Difference between revisions of "Bitcoin"

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'''Bitcoin''' is a decentralized [[digital currency]] created by developer [[Satoshi Nakamoto]]. It does not rely on a central server to process transactions or store funds. There are a maximum of 2,099,999,997,690,000 Bitcoin elements (called satoshis), which are currently most commonly measured in units of 100,000,000 known as BTC. Stated another way, no more than 21 million BTC can ever be created.
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'''Bitcoin''' is a decentralized [[digital currency]] created by an unknown person or group of people under the name [[Satoshi Nakamoto]] and released as open-source software in 2009. It does not rely on a central server to process transactions or store funds. There are a maximum of 2,099,999,997,690,000 Bitcoin elements (called Satoshis, the unit has been named in collective homage to the original creator), which are currently most commonly measured in units of 100,000,000 known as BTC. There will only ever be 21 million Bitcoin (BTC) to ever be created.
  
{{As of|April 2014}}, it is the most widely used alternative currency,<ref name="Quantitative Analysis of the Full Bitcoin Transaction Graph">{{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|coauthors=Adi Shamir|page=17|quote=The Bitcoin system is the best known and most widely used alternative payment scheme,...}}</ref><ref name="Mt.Gox data">{{Cite web|title=Mt.Gox data|url=http://bitcoincharts.com/markets/mtgoxUSD.html|publisher=Bitcoincharts}}</ref> now with the total market cap over 6 billion US dollars<ref>{{cite web|title=Market Capitalization|url=https://blockchain.info/charts/market-cap|publisher= [[BlockChain.info]] |accessdate=21 April 2014}}</ref>.
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{{As of|January 2018}}, it is the most widely used alternative currency,<ref name="Quantitative Analysis of the Full Bitcoin Transaction Graph">{{cite web|title=Quantitative Analysis of the Full Bitcoin Transaction Graph|url=https://eprint.iacr.org/2012/584.pdf|publisher=Cryptology ePrint Archive|accessdate=18 October 2012|author=Ron Dorit|coauthors=Adi Shamir|page=17|quote=The Bitcoin system is the best known and most widely used alternative payment scheme,...}}</ref><ref name="Cryptocurrency Market Capitalization">{{Cite web|title=Coinmarketcap.com|url=https://coinmarketcap.com/}}</ref> now with the total market cap around 250 billion US dollars.<ref>{{cite web|title=Market Capitalization|url=https://coinmarketcap.com/currencies/bitcoin/|publisher= [[Coinmarketcap.com]] |accessdate=10 January 2018}}</ref>
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Bitcoin has no central issuer; instead, the peer-to-peer network regulates Bitcoins, transactions and issuance according to consensus in network software. These transactions are verified by network nodes through the use of cryptography and recorded in a public distributed ledger called a blockchain.
  
Bitcoin has no central issuer; instead, the peer-to-peer network regulates Bitcoins, transactions and issuance according to consensus in network software.
 
 
Bitcoins are issued to various nodes that verify transactions through computing power;
 
Bitcoins are issued to various nodes that verify transactions through computing power;
it is established that there will be a limited and scheduled release of no more than 21 million BTC worth of coins, which will be fully issued by the year 2140.
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it is established that there will be a limited and scheduled release of no more than 21 million BTC worth of coins, which will be fully issued by the year 2140
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Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services. As of February 2015, over 100,000 merchants and vendors accepted Bitcoin as payment. Research produced by the University of Cambridge estimates that in 2017, there were 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using Bitcoin.
  
 
Internationally, Bitcoins can be exchanged and managed through various websites and [[software]] along with physical banknotes and coins.<ref>{{Cite web|title=Physical Bitcoins by Casascius|url=https://www.casascius.com/|publisher=Casascius Coins|accessdate=29 September 2012}}</ref><ref>{{Cite web|title=Bitbills|url=http://www.bitbills.com/|publisher=Bitbills|accessdate=29 September 2012}}</ref>
 
Internationally, Bitcoins can be exchanged and managed through various websites and [[software]] along with physical banknotes and coins.<ref>{{Cite web|title=Physical Bitcoins by Casascius|url=https://www.casascius.com/|publisher=Casascius Coins|accessdate=29 September 2012}}</ref><ref>{{Cite web|title=Bitbills|url=http://www.bitbills.com/|publisher=Bitbills|accessdate=29 September 2012}}</ref>
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A cryptographic system for untraceable payments was first described by David Chaum in 1982.<ref>[http://blog.koehntopp.de/uploads/Chaum.BlindSigForPayment.1982.PDF David Chaum, Blind signatures for untraceable payments], Advances in Cryptology - Crypto '82, Springer-Verlag (1983), 199–203.</ref> In 1990 Chaum extended this system to create the first cryptographic anonymous electronic cash system.,<ref>{{cite journal|journal=Lecture Notes in Computer Science|last1=Chaum|first1=David|last2=Fiat|first2=Amos|last3=Naor|first3=Moni|title=Untraceable Electronic Cash|url=http://blog.koehntopp.de/uploads/chaum_fiat_naor_ecash.pdf}}</ref> which became known as ecash.
 
A cryptographic system for untraceable payments was first described by David Chaum in 1982.<ref>[http://blog.koehntopp.de/uploads/Chaum.BlindSigForPayment.1982.PDF David Chaum, Blind signatures for untraceable payments], Advances in Cryptology - Crypto '82, Springer-Verlag (1983), 199–203.</ref> In 1990 Chaum extended this system to create the first cryptographic anonymous electronic cash system.,<ref>{{cite journal|journal=Lecture Notes in Computer Science|last1=Chaum|first1=David|last2=Fiat|first2=Amos|last3=Naor|first3=Moni|title=Untraceable Electronic Cash|url=http://blog.koehntopp.de/uploads/chaum_fiat_naor_ecash.pdf}}</ref> which became known as ecash.
<ref>{{cite web|url=http://www.wired.com/wired/archive/2.12/emoney.html|publisher=Wired|title=E-Money (That's What I Want)|date=1994–2012|author=Steven Levy}}</ref> In 1998 Wei Dai published a description of an anonymous, distributed electronic cash system which he called "b-money".<ref>{{cite web|title=B-Money|url=http://www.weidai.com/bmoney.txt|author=Wei Dai|year=1998}}</ref> Around the same time, Nick Szabo created ''bit gold''.<ref>{{cite web|url=http://spectrum.ieee.org/computing/software/bitcoin-the-cryptoanarchists-answer-to-cash/0|title=Bitcoin: The Cryptoanarchists’ Answer to Cash|publisher=IEEE Spectrum|quote=Around the same time, Nick Szabo, a computer scientist who now blogs about law and the history of money, was one of the first to imagine a new digital currency from the ground up. Although many consider his scheme, which he calls “bit gold,” to be a precursor to Bitcoin}}</ref><ref name="bitgold">{{cite web|title=Bit gold|url=http://unenumerated.blogspot.co.uk/2005/12/bit-gold.html|author=Nick Szabo|quote=My proposal for bit gold is based on computing a string of bits from a string of challenge bits, using functions called variously "client puzzle function," "proof of work function," or "secure benchmark function.". The resulting string of bits is the proof of work.... The last-created string of bit gold provides the challenge bits for the next-created string.}}</ref> Like Bitcoin, ''Bit gold'' was a currency system where users would compete to solve a [[proof of work]] function, with solutions being cryptographically chained together and published via a distributed property title registry. A variant of ''Bit gold'', called ''Reusable Proofs of Work'', was implemented by Hal Finney.<ref name="bitgold"/>
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<ref>{{cite web|url=https://www.wired.com/wired/archive/2.12/emoney.html|publisher=Wired|title=E-Money (That's What I Want)|date=1994–2012|author=Steven Levy}}</ref> In 1998 [[Wei Dai]] published a description of an anonymous, distributed electronic cash system which he called "b-money".<ref>{{cite web|title=B-Money|url=http://www.weidai.com/bmoney.txt|author=Wei Dai|year=1998}}</ref> Around the same time, Nick Szabo created ''bit gold''.<ref>{{cite web|url=https://spectrum.ieee.org/computing/software/bitcoin-the-cryptoanarchists-answer-to-cash/0|title=Bitcoin: The Cryptoanarchists’ Answer to Cash|publisher=IEEE Spectrum|quote=Around the same time, Nick Szabo, a computer scientist who now blogs about law and the history of money, was one of the first to imagine a new digital currency from the ground up. Although many consider his scheme, which he calls “bit gold,” to be a precursor to Bitcoin}}</ref><ref name="bitgold">{{cite web|title=Bit gold|url=https://unenumerated.blogspot.co.uk/2005/12/bit-gold.html|author=Nick Szabo|quote=My proposal for bit gold is based on computing a string of bits from a string of challenge bits, using functions called variously "client puzzle function," "proof of work function," or "secure benchmark function.". The resulting string of bits is the proof of work.... The last-created string of bit gold provides the challenge bits for the next-created string.}}</ref> Like Bitcoin, ''Bit gold'' was a currency system where users would compete to solve a [[proof of work]] function, with solutions being cryptographically chained together and published via a distributed property title registry. A variant of ''Bit gold'', called ''Reusable Proofs of Work'', was implemented by Hal Finney.<ref name="bitgold"/>
  
 
In 2008, Satoshi Nakamoto published a [[Bitcoin_white_paper|paper]]<ref name="whitepaper">{{cite web
 
In 2008, Satoshi Nakamoto published a [[Bitcoin_white_paper|paper]]<ref name="whitepaper">{{cite web
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  |postscript=
 
  |postscript=
 
}}</ref><ref>{{cite web
 
}}</ref><ref>{{cite web
  |url= http://article.gmane.org/gmane.comp.encryption.general/12588/
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  |url= https://article.gmane.org/gmane.comp.encryption.general/12588/
 
  |title= Bitcoin P2P e-cash paper
 
  |title= Bitcoin P2P e-cash paper
}}</ref> on The Cryptography Mailing list at metzdowd.com<ref>[http://www.mail-archive.com/search?l=cryptography@metzdowd.com&q=from:%22Satoshi+Nakamoto%22 Satoshi's posts to Cryptography mailing list]</ref> describing the Bitcoin protocol.
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}}</ref> on The Cryptography Mailing list at metzdowd.com<ref>[https://www.mail-archive.com/search?l=cryptography@metzdowd.com&q=from:%22Satoshi+Nakamoto%22 Satoshi's posts to Cryptography mailing list]</ref> describing the Bitcoin protocol.
  
The Bitcoin network came into existence on 3 January 2009 with the release of the first Bitcoin client, [[wxBitcoin]], and the issuance of the first Bitcoins.<ref>{{cite web |title=Block 0 – Bitcoin Block Explorer |url=http://blockexplorer.com/block/000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f }}</ref><ref>{{cite web |url=http://www.mail-archive.com/cryptography@metzdowd.com/msg10142.html |title=Bitcoin v0.1 released}}</ref><ref>{{cite web |url=http://sourceforge.net/news/?group_id=244765 |title=SourceForge.net: Bitcoin}}</ref>
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The Bitcoin network came into existence on 3 January 2009 with the release of the first Bitcoin client, [[wxBitcoin]], and the issuance of the first Bitcoins.<ref>{{cite web |title=Block 0 – Bitcoin Block Explorer |url=https://blockexplorer.com/block/000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f }}</ref><ref>{{cite web |url=https://www.mail-archive.com/cryptography@metzdowd.com/msg10142.html |title=Bitcoin v0.1 released}}</ref><ref>{{cite web |url=https://sourceforge.net/news/?group_id=244765 |title=SourceForge.net: Bitcoin}}</ref>
A year after, the initial exchange rates for Bitcoin were set by individuals on the bitcointalk forums.{{Citation needed|date=October 2012}} The most significant transaction involved a 10,000 BTC pizza.<ref>{{cite web|title=The Rise and Fall of Bitcoin|url=http://www.wired.com/magazine/2011/11/mf_bitcoin/|publisher=Wired|accessdate=13 October 2012}}</ref>
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A year after, the initial exchange rates for Bitcoin were set by individuals on the bitcointalk forums.{{Citation needed|date=October 2012}} The most significant transaction involved a 10,000 BTC pizza.<ref>{{cite web|title=The Rise and Fall of Bitcoin|url=https://www.wired.com/magazine/2011/11/mf_bitcoin/|publisher=Wired|accessdate=13 October 2012}}</ref>
Today, the majority of Bitcoin exchanges occur on the [[Bitstamp]] Bitcoin exchange.<ref>{{cite web | title = Exchange volume distribution | work = by market | publisher = [[Bitcoin Charts]]  | date = April 15, 2014 | url = http://bitcoincharts.com/charts/volumepie/ | accessdate = 2014-04-15 }}</ref>
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Today, the majority of Bitcoin exchanges occur on the [[Bitstamp]] Bitcoin exchange.<ref>{{cite web | title = Exchange volume distribution | work = by market | publisher = [[Bitcoin Charts]]  | date = April 15, 2014 | url = https://bitcoincharts.com/charts/volumepie/ | accessdate = 2014-04-15 }}</ref>
  
 
In 2011, Wikileaks,<ref>{{cite news
 
In 2011, Wikileaks,<ref>{{cite news
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  |date=
 
  |date=
 
  |accessdate = 2011-06-22
 
  |accessdate = 2011-06-22
}}</ref> Singularity Institute,<ref>[http://singinst.org/donate/ SIAI donation page]</ref> Internet Archive,<ref>[http://www.archive.org/donate/index.php Internet Archive donation page]</ref> Free Software Foundation<ref>[https://my.fsf.org/donate/other/ Other ways to donate]</ref> and others, began to accept donations in Bitcoin. The Electronic Frontier Foundation did so for a while but has since stopped, citing concerns about a lack of legal precedent about new currency systems, and because they "generally don't endorse any type of product or service."<ref>{{cite web
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}}</ref> Singularity Institute,<ref>[http://singinst.org/donate/ SIAI donation page]</ref> Internet Archive,<ref>[https://www.archive.org/donate/index.php Internet Archive donation page]</ref> Free Software Foundation<ref>[https://my.fsf.org/donate/other/ Other ways to donate]</ref> and others, began [[Receiving_donations_with_bitcoin|to accept donations in Bitcoin]]. The Electronic Frontier Foundation did so for a while but has since stopped, citing concerns about a lack of legal precedent about new currency systems, and because they "generally don't endorse any type of product or service."<ref>{{cite web
 
  |url= https://www.eff.org/deeplinks/2011/06/eff-and-bitcoin
 
  |url= https://www.eff.org/deeplinks/2011/06/eff-and-bitcoin
 
  |title= EFF and Bitcoin &#124; Electronic Frontier Foundation
 
  |title= EFF and Bitcoin &#124; Electronic Frontier Foundation
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Bitcoin does not require a central bank, State,<ref>{{cite web
 
Bitcoin does not require a central bank, State,<ref>{{cite web
  |url= http://spectrum.ieee.org/computing/software/bitcoin-the-cryptoanarchists-answer-to-cash/3
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  |url= https://spectrum.ieee.org/computing/software/bitcoin-the-cryptoanarchists-answer-to-cash/3
 
  |title= Bitcoin: The Cryptoanarchists' Answer to Cash
 
  |title= Bitcoin: The Cryptoanarchists' Answer to Cash
 
  |publisher= IEEE.org
 
  |publisher= IEEE.org
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Payments are made to Bitcoin "addresses": human-readable strings of numbers and letters around 33 characters in length, always beginning with the digit 1 or 3, as in the example of ''31uEbMgunupShBVTewXjtqbBv5MndwfXhb''.
 
Payments are made to Bitcoin "addresses": human-readable strings of numbers and letters around 33 characters in length, always beginning with the digit 1 or 3, as in the example of ''31uEbMgunupShBVTewXjtqbBv5MndwfXhb''.
  
Users obtain new Bitcoin addresses from their Bitcoin software. Creating a new address can be a completely offline process and require no communication with the Bitcoin network.
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Users obtain new Bitcoin addresses from their Bitcoin software. Creating a new address can be a completely offline process and require no communication with the Bitcoin network. Web services often generate a new Bitcoin address for every user, allowing them to have their custom deposit addresses.{{dubious}}
  
 
===Transaction fees===
 
===Transaction fees===
 
{{main|Transaction fees}}
 
{{main|Transaction fees}}
Transaction fees may be included with any transfer of Bitcoins. {{As of|2012}} many transactions are processed in a way which makes no charge for the transaction. For transactions which consume or produce many coins (and therefore have a large data size), a small transaction fee is usually expected.
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Transaction fees may be included with any transfer of Bitcoins. While it's technically possible to send a transaction with zero fee, {{as of|2017|lc=on}} it's highly unlikely that one of these transactions confirms in a realistic amount of time, causing most nodes on the network to drop it. For transactions which consume or produce many outputs (and therefore have a large data size), higher transaction fees are usually expected.
  
 
===Confirmations===
 
===Confirmations===
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  |newspaper= Ars Technica
 
  |newspaper= Ars Technica
 
  |date= 8 June 2011
 
  |date= 8 June 2011
  |url= http://arstechnica.com/tech-policy/news/2011/06/bitcoin-inside-the-encrypted-peer-to-peer-currency.ars
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  |url= https://arstechnica.com/tech-policy/news/2011/06/bitcoin-inside-the-encrypted-peer-to-peer-currency.ars
 
}}</ref><ref>{{cite news
 
}}</ref><ref>{{cite news
 
  |author= Sponsored by
 
  |author= Sponsored by
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  |last= Geere
 
  |last= Geere
 
  |first= Duncan
 
  |first= Duncan
  |url= http://www.wired.co.uk/news/archive/2011-05/16/bitcoin-p2p-currency
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  |url= https://www.wired.co.uk/news/archive/2011-05/16/bitcoin-p2p-currency
 
  |title= Peer-to-peer currency Bitcoin sidesteps financial institutions (Wired UK)
 
  |title= Peer-to-peer currency Bitcoin sidesteps financial institutions (Wired UK)
 
  |publisher= Wired.co.uk
 
  |publisher= Wired.co.uk
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}}</ref> The network is programmed to increase the money supply as a geometric series until the total number of Bitcoins reaches 21 million BTC.<ref name="Quantitative Analysis of the Full Bitcoin Transaction Graph"/> {{As of|2012|10}} slightly over 10 million of the total 21 million BTC had been created; the current total number created is available online.<ref>{{cite web
 
}}</ref> The network is programmed to increase the money supply as a geometric series until the total number of Bitcoins reaches 21 million BTC.<ref name="Quantitative Analysis of the Full Bitcoin Transaction Graph"/> {{As of|2012|10}} slightly over 10 million of the total 21 million BTC had been created; the current total number created is available online.<ref>{{cite web
 
  |title= Total Number of Bitcoins in Existence
 
  |title= Total Number of Bitcoins in Existence
  |url= http://blockexplorer.com/q/totalbc
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  |url= https://blockexplorer.com/q/totalbc
 
  |work= Bitcoin Block Explorer
 
  |work= Bitcoin Block Explorer
 
  |accessdate = 2012-10-03
 
  |accessdate = 2012-10-03
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  |title= Bitcoin: Virtual money created by CPU cycles
 
  |title= Bitcoin: Virtual money created by CPU cycles
 
  |publisher= LWN.net
 
  |publisher= LWN.net
  |url= http://lwn.net/Articles/414452/
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  |url= https://lwn.net/Articles/414452/
 
}}</ref>
 
}}</ref>
  
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=== Transactions ===
 
=== Transactions ===
  
While using bitcoins is an excellent way to make your purchases, donations, and p2p payments, without losing money through inflated transaction fees, transactions are never truly anonymous. Buying Bitcoin you pass identification, Bitcoin transactions are stored publicly and permanently on the network, which means anyone can see the balance and transactions of any Bitcoin address. Bitcoin activities are recorded and available publicly via the [[blockchain]], a comprehensive database which keeps a record of bitcoin transactions.
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While using Bitcoins is an excellent way to make your purchases, donations, and p2p payments, without losing money through inflated transaction fees, transactions are never truly anonymous. Buying Bitcoin you pass identification, Bitcoin transactions are stored publicly and permanently on the network, which means anyone can see the balance and transactions of any Bitcoin address. Bitcoin activities are recorded and available publicly via the [[blockchain]], a comprehensive database which keeps a record of Bitcoin transactions.
  
=== Buying/selling bitcoins ===
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=== Buying/selling Bitcoins ===
  
All exchanges require the user to scan ID documents, and large transactions must be reported to the proper governmental authority. When you use Bitcoin to pay for goods and services, you will of course need to provide your name and address to the seller for delivery purposes.
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All exchange companies require the user to scan ID documents, and large transactions must be reported to the proper governmental authority.
  
 
This means that a third party with an interest in tracking your activities can use your visible balance and ID information as a basis from which to track your future transactions or to study previous activity. In short, you have compromised your [[security]] and [[privacy]].
 
This means that a third party with an interest in tracking your activities can use your visible balance and ID information as a basis from which to track your future transactions or to study previous activity. In short, you have compromised your [[security]] and [[privacy]].
  
In addition to conventional exchanges like Bitstamp, Bitfinex, Kraken and Coinable there are also Peer to peer exchanges like localbitcoins and Paxful. Peer to peer exchanges will often not collect KYC and identity information directly from users, instead they let the users handle KYC amongst themselves. These can often be a better alternative for those looking to purchase bitcoin quickly and without KYC delay.
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In addition to conventional exchanges there are also peer-to-peer exchanges. Peer to peer exchanges will often not collect KYC and identity information directly from users, instead they let the users handle KYC amongst themselves. These can often be a better alternative for those looking to purchase Bitcoin quickly and without KYC delay.
  
 
=== Mixing services ===
 
=== Mixing services ===
  
[http://anonymity.co.in/mixing_services.html Mixing services] are used to avoid compromising of privacy and security. Mixing services provide to periodically exchange your bitcoins for different ones which cannot be associated with the original owner.
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[http://anonymity.co.in/mixing_services.html Mixing services] are used to avoid compromising of privacy and security. Mixing services provide to periodically exchange your Bitcoin for different ones which cannot be associated with the original owner.
  
 
== Security ==<!--Please keep as starting template-->
 
== Security ==<!--Please keep as starting template-->
 
{{seealso|Weaknesses}}
 
{{seealso|Weaknesses}}
  
In the history of bitcoin, there have been a few [[incidents]], caused by problematic as well as malicious transactions. In the worst such incident, and the only one of its type, a person was able to pretend that he had a practically infinite supply of bitcoins, for almost 9 hours.
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In the history of Bitcoin, there have been a few [[incidents]], caused by problematic as well as malicious transactions. In the worst such incident, and the only one of its type, a person was able to pretend that he had a practically infinite supply of Bitcoins, for almost 9 hours.
  
Bitcoin relies, among other things, on [http://en.wikipedia.org/wiki/Public-key_cryptography public key cryptography] and thus may be vulnerable to [http://en.wikipedia.org/wiki/Elliptic_curve_cryptography#Quantum_computing_attacks quantum computing attacks] if and when practical quantum computers can be constructed.
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Bitcoin relies, among other things, on [https://en.wikipedia.org/wiki/Public-key_cryptography public key cryptography] and thus may be vulnerable to [https://en.wikipedia.org/wiki/Elliptic_curve_cryptography#Quantum_computing_attacks quantum computing attacks] if and when practical quantum computers can be constructed.
  
If multiple different software packages, whose usage becomes widespread on the Bitcoin network, disagree on the protocol and the rules for transactions, this could potentially cause a fork in the block chain, with each faction of users being able to accept only their own version of the history of transactions. This could influence the price of bitcoins.
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If multiple different software packages, whose usage becomes widespread on the Bitcoin network, disagree on the protocol and the rules for transactions, this could potentially cause a fork in the block chain, with each faction of users being able to accept only their own version of the history of transactions. This could influence the price of Bitcoins.
  
A global, organized campaign against the currency or the software could also influence the demand for bitcoins, and thus the exchange price.
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A global, organized campaign against the currency or the software could also influence the demand for Bitcoins, and thus the exchange price.
  
 
==Bitcoin mining==
 
==Bitcoin mining==
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Nakamoto compared the generation of new coins by expending CPU time and electricity to gold miners expending resources to add gold to circulation.<ref name="whitepaper"/>
 
Nakamoto compared the generation of new coins by expending CPU time and electricity to gold miners expending resources to add gold to circulation.<ref name="whitepaper"/>
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[[File:Cryptocurrency Mining Farm.jpg|right|350px|thumb|Iceland is a good location for [[mining]] Bitcoin because of the natural cold temperature.]]
  
 
===Node operation===
 
===Node operation===
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  |first= Joshua
 
  |first= Joshua
 
  |title= The Crypto-Currency
 
  |title= The Crypto-Currency
  |url= http://www.wired.com/magazine/2011/11/mf_bitcoin/all
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  |url= https://www.wired.com/magazine/2011/11/mf_bitcoin/all
 
  |accessdate = 11 November 2011
 
  |accessdate = 11 November 2011
 
  |newspaper= Wired Magazine
 
  |newspaper= Wired Magazine
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Node implementations include core software such as Bitcoind/Bitcoin-Qt, [[libbitcoin]], [[cbitcoin]]<ref>{{Cite web|title=cbitcoin|url=https://github.com/MatthewLM/cbitcoin|accessdate=3 October 2012}}</ref> and [[BitCoinJ|bitcoinj]].<ref>{{cite web
 
Node implementations include core software such as Bitcoind/Bitcoin-Qt, [[libbitcoin]], [[cbitcoin]]<ref>{{Cite web|title=cbitcoin|url=https://github.com/MatthewLM/cbitcoin|accessdate=3 October 2012}}</ref> and [[BitCoinJ|bitcoinj]].<ref>{{cite web
  |url= http://news.slashdot.org/story/11/03/23/0210207/Google-Engineer-Releases-Open-Source-Bitcoin-Client
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  |url= https://news.slashdot.org/story/11/03/23/0210207/Google-Engineer-Releases-Open-Source-Bitcoin-Client
 
  |title= Google Engineer Releases Open Source Bitcoin Client
 
  |title= Google Engineer Releases Open Source Bitcoin Client
 
  |author= angry tapir, timothy
 
  |author= angry tapir, timothy
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===As an investment===
 
===As an investment===
Bitcoin describes itself as an experimental digital currency. Reuben Grinberg has noted that Bitcoin's supporters have argued that Bitcoin is neither a security or an investment because it fails to meet the criteria for either category.<ref name="grinberg">{{cite web | url=http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1817857 | title=Bitcoin: An Innovative Alternative Digital Currency | publisher=SSRN | date=9 December 2011 | accessdate=4 December 2012 | author=Grinberg, Reuben}}</ref>  Although it is a virtual currency, some people see it as an 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}}</ref> or accuse it of being a form of investment fraud known as a Ponzi scheme.<ref>{{cite web |url=http://www.theregister.co.uk/2011/06/08/bitcoin_under_attack/ |title=US senators draw a bead on Bitcoin |last1=Chirgwin |first1=Richard |date=8 June 2011 |publisher=The Register |accessdate=14 November 2012}}</ref><ref>{{cite web |url=http://uk.reuters.com/article/2012/04/01/uk-traders-bitcoin-idUKBRE8300JL20120401 |title=Bitcoin, the City traders' anarchic new toy |last1=O'Leary |first1=Naomi |date=2 April 2012 |publisher=Reuters |accessdate=14 November 2012}}</ref> A report by the European Central Bank, using the U.S. Securities and Exchange Commission's definition of a Ponzi scheme, found that the use of bitcoins shares some characteristics with Ponzi schemes, but also has characteristics of its own which contradict several common aspects of Ponzi schemes.<ref name="ecbreport">{{cite web | url=http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf | title=Virtual Currency Schemes | publisher=European Central Bank | date=October 2012 | accessdate=4 December 2012}}</ref>
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{{main|Bitcoin as an investment}}
 +
 
 +
Bitcoin describes itself as an experimental digital currency. Reuben Grinberg has noted that Bitcoin's supporters have argued that Bitcoin is neither a security or an investment because it fails to meet the criteria for either category.<ref name="grinberg">{{cite web | url=http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1817857 | title=Bitcoin: An Innovative Alternative Digital Currency | publisher=SSRN | date=9 December 2011 | accessdate=4 December 2012 | author=Grinberg, Reuben}}</ref>  Although it is a virtual currency, some people see it as an 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}}</ref> or accuse it of being a form of investment fraud known as a Ponzi scheme.<ref>{{cite web |url=https://www.theregister.co.uk/2011/06/08/bitcoin_under_attack/ |title=US senators draw a bead on Bitcoin |last1=Chirgwin |first1=Richard |date=8 June 2011 |publisher=The Register |accessdate=14 November 2012}}</ref><ref>{{cite web |url=http://uk.reuters.com/article/2012/04/01/uk-traders-bitcoin-idUKBRE8300JL20120401 |title=Bitcoin, the City traders' anarchic new toy |last1=O'Leary |first1=Naomi |date=2 April 2012 |publisher=Reuters |accessdate=14 November 2012}}</ref> A report by the European Central Bank, using the U.S. Securities and Exchange Commission's definition of a Ponzi scheme, found that the use of Bitcoins shares some characteristics with Ponzi schemes, but also has characteristics of its own which contradict several common aspects of Ponzi schemes.<ref name="ecbreport">{{cite web | url=http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf | title=Virtual Currency Schemes | publisher=European Central Bank | date=October 2012 | accessdate=4 December 2012}}</ref>
  
 
===Privacy===
 
===Privacy===
 
Because transactions are broadcast to the entire network, they are inherently public. Unlike regular banking,<ref>{{cite web
 
Because transactions are broadcast to the entire network, they are inherently public. Unlike regular banking,<ref>{{cite web
  |url= http://spectrum.ieee.org/computing/software/bitcoin-the-cryptoanarchists-answer-to-cash/0
+
  |url= https://spectrum.ieee.org/computing/software/bitcoin-the-cryptoanarchists-answer-to-cash/0
 
  |title= Bitcoin: The Cryptoanarchists' Answer to Cash
 
  |title= Bitcoin: The Cryptoanarchists' Answer to Cash
 
  |publisher= IEEE.org
 
  |publisher= IEEE.org
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}}</ref> which preserves customer privacy by keeping transaction records private, loose transactional privacy is accomplished in Bitcoin by using many unique addresses for every wallet, while at the same time publishing all transactions. As an example, if Alice sends 123.45 BTC to Bob, the network creates a public record that allows anyone to see that 123.45 has been sent from one address to another. However, unless Alice or Bob make their ownership of these addresses known, it is difficult for anyone else to connect the transaction with them. However, if someone connects an address to a user at any point they could follow back a series of transactions as each participant likely knows who paid them and may disclose that information on request or under duress.
 
}}</ref> which preserves customer privacy by keeping transaction records private, loose transactional privacy is accomplished in Bitcoin by using many unique addresses for every wallet, while at the same time publishing all transactions. As an example, if Alice sends 123.45 BTC to Bob, the network creates a public record that allows anyone to see that 123.45 has been sent from one address to another. However, unless Alice or Bob make their ownership of these addresses known, it is difficult for anyone else to connect the transaction with them. However, if someone connects an address to a user at any point they could follow back a series of transactions as each participant likely knows who paid them and may disclose that information on request or under duress.
  
It can be difficult to associate Bitcoin identities with real-life identities.<ref name="An Analysis of Anonymity in the Bitcoin System">Fergal Reid and Martin Harrigan (24 July 2011). [http://anonymity-in-bitcoin.blogspot.com/2011/07/bitcoin-is-not-anonymous.html An Analysis of Anonymity in the Bitcoin System]. An Analysis of Anonymity in the Bitcoin System.</ref> This property makes Bitcoin transactions attractive to sellers of illegal products.<ref name="Forbes">Andy Greenberg (20 April 2011). [http://www.forbes.com/forbes/2011/0509/technology-psilocybin-bitcoins-gavin-andresen-crypto-currency.html Crypto Currency]. Forbes Magazine.</ref><ref>{{cite web
+
It can be difficult to associate Bitcoin identities with real-life identities.<ref name="An Analysis of Anonymity in the Bitcoin System">Fergal Reid and Martin Harrigan (24 July 2011). [https://anonymity-in-bitcoin.blogspot.com/2011/07/bitcoin-is-not-anonymous.html An Analysis of Anonymity in the Bitcoin System]. An Analysis of Anonymity in the Bitcoin System.</ref> This property makes Bitcoin transactions attractive to sellers of illegal products.<ref name="Forbes">Andy Greenberg (20 April 2011). [http://www.forbes.com/forbes/2011/0509/technology-psilocybin-bitcoins-gavin-andresen-crypto-currency.html Crypto Currency]. Forbes Magazine.</ref><ref>{{cite web
 
  |last= Madrigal
 
  |last= Madrigal
 
  |first= Alexis
 
  |first= Alexis
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  |publisher= The Atlantic Monthly
 
  |publisher= The Atlantic Monthly
 
  |date= 2011-06-01
 
  |date= 2011-06-01
  |url= http://www.theatlantic.com/technology/archive/2011/06/libertarian-dream-a-site-where-you-buy-drugs-with-digital-dollars/239776/
+
  |url= https://www.theatlantic.com/technology/archive/2011/06/libertarian-dream-a-site-where-you-buy-drugs-with-digital-dollars/239776/
 
  |accessdate = 2011-06-05
 
  |accessdate = 2011-06-05
 
}}</ref>
 
}}</ref>
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  |last= Reisinger
 
  |last= Reisinger
 
  |first= Don
 
  |first= Don
  |url= http://news.cnet.com/8301-13506_3-20070268-17/senators-target-bitcoin-currency-citing-drug-sales/
+
  |url= https://news.cnet.com/8301-13506_3-20070268-17/senators-target-bitcoin-currency-citing-drug-sales/
 
  |title= Senators target Bitcoin currency, citing drug sales &#124; The Digital Home – CNET News
 
  |title= Senators target Bitcoin currency, citing drug sales &#124; The Digital Home – CNET News
 
  |publisher= News.cnet.com
 
  |publisher= News.cnet.com
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[[Silk Road]] is an anonymous black market that uses only the Bitcoin.<ref name="npr-06-12-11">
 
[[Silk Road]] is an anonymous black market that uses only the Bitcoin.<ref name="npr-06-12-11">
 
{{Cite news
 
{{Cite news
  |url= http://www.npr.org/2011/06/12/137138008/silk-road-not-your-fathers-amazon-com
+
  |url= https://www.npr.org/2011/06/12/137138008/silk-road-not-your-fathers-amazon-com
 
  |date= 12 June 2011
 
  |date= 12 June 2011
 
  |newspaper= NPR
 
  |newspaper= NPR
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====Botnet mining====
 
====Botnet mining====
In June 2011, Symantec warned about the possibility of botnets engaging in covert "mining" of Bitcoins,<ref>{{Cite web|author=Updated: 17 June 2011 | Translations available: 日本語 |url=http://www.symantec.com/connect/blogs/bitcoin-botnet-mining |title=Bitcoin Botnet Mining &#124; Symantec Connect Community |publisher=Symantec.com |date=2011-06-17 |accessdate = 2012-01-24}}</ref><ref>{{Cite web|url=http://www.zdnet.com/blog/security/researchers-find-malware-rigged-with-bitcoin-miner/8934 |title=Researchers find malware rigged with Bitcoin miner |publisher=ZDNet |date=2011-06-29 |accessdate = 2012-01-24}}</ref> consuming computing cycles, using extra electricity and possibly increasing the temperature of the computer. Later that month, the Australian Broadcasting Corporation caught an employee using the company's servers to generate Bitcoins without permission.<ref>{{Cite web|url=http://thenextweb.com/au/2011/06/23/abc-employee-caught-mining-for-bitcoins-on-company-servers/ |title=ABC employee caught mining for Bitcoins on company servers |publisher=The Next Web |date=2011-06-23 |accessdate = 2012-01-24}}</ref> Some malware also uses the parallel processing capabilities of the GPUs built into many modern-day video cards.<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 |date=16 August 2011<!-- 20:00 GMT -->|first=Dan |last=Goodin }}</ref> In mid August 2011, Bitcoin miner botnets were found;<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=2011-08-19 |accessdate = 2012-01-24}}</ref> trojans infecting Mac OS X have also been uncovered.<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 – sophos, security, malware, Intego – Vulnerabilities – Security |publisher=Techworld |date=2011-11-01 |accessdate = 2012-01-24}}</ref>
+
In June 2011, Symantec warned about the possibility of botnets engaging in covert "mining" of Bitcoins,<ref>{{Cite web|author=Updated: 17 June 2011 | Translations available: 日本語 |url=http://www.symantec.com/connect/blogs/bitcoin-botnet-mining |title=Bitcoin Botnet Mining &#124; Symantec Connect Community |publisher=Symantec.com |date=2011-06-17 |accessdate = 2012-01-24}}</ref><ref>{{Cite web|url=http://www.zdnet.com/blog/security/researchers-find-malware-rigged-with-bitcoin-miner/8934 |title=Researchers find malware rigged with Bitcoin miner |publisher=ZDNet |date=2011-06-29 |accessdate = 2012-01-24}}</ref> consuming computing cycles, using extra electricity and possibly increasing the temperature of the computer (not associated with [http://snowafter.com Snow Day Calculator]). Later that month, the Australian Broadcasting Corporation caught an employee using the company's servers to generate Bitcoins without permission.<ref>{{Cite web|url=http://thenextweb.com/au/2011/06/23/abc-employee-caught-mining-for-bitcoins-on-company-servers/ |title=ABC employee caught mining for Bitcoins on company servers |publisher=The Next Web |date=2011-06-23 |accessdate = 2012-01-24}}</ref> Some malware also uses the parallel processing capabilities of the GPUs built into many modern-day video cards.<ref>{{Cite news |url=https://www.theregister.co.uk/2011/08/16/gpu_bitcoin_brute_forcing/ |title=Malware mints virtual currency using victim's GPU |date=16 August 2011<!-- 20:00 GMT -->|first=Dan |last=Goodin }}</ref> In mid August 2011, Bitcoin miner botnets were found;<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=2011-08-19 |accessdate = 2012-01-24}}</ref> trojans infecting Mac OS X have also been uncovered.<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 – sophos, security, malware, Intego – Vulnerabilities – Security |publisher=Techworld |date=2011-11-01 |accessdate = 2012-01-24}}</ref>
  
 
===Theft and fraud===
 
===Theft and fraud===
On 19 June 2011, a security breach of the Mt.Gox (an acronym for ''M''agic: ''T''he ''G''athering ''O''nline E''x''change, its original purpose) Bitcoin Exchange caused the price of a Bitcoin to briefly drop to US$0.01 on the Mt.Gox exchange (though it remained unaffected on other exchanges) after a hacker allegedly used credentials from a Mt.Gox auditor's compromised computer to illegally transfer a large number of Bitcoins to him- or herself and sell them all, creating a massive "ask" order at any price. Within minutes the price rebounded to over $15 before Mt.Gox shut down their exchange and canceled all trades that happened during the hacking period.<ref>[https://mtgox.com/press_release_20110630.html Clarification of Mt Gox Compromised Accounts and Major Bitcoin Sell-Off]</ref><ref>[http://www.youtube.com/watch?v=T1X6qQt9ONg YouTube. Bitcoin Report]</ref> The exchange rate of Bitcoins quickly returned to near pre-crash values.<ref name="mick">Jason Mick, 19 June 2011, [http://www.dailytech.com/Inside+the+MegaHack+of+Bitcoin+the+Full+Story/article21942.htm Inside the Mega-Hack of Bitcoin: the Full Story], DailyTech</ref><ref>Timothy B. Lee, 19 June 2011, [http://arstechnica.com/tech-policy/news/2011/06/bitcoin-price-plummets-on-compromised-exchange.ars Bitcoin prices plummet on hacked exchange], Ars Technica</ref><ref>Mark Karpeles, 20 June 2011, [https://support.mtgox.com/entries/20208066-huge-bitcoin-sell-off-due-to-a-compromised-account-rollback Huge Bitcoin sell off due to a compromised account – rollback], Mt.Gox Support</ref><ref name="register1">{{Cite news
+
On 19 June 2011, a security breach of the Mt.Gox (an acronym for ''M''agic: ''T''he ''G''athering ''O''nline E''x''change, its original purpose) Bitcoin Exchange caused the price of a Bitcoin to briefly drop to US$0.01 on the Mt.Gox exchange (though it remained unaffected on other exchanges) after a hacker allegedly used credentials from a Mt.Gox auditor's compromised computer to illegally transfer a large number of Bitcoins to him- or herself and sell them all, creating a massive "ask" order at any price. Within minutes the price rebounded to over $15 before Mt.Gox shut down their exchange and canceled all trades that happened during the hacking period.<ref>[https://mtgox.com/press_release_20110630.html Clarification of Mt Gox Compromised Accounts and Major Bitcoin Sell-Off]</ref><ref>[https://www.youtube.com/watch?v=T1X6qQt9ONg YouTube. Bitcoin Report]</ref> The exchange rate of Bitcoins quickly returned to near pre-crash values.<ref name="mick">Jason Mick, 19 June 2011, [http://www.dailytech.com/Inside+the+MegaHack+of+Bitcoin+the+Full+Story/article21942.htm Inside the Mega-Hack of Bitcoin: the Full Story], DailyTech</ref><ref>Timothy B. Lee, 19 June 2011, [https://arstechnica.com/tech-policy/news/2011/06/bitcoin-price-plummets-on-compromised-exchange.ars Bitcoin prices plummet on hacked exchange], Ars Technica</ref><ref>Mark Karpeles, 20 June 2011, [https://support.mtgox.com/entries/20208066-huge-bitcoin-sell-off-due-to-a-compromised-account-rollback Huge Bitcoin sell off due to a compromised account – rollback], Mt.Gox Support</ref><ref name="register1">{{Cite news
 
  |title= Bitcoin collapses on malicious trade – Mt Gox scrambling to raise the Titanic
 
  |title= Bitcoin collapses on malicious trade – Mt Gox scrambling to raise the Titanic
  |url= http://www.theregister.co.uk/2011/06/19/bitcoin_values_collapse_again/
+
  |url= https://www.theregister.co.uk/2011/06/19/bitcoin_values_collapse_again/
 
  |date= 2011-06-19
 
  |date= 2011-06-19
 
  |author= Chirgwin, Richard
 
  |author= Chirgwin, Richard
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}}</ref> Accounts with the equivalent of more than USD 8,750,000 were affected.<ref name="mick" />
 
}}</ref> Accounts with the equivalent of more than USD 8,750,000 were affected.<ref name="mick" />
  
In July 2011, The operator of Bitomat, the third largest Bitcoin exchange, announced that he lost access to his wallet.dat file with about 17,000 BitCoins (roughly equivalent to 220,000 USD at that time). He announced that he would sell the service for the missing amount, aiming to use funds from the sale to refund his customers.<ref>[http://siliconangle.com/blog/2011/08/01/third-largest-bitcoin-exchange-bitomat-lost-their-wallet-over-17000-bitcoins-missing/ Third Largest Bitcoin Exchange Bitomat Lost Their Wallet, Over 17,000 Bitcoins Missing]. SiliconAngle</ref>
+
In July 2011, The operator of Bitomat, the third largest Bitcoin exchange, announced that he lost access to his wallet.dat file with about 17,000 Bitcoins (roughly equivalent to 220,000 USD at that time). He announced that he would sell the service for the missing amount, aiming to use funds from the sale to refund his customers.<ref>[http://siliconangle.com/blog/2011/08/01/third-largest-bitcoin-exchange-bitomat-lost-their-wallet-over-17000-bitcoins-missing/ Third Largest Bitcoin Exchange Bitomat Lost Their Wallet, Over 17,000 Bitcoins Missing]. SiliconAngle</ref>
  
 
In August 2011, MyBitcoin, one of popular Bitcoin transaction processors, declared that it was hacked, which resulted in it being shut down, with paying 49% on customer deposits, leaving more than 78,000 BitCoins (roughly equivalent to 800,000 USD at that time) unaccounted for.<ref>[http://betabeat.com/2011/08/mybitcoin-spokesman-finally-comes-forward-what-did-you-think-we-did-after-the-hack-we-got-shitfaced/ MyBitcoin Spokesman Finally Comes Forward: “What Did You Think We Did After the Hack? We Got Shitfaced”]. BetaBeat</ref><ref>[http://betabeat.com/2011/08/search-for-owners-of-mybitcoin-loses-steam/ Search for Owners of MyBitcoin Loses Steam]. BetaBeat</ref>
 
In August 2011, MyBitcoin, one of popular Bitcoin transaction processors, declared that it was hacked, which resulted in it being shut down, with paying 49% on customer deposits, leaving more than 78,000 BitCoins (roughly equivalent to 800,000 USD at that time) unaccounted for.<ref>[http://betabeat.com/2011/08/mybitcoin-spokesman-finally-comes-forward-what-did-you-think-we-did-after-the-hack-we-got-shitfaced/ MyBitcoin Spokesman Finally Comes Forward: “What Did You Think We Did After the Hack? We Got Shitfaced”]. BetaBeat</ref><ref>[http://betabeat.com/2011/08/search-for-owners-of-mybitcoin-loses-steam/ Search for Owners of MyBitcoin Loses Steam]. BetaBeat</ref>
  
In early August 2012, a lawsuit was filed in San Francisco court against Bitcoinica, claiming about 460,000 USD from the company. Bitcoinica was hacked twice in 2012, which led to allegations of neglecting the safety of customers' money and cheating them out of withdrawal requests.<ref>[http://arstechnica.com/tech-policy/2012/08/bitcoinica-users-sue-for-460k-in-lost-bitcoins/ Bitcoinica users sue for $460k in lost Bitcoins]. Arstechnica</ref><ref>[http://spectrum.ieee.org/tech-talk/computing/networks/first-bitcoin-lawsuit-filed-in-san-francisco First Bitcoin Lawsuit Filed In San Francisco]. IEEE Spectrum</ref>
+
In early August 2012, a lawsuit was filed in San Francisco court against Bitcoinica, claiming about 460,000 USD from the company. Bitcoinica was hacked twice in 2012, which led to allegations of neglecting the safety of customers' money and cheating them out of withdrawal requests.<ref>[https://arstechnica.com/tech-policy/2012/08/bitcoinica-users-sue-for-460k-in-lost-bitcoins/ Bitcoinica users sue for $460k in lost Bitcoins]. Arstechnica</ref><ref>[https://spectrum.ieee.org/tech-talk/computing/networks/first-bitcoin-lawsuit-filed-in-san-francisco First Bitcoin Lawsuit Filed In San Francisco]. IEEE Spectrum</ref>
  
In late August 2012, Bitcoin Savings and Trust was shut down by the owner, allegedly leaving around $5.6 million in debts; this led to allegations of the operation being a Ponzi scheme.<ref>{{Cite web|title=Bitcoin ponzi scheme – investors lose $5 million USD in online hedge fund|url=http://rt.com/usa/news/investors-currency-digital-fund-868/|publisher=RT}}</ref><ref>{{Cite web|last=Jeffries|first=Adrianne|title=Suspected multi-million dollar Bitcoin pyramid scheme shuts down, investors revolt|url=http://www.theverge.com/2012/8/27/3271637/bitcoin-savings-trust-pyramid-scheme-shuts-down|publisher=The Verge}}</ref><ref>{{Cite web|last=Mick|first=Jason|title="Pirateat40" Makes Off $5.6M USD in BitCoins From Pyramid Scheme|url=http://www.dailytech.com/Pirateat40+Makes+Off+56M+USD+in+BitCoins+From+Pyramid+Scheme/article25538.htm|publisher=DailyTech}}</ref><ref>[http://pandodaily.com/2012/08/31/bitcoin-how-a-virtual-currency-became-real-with-a-5-6m-fraud/ Bitcoin: How a Virtual Currency Became Real with a $5.6M Fraud]. PandoDaily</ref> In September 2012, it was reported that U.S. Securities and Exchange Commission has started an investigation on the case.<ref>[http://blogs.telegraph.co.uk/technology/willardfoxton2/100007836/bitcoin-pirate-scandal-sec-steps-in-amid-allegations-that-the-whole-thing-was-a-ponzi-scheme/ Bitcoin 'Pirate' scandal: SEC steps in amid allegations that the whole thing was a Ponzi scheme ]. The Telegraph</ref>
+
In late August 2012, Bitcoin Savings and Trust was shut down by the owner, allegedly leaving around $5.6 million in debts; this led to allegations of the operation being a Ponzi scheme.<ref>{{Cite web|title=Bitcoin ponzi scheme – investors lose $5 million USD in online hedge fund|url=https://rt.com/usa/news/investors-currency-digital-fund-868/|publisher=RT}}</ref><ref>{{Cite web|last=Jeffries|first=Adrianne|title=Suspected multi-million dollar Bitcoin pyramid scheme shuts down, investors revolt|url=http://www.theverge.com/2012/8/27/3271637/bitcoin-savings-trust-pyramid-scheme-shuts-down|publisher=The Verge}}</ref><ref>{{Cite web|last=Mick|first=Jason|title="Pirateat40" Makes Off $5.6M USD in Bitcoin From Pyramid Scheme|url=http://www.dailytech.com/Pirateat40+Makes+Off+56M+USD+in+BitCoins+From+Pyramid+Scheme/article25538.htm|publisher=DailyTech}}</ref><ref>[https://pandodaily.com/2012/08/31/bitcoin-how-a-virtual-currency-became-real-with-a-5-6m-fraud/ Bitcoin: How a Virtual Currency Became Real with a $5.6M Fraud]. PandoDaily</ref> In September 2012, it was reported that U.S. Securities and Exchange Commission has started an investigation on the case.<ref>[http://blogs.telegraph.co.uk/technology/willardfoxton2/100007836/bitcoin-pirate-scandal-sec-steps-in-amid-allegations-that-the-whole-thing-was-a-ponzi-scheme/ Bitcoin 'Pirate' scandal: SEC steps in amid allegations that the whole thing was a Ponzi scheme ]. The Telegraph</ref>
  
In September 2012, Bitfloor Bitcoin exchange also reported being hacked, with 24,000 BitCoins (roughly equivalent to 250,000 USD) stolen. As a result, Bitfloor suspended operations.<ref>[http://www.bbc.co.uk/news/technology-19486695 Bitcoin theft causes Bitfloor exchange to go offline]. BBC</ref><ref>[http://www.theverge.com/2012/9/5/3293375/bitfloor-bitcoin-exchange-suspended-theft Bitcoin exchange BitFloor suspends operations after $250,000 theft Bitcoin exchange BitFloor suspends operations after $250,000 theft]. The Verge</ref> The same month, Bitfloor resumed operations, with its founder saying that he reported the theft to FBI, and that he is planning to repay the victims, though the time frame for such repayment is unclear.<ref>[http://www.pcworld.com/article/2010586/bitcoin-exchange-back-online-after-hack.html?tk=rel_news Bitcoin exchange back online after hack]. PCWorld</ref>
+
In September 2012, Bitfloor Bitcoin exchange also reported being hacked, with 24,000 Bitcoins (roughly equivalent to 250,000 USD) stolen. As a result, Bitfloor suspended operations.<ref>[http://www.bbc.co.uk/news/technology-19486695 Bitcoin theft causes Bitfloor exchange to go offline]. BBC</ref><ref>[http://www.theverge.com/2012/9/5/3293375/bitfloor-bitcoin-exchange-suspended-theft Bitcoin exchange BitFloor suspends operations after $250,000 theft Bitcoin exchange BitFloor suspends operations after $250,000 theft]. The Verge</ref> The same month, Bitfloor resumed operations, with its founder saying that he reported the theft to FBI, and that he is planning to repay the victims, though the time frame for such repayment is unclear.<ref>[http://www.pcworld.com/article/2010586/bitcoin-exchange-back-online-after-hack.html?tk=rel_news Bitcoin exchange back online after hack]. PCWorld</ref>
  
 
===Taxation===
 
===Taxation===
In September 2012, the Intra-European Organization of Tax Administrations (IOTA), in Tbilisi, Georgia, held a workshop titled "Auditing Individuals and Legal Entities in the Use of e-Money." The workshop was attended by representatives from 23 countries.<ref name="BitCoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>  Jerry Taylor, IOTA's technical taxation expert, said, "There's an awful lot happening on the Internet environment which is fascinating at the moment and introducing new challenges for auditors when it comes to virtual currency."<ref name="BitCoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>  Bitcoin was mentioned during the workshop.<ref name="BitCoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>   
+
In September 2012, the Intra-European Organization of Tax Administrations (IOTA), in Tbilisi, Georgia, held a workshop titled "Auditing Individuals and Legal Entities in the Use of e-Money." The workshop was attended by representatives from 23 countries.<ref name="Bitcoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>  Jerry Taylor, IOTA's technical taxation expert, said, "There's an awful lot happening on the Internet environment which is fascinating at the moment and introducing new challenges for auditors when it comes to virtual currency."<ref name="Bitcoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>  Bitcoin was mentioned during the workshop.<ref name="Bitcoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>   
  
Matthew Elias, founder of the [[Cryptocurrency Legal Advocacy Group]] (CLAG) published "Staying Between the Lines: A Survey of U.S. Income Taxation and its Ramifications on Cryptocurrencies", which discusses "the taxability of cryptocurrencies such as bitcoin."<ref name="BitCoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>  CLAG "stressed the importance for taxpayers to determine on their own whether taxes are due on a bitcoin-related transaction based on whether one has "experienced a realization event."<ref name="BitCoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>  Such examples are "when a taxpayer has provided a service in exchange for bitcoins, a realization event has probably occurred, and any gain or loss would likely be calculated using fair market values for the service provided."<ref name="BitCoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>
+
Matthew Elias, founder of the [[Cryptocurrency Legal Advocacy Group]] (CLAG) published "Staying Between the Lines: A Survey of U.S. Income Taxation and its Ramifications on Cryptocurrencies", which discusses "the taxability of cryptocurrencies such as Bitcoin."<ref name="Bitcoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>  CLAG "stressed the importance for taxpayers to determine on their own whether taxes are due on a Bitcoin-related transaction based on whether one has "experienced a realization event."<ref name="Bitcoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>  Such examples are "when a taxpayer has provided a service in exchange for Bitcoins, a realization event has probably occurred, and any gain or loss would likely be calculated using fair market values for the service provided."<ref name="Bitcoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>
  
[[Peter Vessenes]], [[Bitcoin Foundation|Bitcoin Foundation's]] executive director, said, since the foundation is trying to pay for everything in bitcoin, including salaries, "How do we W-2 someone for their bitcoins? Do we mark-to-market every time a transfer happens? Payroll companies cringe."<ref name="BitCoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>  The Bitcoin Foundation hopes "to push for solid guidance about its legal and tax treatment." [[Patrick Murck]], legal counsel for the Bitcoin Foundation, said he would like "to help regulators understand the technology better so they can make better decisions."<ref name="BitCoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref> Murck said, "Bitcoin has the potential to become much more than a niche currency, but it needs the guidance and understanding of regulators." and "The full potential of bitcoin could be realized through clearer guidelines and a better understanding by financial and tax regulators." and "Part of making that happen is to talk to regulators, the IRS, and tax professionals and helping them understand that bitcoin is not this nefarious thing, it's just software, it's a community, and there's nothing inherently nefarious about either of those things."<ref name="BitCoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>
+
[[Peter Vessenes]], [[Bitcoin Foundation|Bitcoin Foundation's]] executive director, said, since the foundation is trying to pay for everything in Bitcoin, including salaries, "How do we W-2 someone for their Bitcoins? Do we mark-to-market every time a transfer happens? Payroll companies cringe."<ref name="BitCoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>  The Bitcoin Foundation hopes "to push for solid guidance about its legal and tax treatment." [[Patrick Murck]], legal counsel for the Bitcoin Foundation, said he would like "to help regulators understand the technology better so they can make better decisions."<ref name="BitCoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref> Murck said, "Bitcoin has the potential to become much more than a niche currency, but it needs the guidance and understanding of regulators." and "The full potential of Bitcoin could be realized through clearer guidelines and a better understanding by financial and tax regulators." and "Part of making that happen is to talk to regulators, the IRS, and tax professionals and helping them understand that Bitcoin is not this nefarious thing, it's just software, it's a community, and there's nothing inherently nefarious about either of those things."<ref name="BitCoin Tax issues Oct 2012">{{cite journal | title=2012 TNT 209-4 NEWS ANALYSIS: VIRTUAL CURRENCY: A NEW WORRY FOR TAX ADMINISTRATORS?. (Release Date: OCTOBER 17, 2012) (Doc 2012-21516) | author=Stewart, David D. and Soong Johnston, Stephanie D. | journal=Tax Notes Today | year=2012 | month=October 29 | volume=2012 TNT 209-4 | issue=2012 TNT 209-4}}</ref>
  
 
==See Also==
 
==See Also==

Latest revision as of 16:29, 19 September 2018

Bitcoin is a decentralized digital currency created by an unknown person or group of people under the name Satoshi Nakamoto and released as open-source software in 2009. It does not rely on a central server to process transactions or store funds. There are a maximum of 2,099,999,997,690,000 Bitcoin elements (called Satoshis, the unit has been named in collective homage to the original creator), which are currently most commonly measured in units of 100,000,000 known as BTC. There will only ever be 21 million Bitcoin (BTC) to ever be created.

As of January 2018, it is the most widely used alternative currency,[1][2] now with the total market cap around 250 billion US dollars.[3]

Bitcoin has no central issuer; instead, the peer-to-peer network regulates Bitcoins, transactions and issuance according to consensus in network software. These transactions are verified by network nodes through the use of cryptography and recorded in a public distributed ledger called a blockchain.

Bitcoins are issued to various nodes that verify transactions through computing power; it is established that there will be a limited and scheduled release of no more than 21 million BTC worth of coins, which will be fully issued by the year 2140.

Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services. As of February 2015, over 100,000 merchants and vendors accepted Bitcoin as payment. Research produced by the University of Cambridge estimates that in 2017, there were 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using Bitcoin.

Internationally, Bitcoins can be exchanged and managed through various websites and software along with physical banknotes and coins.[4][5]

History

Main article: History

A cryptographic system for untraceable payments was first described by David Chaum in 1982.[6] In 1990 Chaum extended this system to create the first cryptographic anonymous electronic cash system.,[7] which became known as ecash. [8] In 1998 Wei Dai published a description of an anonymous, distributed electronic cash system which he called "b-money".[9] Around the same time, Nick Szabo created bit gold.[10][11] Like Bitcoin, Bit gold was a currency system where users would compete to solve a proof of work function, with solutions being cryptographically chained together and published via a distributed property title registry. A variant of Bit gold, called Reusable Proofs of Work, was implemented by Hal Finney.[11]

In 2008, Satoshi Nakamoto published a paper[12][13] on The Cryptography Mailing list at metzdowd.com[14] describing the Bitcoin protocol.

The Bitcoin network came into existence on 3 January 2009 with the release of the first Bitcoin client, wxBitcoin, and the issuance of the first Bitcoins.[15][16][17] A year after, the initial exchange rates for Bitcoin were set by individuals on the bitcointalk forums.[citation needed] The most significant transaction involved a 10,000 BTC pizza.[18] Today, the majority of Bitcoin exchanges occur on the Bitstamp Bitcoin exchange.[19]

In 2011, Wikileaks,[20] Freenet,[21] Singularity Institute,[22] Internet Archive,[23] Free Software Foundation[24] and others, began to accept donations in Bitcoin. The Electronic Frontier Foundation did so for a while but has since stopped, citing concerns about a lack of legal precedent about new currency systems, and because they "generally don't endorse any type of product or service."[25] Some small businesses had started to adopt Bitcoin. LaCie, a public company, accepts Bitcoin for its Wuala service.[26]

In 2012, BitPay reports of having over 1000 merchants accepting Bitcoin under its payment processing service.[27]

Administration

Bitcoin is administered through a decentralized peer-to-peer network.[12] Cryptographic technologies and the peer-to-peer network of computing power enables users to make and verify irreversible, instant online Bitcoin payments, without an obligation to trust and use centralized banking institutions and authorities. Dispute resolution services are not made directly available. Instead it is left to the users to verify and trust the parties they are sending money to through their choice of methods.

Bitcoins are issued according to rules agreed to by the majority of the computing power within the Bitcoin network. The core rules describing the predictable issuance of Bitcoins to its verifying servers, a voluntary and competitive transaction fee system and the hard limit of no more than 21 million BTC issued in total.[12]

Bitcoin does not require a central bank, State,[28] or incorporated backers.

Services

Main article: Wallet

Bitcoins are sent and received through software and websites called wallets. They send and confirm transactions to the network through Bitcoin addresses, the identifiers for users' Bitcoin wallets within the network.[12]

Bitcoin addresses

Main article: Address

Payments are made to Bitcoin "addresses": human-readable strings of numbers and letters around 33 characters in length, always beginning with the digit 1 or 3, as in the example of 31uEbMgunupShBVTewXjtqbBv5MndwfXhb.

Users obtain new Bitcoin addresses from their Bitcoin software. Creating a new address can be a completely offline process and require no communication with the Bitcoin network. Web services often generate a new Bitcoin address for every user, allowing them to have their custom deposit addresses.[dubious?]

Transaction fees

Main article: Transaction fees

Transaction fees may be included with any transfer of Bitcoins. While it's technically possible to send a transaction with zero fee, as of 2017 it's highly unlikely that one of these transactions confirms in a realistic amount of time, causing most nodes on the network to drop it. For transactions which consume or produce many outputs (and therefore have a large data size), higher transaction fees are usually expected.

Confirmations

Main article: Confirmation

The network's software confirms a transaction when it records it in a block. Further blocks of transactions confirm it even further. After six confirmations/blocks, a transaction is confirmed beyond reasonable doubt.

The network must store the whole transaction history inside the blockchain, which grows constantly as new records are added and never removed. Nakamoto conceived that as the database became larger, users would desire applications for Bitcoin that didn't store the entire database on their computer. To enable this, the blockchain uses a merkle tree to organize the transaction records in such a way that client software can locally delete portions of its own database it knows it will never need, such as earlier transaction records of Bitcoins that have changed ownership multiple times.

Economics

Initial distribution

Bitcoin has no centralized issuing authority.[29][30][31] The network is programmed to increase the money supply as a geometric series until the total number of Bitcoins reaches 21 million BTC.[1] As of October 2012 slightly over 10 million of the total 21 million BTC had been created; the current total number created is available online.[32] By 2013 half of the total supply will have been generated, and by 2017, three-quarters will have been generated. To ensure sufficient granularity of the money supply, clients can divide each BTC unit down to eight decimal places (a total of 2.1 × 1015 or 2.1 quadrillion units).[33]

The network as of 2012 required over one million times more work for confirming a block and receiving an award (25 BTC as of February 2012) than when the first blocks were confirmed. The difficulty is automatically adjusted every 2016 blocks based on the time taken to find the previous 2016 blocks such that one block is created roughly every 10 minutes.

Those who chose to put computational and electrical resources toward mining early on had a greater chance at receiving awards for block generations. This served to make available enough processing power to process blocks. Indeed, without miners there are no transactions and the Bitcoin economy comes to a halt.

Exchange rate

Prices fluctuate relative to goods and services more than more widely accepted currencies; the price of a Bitcoin is not static.

In August 2012, 1 BTC traded at around $10.00 USD. Taking into account the total number of Bitcoins mined, the monetary base of the Bitcoin network stands at over 110 million USD.[34]

Anonymity

Main article: Anonymity & Security

Transactions

While using Bitcoins is an excellent way to make your purchases, donations, and p2p payments, without losing money through inflated transaction fees, transactions are never truly anonymous. Buying Bitcoin you pass identification, Bitcoin transactions are stored publicly and permanently on the network, which means anyone can see the balance and transactions of any Bitcoin address. Bitcoin activities are recorded and available publicly via the blockchain, a comprehensive database which keeps a record of Bitcoin transactions.

Buying/selling Bitcoins

All exchange companies require the user to scan ID documents, and large transactions must be reported to the proper governmental authority.

This means that a third party with an interest in tracking your activities can use your visible balance and ID information as a basis from which to track your future transactions or to study previous activity. In short, you have compromised your security and privacy.

In addition to conventional exchanges there are also peer-to-peer exchanges. Peer to peer exchanges will often not collect KYC and identity information directly from users, instead they let the users handle KYC amongst themselves. These can often be a better alternative for those looking to purchase Bitcoin quickly and without KYC delay.

Mixing services

Mixing services are used to avoid compromising of privacy and security. Mixing services provide to periodically exchange your Bitcoin for different ones which cannot be associated with the original owner.

Security

See also: Weaknesses

In the history of Bitcoin, there have been a few incidents, caused by problematic as well as malicious transactions. In the worst such incident, and the only one of its type, a person was able to pretend that he had a practically infinite supply of Bitcoins, for almost 9 hours.

Bitcoin relies, among other things, on public key cryptography and thus may be vulnerable to quantum computing attacks if and when practical quantum computers can be constructed.

If multiple different software packages, whose usage becomes widespread on the Bitcoin network, disagree on the protocol and the rules for transactions, this could potentially cause a fork in the block chain, with each faction of users being able to accept only their own version of the history of transactions. This could influence the price of Bitcoins.

A global, organized campaign against the currency or the software could also influence the demand for Bitcoins, and thus the exchange price.

Bitcoin mining

Main article: Mining

Bitcoin mining nodes are responsible for managing the Bitcoin network.

Bitcoins are awarded to Bitcoin nodes known as "miners" for the solution to a difficult proof-of-work problem which confirms transactions and prevents double-spending. This incentive, as the Nakamoto white paper describes it, encourages "nodes to support the network, and provides a way to initially distribute coins into circulation, since no central authority issues them."[12]

Nakamoto compared the generation of new coins by expending CPU time and electricity to gold miners expending resources to add gold to circulation.[12]

Iceland is a good location for mining Bitcoin because of the natural cold temperature.

Node operation

The node software for the Bitcoin network is based on peer-to-peer networking, digital signatures and cryptographic proof to make and verify transactions. Nodes broadcast transactions to the network, which records them in a public record of all transactions, called the blockchain, after validating them with a proof-of-work system.

Satoshi Nakamoto designed the first Bitcoin node and mining software[35] and developed the majority of the first implementation, Bitcoind, from 2007 to mid-2010.[36]

Node implementations include core software such as Bitcoind/Bitcoin-Qt, libbitcoin, cbitcoin[37] and bitcoinj.[38][39]

Every node in the Bitcoin network collects all the unacknowledged transactions it knows of in a file called a block, which also contains a reference to the previous valid block known to that node. It then appends a nonce value to this previous block and computes the SHA-256 cryptographic hash of the block and the appended nonce value. The node repeats this process until it adds a nonce that allows for the generation of a hash with a value lower than a specified target. Because computers cannot practically reverse the hash function, finding such a nonce is hard and requires on average a predictable amount of repetitious trial and error. This is where the proof-of-work concept comes in to play. When a node finds such a solution, it announces it to the rest of the network. Peers receiving the new solved block validate it by computing the hash and checking that it really starts with the given number of zero bits (i.e., that the hash is within the target). Then they accept it and add it to the chain.

Mining rewards

In addition to receiving the pending transactions confirmed in the block, a generating node adds a generate transaction, which awards new Bitcoins to the operator of the node that generated the block. The system sets the payout of this generated transaction according to its defined inflation schedule. The miner that generates a block also receives the fees that users have paid as an incentive to give particular transactions priority for faster confirmation.[40]

The network never creates more than a 50 BTC reward per block and this amount will decrease over time towards zero, such that no more than 21 million BTC will ever exist.[33] As this payout decreases, the incentive for users to run block-generating nodes is intended to change to earning transaction fees.

Mining pools

Main article: Pooled mining

Bitcoin users often pool computational effort to increase the stability of the collected fees and subsidy they receive.[41]

Mining difficulty

Main article: Difficulty

In order to throttle the creation of blocks, the difficulty of generating new blocks is adjusted over time. If mining output increases or decreases, the difficulty increases or decreases accordingly.

The adjustment is done by changing the threshold that a hash is required to be less than. A lower threshold means fewer possible hashes can be accepted, and thus a higher degree of difficulty. The target rate of block generation is one block every 10 minutes, or 2016 blocks every two weeks. Bitcoin changes the difficulty of finding a valid block every 2016 blocks, using the difficulty that would have been most likely to cause the prior 2016 blocks to have taken two weeks to generate, according to the timestamps on the blocks. Technically, this is done by modeling the generation of Bitcoins as Poisson process. All nodes perform and enforce the same difficulty calculation.

Difficulty is intended as an automatic stabilizer allowing mining for Bitcoins to remain profitable in the long run for the most efficient miners, independently of the fluctuations in demand of Bitcoin in relation to other currencies.

Mining hardware

Main article: Mining Hardware Comparison

Bitcoins used to be mined through Intel/AMD CPUs. As of 2012, mining has gradually moved to GPU and FPGA hardware.[42] ASIC-based hardware for Bitcoin mining has been announced by several manufacturers who intend to ship products from late 2012 to early 2013.[42]

Concerns

As an investment

Main article: Bitcoin as an investment

Bitcoin describes itself as an experimental digital currency. Reuben Grinberg has noted that Bitcoin's supporters have argued that Bitcoin is neither a security or an investment because it fails to meet the criteria for either category.[43] Although it is a virtual currency, some people see it as an investment[44] or accuse it of being a form of investment fraud known as a Ponzi scheme.[45][46] A report by the European Central Bank, using the U.S. Securities and Exchange Commission's definition of a Ponzi scheme, found that the use of Bitcoins shares some characteristics with Ponzi schemes, but also has characteristics of its own which contradict several common aspects of Ponzi schemes.[47]

Privacy

Because transactions are broadcast to the entire network, they are inherently public. Unlike regular banking,[48] which preserves customer privacy by keeping transaction records private, loose transactional privacy is accomplished in Bitcoin by using many unique addresses for every wallet, while at the same time publishing all transactions. As an example, if Alice sends 123.45 BTC to Bob, the network creates a public record that allows anyone to see that 123.45 has been sent from one address to another. However, unless Alice or Bob make their ownership of these addresses known, it is difficult for anyone else to connect the transaction with them. However, if someone connects an address to a user at any point they could follow back a series of transactions as each participant likely knows who paid them and may disclose that information on request or under duress.

It can be difficult to associate Bitcoin identities with real-life identities.[49] This property makes Bitcoin transactions attractive to sellers of illegal products.[50][51]

Illicit use

Cracking

The cracking organization "LulzSec" accepted donations in Bitcoin, having said that the group "needs Bitcoin donations to continue their hacking efforts".[52][53]

Silk Road

Silk Road is an anonymous black market that uses only the Bitcoin.[54]

In a 2011 letter to Attorney General Eric Holder and the Drug Enforcement Administration, senators Charles Schumer of New York and Joe Manchin of West Virginia called for an investigation into Silk Road and the Bitcoin.[54] Schumer described the use of Bitcoins at Silk Road as a form of money laundering.[29]

Botnet mining

In June 2011, Symantec warned about the possibility of botnets engaging in covert "mining" of Bitcoins,[55][56] consuming computing cycles, using extra electricity and possibly increasing the temperature of the computer (not associated with Snow Day Calculator). Later that month, the Australian Broadcasting Corporation caught an employee using the company's servers to generate Bitcoins without permission.[57] Some malware also uses the parallel processing capabilities of the GPUs built into many modern-day video cards.[58] In mid August 2011, Bitcoin miner botnets were found;[59] trojans infecting Mac OS X have also been uncovered.[60]

Theft and fraud

On 19 June 2011, a security breach of the Mt.Gox (an acronym for Magic: The Gathering Online Exchange, its original purpose) Bitcoin Exchange caused the price of a Bitcoin to briefly drop to US$0.01 on the Mt.Gox exchange (though it remained unaffected on other exchanges) after a hacker allegedly used credentials from a Mt.Gox auditor's compromised computer to illegally transfer a large number of Bitcoins to him- or herself and sell them all, creating a massive "ask" order at any price. Within minutes the price rebounded to over $15 before Mt.Gox shut down their exchange and canceled all trades that happened during the hacking period.[61][62] The exchange rate of Bitcoins quickly returned to near pre-crash values.[63][64][65][66] Accounts with the equivalent of more than USD 8,750,000 were affected.[63]

In July 2011, The operator of Bitomat, the third largest Bitcoin exchange, announced that he lost access to his wallet.dat file with about 17,000 Bitcoins (roughly equivalent to 220,000 USD at that time). He announced that he would sell the service for the missing amount, aiming to use funds from the sale to refund his customers.[67]

In August 2011, MyBitcoin, one of popular Bitcoin transaction processors, declared that it was hacked, which resulted in it being shut down, with paying 49% on customer deposits, leaving more than 78,000 BitCoins (roughly equivalent to 800,000 USD at that time) unaccounted for.[68][69]

In early August 2012, a lawsuit was filed in San Francisco court against Bitcoinica, claiming about 460,000 USD from the company. Bitcoinica was hacked twice in 2012, which led to allegations of neglecting the safety of customers' money and cheating them out of withdrawal requests.[70][71]

In late August 2012, Bitcoin Savings and Trust was shut down by the owner, allegedly leaving around $5.6 million in debts; this led to allegations of the operation being a Ponzi scheme.[72][73][74][75] In September 2012, it was reported that U.S. Securities and Exchange Commission has started an investigation on the case.[76]

In September 2012, Bitfloor Bitcoin exchange also reported being hacked, with 24,000 Bitcoins (roughly equivalent to 250,000 USD) stolen. As a result, Bitfloor suspended operations.[77][78] The same month, Bitfloor resumed operations, with its founder saying that he reported the theft to FBI, and that he is planning to repay the victims, though the time frame for such repayment is unclear.[79]

Taxation

In September 2012, the Intra-European Organization of Tax Administrations (IOTA), in Tbilisi, Georgia, held a workshop titled "Auditing Individuals and Legal Entities in the Use of e-Money." The workshop was attended by representatives from 23 countries.[80] Jerry Taylor, IOTA's technical taxation expert, said, "There's an awful lot happening on the Internet environment which is fascinating at the moment and introducing new challenges for auditors when it comes to virtual currency."[80] Bitcoin was mentioned during the workshop.[80]

Matthew Elias, founder of the Cryptocurrency Legal Advocacy Group (CLAG) published "Staying Between the Lines: A Survey of U.S. Income Taxation and its Ramifications on Cryptocurrencies", which discusses "the taxability of cryptocurrencies such as Bitcoin."[80] CLAG "stressed the importance for taxpayers to determine on their own whether taxes are due on a Bitcoin-related transaction based on whether one has "experienced a realization event."[80] Such examples are "when a taxpayer has provided a service in exchange for Bitcoins, a realization event has probably occurred, and any gain or loss would likely be calculated using fair market values for the service provided."[80]

Peter Vessenes, Bitcoin Foundation's executive director, said, since the foundation is trying to pay for everything in Bitcoin, including salaries, "How do we W-2 someone for their Bitcoins? Do we mark-to-market every time a transfer happens? Payroll companies cringe."[81] The Bitcoin Foundation hopes "to push for solid guidance about its legal and tax treatment." Patrick Murck, legal counsel for the Bitcoin Foundation, said he would like "to help regulators understand the technology better so they can make better decisions."[81] Murck said, "Bitcoin has the potential to become much more than a niche currency, but it needs the guidance and understanding of regulators." and "The full potential of Bitcoin could be realized through clearer guidelines and a better understanding by financial and tax regulators." and "Part of making that happen is to talk to regulators, the IRS, and tax professionals and helping them understand that Bitcoin is not this nefarious thing, it's just software, it's a community, and there's nothing inherently nefarious about either of those things."[81]

See Also

References

  1. 1.0 1.1 Ron Dorit; Adi Shamir. "Quantitative Analysis of the Full Bitcoin Transaction Graph". Cryptology ePrint Archive. p. 17. https://eprint.iacr.org/2012/584.pdf. Retrieved 18 October 2012. "The Bitcoin system is the best known and most widely used alternative payment scheme,..."
  2. "Coinmarketcap.com". https://coinmarketcap.com/.
  3. "Market Capitalization". Coinmarketcap.com. https://coinmarketcap.com/currencies/bitcoin/. Retrieved 10 January 2018.
  4. "Physical Bitcoins by Casascius". Casascius Coins. https://www.casascius.com/. Retrieved 29 September 2012.
  5. "Bitbills". Bitbills. http://www.bitbills.com/. Retrieved 29 September 2012.
  6. David Chaum, Blind signatures for untraceable payments, Advances in Cryptology - Crypto '82, Springer-Verlag (1983), 199–203.
  7. Chaum, David; Fiat, Amos; Naor, Moni. "Untraceable Electronic Cash". Lecture Notes in Computer Science. http://blog.koehntopp.de/uploads/chaum_fiat_naor_ecash.pdf.
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