137.222.114.243 (talk) i made it better Tags: possible vandalism blanking |
NorthBySouthBaranof (talk | contribs) m Reverted edits by 137.222.114.243 (talk) to last version by Chrisarnesen |
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{{Use dmy dates|date=December 2013}} |
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bitcoin is 420 dank |
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{{Infobox currency |
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| image_1 = Bitcoin logo.svg |
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| image_title_1 = Logo of the bitcoin reference client |
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| issuing_authority = [[decentralised system|decentralized]]{{refn | group = note | Bitcoin does not have a [[central bank|central authority]].<ref name="JSC" />}} |
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| issuing_authority_title = Administration |
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| date_of_introduction = {{Start date and age|df=yes|2009|1|3}} |
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| using_countries = worldwide |
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| inflation_title = [[Monetary inflation|Supply growth]] |
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| inflation_rate = 25 bitcoins per block (approximately every ten minutes) until mid 2016,<ref name=quantitative>{{cite web | title = Quantitative Analysis of the Full Bitcoin Transaction Graph | url = http://eprint.iacr.org/2012/584.pdf | publisher = Cryptology ePrint Archive | accessdate = 18 October 2012 | author = Ron Dorit | author2 = Adi Shamir | year=2012}}</ref> and then afterwards 12.5 bitcoins per block for 4 years until next halving. This halving continues until 2110-2140 when 21 million bitcoins have been issued. |
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| inflation_source_date = |
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| subunit_ratio_3 = {{val|e=-8}} |
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| subunit_name_3 = satoshi<ref name="satoshi unit">{{cite web | title = Cracking the Bitcoin: Digging Into a $131M USD Virtual Currency | url = http://www.dailytech.com/Cracking+the+Bitcoin+Digging+Into+a+131M+USD+Virtual+Currency/article21878.htm | author = Jason Mick | publisher = Daily Tech | date = 12 June 2011 | accessdate = 30 September 2012 | deadurl = no}}</ref> |
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| subunit_ratio_2 = {{val|e=-6}} |
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| subunit_name_2 = microbitcoin |
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| symbol_subunit_2 = μBTC |
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| subunit_ratio_1 = {{val|e=-3}} |
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| subunit_name_1 = millibitcoin |
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| symbol_subunit_1 = mBTC |
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| symbol = BTC,{{refn | group = note | name = BTCcode | {{as of | 2014}}, BTC is the most commonly used code.<ref name = "standardize">{{cite web | publisher = [[ReadWrite]] | author = Lauren Orsini | date = 8 October 2014 | accessdate = 2 November 2014 | title = Look Out—Bitcoin Wants To Get Standardized | url = http://readwrite.com/2014/10/08/bitcoin-foundation-standardize-currency}}</ref>}} XBT,{{refn | group = note | name = XBTcode | {{as of | 2014}}, XBT is used by [[Bloomberg L.P.]],<ref>{{cite news | title = Bitcoin Ticker Available On Bloomberg Terminal For Employees | publisher = [[TechCrunch]] | url = http://techcrunch.com/2013/08/09/bitcoin-ticker-available-on-bloomberg-terminal/ | date = 9 August 2013 | author = Romain Dillet | accessdate = 2 November 2014}}</ref> [[CNNMoney]],<ref>{{cite web | title = Bitcoin Composite Quote (XBT) | url = http://money.cnn.com/quote/quote.html?symb=XBT | publisher = CNN | work = CNN Money | accessdate = 2 November 2014}}</ref> [[CoinDesk]],<ref>{{cite news | title = Bitcoin Price Index | publisher = [[CoinDesk]] | url = http://www.coindesk.com/price/ | accessdate = 17 November 2014}}</ref> Kraken,<ref>{{cite web | publisher = Kraken | accessdate = 26 November 2014 | title = Market Data | url = https://www.kraken.com/market}}</ref> and [[xe.com]].<ref>{{cite web | title = XBT - Bitcoin | publisher = xe.com | accessdate = 2 November 2014 | url = http://www.xe.com/currency/xbt-bitcoin?}}</ref>}} {{nowrap|[[File:BitcoinSign.svg|9px]]}}{{refn | group = note | name = BTCsym | Bitcoin Foundation will attempt to establish a Unicode symbol for bitcoin. The leading candidates are B⃦ (letter B with combining double vertical stroke overlay), ฿ (the [[Thai Baht]] symbol), and Ƀ ([[B with stroke]]).<ref name="standardize" />}} |
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| used_coins = unspent outputs of transactions denominated in any multiple of satoshis<ref name="Antonopoulos2014">{{cite book | author = Andreas M. Antonopoulos | date = April 2014 | url = http://chimera.labs.oreilly.com/books/1234000001802/ch02.html | chapter = 2 | publisher = O'Reilly Media | accessdate = 23 October 2014 | title = Mastering Bitcoin. Unlocking Digital Crypto-Currencies}}</ref> |
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}} |
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{{Special characters}} |
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{{POV-section|talk=Neutrality dispute on the contents of the lead section|date=December 2014}} |
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'''Bitcoin''' is a software-based online [[payment system]] described by [[Satoshi Nakamoto]]<ref group="note" name="Satoshi">It is not known whether the name ''Satoshi Nakamoto'' is real or a pseudonym, or if it represents one person or a group.</ref> in 2008<ref name="paper">{{cite web|url= https://bitcoin.org/bitcoin.pdf |title= Bitcoin: A Peer-to-Peer Electronic Cash System |date= October 2008 |publisher= bitcoin.org |accessdate= 28 April 2014}}</ref> and introduced as [[open-source software]] in 2009.<ref>{{cite web | last = Davis | first = Joshua | title = The Crypto-Currency: Bitcoin and its mysterious inventor | url = http://www.newyorker.com/reporting/2011/10/10/111010fa_fact_davis | work = The New Yorker | date = 10 October 2011 | accessdate = 31 October 2014}}</ref> A [[peer-to-peer]] client records transactions in a public [[ledger]], which is shared between all running copies of the client, denominated in its own [[unit of account]],<ref name=btcregs /> which is also called '''bitcoin'''.{{refn | group = note | There is no uniform convention for ''bitcoin'' capitalization. Some sources use ''Bitcoin'', capitalized, to refer to the [[technology]] and [[computer network|network]] and ''bitcoin'', lowercase, to refer to the unit of account.<ref name="capitalization">{{cite web | url = http://www.newyorker.com/online/blogs/elements/2013/04/the-future-of-bitcoin.html | title = The Bitcoin Boom | publisher = Condé Nast | work = The New Yorker | date = 2 April 2013 | accessdate = 22 December 2013 | author = Bustillos, Maria | quote = Standards vary, but there seems to be a consensus forming around Bitcoin, capitalized, for the system, the software, and the network it runs on, and bitcoin, lowercase, for the currency itself.}}</ref> The [[Wall Street Journal|WSJ]]<ref>{{cite news|last= Vigna |first= Paul |title= BitBeat: Is It Bitcoin, or bitcoin? The Orthography of the Cryptography |url= http://blogs.wsj.com/moneybeat/2014/03/14/bitbeat-is-it-bitcoin-or-bitcoin-the-orthography-of-the-cryptography |accessdate= 21 April 2014 |newspaper= [[Wall Street Journal|WSJ]] |date=3 March 2014}}</ref> and [[The Chronicle of Higher Education]]<ref>{{cite web|publisher= The Chronicle of Higher Education (chronicle.com) |title= The latest style |date= 14 April 2014 |last= Metcalf |first= Allan |series= Lingua Franca blog |url= http://chronicle.com/blogs/linguafranca/2014/04/11/the-latest-style/ |accessdate= 19 April 2014}}</ref> advocate use of lowercase ''bitcoin'' in all cases, however. This article follows the latter convention.}} Because of its lack of a central repository or single administrator, the [[US Treasury]] has called bitcoin a decentralized [[virtual currency]].<ref name="JSC">{{cite web|url= http://www.fincen.gov/news_room/testimony/html/20131119.html |title= Statement of Jennifer Shasky Calvery, Director Financial Crimes Enforcement Network United States Department of the Treasury Before the United States Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on National Security and International Trade and Finance Subcommittee on Economic Policy |publisher= Financial Crimes Enforcement Network |work= fincen.gov |date= 19 November 2013 |accessdate= 1 June 2014}}</ref> Media reports often refer to bitcoin as a [[cryptocurrency]] or [[digital currency]]. The status of bitcoin as a real [[currency]] is disputed.<ref name="currencydispute"/> Bitcoin was the first cryptocurrency to be created, and most others are similar and derived from it. It is also the largest in terms of total market value.<ref>{{cite news | last = Espinoza | first = Javier | title = Is It Time to Invest in Bitcoin? Cryptocurrencies Are Highly Volatile, but Some Say They Are Worth It | date = 22 September 2014 | url = http://online.wsj.com/articles/how-to-decipher-cryptocurrencies-1411333011 | work = Journal Reports | publisher = [[The Wall Street Journal]] | accessdate = 3 November 2014}}</ref> |
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Bitcoins are created as a reward for processing work in which users offer their computing power to verify and record payments into the public ledger. This activity is called mining and is rewarded by transaction fees and newly created bitcoins.<ref name="primer">{{cite web | url=http://mercatus.org/sites/default/files/Brito_BitcoinPrimer.pdf | title=Bitcoin: A Primer for Policymakers | publisher=George Mason University | work=Mercatus Center | year=2013 | accessdate=22 October 2013 | author=Jerry Brito and Andrea Castillo}}</ref> Besides mining, bitcoins can be obtained in exchange for [[fiat money]], products, and services.<ref name="bitpay130916" /> Users can send and receive bitcoin electronically for an optional transaction fee<ref name="EconOfBTC">{{cite web | url=http://www.weis2013.econinfosec.org/papers/KrollDaveyFeltenWEIS2013.pdf | title=The Economics of Bitcoin Mining, or Bitcoin in the Presence of Adversaries | work=The Twelfth Workshop on the Economics of Information Security (WEIS 2013) |
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| date= 11–12 June 2013 | accessdate=8 May 2014 | author=Joshua A. Kroll, Ian C. Davey, Edward W. Felten |
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| quote="If the value paid out of a transaction (in Bitcoins) is less than the amount put in, the difference is treated as a transaction fee that can be collected by whoever manages to mine a block containing that transaction. A transaction fee is like a tip or gratuity left for the miner."}}</ref> using [[Bitcoin#Wallets|wallet software]] on a [[personal computer]], [[mobile device]], a [[web application]], or a specialized device called a hardware wallet. |
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Bitcoin as a form of payment for products and services has grown,<ref name="bitpay130916">{{cite web | url = http://techcrunch.com/2013/09/16/bitpay-10000-merchants/ | title = BitPay Passes 10,000 Bitcoin-Accepting Merchants On Its Payment Processing Network | author = Natasha Lomas | publisher = Techcrunch.com | work = Techcrunch | date = 16 September 2013 | accessdate = 21 October 2013}}</ref> and merchants have an incentive to accept the digital currency because [[fee]]s are lower than the 2–3% typically imposed by [[credit card]] processors.<ref name="merchantfee">{{cite news | url=http://www.nytimes.com/2013/10/31/technology/bitcoin-pursues-the-mainstream.html | title=Bitcoin Pursues the Mainstream | work=The New York Times | date=30 October 2013 | accessdate=4 November 2013 | author=Wingfield, Nick}}</ref> The [[European Banking Authority]] has warned that bitcoin lacks consumer protections.<ref name="ebawarn"/> Unlike credit cards, any fees are paid by the purchaser, not the vendor. Bitcoin can be stolen,<ref>{{cite news|url=http://dealbook.nytimes.com/2013/12/05/in-the-murky-world-of-bitcoin-fraud-is-quicker-than-the-law/ |title=In the Murky World of Bitcoin, Fraud Is Quicker Than the Law |publisher=''The New York Times'' |author=Nathaniel Popper| date=5 December 2013| accessdate=12 December 2013 |archiveurl= http://web.archive.org/web/20141031101756/dealbook.nytimes.com/2013/12/05/in-the-murky-world-of-bitcoin-fraud-is-quicker-than-the-law/ |archivedate=31 October 2014 }}</ref> and [[chargeback]]s are impossible.<ref name="primer" /> {{As of|2013|July}}, the commercial use of bitcoin was small compared to its use by [[Speculation|speculators]], which has contributed to price volatility.<ref name=winkles>{{cite news | url=http://blogs.wsj.com/moneybeat/2013/07/02/beware-the-risks-of-the-bitcoin-winklevii-outline-the-downside/ | title=Beware the Risks of the Bitcoin: Winklevii Outline the Downside | publisher=''The Wall Street Journal'' | work=Moneybeat | date=2 July 2013 | accessdate=21 October 2013 | author=Grocer, Stephen}}</ref> |
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Bitcoins are sometimes used to purchase illicit items—including child pornography,<ref name=bi>{{cite news | url=http://uk.businessinsider.com/pedophiles-have-created-a-deep-web-version-of-kickstarter-to-crowdfund-child-porn-2014-11?r=US | title=Paedophiles Have Created A Deep Web Version Of Kickstarter To Crowdfund Child Porn | publisher=''Business Insider'' | date=14 November 2014 | accessdate=29 November 2014 | author=James Cook}}</ref> credit card details, and drugs—at [[deep web]] black markets and are seized by authorities when such sites are shut down. In June 2014, GQ journalist Marshall Sella concluded that what remained of the [[Silk Road (marketplace)|Silk Road]] black market site was one of the few places where you could purchase items for bitcoin.<ref name=bloomgq/> |
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The United States is considered more bitcoin-friendly than some other governments.<ref name=capcont>{{cite news|url= http://www.washingtonpost.com/blogs/the-switch/wp/2014/01/27/this-map-shows-which-countries-are-friendly-to-bitcoin/ |title= This map shows which countries are friendly to bitcoin |publisher= ''The Washington Post'' |work= The Switch |date= 27 January 2014 |accessdate= 28 January 2014 |author= Peterson, Andrea}}</ref> At a 2013 US Senate hearing on virtual currencies, The Department of Justice "recognize[ed] that many virtual currency systems offer legitimate financial services." The sole Senator who attended the hearing, Tom Carper, expressed a desire to see an end to virtual currencies' facilitation of the sale of illicit goods and services saying, "[I'm] encouraged that maybe it's possible to have the benefits of virtual currencies and to actually be able to not facilitate [criminal activity]".<ref>{{cite news | url = http://online.wsj.com/articles/SB10001424052702304439804579205740125297358 | title = Authorities See Worth of Bitcoin | date = 18 November 2013 | first = Ryan | last = Tracy | publisher = The Wall Street Journal | work = Markets | accessdate = 28 November 2014}}</ref> Developing countries are less receptive. For example, in China buying bitcoins with [[Renminbi|yuan]] is subject to restrictions, and bitcoin [[Exchange (organized market)|exchanges]] are not allowed to hold bank accounts. |
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{{TOC limit|3}} |
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==Design== |
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The most important part of the bitcoin system is a public [[ledger]], called the ''block chain'', that records transactions in bitcoins. A novel solution is that this is accomplished without the intermediation of any single, central authority, since the maintenance of the ledger is performed by a [[computer network|network]] of [[node (networking)|communicating nodes]] running bitcoin software that anyone can join.<ref name="primer" /> 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 these transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes.<ref name="Antonopoulos2014" /> |
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===The block chain=== |
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Bitcoin transactions are recorded in a public ledger called the ''block chain''. The block chain is [[distributed database|distributed]]; to independently verify the chain of ownership of any and every bitcoin amount, full-featured bitcoin software stores its own copy of it. Approximately six times per hour, a group of accepted transactions, a block, is added to the block chain, which is quickly published to all network nodes. This allows bitcoin software to determine when a particular bitcoin amount has been spent, which is necessary to prevent [[double-spending]] in an environment with no central authority. Whereas a conventional ledger records the transfers of actual [[Banknote|bills]] or [[promissory note]]s that exist apart from it, the block chain is the only place that bitcoins can be said to exist in the form of unspent outputs of transactions.<ref name="Antonopoulos2014" /> |
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===Units=== |
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The unit of account of the bitcoin system is bitcoin (BTC,<ref group="note" name="BTCcode" /> XBT,<ref group="note" name="XBTcode" /> or {{nowrap|[[File:BitcoinSign.svg|9px]]}}<ref group="note" name="BTCsym" />).<ref name=btcregs /> |
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Bitcoin can be broken up into small fragments of 0.00000001 BTC, which is one hundred millionth of a bitcoin. This unit is called ''satoshi'' in homage to bitcoin's creator. Satoshi is the smallest, atomic fragment of bitcoin.<ref name="satoshi unit" /> |
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There are also two other subunits of bitcoin, and those are called ''millibitcoin'' (mBTC) and ''microbitcoin'' (µBTC). One millibitcoin equals to 0.001 BTC, which is one thousandth of bitcoin, or 100,000 satoshis, or 1,000 µBTC.<ref name="Antonopoulos2014" /> One microbitcoin equals to 0.000001 BTC, which is one millionth of bitcoin, or 100 satoshis, or 0.001 mBTC. Microbitcoins are sometimes referred to as simply ''bits''.<ref name="bit unit">{{cite web | title = Coinbase Announces Pricing in 'Bits' and Bitcoin Buyback Option | url = http://www.coindesk.com/coinbase-announces-pricing-bits-bitcoin-buyback-option/ | author = Emily Spaven | publisher = Coindesk | date = 21 June 2011 | accessdate = 12 November 2014 | deadurl = no}}</ref> |
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In a press release issued 7 October 2014, the Bitcoin Foundation revealed a formal plan to apply for an [[ISO 4217]] currency code for bitcoin.<ref name = "standardize" /> The press release mentions BTC and XBT as the leading candidates.<ref>{{cite web | title = Press Release October 7, 2014: Bitcoin Foundation Financial Standards Working Group Leads the Way for Mainstream Bitcoin Adoption | url = https://bitcoinfoundation.org/press-releases/press-release-october-7-2014-bitcoin-foundation-financial-standards-working-group-leads-the-way-for-mainstream-bitcoin-adoption-2/ | publisher = [[Bitcoin Foundation]] | work = Press Release | date = 7 October 2014 | accessdate = 7 November 2014}}</ref> |
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===Ownership=== |
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[[File:Bitcoin Transaction Visual.svg|thumb|Simplified chain of ownership.<ref name="paper" /> In reality, a transaction can have more than one input and more than one output.]] |
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For every transaction output the block chain registers the address to which the output is encumbered. To use the output in a future transaction, the payer must [[digital signature|digitally sign]] the transaction using the corresponding [[private key]]. This prevents unauthorized transfers, since only the user knowing the private key can sign the transaction. Network can verify the signature using the [[public key]].<ref name="Antonopoulos2014" /> |
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If the private key is lost, the [[bitcoin network]] will not recognize any other evidence of ownership;<ref name="primer" /> the coins are then lost and cannot be recovered. For example, in 2013 one user said he lost 7,500 bitcoins, worth $7.5 million at the time, when he discarded a hard drive containing his private key.<ref>{{cite news|title=Man Throws Away 7,500 Bitcoins, Now Worth $7.5 Million|date=29 November 2013|url=http://washington.cbslocal.com/2013/11/29/man-throws-away-7500-bitcoins-now-worth-7-5-million/|work=CBS DC|accessdate=23 January 2014}}</ref> |
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===Transactions=== |
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A transaction must have one or more inputs. For the transaction to be valid, every input must be a digitally signed and previously unspent output of a previous transaction. The use of multiple inputs corresponds to the use of multiple coins in a cash transaction. |
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A transaction can also have multiple outputs, allowing one to make multiple payments in one go. A transaction output can be specified as an arbitrary multiple of satoshi. |
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Similarly as in a cash transaction, the sum of inputs (coins used to pay) can exceed the intended sum of payments. In such case, an additional output is used, returning the change back to the payer.<ref name="Antonopoulos2014" /> |
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===Mining=== |
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{{see also | Cryptographic nonce | Proof of work}} |
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[[File:Difficulty.svg|thumb| Relative mining difficulty{{refn | group = note | Relative mining difficulty is defined as 1 at 9 January 2009. Higher number means higher difficulty. As the total network power increases, the network adjusts the mining difficulty to make mining always last about ten minutes. Therefore, the relative mining difficulty can also be interpreted as the relative power of the network.}} chart.{{refn | group = note | name = blockchain | Data acquired from [[Blockchain.info]]<ref name="Blockchain.info">{{cite web | url = https://blockchain.info/charts | title = Charts | accessdate = 2 November 2014 | publisher = [[Blockchain.info]]}}</ref>}} Vertical axis: relative mining difficulty, the scale is [[logarithmic scale|logarithmic]]. Horizontal axis: date ranging from 2009-01-09 to 2014-11-08.]] |
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''Mining'' is a record-keeping service.{{refn | group = note | 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.<ref name="Andolfatto2014-03" />}} Miners keep the block chain consistent, complete, and unalterable by repeatedly verifying and collecting newly broadcast transactions into a new group of transactions called a ''block''. |
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The new block must contain information that chains it to the previous block and gives the block chain its name. It is a [[cryptographic hash]] - bitcoin uses [[SHA-256]] - of the previous block. |
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Finally, the new block must contain a so-called ''proof-of-work''. The proof-of-work consists of a number called a ''difficulty target'' and a number called a ''nonce'', which is [[jargon]] for "a number used only once". Miners have to find such a nonce that gives a hash of the new block smaller than the difficulty target. When the new block is created and distributed to the network, every network node can easily verify the proof.<ref name="Antonopoulos2014" /> On the other hand, finding the proof requires significant work, since for a secure cryptographic hash there is only one method to find the requisite nonce: miners try different integer values one at a time, e.g., 1, then 2, then 3, and so on until the requisite output is obtained. The fact that the hash of the new block is smaller than the difficulty target serves as a proof that this tedious work has been done, hence the ''proof-of-work'' name. |
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The smaller the target number, the longer on average it will take to find a requisite nonce, because the lower the probability that any particular value will produce a hash less than the target. The bitcoin system periodically (every 2016 blocks) adjusts the difficulty target so that the average time the entire network needs to find a nonce is about ten minutes. That way, as computer hardware gets faster over the years, the bitcoin protocol will simply adjust the mining target to make mining always last about ten minutes.<ref name="Antonopoulos2014" /> For example, at the end of April 2014 miners had to try 34,4 quintillion values at average before finding the requisite nonce, while at the end of October 2014 it was 154.6 quintillion values at average. |
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The proof-of-work together with the fact that the blocks are chained, makes modifications of the block chain extremely hard, because an attacker has to modify not just one block, but also the subsequent blocks, needing to outperform the combined power of the rest of the network, which continues adding new blocks to the original, honest version of the block chain.<ref name="khanbitcoin">{{cite web | last = Ramzan | first = Zulfikar | title = Bitcoin: What is it? | url = http://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/bitcoin/v/bitcoin-what-is-it | publisher = The Khan Academy | date = 2014 | accessdate = 5 April 2014}}</ref> |
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===Supply=== |
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[[File:Total-bitcoins.svg|thumb| Total bitcoins in circulation.<ref group="note" name="blockchain" /> Horizontal axis: date ranging from 2009-01-09 to 2014-11-08.]] |
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The successful miner finding the new block is rewarded with newly created bitcoins and transaction fees.<ref name="bloombergvance111413">{{cite web | url = http://www.businessweek.com/articles/2013-11-14/2014-outlook-bitcoin-mining-chips-a-high-tech-arms-race | title = 2014 Outlook: Bitcoin Mining Chips, a High-Tech Arms Race | publisher = Businessweek | date = 14 November 2013 | author = Ashlee Vance | accessdate = 24 November 2013}}</ref> {{as of|2014}}, the reward amounts to 25 newly created bitcoins per block added to the block chain. To claim the reward, a special transaction called a ''coinbase'' is included with the processed payments.<ref name="Antonopoulos2014" /> All bitcoins in circulation can be traced back to such coinbase transactions. The [[bitcoin protocol]] specifies that the reward for adding a block will be halved approximately every four years. Eventually, the reward will be removed entirely when an arbitrary limit of 21 million bitcoins is reached [[circa|c.]] 2140, and record keeping will then be rewarded by transaction fees solely.<ref name="KWY">{{cite web | url = http://qz.com/154877/by-reading-this-page-you-are-mining-bitcoins/ | title = By reading this article, you're mining bitcoins | publisher = Atlantic Media Co | work = qz.com | date = 17 December 2013 | accessdate = 17 December 2013 | author = Ritchie S. King, Sam Williams, David Yanofsky}}</ref> |
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Paying a transaction fee is optional, but may speed up confirmation of the transaction.<ref name="txnfee">{{cite web|title=How much will the transaction fee be?|url=https://bitcoin.org/en/faq#how-much-will-the-transaction-fee-be|work=FAQ|publisher=Bitcoin Foundation|accessdate=19 March 2014}}</ref> Payers have an incentive to include such fees because doing so means their transaction will likely be added to the block chain sooner; miners can choose which transactions to process<ref name="EconOfBTC" /> and prefer to include those that pay fees. Fees are based on the size of the transaction generated, which in turn is dependent on the number of inputs used to create the transaction. Furthermore, priority is given to older unspent inputs.<ref name="bitcoinfees">{{cite web|title=How much will the transaction fee be?|url=http://bitcoinfees.com/|publisher=Bitcoinfees.com|accessdate=30 November 2014}}</ref> |
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===Wallets=== |
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{{see also | Digital wallet | Armory (software)}} |
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[[File:Electrum Bitcoin Wallet.png|thumb | Electrum bitcoin wallet]] |
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[[File:Bitcoin paper wallet generated at bitaddress.jpg|thumb | Bitcoin paper wallet generated at bitaddress.org]] |
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[[File:10elqpi.jpg|thumb | Trezor hardware wallet]] |
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Bitcoin [[client software]] called a ''bitcoin wallet'' allows a user to transact bitcoins. While wallets are often described as a ''place to hold''<ref>{{cite web | url = http://www.motherjones.com/politics/2013/04/what-is-bitcoin-explained | title = Bitcoin, Explained | publisher = Mother Jones | work = motherjones.com | date = 10 April 2013 | accessdate = 26 April 2014 | author = Adam Serwer and Dana Liebelson}}</ref> or ''store bitcoins'',<ref name=3ceos /> due to the nature of the system, bitcoins are inseparable from the block chain transaction ledger. Perhaps a better way to describe a wallet is something that ''stores the digital credentials for your bitcoin holdings''<ref name=3ceos>{{cite web | url = http://www.forbes.com/sites/johnvillasenor/2014/04/26/secure-bitcoin-storage-a-qa-with-three-bitcoin-company-ceos/ | title = Secure Bitcoin Storage: A Q&A With Three Bitcoin Company CEOs | publisher = Forbes | work = forbes.com | date = 26 April 2014| accessdate = 26 April 2014 | author = Villasenor, John}}</ref> 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.<ref name="Economist113013Pressure">{{cite news | url = http://www.economist.com/news/technology-quarterly/21590766-virtual-currency-it-mathematically-elegant-increasingly-popular-and-highly | title = Bitcoin: Bitcoin under pressure | work = The Economist | date = 30 November 2013 | accessdate = 30 November 2013}}</ref> A hash of the public key is a bitcoin address, and the private key can be thought of as ownership credentials to that address. At its most basic, a wallet is a collection of these keys. Most bitcoin wallets also include the ability to make transactions, however. |
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There are several types of implementations. So-called ''full nodes'' validate transactions and blocks they receive, and relay them to connected peers.<ref name="Bitcoin Clients" /> The first wallet program called ''Bitcoin-Qt'' was released in 2009 by [[Satoshi Nakamoto]] as [[open source|open-source]] code.<ref name="Bitcoin Clients">{{Cite thesis | url = http://publications.theseus.fi/bitstream/handle/10024/47166/Skudnov_Rostislav.pdf?sequence=1 | first = Rostislav | last = Skudnov | title = Bitcoin Clients | type = Bachelor's Thesis | year = 2012 | publisher = [[Turku University of Applied Sciences]] | accessdate = 16 January 2014}}</ref> It can be used as a desktop wallet for payments or as a server utility for merchants and other payment services. Bitcoin-Qt, also called ''Satoshi client'', is sometimes referred to as the ''[[Reference implementation|reference client]]'' because it serves to define the bitcoin protocol and acts as a standard for other implementations.<ref name="Bitcoin Clients"/> As of version 0.9, Bitcoin-Qt has been renamed ''Bitcoin Core'' to more accurately describe its role in the network.<ref>{{cite journal | date = 19 March 2014 | title = Bitcoin Version 0.9.0 Brings Transaction Malleability Fixes, Branding Change | url = http://www.coindesk.com/bitcoin-version-0-9-0-brings-transaction-malleability-fixes-branding-change/ | author = Pete Rizzo | accessdate = 31 October 2014}}</ref> Wallets for mobile devices ubiquitously use [[QR code]]s to simplify transactions. |
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In addition to software wallets, there are also Internet services called ''[[online wallet]]s'' like [[Blockchain.info]], [[Circle]], or [[Coinbase]], offering a similar functionality to their users. The advantage of online wallets is a combination of powerful functionality with ease of use.<ref>{{cite news | title = Be Your Own Bank: Bitcoin Wallet for Apple | url = http://www.forbes.com/sites/jonmatonis/2012/04/26/be-your-own-bank-bitcoin-wallet-for-apple/ | author = Jon Matonis | date = 26 April 2012 | accessdate = 17 November 2014 | publisher = Forbes}}</ref> |
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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,<ref name="theverge">{{cite web|last=Staff|first=Verge |url=http://www.theverge.com/2013/12/13/5207256/casascius-maker-of-shiny-physical-bitcoins-shut-down-by-treasury|title=Casascius, maker of shiny physical bitcoins, shut down by Treasury Department |publisher=The Verge |date=13 December 2013|accessdate=10 January 2014}}</ref> wood,<ref name="coindesk">{{cite web | author = Daniel Cawrey (@danielcawrey) | url = http://www.coindesk.com/canadian-man-worlds-first-wood-bitcoin-wallet/ | title = Canadian Man Builds World's First Wooden Bitcoin Wallet | publisher = Coindesk.com | date = 20 December 2013 | accessdate = 10 January 2014}}</ref> or plastic. For those serious about security, storing private keys on paper printouts or in offline [[data storage device]]s is the best option.<ref name=3ceos/> |
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Hardware wallets are the result of the effort to combine paper wallet security with the convenience of online wallets. An example of such a wallet is Trezor (the word ''trezor'' is a Slavic equivalent for ''vault'').<ref>{{cite news | title = Meet Trezor, A Bitcoin Safe That Fits Into Your Pocket | url = http://www.forbes.com/sites/ericxlmu/2014/10/15/meet-trezor-a-bitcoin-safe-that-can-fit-into-your-pocket/ | author = Eric Mu | date = 15 October 2014 | accessdate = 31 October 2014 | publisher = Forbes | work = Forbes Asia}}</ref> |
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===Privacy=== |
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In traditional banking system, privacy of users is guaranteed by [[Right to Financial Privacy Act]], and it is achieved by limiting access to information to the parties involved and to the trusted third party. |
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In the bitcoin system privacy is achieved by not identifying owners of bitcoin addresses while making other transaction data public. While bitcoin users are not identified by name, transactions can be linked to individuals and companies,<ref>{{cite web | url=http://www.technologyreview.com/news/518816/mapping-the-bitcoin-economy-could-reveal-users-identities/ | title=Mapping the Bitcoin Economy Could Reveal Users’ Identities | work=MIT Technology Review | date=5 September 2013 | accessdate=2 April 2014 | author=Simonite, Tom}}</ref> since transactions are viewable by everyone. Additionally, exchanges where people buy and sell bitcoins for cash, may be required to collect personal information.<ref name="5facts">{{cite news | url=http://www.washingtonpost.com/blogs/the-switch/wp/2013/08/21/five-surprising-facts-about-bitcoin-2/ | title=Five surprising facts about Bitcoin | publisher=The Washington Post | work=washingtonpost.com | date=21 August 2013 | accessdate=2 April 2014 | author=Lee, Timothy}}</ref> To maintain financial privacy, a different bitcoin address for each transaction should be used,<ref>{{cite web | url=http://www.wired.co.uk/news/archive/2013-06/06/bitcoin-retail | title=How Bitcoin lets you spy on careless companies | publisher=Conde Nast | work=wired.co.uk | date=6 June 2013 | accessdate=2 April 2014 | author=McMillan, Robert}}</ref> but multi-input transactions reveal that all their inputs belong to the same owner. That is why users concerned about privacy rely on so-called mixing services that allow users to trade the coins they own for coins with different transaction histories.<ref>{{cite news | url=http://www.forbes.com/sites/jonmatonis/2013/06/05/the-politics-of-bitcoin-mixing-services/ | title=The Politics Of Bitcoin Mixing Services | publisher=Forbes | work=forbes.com | date=5 June 2013 | accessdate=2 April 2014 | author=Matonis, Jon}}</ref> |
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Comparing privacy levels, it has been suggested that bitcoin payments should not be considered more private than credit card payments.<ref>{{cite web | url = http://www.hbarel.com/bitcoin-does-not-provide-anonymity | publisher = hbarel.com | title = Bitcoin does not provide anonymity | date = 3 April 2014 | author = Bar-El, Hagai | accessdate = 31 October 2014}}</ref> |
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===Fungibility=== |
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[[Fungibility]] of fiat money is established by the [[legal tender]] law. In case of bitcoin no law establishes it is fungible. Wallets and similar software technically handle bitcoins as equivalent, establishing the basic level of fungibility to bitcoin. Researchers point out, however, that the history of every single bitcoin is registered and publicly available in the block chain ledger, and that some users may refuse to accept bitcoins coming from controversial transactions, which would harm their fungibility.<ref>{{cite web | first1 = Eli | last1 = Ben-Sasson | first2 = Alessandro | last2 = Chiesa | first3 = Christina | last3 = Garman | first4 = Matthew | last4 = Green | first5 = Ian | last5 = Miers | first6 = Eran | last6 = Tromer | first7 = Madars | last7 = Virza | work = 2014 IEEE Symposium on Security and Privacy | title = Zerocash: Decentralized Anonymous Payments from Bitcoin | url = http://zerocash-project.org/media/pdf/zerocash-oakland2014.pdf | date = 2014 | accessdate = 31 October 2014 | publisher = IEEE computer society}}</ref> |
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==History== |
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{{main|History of Bitcoin|l1=History of bitcoin}} |
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Bitcoin was first mentioned in a research paper published on 31 October 2008 under the name ''Satoshi Nakamoto''<ref group="note" name="Satoshi" /> and released in January 2009.<ref name="paper" /> |
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One of the first supporters, adopters, contributor to bitcoin and receiver of the first bitcoin transaction was a cryptographer, [[cypherpunk]], futurist and programmer [[Hal Finney (cypherpunk)|Hal Finney]]. Finney "downloaded the bitcoin software the day it was released", and Nakamoto sent Finney 10 bitcoins the day after that.<ref>{{cite news|last1=Popper|first1=Nathaniel|title=Hal Finney, Cryptographer and Bitcoin Pioneer, Dies at 58|url=http://www.nytimes.com/2014/08/31/business/hal-finney-cryptographer-and-bitcoin-pioneer-dies-at-58.html?_r=1|accessdate=2 September 2014|work=NYTimes|date=30 August 2014}}</ref> |
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Other early supporters were Wei Dai, creator of bitcoin predecessor b-money, and Nick Szabo, creator of bitcoin predecessor bit gold.<ref name="WallaceWired11">{{cite news | url = http://www.wired.com/magazine/2011/11/mf_bitcoin/ | title = The Rise and Fall of Bitcoin | work = Wired | date = 23 November 2011 | accessdate = 4 November 2013 | author = Wallace, Benjamin}}</ref> |
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In 2009, an [[Exploit (computer security)|exploit]] in an early bitcoin client was found that allowed large numbers of bitcoins to be created.<ref name="bug events" /> |
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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.<ref name="bug events">{{cite web | last = Buterin | first = Vitalik | url = http://bitcoinmagazine.com/3668/bitcoin-network-shaken-by-blockchain-fork/ | title = Bitcoin Network Shaken by Blockchain Fork | publisher = Coin Publishing Ltd | work = Bitcoin Magazine | date = 12 March 2013 | accessdate = 17 January 2014}}</ref> |
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Some mainstream websites began accepting bitcoins [[circa|c.]] 2013. [[WordPress]] started in November 2012,<ref>{{cite web |url=http://en.blog.wordpress.com/2012/11/15/pay-another-way-bitcoin/ |title=Pay Another Way: Bitcoin |last=Skelton |first=Andy |date=15 November 2012 |publisher=[[WordPress]] |accessdate=24 April 2014}}</ref> followed by [[OKCupid]] in April 2013,<ref>{{cite web |url=http://mashable.com/2013/04/17/okcupid-bitcoin/|title=OKCupid Now Accepts Bitcoin|last=Franceschi-Bicchierai|first=Lorenzo|date=18 April 2013 |publisher=[[Mashable]] |accessdate=24 April 2014}}</ref> [[Atomic Mall]] in November 2013,<ref name="powersellersunite.com">{{cite web | url = http://www.powersellersunite.com/about45219.html | title = Atomic Mall adds Bitcoin payments for approved merchants | author = AtomicMall.com | work = powersellersunite.com | date = 17 November 2013 | accessdate = 8 April 2014}}</ref> [[TigerDirect]]<ref name=tigger/> and [[Overstock.com]] in January 2014,<ref name=overstock/> [[Expedia]] in June 2014,<ref>{{cite web |url=http://techcrunch.com/2014/06/11/expedia-now-accepts-bitcoin-for-your-crypto-vacations/ |title=Expedia Now Accepts Bitcoin For Your Crypto-Vacations |last=Biggs |first=John |date=11 June 2014 |publisher=[[Techcrunch]] |accessdate=12 June 2014}}</ref> and [[Newegg]] and [[Dell]] in July 2014.<ref>{{cite web |first=Mike |last=Flacy |title=Dell, Newegg Start Accepting Bitcoin as Payment |publisher=Digital Trends |date=19 July 2014 |url=http://www.digitaltrends.com/web/dell-newegg-start-accepting-bitcoin-payment/#!bv9oFm |accessdate=5 August 2014}}</ref>{{refn | group = note | name = processors | Some of these firms use bitcoin payment processors such as [[BitPay]] and [[Coinbase]] and do not handle or store bitcoins themselves.<ref>{{cite news | first1 = Gertrude | last1 = Chavez-Dreyfuss | first2 = Michael | last2 = Connor | title = Bitcoin shows staying power as online merchants chase digital sparkle | date = 28 August 2014 | publisher = Reuters | url = http://www.reuters.com/article/2014/08/28/us-usa-bitcoin-retailers-analysis-idUSKBN0GS0AG20140828| accessdate = 28 August 2014}}</ref>}} Certain [[Non-profit group|non-profit]] or [[advocacy]] groups such as the [[Electronic Frontier Foundation]] accept bitcoin donations.<ref name="EFF2013">{{cite web | url=https://www.eff.org/deeplinks/2013/05/eff-will-accept-bitcoins-support-digital-liberty | title=EFF Will Accept Bitcoins to Support Digital Liberty | publisher=Electronic Frontier Foundation | date=17 May 2013 | accessdate=27 April 2014 | author=Cindy Cohn, Peter Eckersley, Rainey Reitman, and Seth Schoen}}</ref> (The organization started accepting bitcoins in January 2011,<ref>{{cite web | url = https://www.eff.org/deeplinks/2011/01/bitcoin-step-toward-censorship-resistant | title = Bitcoin - a Step Toward Censorship-Resistant Digital Currency | publisher = Electronic Frontier Foundation | date = 20 January 2011 | accessdate = 21 November 2014 | author = Rainey Reitman}}</ref> stopped accepting them in June 2011,<ref>{{cite web | url=https://www.eff.org/deeplinks/2011/06/eff-and-bitcoin | title=EFF and Bitcoin | publisher=Electronic Frontier Foundation | date=20 June 2011 | accessdate=16 April 2014 | author=Cohn, Cindy}}</ref> and began again in May 2013.<ref name="EFF2013" />) |
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The first law enforcement events occurred in May 2013, when assets belonging to the [[Mt. Gox]] exchange were seized by Department of Homeland Security.<ref>{{cite news |last=Dillet |first=Romain |title=Feds Seize Assets From Mt. Gox's Dwolla Account, Accuse It Of Violating Money Transfer Regulations |url= http://techcrunch.com/2013/05/16/mt-gox-dwolla-account-money-seizure/ |work=TechCrunch |date=16 May 2013 |accessdate=15 May 2013}}</ref> The [[Silk Road (marketplace)|Silk Road]] drug market website was shut down by the U.S. [[Federal Bureau of Investigation]] (FBI) in October 2013.<ref>{{cite news |url= http://www.bloomberg.com/news/2013-10-03/fbi-snags-silk-road-boss-with-own-methods.html|title=FBI Snags Silk Road Boss With Own Methods|work=Bloomberg|location=New York|date=3 October 2013|accessdate=27 October 2013|author=Farrell, Greg}}</ref> |
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In October 2013, Chinese internet giant [[Baidu]] had allowed clients of website security services to pay with bitcoins.<ref>{{cite web | url=http://www.businessinsider.com/chinas-google-is-now-accepting-bitcoin-2013-10 | title=China's Google Is Now Accepting Bitcoin | publisher=Business Insider, Inc | work=businessinsider.com | date=15 October 2013 | accessdate=26 December 2013 | author=Kapur, Saranya}}</ref> 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.<ref>{{cite web|url=http://techcrunch.com/2013/11/18/btc-china-series-a/ |title=As Chinese Investors Pile Into Bitcoin, China's Oldest Exchange, BTC China, Raises $5M From Lightspeed |publisher=TechCrunch|date=18 November 2013|author=Natasha Lomas|accessdate=10 January 2014}}</ref> 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 by the FBI that virtual currencies are a legitimate financial service.<ref>{{cite news|url=http://www.bbc.co.uk/news/technology-24986264 |title=BBC News - 'Legitimate' Bitcoin's value soars after Senate hearing |publisher=Bbc.co.uk|date=19 November 2013|accessdate=10 January 2014}}</ref> On the same day, one bitcoin traded for over [[Renminbi|RMB]]¥6780 (US$1,100) in China.<ref>{{cite news|url=http://www.zdnet.com/cn/china-no-plans-yet-to-legalize-use-of-bitcoins-7000023512/|title=China no plans yet to legalize use of Bitcoins|work=ZDNet|date=22 November 2013|accessdate=27 November 2013|last=Lee|first=Cyrus}}</ref> On 5 December 2013, the [[People's Bank of China]] prohibited Chinese financial institutions from using bitcoins.<ref name="ccontrols">{{cite news | url = http://www.bbc.co.uk/news/technology-25428866 | title = Bitcoin sinks after China restricts yuan exchanges | publisher = BBC | work = bbc.com | date = 18 December 2013 | accessdate = 20 December 2013 | author = Kelion, Leo}}</ref> After the announcement, the value of bitcoins dropped,<ref>{{cite news | date = 6 December 2013 | url = http://www.smh.com.au/business/markets/currencies/china-bans-banks-from-bitcoin-transactions-20131206-2yugy.html | title = China bans banks from bitcoin transactions | work = [[The Sydney Morning Herald]] | publisher = Reuters | accessdate = 31 October 2014}}</ref> and Baidu no longer accepted bitcoins for certain services.<ref name="bloomberg">{{cite news |url=http://www.bloomberg.com/news/2013-12-07/baidu-stops-accepting-bitcoins-after-china-ban.html|title=Baidu Stops Accepting Bitcoins After China Ban |work=Bloomberg |location=New York|date=7 December 2013|accessdate=11 December 2013}}</ref> Buying real-world goods with any virtual currency had been illegal in China since at least 2009.<ref>{{cite web|url=http://english.mofcom.gov.cn/aarticle/newsrelease/commonnews/200906/20090606364208.html |title=China bars use of virtual money for trading in real goods |publisher=English.mofcom.gov.cn |date=29 June 2009|accessdate=10 January 2014}}</ref> |
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The first bitcoin ATM was installed in October 2013 in [[Vancouver]], British Columbia, Canada.<ref>{{cite news | url = http://www.wired.com/wiredenterprise/2013/10/bitcoin_atm_gallery/ | title = Take a tour of Robocoin, the world’s first Bitcoin ATM | first = Robert | last = McMillan | date = 29 October 2013 | work = Wired | accessdate = 31 October 2014}}</ref> |
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With roughly 12 million existing bitcoins in November 2013,<ref name="raskin">{{cite news |url= http://www.bloomberg.com/news/2013-11-18/u-s-agencies-to-say-bitcoins-offer-legitimate-benefits.html |title= U.S. Agencies to Say Bitcoins Offer Legitimate Benefits |date= 18 November 2013 |accessdate= 24 November 2013 |first= Max |last= Raskin |work= Bloomberg}}</ref> the new price increased the [[Market capitalization|market cap]] for bitcoin to at least US$7.2 billion.<ref>{{cite web|author=Todd Wasserman|url=http://mashable.com/2013/11/18/bitcoin-600/ |title=Bitcoin Tops $600, Up 60x Over the Last Year |publisher=Mashable.com |date=18 November 2013|accessdate=10 January 2014}}</ref> By 23 November 2013, the total market capitalization of bitcoin exceeded US$10 billion for the first time.<ref>{{cite web | url = http://blog.panampost.com/joel-fensch/2014/01/02/bitcoin-set-to-boom-in-latin-america/ | title = Bitcoin Set to Boom in Latin America | author = Joel Fensch | publisher = Blog.panampost.com | date = 2 January 2014 | accessdate = 7 January 2014}}</ref> |
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In the United States 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.<ref name=vchair/> |
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In early February 2014, one of the largest bitcoin exchanges, [[Mt. Gox]],<ref>{{cite web | url=http://www.bbc.com/news/technology-26420932 | title=MtGox gives bankruptcy details | publisher=BBC | work=bbc.com | date=4 March 2014 | accessdate=13 March 2014}}</ref> suspended withdrawals citing technical issues.<ref>{{cite web|url=http://techcrunch.com/2014/02/10/whats-going-on-with-bitcoin-exchange-mt-gox/ |title=What’s Going On With Bitcoin Exchange Mt. Gox? |first=John |last=Biggs |publisher=TechCrunch |date=10 February 2014|accessdate=26 February 2014}}</ref> By the end of the month, Mt. Gox had filed for bankruptcy protection in Japan amid reports that 744,000 bitcoins had been stolen.<ref name="GoxBankrupt">{{cite web | url=http://www.bbc.com/news/technology-25233230 | title=MtGox bitcoin exchange files for bankruptcy | publisher=BBC | work=bbc.com | date=28 February 2014 | accessdate=18 April 2014}}</ref> Originally a site for trading [[Magic: The Gathering]] cards,<ref>{{cite web | url=http://blogs.wsj.com/five-things/2014/02/25/5-things-about-mt-goxs-crisis/ | title=Five Things About Mt. Gox's Crisis | publisher=Dow Jones and Company | work=The Wall Street Journal | date=25 Feb 2014 | accessdate=18 April 2014 | author=Vigna, Paul}}</ref> Mt. Gox once was the dominant bitcoin exchange although prior to the collapse its popularity had waned due largely to users having difficulty withdrawing funds.<ref>{{cite web | url=http://www.csmonitor.com/USA/USA-Update/2014/0228/MtGox-bankruptcy-Bitcoin-insiders-saw-problems-with-the-exchange-for-months | title=MtGox bankruptcy: Bitcoin insiders saw problems with the exchange for months | publisher=The Christian Science Monitor | work=csmonitor.com | date=28 February 2014 | accessdate=18 April 2014 | author=Swan, Noelle}}</ref> |
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==Etymology== |
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The word ''bitcoin'' is a [[Compound (linguistics)|compound]] of the words ''[[bit]]'' (being itself a compound of the words ''[[Binary number|binary]]'' and ''[[Numerical digit|digit]]'') and ''[[coin]]'' (originally meaning wedge, stamp, corner). The white paper referring to bitcoin frequently uses just the short ''coin''.<ref name="paper" /> |
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==Economics== |
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===Classification=== |
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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".<ref name="currencydispute">{{cite web | url=http://www.usatoday.com/story/money/business/2014/04/25/ozy-bitcoin-africa-currency/8148853/ | title=How bitcoin is moving money in Africa | publisher=USA Today | work=usatoday.com | date=25 April 2014 | accessdate=25 May 2014 | author=Joyner, April}}</ref> Despite this, bitcoin is commonly referred to with terms like: ''digital currency'',<ref name="primer" /> ''digital cash'',<ref>{{cite web | url = http://www.nytimes.com/2013/08/01/technology/personaltech/virtual-currency-gains-ground-in-actual-world.html | title = Virtual Currency Gains Ground in Actual World | publisher = The New York Times | date = 31 July 2013 | accessdate = 6 May 2014 | author = Murphy, Kate | quote = "A type of digital cash, bitcoins were invented in 2009 and can be sent directly to anyone, anywhere in the world."}}</ref> ''virtual currency'',<ref name="satoshi unit" /> ''electronic currency'',<ref name="capitalization" /> or ''cryptocurrency''.<ref name="currencydispute"/> Some media outlets do make a distinction between "real" money and bitcoins, however.<ref>{{cite web | url=http://www.bloombergview.com/articles/2013-11-29/building-better-bitcoins | title=Building Better Bitcoins | publisher=Bloomberg LP | work=Bloomberg View | date=29 Nov 2013 | accessdate=25 May 2014 | author=Carter, Stephen L. | quote=A principal knock on bitcoins has been the claim that they are inherently insecure. The principal defense has been that they are as secure as “real” currency. }}</ref> |
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Economists defining ''[[money]]'' as a [[store of value]], a [[medium of exchange]], and a [[unit of account]] agree that bitcoin has some way to go to meet all these criteria.<ref name=econ315 /> It does best as a medium of exchange.<ref name=econ315>{{cite news|title=Free Exchange. Money from nothing. Chronic deflation may keep Bitcoin from displacing its rivals.|url=http://www.economist.com/news/finance-and-economics/21599053-chronic-deflation-may-keep-bitcoin-displacing-its-fiat-rivals-money|accessdate=25 March 2014|newspaper=The Economist|date=15 March 2014}}</ref> (About 1,000 [[bricks and mortar]] businesses were willing to accept payment in bitcoins as of November 2013<ref name="bitcoin_brick_and_mortar_merchants">{{cite web |author=Joon Ian Wong |url=http://www.coindesk.com/surge-in-real-locations-accepting-bitcoin/ |title=CoinMap: Bitcoin-Accepting Merchants Increased 81% in November |publisher=CoinDesk |date=28 November 2013 |accessdate=1 December 2013}}</ref> in addition to more than 35,000 online merchants.{{refn | group = note | To obtain 35,000 figure, 16,000 merchants signed up with Bitcoin payment processor Coinbase<ref>{{cite web |url=http://techcrunch.com/2013/12/12/coinbase-raises-25m-from-andreessen-horowitz-to-build-its-bitcoin-wallet-and-merchant-services/ |title=Coinbase Raises $25M Led By Andreessen Horowitz To Build Its Bitcoin Wallet And Merchant Services |publisher=TechCrunch |author=Alex Williams |date=12 December 2013| accessdate=13 December 2013}}</ref> are added to 20,000 merchants signed to BitPay.<ref>{{cite web |url=http://www.coindesk.com/get-paid-bitcoin-bitpays-payroll-api/ |title=Get Paid in Bitcoin With BitPay’s New Payroll API |first=Jon |last=Southurst |date=14 January 2014|accessdate=17 January 2014|publisher=Coindesk}}</ref>}}) The bitcoin market currently suffers from [[Volatility (finance)|volatility]], limiting the ability of bitcoins to act as a stable store of value,<ref name=econ315 /> and, although bitcoin is the unit of account for the block chain, it 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.<ref name=econ315/> Even in online black markets, prices are stated in local currency although purchases are often made with bitcoins.<ref>{{cite web | url=http://www.bbc.com/news/technology-26147994 | title=Utopia drugs market forced off Tor by Dutch police | publisher=BBC | work=bbc.com | date=12 February 2014 | accessdate=10 November 2014}}</ref> |
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Various government agencies, departments, and courts have classified bitcoins differently. Both the U.S. Treasury<ref name="JSC" /> and the European Central Bank<ref name="ECB" />{{rp|6}} classify bitcoin as a virtual currency. The [[People's Bank of China]] has stated that bitcoin "is fundamentally not a currency but an investment target".<ref name="bloomberg.com">{{cite web|url=http://www.bloomberg.com/news/2014-04-10/china-s-bitcoin-exchanges-say-banks-will-close-their-accounts.html|title=China’s Bitcoin Exchanges Say Banks Will Close Their Accounts|quote=The central bank will keep watching risks from Bitcoin, which is fundamentally not a currency but an investment target, Sheng Songcheng, head of the monetary authority’s statistics department, told reporters in Beijing on Jan. 15 2014.|newspaper= Bloomberg|date= 10 April 2014|accessdate=11 April 2014}}</ref> Magistrate Judge Amos L. Mazzant of [[United States District Court for the Eastern District of Texas|a Texas court]] classified bitcoins as a currency.<ref name="Ponzicase">{{cite court|litigants = SEC v. Trendon T. Shavers and Bitcoin Savings and Trust|vol = 416|court = E.D. Tex.|date = 2013|url= https://ia800904.us.archive.org/35/items/gov.uscourts.txed.146063/gov.uscourts.txed.146063.23.0.pdf}}</ref> A German court found bitcoin to be a [[unit of account]].<ref name=btcregs>{{cite web | url=http://www.loc.gov/law/help/bitcoin-survey/regulation-of-bitcoin.pdf| title=Regulation of Bitcoin in Selected Jurisdictions | publisher=The Law Library of Congress, Global Legal Research Center | date=January 2014 | accessdate=26 August 2014}}</ref> The Finnish government judged it to be a [[commodity]].<ref>{{cite news | url = http://www.bloomberg.com/news/2014-01-19/bitcoin-becomes-commodity-in-finland-after-failing-currency-test.html | title = Bitcoin Judged Commodity in Finland After Failing Money Test | author = Kati Pohjanpalo | work = Bloomberg | location = New York | date = 20 January 2014 | accessdate = 27 January 2014}}</ref> |
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Journalists and academics likewise lack unanimous agreement on what to call bitcoin. The Wall Street Journal declared it a commodity in December 2013.<ref>{{cite news | url = http://blogs.wsj.com/venturecapital/2013/12/12/with-25m-coinbase-to-push-bitcoin-from-commodity-to-currency/ | title = Coinbase to Push Bitcoin From Commodity to Currency, With $25M From Investors | publisher = The Wall Street Journal | date = 12 December 2013 | accessdate = 27 January 2014 | author = Chapman, Lizette}}</ref> A Forbes journalist referred to it as ''digital collectible''.<ref>{{cite news | url = http://www.forbes.com/sites/louiswoodhill/2013/04/11/bitcoins-are-digital-collectibles-not-real-money/ | title = Bitcoins Are Digital Collectibles, Not Real Money | publisher = Forbes | date = 4 November 2013 | accessdate = 27 January 2014 | author = Woodhill, Louis}}</ref> 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".<ref name="mlic">{{cite web | url = http://arxiv.org/pdf/1402.4778.pdf|author=Bergstra, J. A., Weijland, P. | date = February 2014 | title = Bitcoin: a money-like informational commodity | publisher = Cornell University | journal = arXiv.org | issue = preprint arXiv:1402.4778. | pages = 26}}</ref> |
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===Buying and selling=== |
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Bitcoins can be bought and sold with many different currencies from individuals and companies. Bitcoins may be purchased in person<ref>{{cite web|author=Lauren Orsini |url=http://www.businessinsider.com/heres-what-happened-when-i-bought-bitcoin-in-person-2013-10 |title=Here's What Happened When I Bought Bitcoin In Person |publisher=Business Insider |date=23 October 2013|accessdate=4 February 2014}}</ref> or at a [[bitcoin ATM]] in exchange for [[cash]] currency.<ref>{{cite news | url = http://www.usatoday.com/story/money/business/2014/02/19/bitcoin-atm-austin/5623387/ | work = USA Today | date = 20 February 2014 | first = Rick | last = Jervis | title = Bitcoin ATMs come to USA | accessdate = 31 October 2014}}</ref> Participants in online [[Digital currency exchanger|exchanges]] offer bitcoin [[Bid and ask|buy and sell bids]]. Using an online exchange to obtain bitcoins entails some risk, and, according to a study published in April 2013, 45% of exchanges fail and take client bitcoins with them.<ref name="wired45">{{cite web |url= http://www.wired.co.uk/news/archive/2013-04/26/large-bitcoin-exchanges-attacks |title=Study: 45 percent of Bitcoin exchanges end up closing |date=26 April 2013|work=Wired |accessdate=28 April 2013|author=Steadman, Ian |deadurl=no}}</ref> Since bitcoin transactions are irreversible, sellers of bitcoins must take extra measures to ensure they have received traditional funds from the buyer. |
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===Price and volatility=== |
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[[File:Bitcoin price and volatility.svg|thumb| Price{{refn | group = note | The price of 1 bitcoin in U.S. dollars.}} and volatility{{refn | group = note | Volatility is calculated on a yearly basis. All yearly volatilities exceed 60%.}} chart.<ref group="note" name="blockchain" /> Left vertical axis: price, the scale is [[logarithmic scale|logarithmic]]. Right vertical axis: volatility. Horizontal axis: date ranging from 2010-08-17 to 2014-11-08.]] |
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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.<ref name=wsjprice>{{cite news|title=Bloomberg to List Bitcoin Prices, Offering Key Stamp of Approval|url=http://online.wsj.com/news/articles/SB10001424052702304893404579532471795644350?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304893404579532471795644350.html|accessdate=1 May 2014|newspaper=WSJ|date=30 April 2014|author=Michael J. Casey}}</ref> |
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According to [[Mark T. Williams]], {{as of | 2014 | lc = y}}, bitcoin has [[volatility (finance)|volatility]] seven times greater than gold, eight times greater than the [[S&P 500]], and eighteen times greater than the U.S. dollar.<ref>{{cite web | url = http://management.bu.edu/files/2014/10/Wlliams-World-Bank-10-21-2014.pdf | title = Virtual Currencies – Bitcoin Risk | publisher = Boston University | work = World Bank Conference Washington DC | date = 21 October 2014 | accessdate = 11 November 2014 | author = Williams, Mark T.}}</ref> |
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Attempting to explain the high volatility, a group of Japanese scholars states that there is no stabilization mechanism.<ref>{{cite news | title = Japanese Scholars Draft Proposal for a Better Bitcoin | url = http://www.coindesk.com/japanese-scholars-draft-proposal-better-bitcoin/ | author = Nermin Hajdarbegovic | date = 7 November 2014 | accessdate = 8 November 2014 | publisher = CoinDesk}}</ref> The Bitcoin Foundation contends that high volatility is due to insufficient [[liquidity]],<ref>{{cite news|last=Wilkes |first=Tommy |url=http://www.reuters.com/article/2013/04/11/us-bitcoin-currency-idUSBRE93A0P020130411 |title=Backer defends virtual currency Bitcoin after big fall |publisher=Reuters |date= 11 April 2013|accessdate=7 January 2014}}</ref> while a Forbes journalist claims that it is related to the uncertainty of its long-term [[Value (economics)|value]],<ref>{{cite news |last=Lee |first=Timothy B. |title=Bitcoin Doesn't Have a Deflation Problem |url=http://www.forbes.com/sites/timothylee/2013/04/11/bitcoin-doesnt-have-a-deflation-problem/ |work=Forbes |location= |date=4 November 2013 |accessdate=27 January 2014}}</ref> and the high volatility of a startup currency makes sense, "because people are still experimenting with the currency to figure out how useful it is."<ref name="VolatilityFatal" /> |
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There are uses where volatility does not matter, such as online gambling, tipping, and international remittances.<ref name="VolatilityFatal">{{cite news | last = Lee | first = Timothy B. | url = http://www.forbes.com/sites/timothylee/2013/04/12/bitcoins-volatility-is-a-disadvantage-but-not-a-fatal-one/ | title = Bitcoin's Volatility Is A Disadvantage, But Not A Fatal One | publisher = Forbes | date = 12 April 2013 | accessdate = 15 November 2014}}</ref> 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.<ref name=wsjprice /> According to Radoslav Albrecht, charts of the past volatility reveal a tendency of bitcoin volatility to decline.<ref>{{cite news | publisher = Coin Publishing Ltd | work = Bitcoin Magazine | title = Bitcoin Volatility – The 4 perspectives | author = Radoslav Albrecht | url = http://bitcoinmagazine.com/6543/bitcoin-volatility-analysis/ | date = 27 August 2013 | accessdate = 18 November 2014}}</ref> |
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The price of bitcoins has gone through various cycles of appreciation and depreciation referred to by some as ''[[Economic bubble|bubble]]s'' and ''busts''.<ref>{{cite news|url=http://www.forbes.com/sites/jessecolombo/2013/12/19/bitcoin-may-be-following-this-classic-bubble-stages-chart/|title=Bitcoin May Be Following This Classic Bubble Stages Chart |publisher=Forbes |date=19 December 2013|accessdate=7 January 2014|first=Jesse |last=Colombo}}</ref><ref>{{cite web | url=http://www.theguardian.com/commentisfree/2013/apr/03/bitcoin-currency-bubble-crash-not-rocking-financial-markets | title=Confused about Bitcoin? It's 'the Harlem Shake of currency' | publisher=The Guardian | work=theguardian.com | date=3 April 2013 | accessdate=2 May 2014 | author=Moore, Heidi}}</ref> In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2.<ref name="Leebubble">{{cite news|url=http://www.washingtonpost.com/blogs/the-switch/wp/2013/11/05/when-will-the-people-who-called-bitcoin-a-bubble-admit-they-were-wrong|title=When will the people who called Bitcoin a bubble admit they were wrong | publisher=The Washington Post|date=5 November 2013|accessdate=10 January 2014|author=Lee, Timothy}}</ref> In the latter half of 2012 and during the [[2012–13 Cypriot financial crisis|2012-2013 Cypriot Financial Crisis]], the bitcoin price began to rise,<ref>{{cite web|last=Liu |first=Alec |url=http://motherboard.vice.com/blog/cyprus-spain-when-governments-take-your-money-bitcoin-looks-really-good |title=When Governments Take Your Money, Bitcoin Looks Really Good |publisher=Motherboard|date=19 March 2013 |accessdate=7 January 2014}}</ref> reaching a high of US$266 on 10 April 2013, before crashing to around US$50.<ref>{{cite news|url=http://www.forbes.com/sites/timothylee/2013/04/11/an-illustrated-history-of-bitcoin-crashes/ |title=An Illustrated History Of Bitcoin Crashes |publisher=Forbes |date= 11 April 2013|accessdate=7 January 2014|first=Timothy B. |last=Lee}}</ref> On November 29, 2013, the cost of one bitcoin rose to the all-time peak of US$1,242.<ref>{{cite web | url = http://money.cnn.com/2013/11/29/investing/bitcoin-gold/index.html | title = Bitcoin worth almost as much as gold | author = Ben Rooney | date = 29 November 2013 | publisher = CNN | accessdate = 31 October 2014}}</ref> In 2014 the price fell sharply, and as of April remained depressed at little more than half 2013 prices. {{As of|2014|August}} it is under US$600.<ref>{{cite web | url = http://www.nasdaq.com/article/bitcoin-prices-remain-below-600-amid-bearish-chart-signals-cm376685 | title = Bitcoin prices remain below $600 amid bearish chart signals | publisher = nasdaq.com | date = August 2014 | accessdate = 31 October 2014}}</ref> The Washington Post pointed out that the observed cycles of appreciation and depreciation don't correspond to the definition of ''speculative bubble''.<ref name="Leebubble" /> |
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===Speculative bubble dispute=== |
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Bitcoin has been labelled a ''[[speculative bubble]]'' by many including former [[Federal Reserve Chairman|Fed Chairman]] [[Alan Greenspan]]<ref name=Kearns>{{cite news|url=http://www.bloomberg.com/news/2013-12-04/greenspan-says-bitcoin-a-bubble-without-intrinsic-currency-value.html|title=Greenspan Says Bitcoin a Bubble Without Intrinsic Currency Value|publisher=Bloomberg LP|work=bloomberg.com|date=4 December 2013|accessdate=23 December 2013|author=Kearns, Jeff}}</ref> and economist [[John Quiggin]].<ref name="BMH">{{cite news | url = http://nationalinterest.org/commentary/the-bitcoin-bubble-bad-hypothesis-8353 | title = The Bitcoin Bubble and a Bad Hypothesis | last = Quiggin | first = John | work = The National Interest | date = 16 April 2013 | deadurl = no | accessdate = 31 October 2014}}</ref> |
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Nobel Laureate [[Robert Shiller]] said that bitcoin "exhibited many of the characteristics of a speculative bubble".<ref>{{cite news | last = Shiller | first = Robert | title = In Search of a Stable Electronic Currency | url = http://www.nytimes.com/2014/03/02/business/in-search-of-a-stable-electronic-currency.html?_r=0 | publisher = New York Times | date = 1 March 2014 | accessdate = 31 October 2014 | deadurl = no}}</ref> |
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Two lead software developers of bitcoin, [[Gavin Andresen]]<ref>{{cite web | title = Bitcoin's History of Crushing Speculators | author = Dan Caplinger | publisher = [[The Motley Fool]] | date = 4 April 2013 | accessdate = 7 January 2014 | url = http://www.fool.com/retirement/general/2013/04/04/bitcoins-history-of-crushing-speculators.aspx}}</ref> and Mike Hearn,<ref>{{cite news|url=http://www.bbc.co.uk/news/magazine-25332746|title=Bitcoin: Price v hype|publisher=BBC|work=bbc.com| date=13 December 2013|accessdate=23 December 2013 | author=Barford, Vanessa}}</ref> have warned that bubbles may occur. |
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David Andolfatto, a Vice President at the [[Federal Reserve Bank of St. Louis]], stated: "Is bitcoin a bubble? Yes, if ''bubble'' is defined as a liquidity premium." According to Andolfatto, most assets likely have a "bubble" component to their price, e.g., gold.<ref name="Andolfatto2014-03" /> |
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[[Business Insider]] analyst Matthew Boesler rejects the ''speculative bubble'' label and sees bitcoin's quick rise in price as nothing more than normal economic forces at work.<ref>{{cite web | last = Boesler | first = Matthew | title = ANALYST: The Rise Of Bitcoin Teaches A Tremendous Lesson About Global Economics | url = http://www.businessinsider.com/global-economics-lesson-from-bitcoin-2013-3 | publisher = Business Insider | date = 7 March 2013 | accessdate = 31 October 2014 | deadurl = no}}</ref> |
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===Ponzi scheme dispute=== |
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A 2012 report by the [[European Central Bank]] had stated, "it [is not] easy to assess whether or not the bitcoin system actually works like a [[pyramid scheme|pyramid]] or [[Ponzi scheme]]."<ref name="ECB" />{{rp|27}} A 2014 report by the [[World Bank]] states: "Contrary to a widely-held opinion, bitcoin is not a deliberate Ponzi".<ref>{{cite web | title = Ponzis: The Science and Mystique of a Class of Financial Frauds | url = http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2014/07/16/000112742_20140716115536/Rendered/PDF/WPS6967.pdf | author = Kaushik Basu | publisher = [[World Bank Group]] | date = July 2014 | accessdate = 30 October 2014}}</ref> In the opinion of Eric Posner, a law professor at the University of Chicago "A real Ponzi scheme takes fraud; bitcoin, by contrast, seems more like a collective delusion."<ref>{{cite web | url = http://www.slate.com/articles/news_and_politics/view_from_chicago/2013/04/bitcoin_is_a_ponzi_scheme_the_internet_currency_will_collapse.html | title = Bitcoin is a Ponzi scheme—the Internet’s favorite currency will collapse. | work = Slate | date = 11 April 2013 | accessdate = 1 April 2014 | author = Posner, Eric}}</ref> U.S. economist [[Nouriel Roubini]], former senior adviser to the U.S. Treasury and the International Monetary Fund, has stated: "Bitcoin Is A Ponzi Game".<ref>{{cite web | url = http://www.businessinsider.com/roubini-bitcoin-is-a-ponzi-scheme-and-a-conduit-for-criminal-activities-2014-3 | title = ROUBINI: 'Bitcoin Is A Ponzi Game And A Conduit For Criminal Activities' | date = 9 March 2014 | accessdate = 1 April 2014 | author = Lubin, Gus | publisher = Business Insider}}</ref> In February 2014 an asset-manager and columnist for The New York Post called bitcoin a ''Ponzi scheme'' opining: "Welcome to 21st-century Ponzi scheme: Bitcoin".<ref>{{cite news | author = Jonathon M. Trugman | url = http://nypost.com/2014/02/15/welcome-to-21st-century-ponzi-scheme-bitcoin/ | title = Welcome to 21st-century Ponzi scheme: Bitcoin | date = 15 February 2014 | accessdate = 13 December 2014 | publisher = NYP Holdings, inc. | work = The New York Post}}</ref> The head of the [[Bank of Estonia|Estonian central bank]], Mihkel Nommela stated: "virtual currency schemes are an innovation that deserves some caution, given the lack of ... evidence that this isn’t just a Ponzi scheme."<ref>{{cite news | url = http://www.bloomberg.com/news/2014-01-30/bitcoin-ponzi-scheme-worry-sparks-estonia-central-bank-caution.html | title = Bitcoin ‘Ponzi’ Concern Sparks Warning From Estonia Bank | publisher = Bloomberg | work = bloomberg.com | date = 31 Jan 2014 | accessdate = 1 April 2014 | author = Ott Ummelas and Milda Seputyte}}</ref> The Huffington Post questioned: "Is Bitcoin a Ponzi scheme, yes or no?", and answered the question "No!".<ref>{{cite news | publisher = TheHuffingtonPost.com, Inc. | work = Huffington Post | title = Is Bitcoin a Ponzi Scheme | url = http://www.huffingtonpost.com/jim-gibson/is-bitcoin-a-ponzi-scheme_b_5177769.html | author = Jim Gibson | date = 21 April 2014 | accessdate = 21 November 2014}}</ref> The PC World stated: "bitcoin is clearly not a Ponzi scheme".<ref>{{cite news | publisher = [[International Data Group]] | work = PC World | title = Bitcoin: The virtual currency built on math, hope and hype | author = Jeremy Kirk | date = 18 December 2013 | accessdate = 21 November 2014 | url = http://www.pcworld.com/article/2081560/bitcoin-the-virtual-currency-built-on-math-hope-and-hype.html}}</ref> Economist [[Jeffrey Tucker]] published the opinion: "There are several key differences between a Ponzi scheme and bitcoin."<ref name=LSP>{{cite news | url = http://libertarianstandard.com/2013/12/01/ponzi-logic-debunking-gary-north/ | title = Ponzi Logic: Debunking Gary North | last = Tucker | first = Jeffrey | date = 1 December 2013 | work = The Libertarian Standard | accessdate = 12 Feb 2014}}</ref> A 2014 report by [[Federal Council (Switzerland)]] states: "the question is repeatedly raised whether bitcoin can be deemed an impermissible pyramid scheme... Since in the case of bitcoin the typical promises of profits are lacking, it cannot be assumed that bitcoin is a pyramid scheme."<ref>{{cite web | publisher = [[Swiss Confederation]] | title = Federal Council report on virtual currencies in response to the Schwaab (13.3687) and Weibel (13.4070) postulates | work = [[Federal Council (Switzerland)]] | date = 25 June 2014 | accessdate = 28 November 2014 | url = http://www.news.admin.ch/NSBSubscriber/message/attachments/35355.pdf}}</ref>{{rp|21}} |
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===Value forecasts=== |
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Financial journalists and analysts, economists, and investors have attempted to predict the possible future value of bitcoin. In April 2013, economist [[John Quiggin]] stated, "bitcoins will attain their true value of zero sooner or later, but it is impossible to say when".<ref name="BMH" /> A similar forecast was made in November 2014 by economist [[Kevin Dowd]].<ref>{{cite news | author = Kevin Dowd | title = Bitcoin is bust: Why investors should abandon the doomed cryptocurrency | url = http://www.cityam.com/1415215686/bitcoin-bust-why-investors-should-abandon-doomed-cryptocurrency | date = 5 November 2014 | accessdate = 6 November 2014 | work = Opinion | publisher = [[City A.M.]]}}</ref> In November 2014, David Yermack, Professor of finance at NYU Stern School of Business forecast that in November 2015 bitcoin may be all but worthless."<ref>{{cite web | url = http://www.cnn.com/2014/11/13/tech/bitcoin-peak-price-future | title = Bitcoin: One year on from peak price, what does the future hold? | accessdate = 15 November 2014 | publisher = CNN | work = Future Finance | date = 14 November 2014 | author = Eoghan Macguire}}</ref> In December 2013, finance professor [[Mark T. Williams]] forecast a bitcoin would be worth less than ten U.S. dollars by July 2014.<ref>{{cite web | url=http://www.businessinsider.com/williams-bitcoin-meltdown-10-2013-12 | title=FINANCE PROFESSOR: Bitcoin Will Crash To $10 By Mid-2014 | publisher=Business Insider | work=businessinsider.com | date=17 December 2013|accessdate=26 February 2014|author=Williams, Mark T.}}</ref> In the indicated period bitcoin has exchanged as low as $344 (April 2014) and during July 2014 the bitcoin low has been $609.<ref group="note" name="blockchain" /><ref>{{cite news | work = Huffington Post | publisher = TheHuffingtonPost.com, Inc. | author = Steve H. Hanke | title = Bitcoin Charts, Finally | date = 18 September 2014 | accessdate = 21 November 2014 | url = http://www.huffingtonpost.com/steve-h-hanke/bitcoin-charts_b_5838132.html}}</ref> In December 2014 professor Williams said: "The probability of success is low, but if it does hit, the reward will be very large."<ref>{{cite news | title = How Mt. Gox Debacle Won Over a Bitcoin Convert | url = http://online.wsj.com/articles/how-mt-gox-debacle-won-over-a-bitcoin-convert-1417471759 | author = Robin Sidel | date = 1 December 2014 | accessdate = 4 December 2014 | publisher = The Wall Street Journal | work = Markets}}</ref> In May 2013, [[Bank of America]] FX and Rate Strategist David Woo forecast a maximum fair value per bitcoin of $1,300.<ref name="BoAFA">{{cite news | last = Sharf | first = Samantha | title = Bitcoin Gets Valued: Bank Of America Puts A Price Target On The Virtual Tender | url = http://www.forbes.com/sites/samanthasharf/2013/12/05/bitcoin-gets-valued-bank-of-america-puts-a-price-on-the-virtual-tender/ | work = Forbes | location = New York | date = 12 May 2013 | accessdate = 31 October 2014}}</ref> Bitcoin investor [[Cameron Winklevoss]] stated in December 2013 that the "[s]mall bull case scenario for bitcoin is... 40,000 USD a coin".<ref>{{cite news | last = Schroeder | first = Stan | title = Cameron Winklevoss: Bitcoin Might Hit $40,000 Per Coin | url = http://mashable.com/2013/12/16/cameron-winklevoss-bitcoin/ | work = Mashable | location = New York | date = 1 December 2013 | accessdate = 31 October 2014}}</ref> |
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===Reception=== |
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Some economists have responded positively to bitcoin, but many have not. François R. Velde, Senior Economist at the [[Chicago Fed]] described it as "an elegant solution to the problem of creating a digital currency".<ref>{{cite web | url = https://www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2013/cfldecember2013_317.pdf | title = Bitcoin: A primer | date = December 2013 | accessdate = December 2013 | first = François | last = Velde | work = Chicago Fed letter | issue = 317 | pages = 4 | publisher = [[Federal Reserve Bank of Chicago]]}}</ref> According to [[Wired (magazine)|Wired]] "in the estimation of many leading economists, bitcoin is a fatally flawed idea shaped by people who don’t really understand how money works".<ref>{{Cite web|url = http://www.wired.com/2014/02/rise-fall-rise-patrick-byrne/|title = Meet Patrick Byrne: Bitcoin Messiah, CEO of Overstock, Scourge of Wall Street|date = 10 February 2014|accessdate = 16 July 2014|website = Wired|publisher = Wired|last = Metz|first = Cade}}</ref> [[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 its value.<ref>{{cite news |author= Paul Krugman |date= 28 December 2013 |title= Bitcoin Is Evil |url= http://krugman.blogs.nytimes.com/2013/12/28/bitcoin-is-evil/ |publisher= [[The New York Times|krugman.blogs.nytimes.com]] |accessdate= 28 December 2013 }}</ref> Economist [[John Quiggin]] has criticized bitcoin as "the final refutation of the [[efficient-market hypothesis]]".<ref name="BMH"/> |
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David Andolfatto, 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.<ref name="Andolfatto2014-03">{{cite web | url=http://www.stlouisfed.org/dialogue-with-the-fed/assets/Bitcoin-3-31-14.pdf | title=Bitcoin and Beyond: The Possibilities and Pitfalls of Virtual Currencies | publisher=Federal Reserve Bank of St. Louis | work=Dialogue with the Fed | date=31 March 2014 | accessdate=16 April 2014 | quote= Well-run central banks should welcome the emerging competition. There is (in my view) room for beneficial coexistence.| author=Andolfatto, David}}</ref><ref>{{cite web | url=http://www.businessinsider.com/interview-with-david-andolfatto-2014-4 | title=St. Louis Fed Economist: Bitcoin Could Be A Good Threat To Central Banks | publisher=Business Insider | work=businessinsider.com | date=6 April 2014 | accessdate=16 April 2014 | author=Wile, Rob}}</ref><ref>{{cite web | url=http://andolfatto.blogspot.com/2013/12/in-gold-we-trust.html | title=In gold we trust? | publisher=David Andolfatto | work=MacroMania | date=24 December 2013 | accessdate=17 April 2014 | quote=Also, note that I am not against gold or bitcoin (or whatever) as a currency. In fact, I think that the threat that they pose as alternate currency can serve as a useful check on a central bank. |author=Andolfatto, David}}</ref> |
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[[Free software movement]] activist [[Richard Stallman]] has criticized the lack of anonymity and called for reformed development.<ref>{{cite news|url=http://www.telegraph.co.uk/technology/news/10488201/Software-activist-calls-for-truly-anonymous-Bitcoins-to-protect-democracy.html |title=Software activist calls for 'truly anonymous' Bitcoins to 'protect democracy' |publisher=Telegraph |date= 2 December 2013|accessdate=27 December 2013|location=London |first=Matthew |last=Sparkes}}</ref> [[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.<ref>{{cite web |url= http://news.cnet.com/8301-1023_3-57615080-93/paypal-president-david-marcus-bitcoin-is-good-nfc-is-bad/ |title= PayPal president David Marcus: Bitcoin is good, NFC is bad |date= 10 December 2013 |accessdate= 10 December 2013 |first= Stephen |last= Shankland |work= CNET}}</ref> [[Bill Gates]], in relation to the cost of moving money from place to place in an interview for Bloomberg L.P. stated: "Bitcoin is exciting because it shows how cheap it can be."<ref>{{cite web | date = 2 October 2014 | accessdate = 12 November 2014 | title = Bill Gates: Bitcoin Is Exciting Because It's Cheap | url = http://www.bloomberg.com/video/bill-gates-bitcoin-is-exciting-because-it-s-cheap-dQ4qHV4~TLSnUIuIRfZBVA.html | publisher = Bloomberg L.P.}}</ref> |
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Similarly, [[Peter Schiff]], a bitcoin sceptic understands "the value of the technology as a payment platform" and his Euro Pacific Precious Metals fund partnered with [[BitPay]] in May 2014, because “a wire transfer of fiat funds can be slow and expensive for the customer”.<ref name=CCN514>{{cite news|author1=Kyle Torpey|title=Peter Schiff Embraces Bitcoin at Euro Pacific Precious Metals|url=https://www.cryptocoinsnews.com/peter-schiff-embraces-bitcoin-euro-pacific-precious-metals/|accessdate=12 December 2014|work=CryptoCoinsNews|date=21 May 2014}}</ref> Schiff sees bitcoin more as a payment method rather than a currency. |
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[[Kevin Dowd]], professor of finance and economics at Durham University has a bearish outlook on bitcoin as a currency. At the [[Cato Institute]]’s 2014 Annual Conference with the topic 'Alternatives to Central Banking: Toward Free-Market Money'<ref name=cato>{{cite web|title=Alternatives to Central Banking: Toward Free-Market Money|url=http://www.cato.org/events/32nd-annual-monetary-conference|publisher=Cato Institute|accessdate=13 December 2014|date=6 November 2014}}</ref> he said "bitcoin’s current incentive structure [is] leading to an inevitable collapse, mostly due to the centralization of mining".<ref name=inside>{{cite news|author1=Kyle Torpey|title=CATO Monetary Conference: Economist Tells World to Sell Their Bitcoins|url=http://insidebitcoins.com/news/cato-monetary-conference-economist-tells-world-to-sell-their-bitcoins/26638|accessdate=13 December 2014|work=Inside Bitcoins|publisher=MecklerMedia Corporation|date=21 November 2014}}</ref> |
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===Acceptance by merchants=== |
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[[File:De Waag Bitcoin.jpg| thumb | Bitcoins are accepted in this [[café]] in the [[Netherlands]] as of 2013]] |
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{{as of|2014|August}} established firms that accept payments in bitcoin include [[Atomic Mall]],<ref name="powersellersunite.com"/> [[Clearly Canadian]],<ref>{{cite web|url=http://finance.yahoo.com/news/clearly-canadian-joins-bitcoin-community-110000013.html|title=Clearly Canadian Joins Bitcoin Community|work=finance.yahoo.com|date=23 December 2013|accessdate=10 February 2014|publisher=[[Yahoo! Finance]]}}</ref> [[Dell]],<ref name=Dell>{{cite web | url = http://dealbook.nytimes.com/2014/07/18/dell-begins-accepting-bitcoin/ | title = Dell Begins Accepting Bitcoin | author = Sydney Ember | work = New York Times | date = 18 July 2014 | accessdate = 18 July 2014}}</ref> [[Dish Network]], [[Expedia]],<ref>{{cite web | url=http://blogs.wsj.com/moneybeat/2014/06/11/expedia-starts-accepting-bitcoin-for-hotel-bookings/ | title = Expedia Starts Accepting Bitcoin for Hotel Bookings | author = Paul Vigna | work = Money Beat | publisher = The Wall Street Journal | date = 11 June 2014 | accessdate = 27 July 2014}}</ref> [[Newegg]],<ref>{{cite web|url=http://www.newegg.com/bitcoin|title=Newegg accepts bitcoins|work=newegg.com|date=1 July 2014|accessdate=3 July 2014}}</ref> [[PrivateFly]],<ref>{{cite web |url= http://www.telegraph.co.uk/technology/news/10558191/Ten-places-where-you-can-spend-your-bitcoins-in-the-UK.html |title= Ten places where you can spend your bitcoins in the UK |date= 10 January 2014|accessdate= 10 September 2013|first= Matthew|last= Sparkes|work= The Telegraph}}</ref> [[Overstock.com]],<ref name=overstock>{{cite web | url=http://blogs.marketwatch.com/thetell/2014/01/09/bitcoin-now-accepted-on-overstock-com-through-vc-backed-coinbase/ | title=Bitcoin now accepted on Overstock.com through VC-backed Coinbase|publisher=Wall Street Journal | work=marketwatch.com | date =9 January 2014|accessdate=10 February 2014|author=Vaishampayan, Saumya}}</ref> the [[Sacramento Kings]],<ref>{{cite news|url=http://www.bloomberg.com/news/2014-01-16/how-many-bitcoins-for-a-courtside-seat-.html|title=How Many Bitcoins for a Courtside Seat?|publisher=Bloomberg LP|work=bloomberg.com|date=16 Jan 2014|accessdate=20 January 2014|author=Davidson, Kavitha}}</ref> [[TigerDirect]],<ref name=tigger>{{cite web|url=http://www.tomshardware.com/news/tigerdirect-bitcoin-bitpay-payments,25859.html|title=TigerDirect is Now Accepting Bitcoin As Payment|publisher=Tom's hardware|date=26 January 2014| accessdate=28 August 2014|author=Jane McEntegart}}</ref> [[Virgin Galactic]],<ref>{{cite web |url= http://www.theguardian.com/technology/2013/nov/22/virgin-galactic-bitcoin-space-flights-payment |title= Virgin Galactic to accept Bitcoin for space flights |date= 22 November 2013|accessdate= 24 November 2013|first= Amanda|last= Holpuch |work= The Guardian}}</ref> and [[Zynga]].<ref>{{cite news|url=http://www.bloomberg.com/news/2014-01-05/bitcoin-tops-1-000-again-on-adoption-by-zynga-amid-wider-usage.html|title=Bitcoin Tops $1,000 Again as Zynga Accepts Virtual Money | publisher=Bloomberg LP | work=bloomberg.com | date=6 Jan 2014|accessdate=20 January 2014|author=Kharif, Olga}}</ref><ref group="note" name="processors" /> |
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Due to the fact that [[chargeback]]s are impossible, retailers usually offer in-store credit as the only option when returning items purchased with bitcoins.<ref>{{cite journal | url=http://www.bostonfed.org/economic/current-policy-perspectives/2014/cpp1404.pdf | title=Bitcoin as Money? | author=Stephanie Lo and J. Christina Wang | journal=Current Policy Perspectives (Federal Reserve Bank of Boston) |date=September 2014 | volume=14 | issue=1 | pages=6}}</ref> |
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In late 2013 the [[University of Nicosia]] became the first university in the world to accept bitcoins.<ref>{{cite news|url= http://blogs.wsj.com/moneybeat/2013/11/22/the-university-of-bitcoin-rises-in-cyprus/ |title= The University of Bitcoin Rises in Cyprus|date= 22 November 2013|accessdate= 22 November 2013|first= Paul|last= Vigna|work= The Wall Street Journal}}</ref> |
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As of 30 July 2014 the [[Wikimedia|Wikimedia Foundation]], hoster of Wikipedia, offers the possibility of making donations to it in bitcoin (through Coinbase) on their donations page.<ref>{{cite web | url = http://blog.wikimedia.org/2014/07/30/wikimedia-foundation-now-accepts-bitcoin/ | title = Wikimedia Foundation Now Accepts Bitcoin | publisher = Wikimedia | author = Lisa Gruwell | date = 30 July 2014 | accessdate = 30 October 2014}}</ref> As of 22 September 2014 [[Greenpeace]] offers the possibility of making donations to it in bitcoin (through Bitpay).<ref>{{cite web | url = http://greenpeaceblogs.org/2014/09/22/greenpeace-now-accepting-bitcoin-donations/ | title = Greenpeace now accepting bitcoin donations | author = Cassady Sharp | date = 22 September 2014 | accessdate = 31 October 2014 | publisher = Greenpeace}}</ref> As of 20 November 2014 the [[Mozilla Foundation]] accepts bitcoin donations via Coinbase.<ref>{{cite news | publisher = CoinDesk | author = Stan Higgins | title = Mozilla Now Accepting Bitcoin in Response to User Demand | date = 20 November 2014 | accessdate = 25 November 2014 | url = http://www.coindesk.com/mozilla-accepting-bitcoin-donations/}}</ref> |
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As of 23 September 2014 [[PayPal]] offers its North American merchants the possibility to receive customer payments for digital goods in bitcoin.<ref>{{cite web | url = https://www.paypal-community.com/t5/PayPal-Forward/PayPal-and-Virtual-Currency/ba-p/828230 | author = Scott Ellison | title = PayPal and Virtual Currency | date = 23 September 2014 | accessdate = 31 October 2014 | publisher = PayPal}}</ref> |
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As of 11 December 2014, [[Microsoft]] accepts bitcoin from U.S. customers to fund a Microsoft Account, which can be used to digitally purchase [[XBox]] content and [[Microsoft Windows|Windows]] apps.<ref>{{cite news | author = Tom Warren | url = http://www.theverge.com/2014/12/11/7375771/microsoft-supports-bitcoin-payments | title = Microsoft now accepts Bitcoin to buy Xbox games and Windows apps | accessdate = 11 December 2014 | date = 11 December 2014 | publisher = Vox Media | work = The Verge}}</ref> |
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As of 16 December 2014, [[Time Inc.]] announced that consumers can now use bitcoin to buy subscriptions of its magazines.<ref>http://dealbook.nytimes.com/2014/12/16/time-inc-begins-accepting-bitcoin-payments/?_r=0</ref> |
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===Financial institutions=== |
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As of 2014, bitcoin companies have had difficulty opening traditional bank accounts because lenders have been leery of bitcoin's links to illicit activity.<ref name=scaredbankers>{{cite web | url=http://www.bloomberg.com/news/2013-12-05/bitcoin-skepticism-by-bankers-from-china-to-u-s-hinders-growth.html | title=Bankers Balking at Bitcoin in U.S. as Real-World Obstacles Mount | publisher=Bloomberg | work=bloomberg.com | date=5 December 2013 | accessdate=16 April 2014 | author=Dougherty, Carter}}</ref> According to a co-founder ([[Tony Gallippi|Antonio Gallippi]]) of one such company, [[BitPay]], "banks are scared to deal with bitcoin companies, even if they really want to".<ref name=scaredbankers/> |
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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".<ref name=ForbesDec>{{cite news|last=Hill|first=Kashmir|title=Bitcoin Valued At $1300 By Bank of America Analysts|url=http://www.forbes.com/sites/kashmirhill/2013/12/05/bank-of-america-analysts-say-bitcoins-value-is-1300/|accessdate=23 March 2014|newspaper=Forbes.com|date=5 December 2013}}</ref> In June 2014, the first bank that converts deposits in currencies instantly to bitcoin without any fees, for further transactions, was opened in Boston.<ref>{{cite news|title=Bitcoin: is Circle the world's first crypto-currency bank?|url=http://www.theweek.co.uk/world-news/bitcoin/56138/bitcoin-passes-1000-mark-will-it-take-over-world|accessdate=13 June 2014|work=The week.co.uk|date=16 May 2014}}</ref> |
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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.<ref name=wsjprice /> |
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A June 2014 U.S. government auction of almost 30,000 bitcoins, which the [[US Marshals Service|U.S. Marshals Service]] seized October 2013 from [[Silk Road]] was said to increase legitimacy of the currency. The 45 registered bidders, each of whom put down a deposit of $200,000 made 63 bids.<ref name=guard714>{{cite news | title = Silk Road's legacy 30,000 bitcoin sold at auction to mystery buyers | author = Alex Hern | url = http://www.theguardian.com/technology/2014/jul/01/silk-road-bitcoin-auction | publisher = The Guardian | date = 1 July 2014 | accessdate = 31 October 2014}}</ref> |
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According to David Andolfatto, a Vice President at the Federal Reserve Bank of St. Louis, bitcoin "Will force traditional institutions to adapt or die."<ref name="Andolfatto2014-03" /> |
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===Mining pools=== |
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[[File:USB Erupter.jpg| thumb | Obsolete bitcoin mining hardware called ''ASICMiner Block Erupter USB'' common in mid and late 2013.{{refn | group = note | Each ASICMiner Block Erupter USB can calculate ~333 megahashes per second (Mhash/s) at an efficiency of 130 megahashes per [[joule]] (Mhash/J).<ref name=ASICMinerBEUSB>{{cite web | title = Mining hardware comparison | url = https://en.bitcoin.it/wiki/Mining_hardware_comparison | website = en.bitcoin.it/wiki | publisher = bitcoin.it | accessdate = 5 October 2014}}</ref> Mining hardware common since mid 2014<ref name=AntMiner-S3>{{cite web | title = ANTMINER S3+ -B10 | url = https://bitmaintech.com/productDetail.htm?pid=00020140917060843699l3bEXYxL06C0 | website = bitmaintech.com | publisher = Bitmain Tech Ltd | accessdate = 5 October 2014}}</ref> typically deliver a ten-fold efficiency of 1.3 gigahashes per joule (Ghash/J) or more.<ref name=coinexplorer>{{cite web | title = Bitcoin mining hardware comparison | url = https://coinplorer.com/Hardware | website = coinplorer.com/Hardware | publisher = coinplorer.com | accessdate = 5 October 2014}}</ref> And [[ASIC]] mining hardware with 6 Ghash/J has been announced for 2015.<ref name=Coinbau>{{cite web | last1 = Higgins | first1 = Stan | title = ASIC Maker Seeks to Bring German Efficiency to Bitcoin Mining | url = http://www.coindesk.com/asic-maker-coinbau-german-efficiency-bitcoin-mining/ | date = 20 August 2014 | publisher = CoinDesk | accessdate = 5 October 2014}}</ref>}}]] |
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{{as of|2013}} mining had become quite competitive, has been compared to an [[arms race]] and ever more specialized technology is utilized. The most efficient mining hardware makes use of custom designed [[application-specific integrated circuit]]s, which outperform general purpose [[Central processing unit|CPU]]s and use less power as well.<ref>{{cite news|url=http://www.theregister.co.uk/2014/01/17/ten_bitcoin_miners/ |title=Manic miners: Ten Bitcoin generating machines |publisher=The Register | first=Simon | last=Rockman | date=17 January 2014|accessdate=13 February 2014}}</ref> 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.<ref name=purdue/> |
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The individual [[odds]] of winning the reward for adding a block to the block chain decrease with an increasing number of miners. {{as of|2014}}, it has become common for miners to join organized [[mining pool]]s.<ref name=boise>{{cite web | url=http://arbiteronline.com/2014/04/03/bitcoins-likely-viable-future/ | title=Bitcoins lose viability | publisher=Boise State Student Media | work=The Arbiter | date=3 April 2014 | accessdate=14 April 2014 | author=Mills, Kelly}}</ref> A pool splits the work between its members and has a much larger chance to win the reward. The reward is then split between the members creating a steady stream of income.<ref>{{cite news | url = http://www.coindesk.com/information/get-started-mining-pools/ | title = What are Bitcoin Mining Pools? | publisher = [[CoinDesk]] | date = 10 March 2014 | accessdate = 18 November 2014}}</ref> Even for those who join pools, the cost of the electricity necessary to mine may outweigh the rewards from doing so.<ref name=purdue>{{cite web | url=http://www.purdueexponent.org/features/article_46e4aefa-dc11-5c5e-972b-80b4e45a70e1.html | title=Bitcoin offers speedy currency, poses high risks | publisher=The Exponent Online | work=Purdue Exponent | date=9 April 2014 | accessdate=14 April 2014 | author=Bays, Jason}}</ref> |
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===As investment=== |
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One way of investing in bitcoins is to buy and hold them as a long-term investment.<ref name="cnbc">{{cite web | url=http://www.cnbc.com/id/45030812/The_Pros_And_Cons_Of_Biting_on_Bitcoins|title=The Pros And Cons Of Biting on Bitcoins|publisher=[[CNBC]]|date=23 November 2011|accessdate=4 December 2012|author=Gustke, Constance|deadurl=no}}</ref> The [[Financial Industry Regulatory Authority]] (FINRA), a United States [[self-regulatory organization]],<ref>{{cite news|url=http://www.reuters.com/article/2014/03/11/us-bitcoin-finra-idUSBREA2A1OJ20140311 |title= Beware Bitcoin: U.S. brokerage regulator.|author=Jonathan Stempel|date=11 March 2014|accessdate=14 March 2014|publisher=reuters.com}}</ref> and the [[European Banking Authority]]<ref name="ebawarn">{{cite web|url=http://www.eba.europa.eu/documents/10180/16136/EBA+Warning+on+Virtual+Currencies.pdf|archiveurl=http://www.webcitation.org/6MCBOsSXG|archivedate=28 December 2013|title=Warning to consumers on virtual currencies|publisher=European Banking Authority |date=12 December 2013| accessdate=23 December 2013}}</ref> warned that investing in bitcoins carries significant risks. Risk hasn't deterred some such as the [[Winklevoss twins]], who in April 2013 claimed they owned nearly 1% of all bitcoins in existence at the time<ref>{{cite web | title = Never Mind Facebook; Winklevoss Twins Rule in Digital Money | author = Nathaniel Popper and Peter Lattman | url = http://dealbook.nytimes.com/2013/04/11/as-big-investors-emerge-bitcoin-gets-ready-for-its-close-up/ | publisher = [[The New York Times]] | date = 11 April 2013 | accessdate = 31 October 2014}}</ref> and have since attempted to launch a bitcoin [[Exchange-traded fund|ETF]].<ref name=winkles/> The first regulated bitcoin fund was established in Jersey in July 2014, with the approval of the Jersey Financial Services Commission.<ref name="BitcoinJersey">{{cite news|title=Jersey approve Bitcoin fund launch on island|url=http://www.bbc.com/news/world-europe-jersey-28247796|date=10 July 2014|accessdate=10 July 2014|publisher=BBC news}}</ref> Other investors, like [[Peter Thiel]]'s [[Founders Fund]], which invested {{currency|3|USD}} million in [[BitPay]], do not purchase bitcoins themselves, instead funding bitcoin infrastructure like companies that provide payment systems to merchants, exchanges, wallet services, etc.<ref name="mtr20130612">{{cite news | url = http://www.technologyreview.com/news/515391/bitcoin-millionaires-become-investing-angels/ | title = Bitcoin Millionaires Become Investing Angels | work = Computing News | publisher = [[MIT Technology Review]] | date = 12 June 2013 | accessdate = 13 June 2013 | author = Simonite, Tom}}</ref> In 2012, an incubator for bitcoin-focused start-ups was founded by Adam Draper with financing help from his father, venture capitalist [[Timothy C. Draper|Tim Draper]], one of the largest bitcoin holders after winning an auction of 30,000 bitcoins,<ref name=wsj1214>{{cite news|author1=Robin Sidel|title=Ten-hut! Bitcoin Recruits Snap To|url=http://www.wsj.com/news/articles/SB21659981523255993497704580305120918936264?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB21659981523255993497704580305120918936264.html|accessdate=9 December 2014|work=Wall Street Journal|publisher=Dow Jones & Company|date=1 December 2014}}</ref> at the time called 'mystery buyer'.<ref name=guard714/> The company's goal is to fund 100 bitcoin businesses within 2–3 years with $10,000 to $20,000 for a 6% stake.<ref name=wsj1214/> Investors also invest in bitcoin mining.<ref>{{cite news| url=http://www.redherring.com/finance/coinseed-raises-7-5m-invests-5m-in-bitcoin-mining-hardware-investment-round-up/| title=CoinSeed raises $7.5m, invests $5m in Bitcoin mining hardware – Investment Round Up|work=Red Herring|date=24 January 2014| accessdate=9 March 2014}}</ref> |
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===Hedge against financial crises=== |
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Bitcoins have been used by some Argentinians to protect their savings against high inflation or the possibility that governments could confiscate savings accounts<ref name="5facts" /> because the [[Argentine peso]]<ref>{{cite web | url = http://blogs.ft.com/beyond-brics/2013/04/16/bitcoins-gain-traction-in-argentina/ | title = Bitcoins gain traction in Argentina | author = Jude Webber | deadurl = no | publisher = Financial Times | date = 16 April 2013 | accessdate = 20 April 2013}}</ref> is stymied by inflation and strict capital controls. During the [[2012–2013 Cypriot financial crisis]], bitcoin purchases rose due to fears that savings accounts would be confiscated or taxed.<ref name="BloombergCyprus">{{cite news | last = Salyer | first = Kirsten | title = Fleeing the Euro for Bitcoins | url = http://www.bloomberg.com/news/2013-03-20/fleeing-the-euro-for-bitcoins-.html | publisher = Bloomberg L.P.| date = 20 March 2013 | accessdate = 31 October 2014 | deadurl = no}}</ref> |
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===Political economy=== |
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Bitcoin appeals to tech-savvy [[libertarian]]s, because it so far exists outside of the institutional banking system and the control of governments.<ref name=nation>{{cite news|url=http://www.thenation.com/article/179620/bitcoin-future-money?page=full| title=Bitcoin the Future of Money?|author=Doug Henwood|date=19 May 2014|publisher=The Nation.com|accessdate=12 September 2014}}</ref> |
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Its appeal reaches from [[left wing politics|left wing critics]], "who perceive the state and banking sector as representing the same elite interests, [...] recognising in it the potential for collective [[direct democratic]] governance of currency"<ref>{{cite web | url = http://www.e-ir.info/2014/06/01/visions-of-a-techno-leviathan-the-politics-of-the-bitcoin-blockchain/ | title = Visions of a Techno-Leviathan: The Politics of the Bitcoin Blockchain | author = Brett Scott | date = 1 June 2014 | publisher = E-International Relations | accessdate = 31 October 2014}}</ref> and socialists proposing their "own states, complete with currencies",<ref>{{cite web | url = http://internationalsocialistnetwork.org/index.php/ideas-and-arguments/301-mistress-magpie-a-left-defence-of-bitcoin | title = A left defence of Bitcoin | publisher = International Socialist Network | date = December 2013 | author = Margaret Corvid | accessdate = 31 October 2014}}</ref> to right wing critics suspicious of [[big government]], at a time when activities within the regulated banking system were responsible for the severity of the [[financial crisis of 2007–08]],<ref>{{cite web | url = http://ssrn.com/abstract=2218812 | author = Melanie L. Fein | title = The Shadow Banking Charade | date = 15 February 2013 | accessdate = 31 October 2014}}</ref> "because governments are not fully living up to the responsibility that comes with state-sponsored money".<ref>{{cite news | url = http://www.breakingviews.com/edward-hadas-bitcoin-is-a-step-back-not-forward/21121998.article | title = Right-wing dreams | author = Edward Hadas | date = 27 November 2013 | publisher = Thomson Reuters | accessdate = 31 October 2014}}</ref> |
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Bitcoin has been described as "remov[ing] the imbalance between the big boys of finance and the disenfranchised little man, potentially allowing early adopters to negotiate favourable rates on exchanges and transfers – something that only the very biggest firms have traditionally enjoyed".<ref>{{cite news|last1=Hamill|first1=Jasper|title=Native American Activist Wants To Swap The Dollar For Bitcoin|url=http://www.forbes.com/sites/jasperhamill/2013/12/19/native-american-activist-wants-to-swap-the-dollar-for-bitcoin/|accessdate=1 October 2014|work=Forbes| date=19 December 2013}}</ref> |
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==Legal status and regulation== |
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{{main|Legality of Bitcoin by country|l1=Legality of bitcoin by country}} |
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Few governments have moved to regulate bitcoin and similar private currencies. |
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According to the [[European Central Bank]], traditional financial sector regulation is not applicable because bitcoin does not involve traditional financial actors.<ref name=ECB>{{cite book|title=Virtual Currency Schemes|date=October 2012|publisher=European Central Bank|location=Frankfurt am Main|isbn=978-92-899-0862-7|url=http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf|format=PDF|author=European Central Bank|accessdate=5 March 2014}}</ref>{{rp|5}} Under other regimes, existing rules have been extended to include bitcoin and bitcoin companies. {{As of|2014}}, Bitcoin is illegal only in two countries: Vietnam, where trading in Bitcoin and "other electronic currencies" is against the law and not allowed, and Iceland, whose central bank throttles incoming bitcoins to restrict money flow abroad.<ref name=cnn414>{{cite news|author1=Jose Pagliery|title=Where is Bitcoin legal?|url=http://money.cnn.com/2014/04/02/technology/bitcoin-laws/|accessdate=9 December 2014|work=Money Cable News Network|publisher=Time Warner|date=2 April 2014}}</ref> The flourishing bitcoin mining business in Iceland<ref name=NYT1214>{{cite news|author1=Nathaniel Popper|title=Into the Bitcoin Mines|url=http://dealbook.nytimes.com/2013/12/21/into-the-bitcoin-mines/|accessdate=9 December 2014|work=Deal Book NY Times|publisher=NY Times Company|date=21 December 2013}}</ref> is not affected by this rule.<ref name=coin614>{{cite news | author1 = Armand Tanzarian | title = Legal Basics: Owning and Using Bitcoin in Europe | url = http://cointelegraph.com/news/111733/legal_basics_owning_and_using_bitcoin_in_europe | accessdate = 9 December 2014 | work = CoinTelegraph | publisher = Cointelegraph | date = 9 June 2014}}</ref> Steven Strauss, a Harvard public policy professor, suggested in April 2013 that governments could outlaw bitcoin,<ref>{{cite news|url=http://www.huffingtonpost.com/steven-strauss/bitcoin_b_3081812.html|title=Nine Trust-Based Problems With Bitcoin | work=The Huffington Post|date=14 April 2013|accessdate=20 October 2013 | last=Strauss | first=Steven}}</ref> a possibility that was mentioned in a 2013 [[U.S. Securities and Exchange Commission]] (SEC) filing made by a bitcoin investment vehicle.<ref name=winkles /> A detailed survey of forty foreign jurisdictions and the European Union is maintained by the [[U.S. Library of Congress]].<ref name=btcregs /> |
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===China=== |
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On 5 December 2013, [[China Central Bank]] made its first step in regulating bitcoin by prohibiting financial institutions to handle bitcoin transactions.<ref name="Bloomberd">{{cite web|url=http://www.bloomberg.com/news/2013-12-05/china-s-pboc-bans-financial-companies-from-bitcoin-transactions.html |title=China Bans Financial Companies From Bitcoin Transactions |publisher=Bloomberg |date=5 December 2013 |accessdate=16 December 2013}}</ref> In a statement on the central bank’s website the [[People’s Bank of China|People's Bank of China]] said financial institutions and payment companies cannot give pricing in, buy and sell bitcoin or insure bitcoin-linked products. A December 2013 statement from BTC China suggested payment processors had voluntarily withdrawn their services.<ref>{{cite web|url=http://allthingsd.com/20131219/china-bitcoin-exchange-ceo-were-not-giving-up-yet/|title=China Bitcoin Exchange CEO: We’re Not Giving Up Yet |date=19 December 2013 |work=allthingsd.com|accessdate=19 December 2013}}</ref> On 1 April 2014 China Central Bank ordered commercial banks and payment companies to close bitcoin trading accounts in two weeks.<ref name=wsj4-2014>{{cite news|author1=Chao Deng|author2=Lingling Wei|title=China Cracks Down on Bitcoin|url=http://online.wsj.com/articles/SB10001424052702304157204579475233879506454|accessdate=8 November 2014|work=WSJ.com|publisher=Dow Jones & Company|date=1 April 2014}}</ref> Trading bitcoins by individuals is legal in China.<ref name="Bloomberd"/> |
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===European Union=== |
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In July 2014 the [[European Banking Authority]] advised European banks not to deal in virtual currencies such as bitcoin until a regulatory regime was in place.<ref name=EBA>{{cite web|title=EBA Opinion on ‘virtual currencies|url=http://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-08+Opinion+on+Virtual+Currencies.pdf|publisher=European Banking Authority|accessdate=8 July 2014|pages=46|format=pdf|date=4 July 2014}}</ref> |
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===G7=== |
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The 2013 [[G7]]'s [[Financial Action Task Force]] published guidance for Internet-based payment services that defines "exchangers buying or selling digital currency for cash (or other digital currencies) [...] as a virtual bureau de change" and warns that "Internet-based payment services that allow third party funding from anonymous sources may face an increased risk of [money laundering/terrorist financing]" concluding that this may "pose challenges to countries in [anti-money laundering/counter terrorist financing] regulation and supervision".<ref name=fatf>{{cite web|url=http://www.fatf-gafi.org/media/fatf/documents/recommendations/Guidance-RBA-NPPS.pdf|title=Guidance for a Risk-Based Approach: Prepaid Cards, Mobile Payments and Internet-based Payment Services|work=Guidance for a risk-based approach|publisher=Financial Action Task Force (FATF)|accessdate=6 March 2014|location=Paris|page=47|format=PDF|date=June 2013}}</ref> |
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===United States=== |
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The [[U.S. Government Accountability Office]] (GAO) reviewed virtual currencies upon the request of the [[Senate Finance Committee]] and in May 2013 recommended<ref>{{cite web | url = http://www.gao.gov/products/gao-13-516 | title = Virtual Economies and currencies: Additional IRS guidance could reduce tax compliance risks | work = GAO Report GAO-13-516 | publisher = Report to the Committee on Finance, U.S. Senate | accessdate = 6 March 2014 | author = US Government Accountability Office | authorlink = Government Accountability Office | date = May 2013}}</ref> that the [[Internal Revenue Service]] (IRS) formulate tax guidance for bitcoin businesses. On 25 March 2014, in time for 2013 tax filing, the IRS issued a guidance that virtual currency is treated as property for U.S. federal tax purposes and that "an individual who 'mines' virtual currency as a trade or business [is] subject to self-employment tax".<ref name=IRS>{{cite web|title= IRS Virtual Currency Guidance|url=http://www.irs.gov/pub/irs-drop/n-14-21.pdf|work=Notice 2014-21|publisher=IRS|accessdate=30 March 2014|author=IRS|date=25 March 2014}}</ref> |
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On 18 November 2013, the [[United States Senate]] held a committee hearing titled ''Beyond Silk Road: Potential Risks, Threats and Promises of Virtual Currencies'' to discuss virtual currencies.<ref name="theguardian">{{cite web |url= http://www.theguardian.com/technology/2013/nov/18/bitcoin-risks-rewards-senate-hearing-virtual-currency |title= Bitcoin hits $700 high as Senate stages hearing on virtual currency |date= 18 November 2013 |accessdate= 24 November 2013 |first= Dominic |last= Rushe |work= The Guardian}}</ref> At this hearing, held by senator [[Tom Carper]], bitcoin and other currencies were received generally positively, with it being stated that bitcoin was a "legal means of exchange" and that "online payment systems, both centralized and decentralized, offer legitimate financial services" by US officials such as Peter Kadzik and [[Mythili Raman]].<ref name="raskin">{{cite web |url= http://www.bloomberg.com/news/2013-11-18/u-s-agencies-to-say-bitcoins-offer-legitimate-benefits.html |title= U.S. Agencies to Say Bitcoins Offer Legitimate Benefits |date= 18 November 2013 |accessdate= 24 November 2013 |first= Max |last= Raskin |work= Bloomberg}}</ref><ref>{{cite web |url= http://www.washingtonpost.com/business/economy/for-bitcoin-a-successful-charm-offensive-on-the-hill/2013/11/22/000ed4b0-53b1-11e3-a7f0-b790929232e1_story.html |title= For Bitcoin, a successful charm offensive on the Hill |date= 23 November 2013 |accessdate= 24 November 2013 |first= Timothy |last= Lee |work= Washington Post}}</ref> |
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The FEC deadlocked on Nov 21, 2013 on whether to allow bitcoin in political campaigns.<ref name="fecbitcoin">{{cite web|last=Gillum |first=Jack |url=http://bigstory.ap.org/article/fec-donors-cant-use-bitcoins-contributions |title=FEC: Donors can't use bitcoins for contributions |publisher=Bigstory.ap.org |date=2013-04-03 |accessdate=2013-12-27}}</ref> Their decision was split across party lines (three members Democrat voting nay, three Republicans voting yea). While their decision covered group donations, political bitcoin pioneers New Hampshire House member Mark Warden<ref name="wardenbtc">{{cite web | url = http://www.markwarden.com/page/contribute-campaign | title = Donate to the campaign | Mark Warden — State Rep | publisher = Markwarden.com | accessdate = 9 November 2014}}</ref> and Southern California politician Michael B. Glenn<ref name="latimesbitcoin">{{cite web | last = Foxhall | first = Emily | url = http://www.latimes.com/local/lanow/la-me-ln-bitcoin-accepted-newport-city-council-race-20131220,0,7500678.story | title = Bitcoin donations welcome, Newport Beach City Council candidate says | publisher = latimes.com | date = 20 December 2013 | accessdate = 27 December 2013}}</ref> acted independently in accepting bitcoin, and paved the way for others to follow suit. |
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In January 2014, the U.S. [[Securities and Exchange Commission]] (SEC) was focused on whether bitcoin-denominated stock exchanges were illegal, per its enforcement administrator, and inquired into the gambling site SatoshiDice listing shares on bitcoin exchange MPEx.<ref>{{cite news|last1=Dougherty|first1=Carter|title=Gambling Website’s Bitcoin-Denominated Stock Draws SEC Inquiry|url=http://www.businessweek.com/news/2014-03-19/gambling-website-s-bitcoin-denominated-stock-draws-sec-inquiry|accessdate=13 June 2014|work=Bloomberg BusinessWeek.com|publisher=Bloomberg LP|date=20 March 2014}}</ref> In May it warned investors that "both fraudsters and promoters of high-risk investment schemes may target bitcoin users".<ref>{{cite web|title=Investor Alert: Bitcoin and Other Virtual Currency-Related Investments|url=http://investor.gov/news-alerts/investor-alerts/investor-alert-bitcoin-other-virtual-currency-related-investments#.U3GCQ61dVD4|work=Investor.gov|publisher=U.S. Securities and Exchange Commission|accessdate=13 May 2014}}</ref> The SEC charged and settled with the former owner of SatoshiDice in June 2014 for selling securities without registering with the SEC.<ref>{{cite web|title=Press Release SEC Charges Bitcoin Entrepreneur With Offering Unregistered Securities|url=http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541972520#.U5qaD3bb73C|publisher=SEC.gov|accessdate=13 June 2014|date=3 June 2014}}</ref> |
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The U.S. [[Commodity Futures Trading Commission]] stated in March 2014 it was considering regulation of digital currencies.<ref>{{cite news|title=U.S. swaps watchdog says considering bitcoin regulation|url=http://www.reuters.com/article/2014/03/11/us-bitcoin-regulation-idUSBREA2A1W020140311|accessdate=11 March 2014|newspaper=Reuters.com|date=11 March 2014|first=Douwe|last=Miedema}}</ref> |
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On 8 May 2014, the U.S. [[Federal Election Commission]] issued draft guidance to U.S. politicians who want to receive bitcoin donations.<ref name="ADVISORY OPINION 2014-02">{{cite web | url=http://saos.fec.gov/aodocs/2014-02.pdf | title=FEC Advisory Opinion 2014-02 | publisher=Federal Election Commission | date=8 May 2014 | accessdate=8 May 2014 | author=Goodman, Lee E. }}</ref> The Commission declined to declare bitcoins currency, stating they fit into its "anything of value" definition.<ref>{{cite news |url=https://www.publicintegrity.org/2014/05/08/14739/what-fecs-bitcoin-ruling-means | title=What the FEC's Bitcoin ruling means |date=8 May 2014 |accessdate=8 May 2014 |first=Dave |last=Levinthal |work=Center for Public Integrity}}</ref> Also that month, Brett Stapper, co-founder of Falcon Global Capital, registered to lobby members of Congress and federal agencies on issues related to bitcoin.<ref name="Bitcoin gets a lobbyist">{{cite web | url=http://thehill.com/policy/technology/207085-bitcoin-investors-register-lobbyist?nr_email_referer=1%29 | title=Bitcoin gets a lobbyist | publisher=The Hill | date=23 May 2014 | accessdate=27 May 2014 | author=Hattem, Julian}}</ref> |
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In June 2014 California Assemblyman [[Roger Dickinson]] (D–Sacramento) submitted draft legislation [http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201320140AB129&search_keywords= (Assembly Bill 129)] to legalize bitcoin and all other forms of alternative and digital currency.<ref name="BitcoinCalifornia">{{cite web | url=http://www.businessinsider.com/bitcoin-llegal-in-california-2014-6?utm_source=alerts&nr_email_referer=1 | title=Bitcoin Is Actually Illegal In California, But That Could Change Soon | publisher=Business Insider | date=25 June 2014 | accessdate=26 June 2014 | author=Cosco, Joey}}</ref> After the GAO had called for increased oversight of bitcoin, the [[Consumer Financial Protection Bureau]] warned consumers of bitcoin being risky.<ref name=CFPB>{{cite news|author1=Peter Schroeder|title=CFPB warns consumers about bitcoin 'Wild West'|url=http://thehill.com/policy/finance/214831-cfpb-warns-consumers-about-bitcoin-wild-west|accessdate=27 August 2014|work=The Hill|publisher=News Communications, Inc.|date=11 August 2014}}</ref> |
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{{as of|November 2014}}, there are no final rules at the U.S. state level yet. In March, the [[New York State Department of Financial Services]] led by superintendent [[Benjamin Lawsky]] had officially invited bitcoin exchanges to apply with them,<ref>{{cite web|title=In the Matter of Virtual Currency Exchanges|work=Public Order|url=http://www.dfs.ny.gov/about/po_vc_03112014.pdf|publisher=New York State Department of Financial Services|accessdate=30 March 2014|date=11 March 2014}}</ref> and on 17 July it published draft regulations for virtual currency businesses.<ref name=wsj72014>{{cite news|last1=Vigna|first1=Paul|title=NY Financial Regulator Releases Draft of ‘Bitlicense’ for Bitcoin Businesses|accessdate=19 July 2014|work=WSJ|publisher=Dow Jones & Company|date=17 July 2014}}</ref> Businesses would have to provide transaction receipts, disclosures about risks, policies to handle customer complaints, maintain a cybersecurity program, hire a compliance officer and verify details about their customers to follow anti-money-laundering rules, per FinCEN.<ref name=wsj72014 /> |
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==Criminal activity== |
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Bitcoins have been associated with online criminal behavior and [[cybercriminal]]s.<ref name="fbi_report"/> Used to obfuscate online transactions, bitcoins are seized when [[Deep Web|deep web]] black markets are shut by authorities.<ref name="Kelion, Leo">{{cite news | url=http://www.bbc.co.uk/news/technology-26158012 | title=Five arrested in Utopia dark net marketplace crackdown | publisher=BBC | work=bbc.co.uk | date=12 February 2014 | accessdate=13 February 2014 | author=Kelion, Leo}}</ref> Criminal activities have stigmatized the currency<ref name=bloomgq>{{cite web | url=http://www.bloomberg.com/news/2014-10-10/child-porn-seals-bitcoin-s-virtually-amoral-status-opening-line.html | title=Child Porn Seals Bitcoin’s Virtually Amoral Status: Opening Line | publisher=Bloomberg LP | work=bloomberg.com | date=Oct 10, 2014 | accessdate=9 November 2014}}</ref>{{refn | group = note | name = illegal | Bitcoin facilitates illegal trading like USD, gold, etc. It is like cash in facilitating illegal trades. The difference is that bitcoin transaction history is publicly available, while cash transaction history is not. Bitcoin also facilitates legal trading.<ref name="Andolfatto2014-03" />}} and attracted the attention of financial regulators, legislative bodies, and law enforcement.<ref>{{cite news|url=http://www.bloomberg.com/news/2013-08-08/did-the-sec-just-validate-bitcoin-no-.html | title=The SEC Shows Why Bitcoin Is Doomed | publisher=Bloomberg LP | work=bloomberg.com | date=8 August 2013 | accessdate=20 October 2013 | author=Lavin, Tim}}</ref> |
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Many major news organizations have linked bitcoins to criminality. [[CNN]] has referred to bitcoin as a "shady online currency [that is] starting to gain legitimacy in certain parts of the world",<ref name="cnn">{{cite news|url=http://finance.fortune.cnn.com/2012/12/18/bitcoin-money-laundering/|title=Bitcoin looks primed for money laundering|publisher=CNN | work=money.cnn.com | date=18 December 2012|accessdate=18 October 2013 | author=Sanati, Cyrus}}</ref> and [[The Washington Post]] calls it "the currency of choice for seedy online activities".<ref name="washp">{{cite news | url=http://articles.washingtonpost.com/2013-10-02/business/42613812_1_digital-currency-federal-authorities-reputation | title=Authorities shut down Silk Road, the world's largest Bitcoin-based drug market|work=The Washington Post|date=2 October 2013|accessdate=21 October 2013 | author=Timothy B. Lee and Hayley Tsukayama}}</ref> [[The Sacramento Bee]] says that "bitcoins are the currency of choice" in "underground networks where marketing in contraband is common".<ref>{{cite web | url=http://www.sacbee.com/news/local/crime/article2601218.html | title=Carmichael man pleads not guilty in weapons case; FBI probes his connections to the ‘Darknet' | publisher=McClatchy Co | work=The Sacramento Bee | date=2014-06-12 | accessdate=27 November 2014 | author=SAM STANTON AND DENNY WALSH}}</ref> The [[BBC]] states, "bitcoin is often the virtual currency of choice" for "sites selling drugs".<ref>{{cite web | url=http://www.bbc.com/news/technology-29987373 | title=Dark net experts trade theories on 'de-cloaking' after raids | publisher=BBC | work=bbc.com | date=10 November 2014 | accessdate=27 November 2014 | author=Lee, Dave}}</ref> [[The London Evening Standard]] says, "it’s true that bitcoins are the currency of choice for ‘dark’ websites... through which users can buy drugs."<ref>{{cite web | url=http://www.standard.co.uk/lifestyle/esmagazine/bitcoins-currency-20-9684079.html | title=Bitcoins: currency 2.0 | publisher=The London Evening Standard | work=standard.co.uk | date=21 August 2014 | accessdate=27 November 2014 | author=ARLIDGE, JOHN}}</ref> |
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The FBI stated in a 2012 report that "bitcoin will likely continue to attract cyber-criminals who view it as a means to move or steal funds".<ref name="fbi_report">{{cite web | url = http://www.wired.com/images_blogs/threatlevel/2012/05/Bitcoin-FBI.pdf | title = Bitcoins Virtual Currency: Unique Features Present Challenges for Deterring Illicit Activity | publisher = FBI | work = Cyber Intelligence Section and Criminal Intelligence Section | date = 24 April 2012 | accessdate = 2 November 2014}}</ref> A working paper written by researchers at the University of Kentucky concludes that its authors found "robust evidence that computer programming enthusiasts and illegal activity drive interest in Bitcoin".<ref>{{cite journal | url=file:///C:/Users/Craig/Downloads/SSRN-id2518603.pdf | title=Characteristics of Bitcoin Users: An Analysis of Google Search Data | author=Matthew Wilson and Aaron Yelowitz |date=November 2014 }}</ref> Criminal activity involving bitcoin has largely centered around theft, money laundering, the use of [[botnet]]s for mining, and the use of bitcoins in exchange for illegal items or services. "Like cash, it can be used for ill as well as for good."<ref name="primer" /> Certain nation states may feel that its use in circumventing [[capital control]]s is also undesirable.<ref name=capcont/> Despite claims made by non-profit [[Bitcoin Foundation]] that "cryptography is the reason no one can steal bitcoins,"<ref name=foundationclaim>{{cite web | url = https://bitcoinfoundation.org/about/ | title = Developing a More Open Economy | publisher = Bitcoin Foundation | work = bitcoinfoundation.org | quote = Cryptography is the key to Bitcoin’s success. It’s the reason that no one can double spend, counterfeit or steal Bitcoins | date = 2014 | accessdate = 4 March 2014}}</ref> there have been many cases of bitcoin theft.<ref name="Economist113013Pressure" /> |
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===Theft=== |
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There have been many cases of bitcoin theft.<ref name="Economist113013Pressure" /> The non-profit [[Bitcoin Foundation]] maintains that "cryptography is the reason no one can steal bitcoins."<ref name=foundationclaim/> |
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Many high-profile thefts have been reported. In late November 2013, an estimated $100 million in bitcoins were stolen from the online illicit goods marketplace [[Sheep Marketplace]], which immediately closed.<ref name=hern2013/> Users tracked the coins as they were processed and converted to cash, but no funds were recovered and no culprits identified.<ref name=hern2013>{{cite news | url=http://www.theguardian.com/technology/2013/dec/09/recovering-stolen-bitcoin-sheep-marketplace-trading-digital-currency-money | title=Recovering stolen bitcoin: a digital wild goose chase | work=The Guardian | date=9 December 2013 | first=Alex | last=Hern | accessdate=6 March 2014}}</ref> A different black market, Silk Road 2, stated that during a February 2014 hack bitcoins valued at $2.7 million were taken from escrow accounts.<ref name=silk2>{{cite news|url=http://www.bbc.co.uk/news/technology-26187725 |title=Silk Road 2 loses $2.7m in bitcoins in alleged hack |work=BBC News |date=14 February 2014 |accessdate=15 February 2014}}</ref> In late February 2014 [[Mt. Gox]], one of the largest virtual currency exchanges, filed for bankruptcy in [[Tokyo]] amid reports that 744,000 bitcoins had been stolen.<ref name="GoxBankrupt" /> Flexcoin, a bitcoin storage specialist based in [[Alberta, Canada]], shut down on March 2014 after saying it discovered a theft of about $650,000 in bitcoins.<ref name=ligaya2014>{{cite news | work=Financial Post | url=http://business.financialpost.com/2014/03/05/after-albertas-flexcoin-mt-gox-hacked-bitcoin-businesses-face-sting-of-free-wheeling-ways/ |title=After Alberta’s Flexcoin, Mt. Gox hacked, Bitcoin businesses face sting of free-wheeling ways | date=5 March 2014 | first=Armina | last=Ligaya | accessdate=7 March 2014}}</ref> Poloniex, a digital currency exchange, reported on March 2014 that it lost bitcoins valued at around $50,000.<ref name=truong2014>{{ cite news | url=http://www.fastcompany.com/3027373/fast-feed/another-bitcoin-exchange-another-heist | title=Another Bitcoin exchange, another heist | first=Alice | last=Truong | work=Fast Company | date=6 March 2014 | accessdate=7 March 2014 }}</ref> |
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One way theft is accomplished involves a thief infiltrating an online wallet service.<ref>{{cite news|last=Everett|first=David|title=So how can you steal Bitcoins|url=http://www.smartcard.co.uk/articles/so_how_can_you_steal_bitcoins.php|work=Smartcard & Identity News | accessdate=17 January 2014 | date=April 2012}}</ref> One way to steal bitcoins is to transfer them from the victim's bitcoin address using a stolen private key to sign the transaction.<ref>{{cite news|last=Jeffries|first=Adrianne|title=How to steal Bitcoin in three easy steps|date=19 December 2013|url=http://www.theverge.com/2013/12/19/5183356/how-to-steal-bitcoin-in-three-easy-steps|work=The Verge|accessdate=17 January 2014}}</ref> If the private key is stolen, the thief can use it to transfer all the bitcoins from the compromised address to another address of his own. In that case, the network does not have any provision to identify the thief, to block further transactions of those stolen bitcoins, or return them to the legitimate owner.<ref name=winkles/><ref name=legal1>{{cite web | author = Austin Brister | url = http://www.satoshilegal.com/articles/2014/2/16/colored-coins-can-irreversible-transfers-co-exist-with-equitable-legal-systems | title = "No Charge-Backs" Systems: Do They Invalidate Well-Established Legal Remedies? | publisher = SatoshiLegal | date = 18 October 2014 | accessdate = 14 October 2014}}</ref> |
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===Black markets=== |
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Because of their presumed capacity to obfuscate the source of payments in online transactions and bypass money transfer controls by governments and law enforcement agencies, bitcoin have come to be used in the [[Deep Web|deep web]] black markets.<ref name=Greenberg>{{cite news|url= http://www.forbes.com/sites/andygreenberg/2013/10/25/fbi-says-its-seized-20-million-in-bitcoins-from-ross-ulbricht-alleged-owner-of-silk-road/ |title= FBI Says It's Seized $28.5 Million In Bitcoins From Ross Ulbricht, Alleged Owner Of Silk Road |author= Andy Greenberg |publisher= Forbes.com |format= blog |date= 23 October 2013 |accessdate= 24 November 2013}}</ref> In 2012, it was estimated that 4.5% to 9% of all transactions of all bitcoin exchanges in the world were for drug trades on a single [[deep web]] drugs market, [[Silk Road (marketplace)|Silk Road]].<ref name="cmacademic">{{cite conference | url = http://www.andrew.cmu.edu/user/nicolasc/publications/Christin-WWW13.pdf | title = Traveling the Silk Road: A Measurement Analysis of a Large Anonymous Online Marketplace | publisher = Carnegie Mellon INI/CyLab | accessdate = 22 October 2013 | author = Christin, Nicolas | year = 2013 | pages = 8 | quote = we suggest to compare the estimated total volume of Silk Road transactions with the estimated total volume of transactions at all Bitcoin exchanges (including Mt.Gox, but not limited to it). The latter corresponds to the amount of money entering and leaving the Bitcoin network, and statistics for it are readily available... approximately 1,335,580 BTC were exchanged on Silk Road... approximately 29,553,384 BTC were traded in Bitcoin exchanges over the same period... The only conclusion we can draw from this comparison is that Silk Road-related trades could plausibly correspond to 4.5% to 9% of all exchange trades}}</ref> The bulk of bitcoin purchases during the time were [[speculation|speculative]] in nature,<ref name="cmacademic"/> so drugs must have constituted a greater percentage of the actual goods purchased with bitcoins [[circa|c.]] 2012.{{according to whom|date=December 2014}} |
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Several [[deep web]] black markets where vendors sell illegal items for bitcoins have been shut by authorities. In October 2013 one such market, Silk Road, was shut down by U.S. law enforcement<ref name="Kelion, Leo"/><ref name=Greenberg /><ref>{{cite news | publisher = The Guardian | title = Bitcoin price plummets after Silk Road closure | author = Alex Hern | quote = Digital currency loses quarter of value after arrest of Ross Ulbricht, who is accused of running online drugs marketplace | date = 3 October 2013 | url = http://www.theguardian.com/technology/2013/oct/03/bitcoin-price-silk-road-ulbricht-value | accessdate = 31 October 2014}}</ref> leading to a short-term fall in the value of bitcoin.<ref>{{cite web | url = http://www.wired.com/2013/10/bitcoin-market-drops-600-million-on-silk-road-bust/ | title = Bitcoin Values Plummet $500M, Then Recover, After Silk Road Bust | author = Robert McMillan | date = 2 October 2013 | publisher = Wired | accessdate = 31 October 2014}}</ref> Alternative sites were soon available, and in early 2014 the [[Australian Broadcasting Corporation]] reported that the closure of the Silk Road had little impact on the number of Australians selling drugs online, which had actually increased.<ref>{{cite news | url = http://www.abc.net.au/news/2014-03-31/online-drug-trade-soaring-experts-say/5354930 | publisher = ABC News | title = Silk Road closure fails to dampen illegal drug sales online, experts say | author = Katie Silver | date = 31 March 2014 | accessdate = 31 October 2014}}</ref> In early 2014, Dutch authorities closed Utopia, an online illegal goods market, and seized 900 bitcoins.<ref>{{cite web | url = http://www.independent.co.uk/life-style/gadgets-and-tech/utopia-no-more-drug-marketplace-seen-as-the-next-silk-road-shut-down-by-dutch-police-9126063.html | title = Utopia no more: Drug marketplace seen as the next Silk Road shut down by Dutch police | publisher = independent.co.uk | work = The Independent | date = 13 February 2014 | accessdate = 8 November 2014 | author = Sophie Murray-Morris}}</ref> In late 2014, a joint police operation saw European and American authorities seize bitcoins and close 400 [[deep web]] sites including the illicit goods market Silk Road 2.0.<ref>{{cite web | url=http://www.bbc.com/news/technology-29950946 | title=Huge raid to shut down 400-plus dark net sites | publisher=BBC | work=bbc.com | date=7 November 2014 | accessdate=8 November 2014 | author=Wakefield, Jane}}</ref> |
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Several news outlets have asserted that the popularity of bitcoins hinges on the ability to use them to purchase illegal goods.<ref>{{cite news |url=http://www.economist.com/node/21563752|title=Monetarists Anonymous | publisher=The Economist Newspaper Limited|work=The Economist|date=29 September 2012| accessdate=21 October 2013}}</ref><ref>{{cite web|url=http://www.theguardian.com/world/2013/mar/22/silk-road-online-drug-marketplace|title=Silk Road: the online drug marketplace that officials seem powerless to stop|publisher=Guardian News and Media Limited|work=theguardian.com|date=22 March 2013|accessdate=20 October 2013|author=Ball, James}}</ref> Non-drug transactions were thought to be far less than the number involved in the purchase of drugs,<ref>{{cite news |url= http://www.forbes.com/sites/quora/2013/10/02/how-will-the-fbi-shut-down-of-silk-road-affect-bitcoins/|title=How Will The FBI Shut Down Of Silk Road Affect Bitcoins?|publisher=Forbes|work=Quora |date=2 October 2013|accessdate=21 October 2013|author= Mardlin, John Jeffrey}}</ref> and roughly one half of all transactions made using bitcoin [[circa|c.]] 2013 were bets placed at a single online gambling website, [[Satoshi Dice]].<ref>{{cite news|url= http://arstechnica.com/business/2013/08/firm-says-online-gambling-accounts-for-almost-half-of-all-bitcoin-transactions/|title=Firm says online gambling accounts for almost half of all Bitcoin transactions |work=Ars Technica |date=24 August 2013|accessdate=21 October 2013 |author=Geuss, Megan}}</ref> One source stated online gun dealers use bitcoin to sell arms without background checks.<ref>{{cite news|url=http://www.huffingtonpost.com/2013/04/15/bitcoin-guns_n_3070828.html | title=How Bitcoin Sales Of Guns Could Undermine New Rules|publisher=TheHuffingtonPost.com, Inc. | work=huffingtonpost.com | date=15 April 2013 | accessdate=20 October 2013|author=Smith, Gerry}}</ref> The bitcoin community branded one site, Sheep Marketplace, as a scam when it prevented withdrawals and shut down after an alleged bitcoins theft.<ref name="techienews">{{cite web | url = http://www.techienews.co.uk/973470/silk-road-like-sheep-marketplace-scams-users-39k-bitcoins-worth-40-million-stolen/ | title = Silk Road-like Sheep Marketplace scams users; over 39k Bitcoins worth $40 million stolen | author = Ravi Mandalia | publisher = Techie News | date = 1 December 2013 | accessdate = 2 December 2013}}</ref> In a separate case, escrow accounts with bitcoins belonging to patrons of a different black market were hacked in early 2014.<ref name=silk2/> |
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===Money laundering=== |
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Bitcoins may not be ideal for money laundering because all transactions are public.<ref name="FistfulPaper201308">{{cite news | url = http://www.pcworld.com/article/2047608/bitcoin-offers-privacy-as-long-as-you-dont-cash-out-or-spend-it.html | title = Bitcoin offers privacy-as long as you don't cash out or spend it | last = Kirk | first = Jeremy | date = 28 August 2013 | work = PC World | accessdate = 31 October 2014}}</ref> Authorities have expressed concerns, however. The [[European Banking Authority]]<ref name="ebawarn" /> and the FBI<ref name="fbi_report" /> have both stated that bitcoin may be used for money laundering. In early 2014, an operator of a U.S. bitcoin exchange was arrested for money laundering.<ref name=vchair>{{cite news | url=http://www.bbc.co.uk/news/technology-25919482 | title=US makes Bitcoin exchange arrests after Silk Road closure | publisher=BBC | work=bbc.co.uk | date=27 January 2014 | accessdate=28 January 2014 | author=Lee, Dave}}</ref> |
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===Ponzi scheme using bitcoins=== |
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In a [[Ponzi scheme]] that utilized bitcoins, The Bitcoin Savings and Trust promised investors up to 7 percent weekly interest, and raised at least 700,000 bitcoins from 2011 to 2012.<ref name=secponzi/> In July 2013 the U.S. Securities and Exchange Commission charged the company and its founder in 2013 "with defrauding investors in a Ponzi scheme involving bitcoin".<ref name=secponzi>{{cite press release | url = https://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539730583 | date = 23 July 2013 | issue = 2013-132 | title = SEC charges Texas man with running Bitcoin-denominated Ponzi scheme | publisher = US Securities and Exchange Commission | accessdate = 7 March 2014}}</ref> In September 2014 the judge fined Bitcoin Savings & Trust and its owner $40 Million for operating a bitcoin Ponzi scheme.<ref>{{cite news | title = Bitcoin Savings & Trust Comes Up $40 Million Short On The Trust Part | url = http://www.forbes.com/sites/jayadkisson/2014/09/25/bitcoin-savings-trust-comes-up-40-million-short-on-the-trust-part/ | author = Jay Adkisson | date = 25 September 2014 | accessdate = 13 December 2014 | work = Personal Finance | publisher = Forbes}}</ref> |
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===Malware=== |
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Bitcoin-related [[malware]] includes software that steals bitcoins from users using a variety of techniques, software that uses infected computers to mine bitcoins, and different types of [[ransomware]], which disable computers or prevent files from being accessed until some payment is made. Security company [[SecureWorks|Dell SecureWorks]] said in February 2014 that it had identified 146 types of bitcoin malware; about half of it undetectable with standard [[Antivirus software|antivirus scanners]].<ref name=haj2014/> |
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====Unauthorized mining==== |
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In June 2011, [[Symantec]] warned about the possibility that [[botnet]]s could mine covertly for bitcoins.<ref>{{cite web|author=Peter Coogan |url=http://www.symantec.com/connect/blogs/bitcoin-botnet-mining |title=Bitcoin Botnet Mining|work=Symantec.com|date=17 June 2011 |accessdate = 24 January 2012|deadurl=no}}</ref> Malware used the [[parallel computing|parallel processing]] capabilities of [[GPU]]s built into many modern [[video card]]s.<ref>{{cite news | url = http://www.theregister.co.uk/2011/08/16/gpu_bitcoin_brute_forcing/ | title = Malware mints virtual currency using victim's GPU | work = The Register | date = 16 August 2011 | accessdate = 31 October 2014 | author = Goodin, Dan}}</ref> Although the average PC with an integrated graphics processor is virtually useless for bitcoin mining, tens of thousands of PCs laden with mining malware could produce some results.<ref name=hajb2014/> |
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In mid-August 2011, bitcoin mining botnets were detected,<ref>{{cite web |url=http://www.infosecurity-magazine.com/view/20211/researcher-discovers-distributed-bitcoin-cracking-trojan-malware/|title=Infosecurity - Researcher discovers distributed bitcoin cracking trojan malware |publisher=Infosecurity-magazine.com|date=19 August 2011|accessdate = 24 January 2012 }}</ref> and less than three months later, bitcoin mining [[Trojan horse (computing)|trojans]] had infected [[Mac OS X]].<ref>{{cite web | url = http://www.techworld.com.au/article/405849/mac_os_x_trojan_steals_processing_power_produce_bitcoins | title = Mac OS X Trojan steals processing power to produce Bitcoins: Security researchers warn that DevilRobber malware could slow down infected Mac computers | author = Lucian Constantin | publisher = IDG communications | work = TechWorld | date = 1 November 2011 | accessdate = 24 January 2012}}</ref> |
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In April 2013, [[electronic sports]] organization E-Sports Entertainment was accused of hijacking 14,000 computers to mine bitcoins; the company later settled the case with the State of New Jersey.<ref>{{cite news |url= http://www.bbc.co.uk/news/technology-25014477 |title= E-Sports Entertainment settles Bitcoin botnet allegations |date= 20 November 2013 |accessdate= 24 November 2013 |work= [[BBC News]]}}</ref> |
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German police arrested two people in December 2013 who customized existing botnet software to perform bitcoin mining, which police said had been used to mine at least $950,000 worth of bitcoins.<ref>{{cite news | url=http://www.coindesk.com/german-police-detain-bitcoin-hackers/ | title=German police detain ‘Bitcoin mining hackers’ | first=Nermin | last=Hajdarbegovic | date=5 December 2013 | work=CoinDesk | accessdate=7 March 2014 }}</ref> |
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For four days in December 2013 and January 2014, Yahoo! Europe hosted an ad containing bitcoin mining malware that infected an estimated two million computers.<ref name=hajb2014>{{cite news | url=http://www.coindesk.com/yahoo-infects-2-million-european-pcs-bitcoin-malware/ | title=Yahoo infects 2 million European PCs with Bitcoin malware | first=Nermin | last=Hajdarbegovic | date=8 January 2014 | work=CoinDesk | accessdate=7 March 2014 }}</ref> The software, called [[Mevade Botnet|Sefnit]], was first detected in mid-2013 and has been bundled with many software packages. Microsoft has been removing the malware through its [[Microsoft Security Essentials]] and other security software since January 2014.<ref>{{cite news | url=http://www.coindesk.com/microsoft-destroys-bitcoin-mining-botnet-sefnit/ | title=Microsoft destroys Bitcoin mining botnet Sefnit | first=Nermin | last=Hajdarbegovic | date=22 January 2014 | work=CoinDesk | accessdate=7 March 2014 }}</ref> |
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Several reports of employees or students using university or research computers to mine bitcoins have been published.<ref>{{cite news|last1=Zagaeski|first1=Sid|title=Iowa State University Computers Hacked to Get Bitcoin Mining Power|url=https://coinreport.net/iowa-state-university-computers-hack-mine/|accessdate=13 June 2014|work=Coin Report.net|publisher=Coin Report|date=23 Apr 2014}}</ref><ref>{{cite news|last1=Hornyack|first1=Tim|title=US researcher banned for mining Bitcoin using university supercomputers|url=http://www.pcworld.com/article/2360840/us-researcher-banned-for-mining-bitcoin-using-university-supercomputers.html|accessdate=13 June 2014|work=PC world.com|publisher=IDG Consumer & SMB|date=6 June 2014}}</ref> |
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====Malware stealing bitcoins==== |
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Some malware can steal private keys for bitcoin wallets allowing the bitcoins themselves to be stolen. The most common type searches computers for cryptocurrency wallets to upload to a remote server where they can be cracked and their coins stolen.<ref name=haj2014/> Many of these also [[Keylogger|log keystrokes]] to record passwords, often avoiding the need to crack the keys.<ref name=haj2014/> A different approach detects when a bitcoin address is copied to a [[Clipboard (computing)|clipboard]] and quickly replaces it with a different address, tricking people into sending bitcoins to the wrong address.<ref name=haj2014>{{cite news | url=http://www.coindesk.com/nearly-150-strains-malware-bitcoins/ | title=Nearly 150 strains of malware are after your bitcoins | first=Nermin | last=Hajdarbegovic | date=27 February 2014 | work=CoinDesk | accessdate=7 March 2014 }}</ref> This method is effective because bitcoin transactions are irreversible. |
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One [[Computer virus|virus]], spread through the Pony [[botnet]], was reported in February 2014 to have stolen up to $220,000 in cryptocurrencies including 335 bitcoins from 85 wallets.<ref name=rizzo2014>{{cite news | url=http://www.coindesk.com/bitcoin-bank-flexcoin-close-600000-bitcoin-theft/ | title=Bitcoin bank Flexcoin to close after $600,000 bitcoin theft | date=4 March 2014 | first=Pete | last=Rizzo | work=CoinDesk | accessdate=7 March 2014 }}</ref> Security company [[Trustwave]], which tracked the malware, reports that its latest version was able to steal 30 types of digital currency.<ref>{{cite news | url=http://www.reuters.com/article/2014/02/24/us-bitcoin-security-idUSBREA1N1JO20140224 | title='Pony' botnet steals bitcoins, digital currencies: Trustwave | first=Jim |last=Finkle | date=24 February 2014 | work=Reuters | accessdate=7 March 2014 }}</ref> |
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A type Mac malware active in August 2013, Bitvanity posed as a vanity wallet address generator and stole addresses and private keys from other bitcoin client software.<ref name=southurst2014>{{cite news | url=http://www.coindesk.com/cointhief-mac-malware-steals-bitcoins/ | title=‘CoinThief’ Mac malware steals bitcoins from your wallet | first=Jon | last=Southurst | date=10 February 2014 | work=CoinDesk | accessdate=7 March 2014 }}</ref> A different trojan for Mac OS X, called CoinThief was reported in February 2014 to be responsible for multiple bitcoin thefts, including one user who lost 20 bitcoins.<ref name=southurst2014/> The software was hidden in versions of some cryptocurrency apps on [[Download.com]] and [[MacUpdate]].<ref name=southurst2014/> |
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====Ransomware==== |
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Another type of bitcoin-related malware is [[ransomware]]. One program called Cryptolocker, typically spread through legitimate-looking email attachments, encrypts the hard drive of an infected computer, then displays a countdown timer and demands a ransom, usually two bitcoins, to decrypt it.<ref name=guardian-ransomware>{{cite news | url=http://www.theguardian.com/technology/2014/feb/10/how-ransomware-turns-your-computer-bitcoin-miner-linkup | work=The Guardian | title=How Ransomware turns your computer into a bitcoin miner | date=10 February 2014 | accessdate=7 March 2014 }}</ref> Massachusetts police said they paid a 2 bitcoin ransom in November 2013, worth more than $1,300 at the time, to decrypt one of their hard drives.<ref>{{cite news | url=http://www.theguardian.com/technology/2013/nov/21/us-police-force-pay-bitcoin-ransom-in-cryptolocker-malware-scam | title=US police force pay bitcoin ransom in Cryptolocker malware scam | work=The Guardian | first=Samuel | last=Gibbs | date=21 November 2013 | accessdate=7 March 2014 }}</ref> Linkup, a combination ransomware and bitcoin mining program that surfaced in February 2014, disables internet access and demands credit card information to restore it, while secretly mining bitcoins.<ref name=guardian-ransomware/> |
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==Security== |
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Various potential attacks on the [[bitcoin network]] and its use as a payment system, real or theoretical, have been considered. The bitcoin protocol includes several features that protect it against some of those attacks, such as unauthorized spending, double spending, forging bitcoins, and tampering with the block chain.<ref name="khanbitcoin" /> Other attacks, such as theft of private keys, require due care by users. |
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===Unauthorized spending=== |
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When Alice sends a bitcoin to Bob, Bob becomes the new owner of the bitcoin. Eve observing the transaction might want to spend the bitcoin Bob just received, but she cannot sign the transaction without the knowledge of Bob's private key.<ref name="primer"/> |
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===Double spending=== |
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A specific problem that an internet payment system must solve is [[double-spending]], whereby a user pays the same coin to two or more different recipients. An example of such a problem would be if Eve sent a bitcoin to Alice and later sent the same bitcoin to Bob. The bitcoin network guards against double-spending by recording all bitcoin transfers in a ledger (the block chain) that is visible to all users, and ensuring for all transferred bitcoins that they haven't been previously spent.<ref name="primer"/> |
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===Race attack=== |
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If Eve offers to pay Alice a bitcoin in exchange for goods and signs a corresponding transaction, it is still possible that she also creates a different transaction at the same time sending the same bitcoin to Bob. By the rules, the network accepts only one of the transactions. This is called ''race attack'', since there is a race which transaction will be accepted first. Alice can reduce the risk of race attack stipulating that she will not deliver the goods until Eve's payment to Alice appears in the block chain.<ref>{{cite web | url = http://blogs.cornell.edu/info4220/2013/03/29/bitcoin-and-the-double-spending-problem/ | title = Bitcoin and the Double-spending Problem | publisher = Cornell University | date = 29 March 2013 | accessdate = 22 October 2014 | author = Erik Bonadonna}}</ref> |
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A variant race attack (which has been called a ''Finney attack'' by reference to Hal Finney) requires the participation of a miner. Instead of sending both payment requests (to pay Bob and Alice with the same coins) to the network, Eve issues only Alice's payment request to the network, while the accomplice tries to mine a block that includes the payment to Bob instead of Alice. There is a positive probability that the rogue miner will succeed before the network, in which case the payment to Alice will be rejected. As with the plain double-spending attack, Alice can reduce the risk of a Finney attack by waiting for the payment to be included in the block chain.<ref>{{cite paper | title = Two Bitcoins at the Price of One? Double-Spending Attacks on Fast Payments in Bitcoin | url = http://eprint.iacr.org/2012/248.pdf | last1 = Karame | first1 = Ghassan O. | last2 = Androulaki | first2 = Elli | last3 = Capkun | first3 = Srdjan | publisher = International Association for Cryptologic Research | year = 2012 | accessdate = 22 October 2014}}</ref> |
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===History modification=== |
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The other principal way to steal bitcoins would be to modify block chain ledger entries. |
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For example, Eve could buy something from Alice, like a sofa, by adding a signed entry to the block chain ledger equivalent to ''Eve pays Alice 100 bitcoins''. Later, after receiving the sofa, Eve could modify that block chain ledger entry to read instead: ''Eve pays Alice 1 bitcoin'', or replace Alice's address by another of Eve's addresses. Digital signatures cannot prevent this attack: Eve can simply sign her entry again after modifying it. |
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To prevent modification attacks, each block of transactions that is added to the block chain includes a [[cryptographic hash function|cryptographic hash code]] that is computed from the hash of the previous block as well as all the information in the block itself. When the bitcoin software notices two competing block chains, it will automatically assume that the longer one is the valid one. Therefore, in order to modify an already recorded transaction (as in the above example), the attacker would have to recalculate not just the modified block, but all the blocks after the modified one, until the modified chain is longer than the legitimate chain that the rest of the network has been building in the meantime. Consequently, for this attack to succeed, the attacker must outperform the honest part of the network.<ref name="khanbitcoin" /> |
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Each block that is added to the block chain, starting with the block containing a given transaction, is called a ''confirmation'' of that transaction. Ideally, merchants and services that receive payment in bitcoin should wait for at least one confirmation to be distributed over the network, before assuming that the payment was done. The more confirmations that the merchant waits for, the more difficult it is for an attacker to successfully reverse the transaction in a block chain—unless the attacker controls more than half the total network power, in which case it is called a ''51% attack''.<ref name="51%">{{cite news | author1 = Michael J. Casey | author2 = Paul Vigna | title = Short-Term Fixes To Avert "51% Attack" | url = http://blogs.wsj.com/moneybeat/2014/06/16/bitbeat-a-51-attack-what-is-it-and-could-it-happen/ | accessdate = 30 June 2014 | work = Money Beat | publisher = Wall Street Journal | date = 16 June 2014}}</ref> For example, if the attacker possesses 10% of the calculation power of the bitcoin network and the shop requires 6 confirmations for a successful transaction, the probability of success of such an attack will be 0.02428%.<ref name="paper" /> |
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<!--CLARIFY: ===== Vector76 attack ===== |
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Also called an ''attack with confirmation'', this is a combination of the 2 aforementioned attacks which gives the perpetrator the ability to spend funds twice simply with a confirmation.{{citation needed|date=April 2014}} --> |
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=== Selfish mining === |
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This attack was first introduced by Ittay Eyal and Emin Gun Sirer at the beginning of November 2013.<ref>{{cite web | last1 = Eyal | first1 = Ittay | last2 = Gun Sirer | first2 = Emin | title = Majority is not Enough: Bitcoin Mining is Vulnerable | url = http://arxiv.org/abs/1311.0243 | date = 15 November 2013 | accessdate = 7 October 2014}}</ref> The attacker does not normally broadcast the blocks upon finding them. He mines his private chain and eventually (when somebody finds his own block) publishes several blocks at row. This makes the "honest" network abandon their last work and switch to the attacker's branch. As a result, honest miners lose a significant part of their revenue, whilst the attacker increases profits due to changes in relative hashpowers. |
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According to the authors it changes the incentives for rational miners and makes them want to join the attacker's pool, increasing attacker's hashpower (which could potentially lead to [[Cryptocurrency#Overview|51% attack]]). |
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However, other researchers disagree with the conclusion and point out the flaws in the article.<ref>{{cite news | last = Hill | first = Kashmir | title = Bitcoin Is Not Broken | url = http://www.forbes.com/sites/kashmirhill/2013/11/06/bitcoin-is-not-broken/ | accessdate = 19 October 2014 | newspaper = Forbes | date = 6 November 2013}}</ref> |
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=== Deanonymisation of clients === |
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Along with transaction graph analysis, which may reveal connections between Bitcoin addresses (pseudonyms),<ref name=quantitative /><ref name=reid>{{cite journal|last1=Reid|first1=Fergal|last2=Harrigan|first2=Martin|title=An Analysis of Anonymity in the Bitcoin System|journal=Security and Privacy in Social Networks|date=2013|pages=197-223}}</ref> there is a possible attack<ref name=dep2p>{{cite journal|last1=Biryukov|first1=Alex|last2=Khovratovich|first2=Dmitry|last3=Pustogarov|first3=Ivan|title=Deanonymisation of clients in Bitcoin P2P network|journal=ACM Conference on Computer and Communications Security|date=2014|url=http://orbilu.uni.lu/handle/10993/18679}}</ref> which links user pseudonym to its [[IP address]], even if the peer is using [[Tor (anonymity network)|Tor]]. The attack makes use of Bitcoin mechanisms of relaying peer addresses and anti-[[DoS]] protection. The cost of the attack on the full Bitcoin network is under €1500 per month.<ref name="dep2p" /> |
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==In the media== |
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A bitcoin documentary film called ''The Rise and Rise of Bitcoin'' made its debut at the [[Tribeca Film Festival]] in New York on 23 April 2014, chronicling its origins to its explosive growth in 2013.<ref>{{cite news | url = http://newsbtc.com/2014/03/17/bitcoin-documentary-film-rise-rise-bitcoin-debut-tribeca-film-festival/ | title = Bitcoin Documentary Film ‘The Rise and Rise of Bitcoin’ To Debut at Tribeca Film Festival | date = 17 March 2014 | author = Eric Calouro | accessdate = 31 October 2014}}</ref> |
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Several lighthearted songs celebrating Bitcoin have been released.<ref>{{cite web | url=http://blogs.wsj.com/moneybeat/2014/02/18/bitbeat-mt-goxs-pyrrhic-victory/ | title = BitBeat: Mt. Gox’s Pyrrhic Victory | publisher = The Wall Street Journal | work = Money Beat | quote='Ode to Satoshi' is a bluegrass-style song with an old-timey feel that mixes references to Satoshi Nakamoto and blockchains (and, ahem, 'the fall of old Mt. Gox') with mandolin-picking and harmonicas. | date = 18 February 2014 | accessdate = 30 September 2014 | author = Paul Vigna}}</ref><ref>{{cite web|url= http://www.coindesk.com/bitcoin-song-commemorates-bitcoin-fever/|title=Bitcoin Song Commemorates a Year of Bitcoin Fever |publisher=Coin Desk|work= |date=31 December 2013 | accessdate=22 March 2014|author=Ashton, Danny}}</ref><ref>{{cite web|url= http://bitcoinexaminer.org/7-bitcoin-songs-to-listen-to-before-2013-is-over/ |
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| title=7 Bitcoin Songs to Listen to Before 2013 is Over |publisher=Bitcoin Examiner|work= |date=31 December 2013 | accessdate=22 March 2014|editor=Bonney, Jeremy}}</ref> Numerous U.S. comedians have made fun of "bitcoin confusion".<ref>{{cite news | title = Bitcoin confusion is comedy gold | author = Patrick Seitz | url = http://news.investors.com/technology-click/032114-694251-comedians-cannot-explain-bitcoin-but-think-it-is-funny.htm | accessdate = 5 September 2014 | work = Investors Business Daily, Tech News & Commentary | publisher = William O'Neil + Co. Incorporated | date = 21 March 2014}}</ref> |
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In Fall 2014, undergraduate students at the [[Massachusetts Institute of Technology]] (MIT) received $100 in bitcoins "to better understand this emerging technology". A student had the idea of a Bitcoin Club and raised more than half a million dollars from a MIT alum working in high-frequency trading.<ref name=MIT>{{cite news|last=Hern|first=Alex|title=MIT students to get $100 worth of bitcoin from Wall Street donor|url=http://www.theguardian.com/technology/2014/apr/29/mit-student-bitcoin-wall-street-donor|accessdate=1 May 2014|newspaper=The Guardian|date=30 April 2014}}</ref> |
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Some U.S. political candidates, including New York City Democratic Congressional candidate [[Jeff Kurzon]] have said they would accept campaign donations in bitcoin.<ref name="NY Congressional Candidate Jeff Kurzon is Now Taking Donations in Bitcoin">{{cite web | url = http://betabeat.com/2014/06/ny-congressional-candidate-jeff-kurzen-is-now-taking-donations-in-bitcoin | title = NY Congressional Candidate Jeff Kurzon | work = BetaBeat.com | publisher = [[The New York Observer]] | date = 3 June 2014 | accessdate = 4 June 2014 | author = Jack Smith IV}}</ref> |
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On September 17, 2014, [[Dynamite Entertainment]] became the first comic book publisher to accept bitcoin for purchases through their DRM-Free Digital Comic Store.<ref>{{cite web | url = http://www.bleedingcool.com/2014/09/17/dynamite-to-accept-bitcoin-for-digital-comic-sales-plus-25-books-for-10/ | title = Dynamite To Accept Bitcoin For Digital Comic Sales Plus 25 Books For $10 | date = 17 September 2014 | author = Dan Wickline | publisher = bleedingcool.com | accessdate = 2 November 2014}}</ref>{{third-party-inline|date=October 2014}} |
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==See also== |
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{{Div col}} |
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* [[Alternative currency]] |
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* [[Crypto-anarchism]] |
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* [[Private currency]] |
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* [[Digital currency]] |
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* [[Tidbit]] |
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{{Div col end}} |
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{{Portal bar|Cryptography|Economics|Free software|Internet|Numismatics}} |
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==Notes== |
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{{Reflist|group=note|30em}} |
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==References== |
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{{Reflist|30em}} |
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==External links== |
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{{Commons category|Bitcoin}} |
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{{Wiktionary}} |
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{{Wikibooks|Professionalism|BitTorrent and BitCoin}} |
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{{Wikibooks|Strategy for Information Markets|Micropayments}} |
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* [https://bitcoin.org/ Bitcoin.org] - unofficial website managed by Bitcoin core developers. |
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* {{Dmoz|Science/Social_Sciences/Economics/Financial_Economics/Currency_and_Money/Alternative_Monetary_Systems/Bitcoin}} |
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* [https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/bitcoin/v/bitcoin-what-is-it Bitcoin video series] at [[Khan Academy]] |
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* [http://cert.inteco.es/extfrontinteco/img/File/intecocert/EstudiosInformes/int_bitcoin_en.pdf Bitcoin: a cryptographic currency] Bitcoin, Instituto Nacional de Tecnologías de la Communicación (INTECO), Spain, or National Institute of Communication Technologies (undated, 47pp, in English). |
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* [http://nakamotoinstitute.org/origins-of-bitcoin/ On the Origins of Bitcoin: Stages of Monetary Evolution] |
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* [[Quandl]] - [https://www.quandl.com/c/markets/bitcoin-data Bitcoin currency data] - historical statistics in time series downloadable format. |
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{{Bitcoin}} |
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{{Cryptocurrencies}} |
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[[Category:2009 introductions]] |
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[[Category:2009 software]] |
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[[Category:Alternative currencies]] |
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[[Category:Application layer protocols]] |
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[[Category:Bitcoin]] |
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[[Category:Cryptocurrencies]] |
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[[Category:Decentralized Software]] |
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[[Category:Volunteer Computing]] |
Revision as of 22:01, 18 December 2014
Unit | |
---|---|
Symbol | BTC,[note 1] XBT,[note 2] [note 3] |
Denominations | |
Subunit | |
10−3 | millibitcoin |
10−6 | microbitcoin |
10−8 | satoshi[8] |
Symbol | |
millibitcoin | mBTC |
microbitcoin | μBTC |
Coins | unspent outputs of transactions denominated in any multiple of satoshis[7] |
Demographics | |
Date of introduction | 3 January 2009 |
User(s) | worldwide |
Issuance | |
Administration | decentralized[note 4] |
Valuation | |
Supply growth | 25 bitcoins per block (approximately every ten minutes) until mid 2016,[10] and then afterwards 12.5 bitcoins per block for 4 years until next halving. This halving continues until 2110-2140 when 21 million bitcoins have been issued. |
Bitcoin is a software-based online payment system described by Satoshi Nakamoto[note 5] in 2008[11] and introduced as open-source software in 2009.[12] A peer-to-peer client records transactions in a public ledger, which is shared between all running copies of the client, denominated in its own unit of account,[13] which is also called bitcoin.[note 6] Because of its lack of a central repository or single administrator, the US Treasury has called bitcoin a decentralized virtual currency.[9] Media reports often refer to bitcoin as a cryptocurrency or digital currency. The status of bitcoin as a real currency is disputed.[17] Bitcoin was the first cryptocurrency to be created, and most others are similar and derived from it. It is also the largest in terms of total market value.[18]
Bitcoins are created as a reward for processing work in which users offer their computing power to verify and record payments into the public ledger. This activity is called mining and is rewarded by transaction fees and newly created bitcoins.[19] Besides mining, bitcoins can be obtained in exchange for fiat money, products, and services.[20] Users can send and receive bitcoin electronically for an optional transaction fee[21] using wallet software on a personal computer, mobile device, a web application, or a specialized device called a hardware wallet.
Bitcoin as a form of payment for products and services has grown,[20] and merchants have an incentive to accept the digital currency because fees are lower than the 2–3% typically imposed by credit card processors.[22] The European Banking Authority has warned that bitcoin lacks consumer protections.[23] Unlike credit cards, any fees are paid by the purchaser, not the vendor. Bitcoin can be stolen,[24] and chargebacks are impossible.[19] As of July 2013, the commercial use of bitcoin was small compared to its use by speculators, which has contributed to price volatility.[25]
Bitcoins are sometimes used to purchase illicit items—including child pornography,[26] credit card details, and drugs—at deep web black markets and are seized by authorities when such sites are shut down. In June 2014, GQ journalist Marshall Sella concluded that what remained of the Silk Road black market site was one of the few places where you could purchase items for bitcoin.[27]
The United States is considered more bitcoin-friendly than some other governments.[28] At a 2013 US Senate hearing on virtual currencies, The Department of Justice "recognize[ed] that many virtual currency systems offer legitimate financial services." The sole Senator who attended the hearing, Tom Carper, expressed a desire to see an end to virtual currencies' facilitation of the sale of illicit goods and services saying, "[I'm] encouraged that maybe it's possible to have the benefits of virtual currencies and to actually be able to not facilitate [criminal activity]".[29] Developing countries are less receptive. For example, in China buying bitcoins with yuan is subject to restrictions, and bitcoin exchanges are not allowed to hold bank accounts.
Design
The most important part of the bitcoin system is a public ledger, called the block chain, that records transactions in bitcoins. A novel solution is that this is accomplished without the intermediation of any single, central authority, since the maintenance of the ledger is performed by a network of communicating nodes running bitcoin software that anyone can join.[19] 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 these transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes.[7]
The block chain
Bitcoin transactions are recorded in a public ledger called the block chain. The block chain is distributed; to independently verify the chain of ownership of any and every bitcoin amount, full-featured bitcoin software stores its own copy of it. Approximately six times per hour, a group of accepted transactions, a block, is added to the block chain, which is quickly published to all network nodes. This allows bitcoin software to determine when a particular bitcoin amount has been spent, which is necessary to prevent double-spending in an environment with no central authority. Whereas a conventional ledger records the transfers of actual bills or promissory notes that exist apart from it, the block chain is the only place that bitcoins can be said to exist in the form of unspent outputs of transactions.[7]
Units
The unit of account of the bitcoin system is bitcoin (BTC,[note 1] XBT,[note 2] or [note 3]).[13]
Bitcoin can be broken up into small fragments of 0.00000001 BTC, which is one hundred millionth of a bitcoin. This unit is called satoshi in homage to bitcoin's creator. Satoshi is the smallest, atomic fragment of bitcoin.[8]
There are also two other subunits of bitcoin, and those are called millibitcoin (mBTC) and microbitcoin (µBTC). One millibitcoin equals to 0.001 BTC, which is one thousandth of bitcoin, or 100,000 satoshis, or 1,000 µBTC.[7] One microbitcoin equals to 0.000001 BTC, which is one millionth of bitcoin, or 100 satoshis, or 0.001 mBTC. Microbitcoins are sometimes referred to as simply bits.[30]
In a press release issued 7 October 2014, the Bitcoin Foundation revealed a formal plan to apply for an ISO 4217 currency code for bitcoin.[1] The press release mentions BTC and XBT as the leading candidates.[31]
Ownership
For every transaction output the block chain registers the address to which the output is encumbered. To use the output in a future transaction, the payer must digitally sign the transaction using the corresponding private key. This prevents unauthorized transfers, since only the user knowing the private key can sign the transaction. Network can verify the signature using the public key.[7]
If the private key is lost, the bitcoin network will not recognize any other evidence of ownership;[19] the coins are then lost and cannot be recovered. For example, in 2013 one user said he lost 7,500 bitcoins, worth $7.5 million at the time, when he discarded a hard drive containing his private key.[32]
Transactions
A transaction must have one or more inputs. For the transaction to be valid, every input must be a digitally signed and previously unspent output of a previous transaction. The use of multiple inputs corresponds to the use of multiple coins in a cash transaction.
A transaction can also have multiple outputs, allowing one to make multiple payments in one go. A transaction output can be specified as an arbitrary multiple of satoshi.
Similarly as in a cash transaction, the sum of inputs (coins used to pay) can exceed the intended sum of payments. In such case, an additional output is used, returning the change back to the payer.[7]
Mining
Mining is a record-keeping service.[note 9] Miners keep the block chain consistent, complete, and unalterable by repeatedly verifying and collecting newly broadcast transactions into a new group of transactions called a block.
The new block must contain information that chains it to the previous block and gives the block chain its name. It is a cryptographic hash - bitcoin uses SHA-256 - of the previous block.
Finally, the new block must contain a so-called proof-of-work. The proof-of-work consists of a number called a difficulty target and a number called a nonce, which is jargon for "a number used only once". Miners have to find such a nonce that gives a hash of the new block smaller than the difficulty target. When the new block is created and distributed to the network, every network node can easily verify the proof.[7] On the other hand, finding the proof requires significant work, since for a secure cryptographic hash there is only one method to find the requisite nonce: miners try different integer values one at a time, e.g., 1, then 2, then 3, and so on until the requisite output is obtained. The fact that the hash of the new block is smaller than the difficulty target serves as a proof that this tedious work has been done, hence the proof-of-work name.
The smaller the target number, the longer on average it will take to find a requisite nonce, because the lower the probability that any particular value will produce a hash less than the target. The bitcoin system periodically (every 2016 blocks) adjusts the difficulty target so that the average time the entire network needs to find a nonce is about ten minutes. That way, as computer hardware gets faster over the years, the bitcoin protocol will simply adjust the mining target to make mining always last about ten minutes.[7] For example, at the end of April 2014 miners had to try 34,4 quintillion values at average before finding the requisite nonce, while at the end of October 2014 it was 154.6 quintillion values at average.
The proof-of-work together with the fact that the blocks are chained, makes modifications of the block chain extremely hard, because an attacker has to modify not just one block, but also the subsequent blocks, needing to outperform the combined power of the rest of the network, which continues adding new blocks to the original, honest version of the block chain.[35]
Supply
The successful miner finding the new block is rewarded with newly created bitcoins and transaction fees.[36] As of 2014, the reward amounts to 25 newly created bitcoins per block added to the block chain. To claim the reward, a special transaction called a coinbase is included with the processed payments.[7] All bitcoins in circulation can be traced back to such coinbase transactions. The bitcoin protocol specifies that the reward for adding a block will be halved approximately every four years. Eventually, the reward will be removed entirely when an arbitrary limit of 21 million bitcoins is reached c. 2140, and record keeping will then be rewarded by transaction fees solely.[37]
Paying a transaction fee is optional, but may speed up confirmation of the transaction.[38] Payers have an incentive to include such fees because doing so means their transaction will likely be added to the block chain sooner; miners can choose which transactions to process[21] and prefer to include those that pay fees. Fees are based on the size of the transaction generated, which in turn is dependent on the number of inputs used to create the transaction. Furthermore, priority is given to older unspent inputs.[39]
Wallets
Bitcoin client software called a bitcoin wallet allows a user to transact bitcoins. While wallets are often described as a place to hold[40] or store bitcoins,[41] due to the nature of the system, bitcoins are inseparable from the block chain transaction ledger. Perhaps a better way to describe a wallet is something that stores the digital credentials for your bitcoin holdings[41] 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.[42] A hash of the public key is a bitcoin address, and the private key can be thought of as ownership credentials to that address. At its most basic, a wallet is a collection of these keys. Most bitcoin wallets also include the ability to make transactions, however.
There are several types of implementations. So-called full nodes validate transactions and blocks they receive, and relay them to connected peers.[43] The first wallet program called Bitcoin-Qt was released in 2009 by Satoshi Nakamoto as open-source code.[43] It can be used as a desktop wallet for payments or as a server utility for merchants and other payment services. Bitcoin-Qt, also called Satoshi client, is sometimes referred to as the reference client because it serves to define the bitcoin protocol and acts as a standard for other implementations.[43] As of version 0.9, Bitcoin-Qt has been renamed Bitcoin Core to more accurately describe its role in the network.[44] Wallets for mobile devices ubiquitously use QR codes to simplify transactions.
In addition to software wallets, there are also Internet services called online wallets like Blockchain.info, Circle, or Coinbase, offering a similar functionality to their users. The advantage of online wallets is a combination of powerful functionality with ease of use.[45]
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,[46] wood,[47] or plastic. For those serious about security, storing private keys on paper printouts or in offline data storage devices is the best option.[41]
Hardware wallets are the result of the effort to combine paper wallet security with the convenience of online wallets. An example of such a wallet is Trezor (the word trezor is a Slavic equivalent for vault).[48]
Privacy
In traditional banking system, privacy of users is guaranteed by Right to Financial Privacy Act, and it is achieved by limiting access to information to the parties involved and to the trusted third party.
In the bitcoin system privacy is achieved by not identifying owners of bitcoin addresses while making other transaction data public. While bitcoin users are not identified by name, transactions can be linked to individuals and companies,[49] since transactions are viewable by everyone. Additionally, exchanges where people buy and sell bitcoins for cash, may be required to collect personal information.[50] To maintain financial privacy, a different bitcoin address for each transaction should be used,[51] but multi-input transactions reveal that all their inputs belong to the same owner. That is why users concerned about privacy rely on so-called mixing services that allow users to trade the coins they own for coins with different transaction histories.[52]
Comparing privacy levels, it has been suggested that bitcoin payments should not be considered more private than credit card payments.[53]
Fungibility
Fungibility of fiat money is established by the legal tender law. In case of bitcoin no law establishes it is fungible. Wallets and similar software technically handle bitcoins as equivalent, establishing the basic level of fungibility to bitcoin. Researchers point out, however, that the history of every single bitcoin is registered and publicly available in the block chain ledger, and that some users may refuse to accept bitcoins coming from controversial transactions, which would harm their fungibility.[54]
History
Bitcoin was first mentioned in a research paper published on 31 October 2008 under the name Satoshi Nakamoto[note 5] and released in January 2009.[11]
One of the first supporters, adopters, contributor to bitcoin and receiver of the first bitcoin transaction was a cryptographer, cypherpunk, futurist and programmer Hal Finney. Finney "downloaded the bitcoin software the day it was released", and Nakamoto sent Finney 10 bitcoins the day after that.[55]
Other early supporters were Wei Dai, creator of bitcoin predecessor b-money, and Nick Szabo, creator of bitcoin predecessor bit gold.[56]
In 2009, an exploit in an early bitcoin client was found that allowed large numbers of bitcoins to be created.[57]
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.[57]
Some mainstream websites began accepting bitcoins c. 2013. WordPress started in November 2012,[58] followed by OKCupid in April 2013,[59] Atomic Mall in November 2013,[60] TigerDirect[61] and Overstock.com in January 2014,[62] Expedia in June 2014,[63] and Newegg and Dell in July 2014.[64][note 10] Certain non-profit or advocacy groups such as the Electronic Frontier Foundation accept bitcoin donations.[66] (The organization started accepting bitcoins in January 2011,[67] stopped accepting them in June 2011,[68] and began again in May 2013.[66])
The first law enforcement events occurred in May 2013, when assets belonging to the Mt. Gox exchange were seized by Department of Homeland Security.[69] The Silk Road drug market website was shut down by the U.S. Federal Bureau of Investigation (FBI) in October 2013.[70]
In October 2013, Chinese internet giant Baidu had allowed clients of website security services to pay with bitcoins.[71] 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.[72] 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 by the FBI that virtual currencies are a legitimate financial service.[73] On the same day, one bitcoin traded for over RMB¥6780 (US$1,100) in China.[74] On 5 December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoins.[75] After the announcement, the value of bitcoins dropped,[76] and Baidu no longer accepted bitcoins for certain services.[77] Buying real-world goods with any virtual currency had been illegal in China since at least 2009.[78]
The first bitcoin ATM was installed in October 2013 in Vancouver, British Columbia, Canada.[79]
With roughly 12 million existing bitcoins in November 2013,[80] the new price increased the market cap for bitcoin to at least US$7.2 billion.[81] By 23 November 2013, the total market capitalization of bitcoin exceeded US$10 billion for the first time.[82]
In the United States 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.[83]
In early February 2014, one of the largest bitcoin exchanges, Mt. Gox,[84] suspended withdrawals citing technical issues.[85] By the end of the month, Mt. Gox had filed for bankruptcy protection in Japan amid reports that 744,000 bitcoins had been stolen.[86] Originally a site for trading Magic: The Gathering cards,[87] Mt. Gox once was the dominant bitcoin exchange although prior to the collapse its popularity had waned due largely to users having difficulty withdrawing funds.[88]
Etymology
The word bitcoin is a compound of the words bit (being itself a compound of the words binary and digit) and coin (originally meaning wedge, stamp, corner). The white paper referring to bitcoin frequently uses just the short coin.[11]
Economics
Classification
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".[17] Despite this, bitcoin is commonly referred to with terms like: digital currency,[19] digital cash,[89] virtual currency,[8] electronic currency,[14] or cryptocurrency.[17] Some media outlets do make a distinction between "real" money and bitcoins, however.[90]
Economists defining money as a store of value, a medium of exchange, and a unit of account agree that bitcoin has some way to go to meet all these criteria.[91] It does best as a medium of exchange.[91] (About 1,000 bricks and mortar businesses were willing to accept payment in bitcoins as of November 2013[92] in addition to more than 35,000 online merchants.[note 11]) The bitcoin market currently suffers from volatility, limiting the ability of bitcoins to act as a stable store of value,[91] and, although bitcoin is the unit of account for the block chain, it 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.[91] Even in online black markets, prices are stated in local currency although purchases are often made with bitcoins.[95]
Various government agencies, departments, and courts have classified bitcoins differently. Both the U.S. Treasury[9] and the European Central Bank[96]: 6 classify bitcoin as a virtual currency. The People's Bank of China has stated that bitcoin "is fundamentally not a currency but an investment target".[97] Magistrate Judge Amos L. Mazzant of a Texas court classified bitcoins as a currency.[98] A German court found bitcoin to be a unit of account.[13] The Finnish government judged it to be a commodity.[99]
Journalists and academics likewise lack unanimous agreement on what to call bitcoin. The Wall Street Journal declared it a commodity in December 2013.[100] A Forbes journalist referred to it as digital collectible.[101] 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".[102]
Buying and selling
Bitcoins can be bought and sold with many different currencies from individuals and companies. Bitcoins may be purchased in person[103] or at a bitcoin ATM in exchange for cash currency.[104] Participants in online exchanges offer bitcoin buy and sell bids. Using an online exchange to obtain bitcoins entails some risk, and, according to a study published in April 2013, 45% of exchanges fail and take client bitcoins with them.[105] Since bitcoin transactions are irreversible, sellers of bitcoins must take extra measures to ensure they have received traditional funds from the buyer.
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.[106]
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 eighteen times greater than the U.S. dollar.[107]
Attempting to explain the high volatility, a group of Japanese scholars states that there is no stabilization mechanism.[108] The Bitcoin Foundation contends that high volatility is due to insufficient liquidity,[109] while a Forbes journalist claims that it is related to the uncertainty of its long-term value,[110] and the high volatility of a startup currency makes sense, "because people are still experimenting with the currency to figure out how useful it is."[111]
There are uses where volatility does not matter, such as online gambling, tipping, and international remittances.[111] 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.[106] According to Radoslav Albrecht, charts of the past volatility reveal a tendency of bitcoin volatility to decline.[112]
The price of bitcoins has gone through various cycles of appreciation and depreciation referred to by some as bubbles and busts.[113][114] In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2.[115] In the latter half of 2012 and during the 2012-2013 Cypriot Financial Crisis, the bitcoin price began to rise,[116] reaching a high of US$266 on 10 April 2013, before crashing to around US$50.[117] On November 29, 2013, the cost of one bitcoin rose to the all-time peak of US$1,242.[118] In 2014 the price fell sharply, and as of April remained depressed at little more than half 2013 prices. As of August 2014 it is under US$600.[119] The Washington Post pointed out that the observed cycles of appreciation and depreciation don't correspond to the definition of speculative bubble.[115]
Speculative bubble dispute
Bitcoin has been labelled a speculative bubble by many including former Fed Chairman Alan Greenspan[120] and economist John Quiggin.[121]
Nobel Laureate Robert Shiller said that bitcoin "exhibited many of the characteristics of a speculative bubble".[122]
Two lead software developers of bitcoin, Gavin Andresen[123] and Mike Hearn,[124] have warned that bubbles may occur.
David Andolfatto, a Vice President at the Federal Reserve Bank of St. Louis, stated: "Is bitcoin a bubble? Yes, if bubble is defined as a liquidity premium." According to Andolfatto, most assets likely have a "bubble" component to their price, e.g., gold.[34]
Business Insider analyst Matthew Boesler rejects the speculative bubble label and sees bitcoin's quick rise in price as nothing more than normal economic forces at work.[125]
Ponzi scheme dispute
A 2012 report by the European Central Bank had stated, "it [is not] easy to assess whether or not the bitcoin system actually works like a pyramid or Ponzi scheme."[96]: 27 A 2014 report by the World Bank states: "Contrary to a widely-held opinion, bitcoin is not a deliberate Ponzi".[126] In the opinion of Eric Posner, a law professor at the University of Chicago "A real Ponzi scheme takes fraud; bitcoin, by contrast, seems more like a collective delusion."[127] U.S. economist Nouriel Roubini, former senior adviser to the U.S. Treasury and the International Monetary Fund, has stated: "Bitcoin Is A Ponzi Game".[128] In February 2014 an asset-manager and columnist for The New York Post called bitcoin a Ponzi scheme opining: "Welcome to 21st-century Ponzi scheme: Bitcoin".[129] The head of the Estonian central bank, Mihkel Nommela stated: "virtual currency schemes are an innovation that deserves some caution, given the lack of ... evidence that this isn’t just a Ponzi scheme."[130] The Huffington Post questioned: "Is Bitcoin a Ponzi scheme, yes or no?", and answered the question "No!".[131] The PC World stated: "bitcoin is clearly not a Ponzi scheme".[132] Economist Jeffrey Tucker published the opinion: "There are several key differences between a Ponzi scheme and bitcoin."[133] A 2014 report by Federal Council (Switzerland) states: "the question is repeatedly raised whether bitcoin can be deemed an impermissible pyramid scheme... Since in the case of bitcoin the typical promises of profits are lacking, it cannot be assumed that bitcoin is a pyramid scheme."[134]: 21
Value forecasts
Financial journalists and analysts, economists, and investors have attempted to predict the possible future value of bitcoin. In April 2013, economist John Quiggin stated, "bitcoins will attain their true value of zero sooner or later, but it is impossible to say when".[121] A similar forecast was made in November 2014 by economist Kevin Dowd.[135] In November 2014, David Yermack, Professor of finance at NYU Stern School of Business forecast that in November 2015 bitcoin may be all but worthless."[136] In December 2013, finance professor Mark T. Williams forecast a bitcoin would be worth less than ten U.S. dollars by July 2014.[137] In the indicated period bitcoin has exchanged as low as $344 (April 2014) and during July 2014 the bitcoin low has been $609.[note 8][138] In December 2014 professor Williams said: "The probability of success is low, but if it does hit, the reward will be very large."[139] In May 2013, Bank of America FX and Rate Strategist David Woo forecast a maximum fair value per bitcoin of $1,300.[140] Bitcoin investor Cameron Winklevoss stated in December 2013 that the "[s]mall bull case scenario for bitcoin is... 40,000 USD a coin".[141]
Reception
Some economists have responded positively to bitcoin, but many have not. François R. Velde, Senior Economist at the Chicago Fed described it as "an elegant solution to the problem of creating a digital currency".[142] According to Wired "in the estimation of many leading economists, bitcoin is a fatally flawed idea shaped by people who don’t really understand how money works".[143] 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 its value.[144] Economist John Quiggin has criticized bitcoin as "the final refutation of the efficient-market hypothesis".[121]
David Andolfatto, 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.[34][145][146]
Free software movement activist Richard Stallman has criticized the lack of anonymity and called for reformed development.[147] 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.[148] Bill Gates, in relation to the cost of moving money from place to place in an interview for Bloomberg L.P. stated: "Bitcoin is exciting because it shows how cheap it can be."[149]
Similarly, Peter Schiff, a bitcoin sceptic understands "the value of the technology as a payment platform" and his Euro Pacific Precious Metals fund partnered with BitPay in May 2014, because “a wire transfer of fiat funds can be slow and expensive for the customer”.[150] Schiff sees bitcoin more as a payment method rather than a currency.
Kevin Dowd, professor of finance and economics at Durham University has a bearish outlook on bitcoin as a currency. At the Cato Institute’s 2014 Annual Conference with the topic 'Alternatives to Central Banking: Toward Free-Market Money'[151] he said "bitcoin’s current incentive structure [is] leading to an inevitable collapse, mostly due to the centralization of mining".[152]
Acceptance by merchants
As of August 2014 established firms that accept payments in bitcoin include Atomic Mall,[60] Clearly Canadian,[153] Dell,[154] Dish Network, Expedia,[155] Newegg,[156] PrivateFly,[157] Overstock.com,[62] the Sacramento Kings,[158] TigerDirect,[61] Virgin Galactic,[159] and Zynga.[160][note 10]
Due to the fact that chargebacks are impossible, retailers usually offer in-store credit as the only option when returning items purchased with bitcoins.[161]
In late 2013 the University of Nicosia became the first university in the world to accept bitcoins.[162]
As of 30 July 2014 the Wikimedia Foundation, hoster of Wikipedia, offers the possibility of making donations to it in bitcoin (through Coinbase) on their donations page.[163] As of 22 September 2014 Greenpeace offers the possibility of making donations to it in bitcoin (through Bitpay).[164] As of 20 November 2014 the Mozilla Foundation accepts bitcoin donations via Coinbase.[165]
As of 23 September 2014 PayPal offers its North American merchants the possibility to receive customer payments for digital goods in bitcoin.[166]
As of 11 December 2014, Microsoft accepts bitcoin from U.S. customers to fund a Microsoft Account, which can be used to digitally purchase XBox content and Windows apps.[167]
As of 16 December 2014, Time Inc. announced that consumers can now use bitcoin to buy subscriptions of its magazines.[168]
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.[169] According to a co-founder (Antonio Gallippi) of one such company, BitPay, "banks are scared to deal with bitcoin companies, even if they really want to".[169] 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".[170] In June 2014, the first bank that converts deposits in currencies instantly to bitcoin without any fees, for further transactions, was opened in Boston.[171]
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.[106]
A June 2014 U.S. government auction of almost 30,000 bitcoins, which the U.S. Marshals Service seized October 2013 from Silk Road was said to increase legitimacy of the currency. The 45 registered bidders, each of whom put down a deposit of $200,000 made 63 bids.[172]
According to David Andolfatto, a Vice President at the Federal Reserve Bank of St. Louis, bitcoin "Will force traditional institutions to adapt or die."[34]
Mining pools
As of 2013 mining had become quite competitive, has been compared to an arms race and 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.[177] 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.[178]
The individual odds of winning the reward for adding a block to the block chain decrease with an increasing number of miners. As of 2014, it has become common for miners to join organized mining pools.[179] A pool splits the work between its members and has a much larger chance to win the reward. The reward is then split between the members creating a steady stream of income.[180] Even for those who join pools, the cost of the electricity necessary to mine may outweigh the rewards from doing so.[178]
As investment
One way of investing in bitcoins is to buy and hold them as a long-term investment.[181] The Financial Industry Regulatory Authority (FINRA), a United States self-regulatory organization,[182] and the European Banking Authority[23] warned that investing in bitcoins carries significant risks. Risk hasn't deterred some such as the Winklevoss twins, who in April 2013 claimed they owned nearly 1% of all bitcoins in existence at the time[183] and have since attempted to launch a bitcoin ETF.[25] The first regulated bitcoin fund was established in Jersey in July 2014, with the approval of the Jersey Financial Services Commission.[184] Other investors, like Peter Thiel's Founders Fund, which invested US$3 million in BitPay, do not purchase bitcoins themselves, instead funding bitcoin infrastructure like companies that provide payment systems to merchants, exchanges, wallet services, etc.[185] 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,[186] at the time called 'mystery buyer'.[172] The company's goal is to fund 100 bitcoin businesses within 2–3 years with $10,000 to $20,000 for a 6% stake.[186] Investors also invest in bitcoin mining.[187]
Hedge against financial crises
Bitcoins have been used by some Argentinians to protect their savings against high inflation or the possibility that governments could confiscate savings accounts[50] because the Argentine peso[188] is stymied by inflation and strict capital controls. During the 2012–2013 Cypriot financial crisis, bitcoin purchases rose due to fears that savings accounts would be confiscated or taxed.[189]
Political economy
Bitcoin appeals to tech-savvy libertarians, because it so far exists outside of the institutional banking system and the control of governments.[190] Its appeal reaches from left wing critics, "who perceive the state and banking sector as representing the same elite interests, [...] recognising in it the potential for collective direct democratic governance of currency"[191] and socialists proposing their "own states, complete with currencies",[192] to right wing critics suspicious of big government, at a time when activities within the regulated banking system were responsible for the severity of the financial crisis of 2007–08,[193] "because governments are not fully living up to the responsibility that comes with state-sponsored money".[194] Bitcoin has been described as "remov[ing] the imbalance between the big boys of finance and the disenfranchised little man, potentially allowing early adopters to negotiate favourable rates on exchanges and transfers – something that only the very biggest firms have traditionally enjoyed".[195]
Legal status and regulation
Few governments have moved to regulate bitcoin and similar private currencies. According to the European Central Bank, traditional financial sector regulation is not applicable because bitcoin does not involve traditional financial actors.[96]: 5 Under other regimes, existing rules have been extended to include bitcoin and bitcoin companies. As of 2014, Bitcoin is illegal only in two countries: Vietnam, where trading in Bitcoin and "other electronic currencies" is against the law and not allowed, and Iceland, whose central bank throttles incoming bitcoins to restrict money flow abroad.[196] The flourishing bitcoin mining business in Iceland[197] is not affected by this rule.[198] Steven Strauss, a Harvard public policy professor, suggested in April 2013 that governments could outlaw bitcoin,[199] a possibility that was mentioned in a 2013 U.S. Securities and Exchange Commission (SEC) filing made by a bitcoin investment vehicle.[25] A detailed survey of forty foreign jurisdictions and the European Union is maintained by the U.S. Library of Congress.[13]
China
On 5 December 2013, China Central Bank made its first step in regulating bitcoin by prohibiting financial institutions to handle bitcoin transactions.[200] In a statement on the central bank’s website the People's Bank of China said financial institutions and payment companies cannot give pricing in, buy and sell bitcoin or insure bitcoin-linked products. A December 2013 statement from BTC China suggested payment processors had voluntarily withdrawn their services.[201] On 1 April 2014 China Central Bank ordered commercial banks and payment companies to close bitcoin trading accounts in two weeks.[202] Trading bitcoins by individuals is legal in China.[200]
European Union
In July 2014 the European Banking Authority advised European banks not to deal in virtual currencies such as bitcoin until a regulatory regime was in place.[203]
G7
The 2013 G7's Financial Action Task Force published guidance for Internet-based payment services that defines "exchangers buying or selling digital currency for cash (or other digital currencies) [...] as a virtual bureau de change" and warns that "Internet-based payment services that allow third party funding from anonymous sources may face an increased risk of [money laundering/terrorist financing]" concluding that this may "pose challenges to countries in [anti-money laundering/counter terrorist financing] regulation and supervision".[204]
United States
The U.S. Government Accountability Office (GAO) reviewed virtual currencies upon the request of the Senate Finance Committee and in May 2013 recommended[205] that the Internal Revenue Service (IRS) formulate tax guidance for bitcoin businesses. On 25 March 2014, in time for 2013 tax filing, the IRS issued a guidance that virtual currency is treated as property for U.S. federal tax purposes and that "an individual who 'mines' virtual currency as a trade or business [is] subject to self-employment tax".[206]
On 18 November 2013, the United States Senate held a committee hearing titled Beyond Silk Road: Potential Risks, Threats and Promises of Virtual Currencies to discuss virtual currencies.[207] At this hearing, held by senator Tom Carper, bitcoin and other currencies were received generally positively, with it being stated that bitcoin was a "legal means of exchange" and that "online payment systems, both centralized and decentralized, offer legitimate financial services" by US officials such as Peter Kadzik and Mythili Raman.[80][208]
The FEC deadlocked on Nov 21, 2013 on whether to allow bitcoin in political campaigns.[209] Their decision was split across party lines (three members Democrat voting nay, three Republicans voting yea). While their decision covered group donations, political bitcoin pioneers New Hampshire House member Mark Warden[210] and Southern California politician Michael B. Glenn[211] acted independently in accepting bitcoin, and paved the way for others to follow suit.
In January 2014, the U.S. Securities and Exchange Commission (SEC) was focused on whether bitcoin-denominated stock exchanges were illegal, per its enforcement administrator, and inquired into the gambling site SatoshiDice listing shares on bitcoin exchange MPEx.[212] In May it warned investors that "both fraudsters and promoters of high-risk investment schemes may target bitcoin users".[213] The SEC charged and settled with the former owner of SatoshiDice in June 2014 for selling securities without registering with the SEC.[214]
The U.S. Commodity Futures Trading Commission stated in March 2014 it was considering regulation of digital currencies.[215]
On 8 May 2014, the U.S. Federal Election Commission issued draft guidance to U.S. politicians who want to receive bitcoin donations.[216] The Commission declined to declare bitcoins currency, stating they fit into its "anything of value" definition.[217] Also that month, Brett Stapper, co-founder of Falcon Global Capital, registered to lobby members of Congress and federal agencies on issues related to bitcoin.[218]
In June 2014 California Assemblyman Roger Dickinson (D–Sacramento) submitted draft legislation (Assembly Bill 129) to legalize bitcoin and all other forms of alternative and digital currency.[219] After the GAO had called for increased oversight of bitcoin, the Consumer Financial Protection Bureau warned consumers of bitcoin being risky.[220]
As of November 2014, there are no final rules at the U.S. state level yet. In March, the New York State Department of Financial Services led by superintendent Benjamin Lawsky had officially invited bitcoin exchanges to apply with them,[221] and on 17 July it published draft regulations for virtual currency businesses.[222] Businesses would have to provide transaction receipts, disclosures about risks, policies to handle customer complaints, maintain a cybersecurity program, hire a compliance officer and verify details about their customers to follow anti-money-laundering rules, per FinCEN.[222]
Criminal activity
Bitcoins have been associated with online criminal behavior and cybercriminals.[223] Used to obfuscate online transactions, bitcoins are seized when deep web black markets are shut by authorities.[224] Criminal activities have stigmatized the currency[27][note 15] and attracted the attention of financial regulators, legislative bodies, and law enforcement.[225]
Many major news organizations have linked bitcoins to criminality. CNN has referred to bitcoin as a "shady online currency [that is] starting to gain legitimacy in certain parts of the world",[226] and The Washington Post calls it "the currency of choice for seedy online activities".[227] The Sacramento Bee says that "bitcoins are the currency of choice" in "underground networks where marketing in contraband is common".[228] The BBC states, "bitcoin is often the virtual currency of choice" for "sites selling drugs".[229] The London Evening Standard says, "it’s true that bitcoins are the currency of choice for ‘dark’ websites... through which users can buy drugs."[230]
The FBI stated in a 2012 report that "bitcoin will likely continue to attract cyber-criminals who view it as a means to move or steal funds".[223] A working paper written by researchers at the University of Kentucky concludes that its authors found "robust evidence that computer programming enthusiasts and illegal activity drive interest in Bitcoin".[231] Criminal activity involving bitcoin has largely centered around theft, money laundering, the use of botnets for mining, and the use of bitcoins in exchange for illegal items or services. "Like cash, it can be used for ill as well as for good."[19] Certain nation states may feel that its use in circumventing capital controls is also undesirable.[28] Despite claims made by non-profit Bitcoin Foundation that "cryptography is the reason no one can steal bitcoins,"[232] there have been many cases of bitcoin theft.[42]
Theft
There have been many cases of bitcoin theft.[42] The non-profit Bitcoin Foundation maintains that "cryptography is the reason no one can steal bitcoins."[232]
Many high-profile thefts have been reported. In late November 2013, an estimated $100 million in bitcoins were stolen from the online illicit goods marketplace Sheep Marketplace, which immediately closed.[233] Users tracked the coins as they were processed and converted to cash, but no funds were recovered and no culprits identified.[233] A different black market, Silk Road 2, stated that during a February 2014 hack bitcoins valued at $2.7 million were taken from escrow accounts.[234] In late February 2014 Mt. Gox, one of the largest virtual currency exchanges, filed for bankruptcy in Tokyo amid reports that 744,000 bitcoins had been stolen.[86] Flexcoin, a bitcoin storage specialist based in Alberta, Canada, shut down on March 2014 after saying it discovered a theft of about $650,000 in bitcoins.[235] Poloniex, a digital currency exchange, reported on March 2014 that it lost bitcoins valued at around $50,000.[236]
One way theft is accomplished involves a thief infiltrating an online wallet service.[237] One way to steal bitcoins is to transfer them from the victim's bitcoin address using a stolen private key to sign the transaction.[238] If the private key is stolen, the thief can use it to transfer all the bitcoins from the compromised address to another address of his own. In that case, the network does not have any provision to identify the thief, to block further transactions of those stolen bitcoins, or return them to the legitimate owner.[25][239]
Black markets
Because of their presumed capacity to obfuscate the source of payments in online transactions and bypass money transfer controls by governments and law enforcement agencies, bitcoin have come to be used in the deep web black markets.[240] In 2012, it was estimated that 4.5% to 9% of all transactions of all bitcoin exchanges in the world were for drug trades on a single deep web drugs market, Silk Road.[241] The bulk of bitcoin purchases during the time were speculative in nature,[241] so drugs must have constituted a greater percentage of the actual goods purchased with bitcoins c. 2012.[according to whom?]
Several deep web black markets where vendors sell illegal items for bitcoins have been shut by authorities. In October 2013 one such market, Silk Road, was shut down by U.S. law enforcement[224][240][242] leading to a short-term fall in the value of bitcoin.[243] Alternative sites were soon available, and in early 2014 the Australian Broadcasting Corporation reported that the closure of the Silk Road had little impact on the number of Australians selling drugs online, which had actually increased.[244] In early 2014, Dutch authorities closed Utopia, an online illegal goods market, and seized 900 bitcoins.[245] In late 2014, a joint police operation saw European and American authorities seize bitcoins and close 400 deep web sites including the illicit goods market Silk Road 2.0.[246]
Several news outlets have asserted that the popularity of bitcoins hinges on the ability to use them to purchase illegal goods.[247][248] Non-drug transactions were thought to be far less than the number involved in the purchase of drugs,[249] and roughly one half of all transactions made using bitcoin c. 2013 were bets placed at a single online gambling website, Satoshi Dice.[250] One source stated online gun dealers use bitcoin to sell arms without background checks.[251] The bitcoin community branded one site, Sheep Marketplace, as a scam when it prevented withdrawals and shut down after an alleged bitcoins theft.[252] In a separate case, escrow accounts with bitcoins belonging to patrons of a different black market were hacked in early 2014.[234]
Money laundering
Bitcoins may not be ideal for money laundering because all transactions are public.[253] Authorities have expressed concerns, however. The European Banking Authority[23] and the FBI[223] have both stated that bitcoin may be used for money laundering. In early 2014, an operator of a U.S. bitcoin exchange was arrested for money laundering.[83]
Ponzi scheme using bitcoins
In a Ponzi scheme that utilized bitcoins, The Bitcoin Savings and Trust promised investors up to 7 percent weekly interest, and raised at least 700,000 bitcoins from 2011 to 2012.[254] In July 2013 the U.S. Securities and Exchange Commission charged the company and its founder in 2013 "with defrauding investors in a Ponzi scheme involving bitcoin".[254] In September 2014 the judge fined Bitcoin Savings & Trust and its owner $40 Million for operating a bitcoin Ponzi scheme.[255]
Malware
Bitcoin-related malware includes software that steals bitcoins from users using a variety of techniques, software that uses infected computers to mine bitcoins, and different types of ransomware, which disable computers or prevent files from being accessed until some payment is made. Security company Dell SecureWorks said in February 2014 that it had identified 146 types of bitcoin malware; about half of it undetectable with standard antivirus scanners.[256]
Unauthorized mining
In June 2011, Symantec warned about the possibility that botnets could mine covertly for bitcoins.[257] Malware used the parallel processing capabilities of GPUs built into many modern video cards.[258] Although the average PC with an integrated graphics processor is virtually useless for bitcoin mining, tens of thousands of PCs laden with mining malware could produce some results.[259]
In mid-August 2011, bitcoin mining botnets were detected,[260] and less than three months later, bitcoin mining trojans had infected Mac OS X.[261]
In April 2013, electronic sports organization E-Sports Entertainment was accused of hijacking 14,000 computers to mine bitcoins; the company later settled the case with the State of New Jersey.[262]
German police arrested two people in December 2013 who customized existing botnet software to perform bitcoin mining, which police said had been used to mine at least $950,000 worth of bitcoins.[263]
For four days in December 2013 and January 2014, Yahoo! Europe hosted an ad containing bitcoin mining malware that infected an estimated two million computers.[259] The software, called Sefnit, was first detected in mid-2013 and has been bundled with many software packages. Microsoft has been removing the malware through its Microsoft Security Essentials and other security software since January 2014.[264]
Several reports of employees or students using university or research computers to mine bitcoins have been published.[265][266]
Malware stealing bitcoins
Some malware can steal private keys for bitcoin wallets allowing the bitcoins themselves to be stolen. The most common type searches computers for cryptocurrency wallets to upload to a remote server where they can be cracked and their coins stolen.[256] Many of these also log keystrokes to record passwords, often avoiding the need to crack the keys.[256] A different approach detects when a bitcoin address is copied to a clipboard and quickly replaces it with a different address, tricking people into sending bitcoins to the wrong address.[256] This method is effective because bitcoin transactions are irreversible.
One virus, spread through the Pony botnet, was reported in February 2014 to have stolen up to $220,000 in cryptocurrencies including 335 bitcoins from 85 wallets.[267] Security company Trustwave, which tracked the malware, reports that its latest version was able to steal 30 types of digital currency.[268]
A type Mac malware active in August 2013, Bitvanity posed as a vanity wallet address generator and stole addresses and private keys from other bitcoin client software.[269] A different trojan for Mac OS X, called CoinThief was reported in February 2014 to be responsible for multiple bitcoin thefts, including one user who lost 20 bitcoins.[269] The software was hidden in versions of some cryptocurrency apps on Download.com and MacUpdate.[269]
Ransomware
Another type of bitcoin-related malware is ransomware. One program called Cryptolocker, typically spread through legitimate-looking email attachments, encrypts the hard drive of an infected computer, then displays a countdown timer and demands a ransom, usually two bitcoins, to decrypt it.[270] Massachusetts police said they paid a 2 bitcoin ransom in November 2013, worth more than $1,300 at the time, to decrypt one of their hard drives.[271] Linkup, a combination ransomware and bitcoin mining program that surfaced in February 2014, disables internet access and demands credit card information to restore it, while secretly mining bitcoins.[270]
Security
Various potential attacks on the bitcoin network and its use as a payment system, real or theoretical, have been considered. The bitcoin protocol includes several features that protect it against some of those attacks, such as unauthorized spending, double spending, forging bitcoins, and tampering with the block chain.[35] Other attacks, such as theft of private keys, require due care by users.
Unauthorized spending
When Alice sends a bitcoin to Bob, Bob becomes the new owner of the bitcoin. Eve observing the transaction might want to spend the bitcoin Bob just received, but she cannot sign the transaction without the knowledge of Bob's private key.[19]
Double spending
A specific problem that an internet payment system must solve is double-spending, whereby a user pays the same coin to two or more different recipients. An example of such a problem would be if Eve sent a bitcoin to Alice and later sent the same bitcoin to Bob. The bitcoin network guards against double-spending by recording all bitcoin transfers in a ledger (the block chain) that is visible to all users, and ensuring for all transferred bitcoins that they haven't been previously spent.[19]
Race attack
If Eve offers to pay Alice a bitcoin in exchange for goods and signs a corresponding transaction, it is still possible that she also creates a different transaction at the same time sending the same bitcoin to Bob. By the rules, the network accepts only one of the transactions. This is called race attack, since there is a race which transaction will be accepted first. Alice can reduce the risk of race attack stipulating that she will not deliver the goods until Eve's payment to Alice appears in the block chain.[272]
A variant race attack (which has been called a Finney attack by reference to Hal Finney) requires the participation of a miner. Instead of sending both payment requests (to pay Bob and Alice with the same coins) to the network, Eve issues only Alice's payment request to the network, while the accomplice tries to mine a block that includes the payment to Bob instead of Alice. There is a positive probability that the rogue miner will succeed before the network, in which case the payment to Alice will be rejected. As with the plain double-spending attack, Alice can reduce the risk of a Finney attack by waiting for the payment to be included in the block chain.[273]
History modification
The other principal way to steal bitcoins would be to modify block chain ledger entries.
For example, Eve could buy something from Alice, like a sofa, by adding a signed entry to the block chain ledger equivalent to Eve pays Alice 100 bitcoins. Later, after receiving the sofa, Eve could modify that block chain ledger entry to read instead: Eve pays Alice 1 bitcoin, or replace Alice's address by another of Eve's addresses. Digital signatures cannot prevent this attack: Eve can simply sign her entry again after modifying it.
To prevent modification attacks, each block of transactions that is added to the block chain includes a cryptographic hash code that is computed from the hash of the previous block as well as all the information in the block itself. When the bitcoin software notices two competing block chains, it will automatically assume that the longer one is the valid one. Therefore, in order to modify an already recorded transaction (as in the above example), the attacker would have to recalculate not just the modified block, but all the blocks after the modified one, until the modified chain is longer than the legitimate chain that the rest of the network has been building in the meantime. Consequently, for this attack to succeed, the attacker must outperform the honest part of the network.[35]
Each block that is added to the block chain, starting with the block containing a given transaction, is called a confirmation of that transaction. Ideally, merchants and services that receive payment in bitcoin should wait for at least one confirmation to be distributed over the network, before assuming that the payment was done. The more confirmations that the merchant waits for, the more difficult it is for an attacker to successfully reverse the transaction in a block chain—unless the attacker controls more than half the total network power, in which case it is called a 51% attack.[274] For example, if the attacker possesses 10% of the calculation power of the bitcoin network and the shop requires 6 confirmations for a successful transaction, the probability of success of such an attack will be 0.02428%.[11]
Selfish mining
This attack was first introduced by Ittay Eyal and Emin Gun Sirer at the beginning of November 2013.[275] The attacker does not normally broadcast the blocks upon finding them. He mines his private chain and eventually (when somebody finds his own block) publishes several blocks at row. This makes the "honest" network abandon their last work and switch to the attacker's branch. As a result, honest miners lose a significant part of their revenue, whilst the attacker increases profits due to changes in relative hashpowers.
According to the authors it changes the incentives for rational miners and makes them want to join the attacker's pool, increasing attacker's hashpower (which could potentially lead to 51% attack).
However, other researchers disagree with the conclusion and point out the flaws in the article.[276]
Deanonymisation of clients
Along with transaction graph analysis, which may reveal connections between Bitcoin addresses (pseudonyms),[10][277] there is a possible attack[278] which links user pseudonym to its IP address, even if the peer is using Tor. The attack makes use of Bitcoin mechanisms of relaying peer addresses and anti-DoS protection. The cost of the attack on the full Bitcoin network is under €1500 per month.[278]
In the media
A bitcoin documentary film called The Rise and Rise of Bitcoin made its debut at the Tribeca Film Festival in New York on 23 April 2014, chronicling its origins to its explosive growth in 2013.[279]
Several lighthearted songs celebrating Bitcoin have been released.[280][281][282] Numerous U.S. comedians have made fun of "bitcoin confusion".[283]
In Fall 2014, undergraduate students at the Massachusetts Institute of Technology (MIT) received $100 in bitcoins "to better understand this emerging technology". A student had the idea of a Bitcoin Club and raised more than half a million dollars from a MIT alum working in high-frequency trading.[284]
Some U.S. political candidates, including New York City Democratic Congressional candidate Jeff Kurzon have said they would accept campaign donations in bitcoin.[285]
On September 17, 2014, Dynamite Entertainment became the first comic book publisher to accept bitcoin for purchases through their DRM-Free Digital Comic Store.[286][third-party source needed]
See also
Notes
- ^ a b As of 2014, BTC is the most commonly used code.[1]
- ^ a b As of 2014, XBT is used by Bloomberg L.P.,[2] CNNMoney,[3] CoinDesk,[4] Kraken,[5] and xe.com.[6]
- ^ a b Bitcoin Foundation will attempt to establish a Unicode symbol for bitcoin. The leading candidates are B⃦ (letter B with combining double vertical stroke overlay), ฿ (the Thai Baht symbol), and Ƀ (B with stroke).[1]
- ^ Bitcoin does not have a central authority.[9]
- ^ a b It is not known whether the name Satoshi Nakamoto is real or a pseudonym, or if it represents one person or a group.
- ^ There is no uniform convention for bitcoin capitalization. Some sources use Bitcoin, capitalized, to refer to the technology and network and bitcoin, lowercase, to refer to the unit of account.[14] The WSJ[15] and The Chronicle of Higher Education[16] advocate use of lowercase bitcoin in all cases, however. This article follows the latter convention.
- ^ Relative mining difficulty is defined as 1 at 9 January 2009. Higher number means higher difficulty. As the total network power increases, the network adjusts the mining difficulty to make mining always last about ten minutes. Therefore, the relative mining difficulty can also be interpreted as the relative power of the network.
- ^ a b c d Data acquired from Blockchain.info[33]
- ^ 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.[34]
- ^ a b Some of these firms use bitcoin payment processors such as BitPay and Coinbase and do not handle or store bitcoins themselves.[65]
- ^ To obtain 35,000 figure, 16,000 merchants signed up with Bitcoin payment processor Coinbase[93] are added to 20,000 merchants signed to BitPay.[94]
- ^ The price of 1 bitcoin in U.S. dollars.
- ^ Volatility is calculated on a yearly basis. All yearly volatilities exceed 60%.
- ^ Each ASICMiner Block Erupter USB can calculate ~333 megahashes per second (Mhash/s) at an efficiency of 130 megahashes per joule (Mhash/J).[173] Mining hardware common since mid 2014[174] typically deliver a ten-fold efficiency of 1.3 gigahashes per joule (Ghash/J) or more.[175] And ASIC mining hardware with 6 Ghash/J has been announced for 2015.[176]
- ^ Bitcoin facilitates illegal trading like USD, gold, etc. It is like cash in facilitating illegal trades. The difference is that bitcoin transaction history is publicly available, while cash transaction history is not. Bitcoin also facilitates legal trading.[34]
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- ^ "Market Data". Kraken. Retrieved 26 November 2014.
- ^ "XBT - Bitcoin". xe.com. Retrieved 2 November 2014.
- ^ a b c d e f g h i Andreas M. Antonopoulos (April 2014). "2". Mastering Bitcoin. Unlocking Digital Crypto-Currencies. O'Reilly Media. Retrieved 23 October 2014.
- ^ a b c Jason Mick (12 June 2011). "Cracking the Bitcoin: Digging Into a $131M USD Virtual Currency". Daily Tech. Retrieved 30 September 2012.
{{cite web}}
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Standards vary, but there seems to be a consensus forming around Bitcoin, capitalized, for the system, the software, and the network it runs on, and bitcoin, lowercase, for the currency itself.
- ^ Vigna, Paul (3 March 2014). "BitBeat: Is It Bitcoin, or bitcoin? The Orthography of the Cryptography". WSJ. Retrieved 21 April 2014.
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If the value paid out of a transaction (in Bitcoins) is less than the amount put in, the difference is treated as a transaction fee that can be collected by whoever manages to mine a block containing that transaction. A transaction fee is like a tip or gratuity left for the miner.
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Well-run central banks should welcome the emerging competition. There is (in my view) room for beneficial coexistence.
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Also, note that I am not against gold or bitcoin (or whatever) as a currency. In fact, I think that the threat that they pose as alternate currency can serve as a useful check on a central bank.
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Cryptography is the key to Bitcoin's success. It's the reason that no one can double spend, counterfeit or steal Bitcoins
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we suggest to compare the estimated total volume of Silk Road transactions with the estimated total volume of transactions at all Bitcoin exchanges (including Mt.Gox, but not limited to it). The latter corresponds to the amount of money entering and leaving the Bitcoin network, and statistics for it are readily available... approximately 1,335,580 BTC were exchanged on Silk Road... approximately 29,553,384 BTC were traded in Bitcoin exchanges over the same period... The only conclusion we can draw from this comparison is that Silk Road-related trades could plausibly correspond to 4.5% to 9% of all exchange trades
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Digital currency loses quarter of value after arrest of Ross Ulbricht, who is accused of running online drugs marketplace
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'Ode to Satoshi' is a bluegrass-style song with an old-timey feel that mixes references to Satoshi Nakamoto and blockchains (and, ahem, 'the fall of old Mt. Gox') with mandolin-picking and harmonicas.
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External links
- Bitcoin.org - unofficial website managed by Bitcoin core developers.
- Bitcoin at Curlie
- Bitcoin video series at Khan Academy
- Bitcoin: a cryptographic currency Bitcoin, Instituto Nacional de Tecnologías de la Communicación (INTECO), Spain, or National Institute of Communication Technologies (undated, 47pp, in English).
- On the Origins of Bitcoin: Stages of Monetary Evolution
- Quandl - Bitcoin currency data - historical statistics in time series downloadable format.