as a currency.[5][128] Bitcoins have three qualities useful in a currency, according to The Economist in January 2015: they are "hard to earn, limited in supply and easy to verify".[129] However, as of 2015 bitcoin functions more as a payment processor than as a currency.[130][30]

Economists define money as a store of value, a medium of exchange, and a unit of account.[131] According to The Economist in 2014, bitcoin functions best as a medium of exchange.[131] However, this is debated,[132] and a 2018 assessment by The Economist found that cryptocurrencies met none of these three criteria.[122]

Liquidity (estimated, USD/year, logarithmic scale).[66]

According to research by Cambridge University, between 2.9 million and 5.8 million unique users used a cryptocurrency wallet in 2017, most of them for bitcoin. The number of users has grown significantly since 2013, when there were 300,000 to 1.3 million users.[12]

Acceptance by merchants

The overwhelming majority of bitcoin transactions take place on a cryptocurrency exchange, rather than being used in transactions with merchants.[133] Delays from processing payments through the blockchain of about ten minutes at a minimum make bitcoin use very difficult in a retail setting. Prices are not usually quoted in units of bitcoin and many trades involve one, or sometimes two, conversions into conventional currencies.[30] Merchants that do accept bitcoin payments may use payment service providers to perform the conversions.[134]

In 2017 and 2018 bitcoin's acceptance among major online retailers included only three out of the top 500 U.S. online merchants, down from five in 2016.[133] Reasons for this fall include high transaction fees due to bitcoin's scalability issues and long transaction times.[135]

Bloomberg reported that the largest 17 crypto merchant-processing services handled $69 million in June 2018, down from $411 million in September 2017. Bitcoin is "not actually usable" for retail transactions because of high costs and the inability to process chargebacks, according to Nicholas Weaver, a researcher quoted by Bloomberg. High price volatility and transaction fees make paying for small retail purchases with bitcoin impractical, according to economist Kim Grauer. However, bitcoin continues to be used for large-item purchases on sites such as Overstock.com, and for cross-border payments to freelancers and other vendors.[136]

Financial institutions

Bitcoins can be bought on digital currency exchanges.

Bitcoin has not gained acceptance for use in international remittances despite high fees charged by banks and Western Union who compete in this market. Unlike bitcoin, these competitors accept and dispense cash and do not require the use of the internet which is a distinct advantage in lower income countries.[30]

In 2014, the National Australia Bank closed accounts of businesses with ties to bitcoin,[137] and HSBC refused to serve a hedge fund with links to bitcoin.[138] Australian banks in general have been reported as closing down bank accounts of operators of businesses involving the currency.[139]

Plans were announced to include a bitcoin futures option on the Chicago Mercantile Exchange in 2017.[140] Trading in bitcoin futures was announced to begin on 10 December 2017.[141]

As an investment

The Winklevoss twins have invested into bitcoins. In 2013 The Washington Post reported a claim that they owned 1% of all the bitcoins in existence at the time.[142]

Other methods of investment are bitcoin funds. The first regulated bitcoin fund was established in Jersey in July 2014 and approved by the Jersey Financial Services Commission.[143]

In 2013 and 2014, the European Banking Authority[144] and the Financial Industry Regulatory Authority (FINRA), a United States self-regulatory organization,[145] warned that investing in bitcoins carries significant risks. Forbes named bitcoin the best investment of 2013.[146] In 2014, Bloomberg named bitcoin one of its worst investments of the year.[147] In 2015, bitcoin topped Bloomberg's currency tables.[148]

According to bitinfocharts.com, in 2017 there are 9,272 bitcoin wallets with more than $1 million worth of bitcoins.[149] The exact number of bitcoin millionaires is uncertain as a single person can have more than one bitcoin wallet.

Venture capital

Venture capitalists, such as Peter Thiel's Founders Fund, which invested US$3 million in BitPay, do not purchase bitcoins themselves, but instead fund bitcoin infrastructure that provides payment systems to merchants, exchanges, wallet services, etc.[150] In 2012, an incubator for bitcoin-focused start-ups was founded by Adam Draper, with financing help from his father, venture capitalist Tim Draper, one of the largest bitcoin holders after winning an auction of 30,000 bitcoins,[151] at the time called 'mystery buyer'.[152] The company's goal is to fund 100 bitcoin businesses within 2–3 years with $10,000 to $20,000 for a 6% stake.[151] Investors also invest in bitcoin mining.[153] According to a 2015 study by Paolo Tasca, bitcoin startups raised almost $1 billion in three years (Q1 2012 – Q1 2015).[154]

Price and volatility

Bitcoin price bubbles in 2011, 2013 and 2017
Price[g] (left y-axis, logarithmic scale) and volatility[h] (right y-axis).[66]

The price of bitcoins has gone through cycles of appreciation and depreciation referred to by some as bubbles and busts.[155] In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2.[156] In the latter half of 2012 and during the 2012–13 Cypriot financial crisis, the bitcoin price began to rise,[157] reaching a high of US$266 on 10 April 2013, before crashing to around US$50.[158] On 29 November 2013, the cost of one bitcoin rose to a peak of US$1,242.[159] In 2014, the price fell sharply, and as of April remained depressed at little more than half 2013 prices. As of August 2014 it was under US$600.[160] During their time as bitcoin developers, Gavin Andresen[161] and Mike Hearn[162] warned that bubbles may occur.

According to Mark T. Williams, as of 2014, bitcoin has volatility seven times greater than gold, eight times greater than the S&P 500, and 18 times greater than the US dollar.[163]

Legal status, tax and regulation

Because of bitcoin's decentralized nature and its trading on online exchanges located in many countries, regulation of bitcoin has been difficult. However, the use of bitcoin can be criminalized, and shutting down exchanges and the peer-to-peer economy in a given country would constitute a "de facto ban".[164] The legal status of bitcoin varies substantially from country to country and is still undefined or changing in many of them.

According to the Library of Congress, an "absolute ban" on trading or using cryptocurrencies applies in eight countries: Algeria, Bolivia, Egypt, Iraq, Morocco, Nepal, Pakistan, and the United Arab Emirates. An "implicit ban" applies in another 15 countries, which include Bahrain, Bangladesh, China, Colombia, the Dominican Republic, Indonesia, Iran, Kuwait, Lesotho, Lithuania, Macau, Oman, Qatar, Saudi Arabia and Taiwan.[165]

If money services businesses, including cryptocurrency exchanges, money transmitters, and anonymizing services (known as "mixers" or "tumblers") do a substantial amount of business in the U.S., they are required to

  • register with the U.S.FinCEN as a money services business
  • design and enforce an anti-money laundering (AML) program, and
  • keep appropriate records and make reports to FinCEN, including Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs)[166]

Seventeen other countries have similar AML requirements.[165] As of 2018 U.S. FinCEN receives more than 1,500 SARs per month involving cryptocurrencies.[166]

The legal status of bitcoin varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed its use and trade, others have banned or restricted it. Regulations and bans that apply to bitcoin probably extend to similar cryptocurrency systems.[167]

Regulatory warnings

The U.S. Commodity Futures Trading Commission has issued four "Customer Advisories" for bitcoin and related investments.[14] A July 2018 warning emphasized that trading in any cryptocurrency is often speculative, the risk of theft from hacking, and fraud.[168] A February 2018 advisory warned against investing an IRA fund into virtual currencies.[169] A December 2017 advisory warned that virtual currencies are risky because:

  • the exchanges are not regulated or supervised by a government agency
  • the exchanges may lack system safeguards and customer protections
  • large price swings and "flash crashes"
  • market manipulation
  • theft and hacking
  • self-dealing by the exchanges[170]

The U.S. Securities and Exchange Commission has also issued warnings. A May 2014 "Investor Alert" warned that investments involving bitcoin might have high rates of fraud, and that investors might be solicited on social media sites.[171] An earlier "Investor Alert" warned about the use of bitcoin in Ponzi schemes.[172]

The European Banking Authority issued a warning in 2013 focusing on the lack of regulation of bitcoin, the chance that exchanges would be hacked, the volatility of bitcoin's price, and general fraud.[144]

The self-regulatory organization FINRA and the North American Securities Administrators Association have both issued investor alerts about bitcoin.[173][174]

Criticism

External video
Cryptocurrencies: looking beyond the hype, Hyun Song Shin, Bank for International Settlements, 2:48[175]

The Bank for International Settlements summarized several criticisms of bitcoin in Chapter V of their 2018 annual report. The criticisms include the lack of stability in bitcoin's price, the high energy consumption, high and variable transactions costs, the poor security and fraud at cryptocurrency exchanges, vulnerability to debasement (from forking), and the influence of miners.[175][176][177]

The Economist wrote in 2015 that these criticisms are unfair predominantly because the shady image may compel users to overlook the capabilities of the blockchain technology.[178]

Identification as a speculative bubble

Bitcoin and other cryptocurrencies have been identified as economic bubbles by at least eight Nobel Memorial Prize in Economic Sciences laureates, including Robert Shiller,[179] Joseph Stiglitz[180] and Richard Thaler.[181][13] Noted Keyensian economist Paul Krugman wrote in his New York Times column criticizing bitcoin, calling it a bubble and a fraud;[182] and professor Nouriel Roubini of New York University called bitcoin the "mother of all bubbles."[183] Central bankers, including Former Federal Reserve Chairman Alan Greenspan,[184] investors such as Warren Buffett[185][186] and George Soros[187] have stated similar views, as have business executives such as Jamie Dimon and Jack Ma.[188]

Tim Draper, a venture capitalist who has heavily invested in bitcoin, counters that bitcoin "is bigger than the internet. It's bigger than the iron age, the Renaissance. It's bigger than the industrial revolution."[189]

Energy consumption

Bitcoin has been criticized for the amounts of electricity consumed by mining. As of 2015, The Economist estimated that even if all miners used modern facilities, the combined electricity consumption would be 166.7 megawatts (1.46 terawatt-hours per year).[129] At the end of 2017, the global bitcoin mining activity was estimated to consume between 1 and 4 gigawatts of electricity.[190] Politico noted that the banking sector today consumes about 6% of total global power, and even if bitcoin's consumption levels increased 100 fold from today's levels, bitcoin's consumption would still only amount to about 2% of global power consumption.[191]

To lower the costs, bitcoin miners have set up in places like Iceland where geothermal energy is cheap and cooling Arctic air is free.[192] Bitcoin miners are known to use hydroelectric power in Tibet, Quebec, Washington (state), and Austria to reduce electricity costs.[191][193][194][195] Miners are attracted to suppliers such as Hydro Quebec that have energy surpluses.[196] According to a University of Cambridge study, much of bitcoin mining is done in China, where electricity is subsidized by the government.[197][198]

Price manipulation investigation

An official investigation into bitcoin traders was reported in May 2018.[199] The U.S. Justice Department launched an investigation into possible price manipulation, including the techniques of spoofing and wash trades.[200][201][202] Traders in the U.S., the U.K, South Korea, and possibly other countries are being investigated.[199] Brett Redfearn, head of the U.S. Securities and Exchange Commission's Division of Trading and Markets, had identified several manipulation techniques of concern in March 2018.

The U.S. federal investigation was prompted by concerns of possible manipulation during futures settlement dates. The final settlement price of CME bitcoin futures is determined by prices on four exchanges, Bitstamp, Coinbase, itBit and Kraken. Following the first delivery date in January 2018, the CME requested extensive detailed trading information but several of the exchanges refused to provide it and later provided only limited data. The Commodity Futures Trading Commission then subpoenaed the data from the exchanges.[203][204]

State and provincial securities regulators, coordinated through the North American Securities Administrators Association, are investigating "bitcoin scams" and ICOs in 40 jurisdictions.[205]

Academic research published in the Journal of Monetary Economics concluded that price manipulation occurred during the Mt Gox bitcoin theft and that the market remains vulnerable to manipulation.[206] The history of hacks, fraud and theft involving bitcoin dates back to at least 2011.[207]

Research by John M. Griffin and Amin Shams in 2018 suggests that trading associated with increases in the amount of the Tether cryptocurrency and associated trading at the Bitfinex exchange account for about half of the price increase in bitcoin in late 2017.[208][209]

J.L. van der Velde, CEO of both Bitfinex and Tether, denied the claims of price manipulation: "Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation. Tether issuances cannot be used to prop up the price of bitcoin or any other coin/token on Bitfinex."[210]

Ponzi scheme and pyramid scheme concerns

Various journalists,[192][211] economists,[212][213] and the central bank of Estonia[214] have voiced concerns that bitcoin is a Ponzi scheme. In 2013, Eric Posner, a law professor at the University of Chicago, stated that "a real Ponzi scheme takes fraud; bitcoin, by contrast, seems more like a collective delusion."[215] A 2014 report by the World Bank concluded that bitcoin was not a deliberate Ponzi scheme.[216]:7 The Swiss Federal Council[217]:21 examined the concerns that bitcoin might be a pyramid scheme; it concluded that "Since in the case of bitcoin the typical promises of profits are lacking, it cannot be assumed that bitcoin is a pyramid scheme." In July 2017, billionaire Howard Marks referred to bitcoin as a pyramid scheme.[218]

Security issues

Bitcoin is vulnerable to theft through phishing, scamming, and hacking. As of December 2017, around 980,000 bitcoins have been stolen from cryptocurrency exchanges.[219]

Use in illegal transactions

The use of bitcoin by criminals has attracted the attention of financial regulators, legislative bodies, law enforcement, and the media.[220] In the United States, the FBI prepared an intelligence assessment,[221] the SEC issued a pointed warning about investment schemes using virtual currencies,[220] and the U.S. Senate held a hearing on virtual currencies in November 2013.[222] The US government claimed that bitcoin was used to facilitate payments related to Russian interference in the 2016 United States elections.[223]

Several news outlets have asserted that the popularity of bitcoins hinges on the ability to use them to purchase illegal goods.[128][224] Nobel-prize winning economist Joseph Stiglitz says that bitcoin's anonymity encourages money laundering and other crimes, "If you open up a hole like bitcoin, then all the nefarious activity will go through that hole, and no government can allow that." He's also said that if "you regulate it so you couldn’t engage in money laundering and all these other [crimes], there will be no demand for Bitcoin. By regulating the abuses, you are going to regulate it out of existence. It exists because of the abuses."[225][226]

In 2014, researchers at the University of Kentucky found "robust evidence that computer programming enthusiasts and illegal activity drive interest in bitcoin, and find limited or no support for political and investment motives".[127] Australian researchers have estimated that 25% of all bitcoin users and 44% of all bitcoin transactions are associated with illegal activity as of April 2017. There were an estimated 24 million bitcoin users primarily using bitcoin for illegal activity, who held $8 billion worth of bitcoin, and made 36 million transactions valued at $72 billion.[227][228] A group of researches analyzed bitcoin transactions in 2016 and came to a conclusion that "some recent concerns regarding the use of bitcoin for illegal transactions at the present time might be overstated".[229]

Advertising bans

Bitcoin and other cryptocurrency advertisements are banned on Facebook,[230] Google, Twitter,[231] Bing,[232] Snapchat, LinkedIn and MailChimp.[233] Chinese internet platforms Baidu, Tencent, and Weibo have also prohibited bitcoin advertisements. The Japanese platform Line and the Russian platform Yandex have similar prohibitions.[234]

Documentation

Academia

In September 2015, the establishment of the peer-reviewed academic journal Ledger (ISSN 2379-5980) was announced. It will cover studies of cryptocurrencies and related technologies, and is published by the University of Pittsburgh.[235]

The journal encourages authors to digitally sign a file hash of submitted papers, which will then be timestamped into the bitcoin blockchain. Authors are also asked to include a personal bitcoin address in the first page of their papers.[236][237]

Film

The documentary film, The Rise and Rise of Bitcoin (late 2014), features interviews with people who use bitcoin, such as a computer programmer and a drug dealer.[238]

See also

Notes

  1. ^ The genesis block is the block number 0. The timestamp of the block is 2009-01-03 18:15:05. This block is unlike all other blocks in that it doesn't have a previous block to reference.
  2. ^ As of 2014, BTC is a commonly used code.[68] It does not conform to ISO 4217 as BT is the country code of Bhutan, and ISO 4217 requires the first letter used in global commodities to be 'X'.
  3. ^ As of 2014, XBT, a code that conforms to ISO 4217 though is not officially part of it, is used by Bloomberg L.P.,[69] CNNMoney,[70] and xe.com.[71]
  4. ^ Relative mining difficulty is defined as the ratio of the difficulty target on 9 January 2009 to the current difficulty target.
  5. ^ It is misleading to think that there is an analogy between gold mining and bitcoin mining. The fact is that gold miners are rewarded for producing gold, while bitcoin miners are not rewarded for producing bitcoins; they are rewarded for their record-keeping services.[78]
  6. ^ The exact number is 20,999,999.9769 bitcoins.[3]:ch. 8
  7. ^ The price of 1 bitcoin in US dollars.
  8. ^ Volatility is calculated on a yearly basis.

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