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===Bubbles===
===Bubbles===
⚫
Many have mentioned speculative [[bubble (economics)|bubbles]] in connection with Bitcoin.<ref>{{cite web | url=https://medium.com/money-banking/2b5ef79482cb | title=The Bitcoin Bubble and the Future of Currency | work=medium.com | date=3 April 2013 | accessdate=26 October 2013 | author=Salmon, Felix}}</ref><ref>{{cite web | url=http://money.cnn.com/2013/04/12/investing/bitcoin-bubble/ | title=Bitcoin bubble may have burst | publisher=CNN | work=CNNMoney | date=12 April 2013 | accessdate=26 October 2013 | author=Isidore, Chris}}</ref> Professor [[John Quiggin]] of the University of Queensland has noted that since Bitcoin by design has no intrinsic value, it is "perhaps the finest example of a pure bubble" currently known, but cautions that we have no way to predict when the value of bitcoins will return to zero.<ref>{{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 |archiveurl=http://archive.is/IQVny |archivedate=29 April 2013 |deadurl=no}}</ref><ref>{{cite web |url= http://www.gq-magazine.co.uk/comment/articles/2013-04/05/bitcoin-bubble-exchange-rate-crash |title= When the Bitcoin Bubble will burst |work=GQ |date=5 April 13 |accessdate=27 October 2013 |author=Franklin, Oliver}}</ref>
Many have mentioned speculative [[bubble (economics)|bubbles]] in connection with Bitcoin, and [[Reuters]] journalist Felix Salmon correctly predicted the bursting of one such Bitcoin bubble in April 2013.<ref>For Salmon's 3 April prediction, see {{cite web | url=https://medium.com/money-banking/2b5ef79482cb | title=The Bitcoin Bubble and the Future of Currency | work=medium.com | date=3 April 2013 | accessdate=26 October 2013 | author=Salmon, Felix}}
⚫
* For bubble bursting 12 April, see {{cite web | url=http://money.cnn.com/2013/04/12/investing/bitcoin-bubble/ | title=Bitcoin bubble may have burst | publisher=CNN | work=CNNMoney | date=12 April 2013 | accessdate=26 October 2013 | author=Isidore, Chris}}</ref> Professor [[John Quiggin]] of the University of Queensland has noted that since Bitcoin by design has no intrinsic value, it is "perhaps the finest example of a pure bubble" currently known, but cautions that we have no way to predict when the value of bitcoins will return to zero.<ref>{{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 |archiveurl=http://archive.is/IQVny |archivedate=29 April 2013 |deadurl=no}}</ref> Economist [[Steve Hanke]] has also mentioned the possibility of a Bitcoin bubble.<ref>{{cite web |url= http://www.gq-magazine.co.uk/comment/articles/2013-04/05/bitcoin-bubble-exchange-rate-crash |title= When the Bitcoin Bubble will burst |work=GQ |date=5 April 13 |accessdate=27 October 2013 |author=Franklin, Oliver}}</ref>


===Alternative to fiat currency===
===Alternative to fiat currency===

Revision as of 20:09, 24 November 2013

Bitcoin
A common Bitcoin logo
Unit
SymbolBTC, XBT,[1] , ฿ (note: this also is the baht symbol),[2] Ƀ[3]‎
Denominations
Subunit
 .001mBTC (millicoin)
 .000001μBTC (microcoin)
 .00000001satoshi[4]
Demographics
Date of introduction3 January 2009Bitcoin Genesis Block
User(s)International
Issuance
LedgerThe majority of the Bitcoin peer-to-peer network regulates transactions and balances.[5]
Valuation
IssuanceLimited release
 SourceTotal BTC in Circulation
 MethodThe rate of new Bitcoin creation will be halved every four years until there are 21 million BTC[6]: 17 

Bitcoin (sign: ; code: BTC or XBT[7]) is a peer-to-peer digital currency that functions without the intermediation of a central authority.[8] The concept was introduced in a 2008 paper by a pseudonymous developer known as "Satoshi Nakamoto".[9]

Bitcoin has been called a cryptocurrency because it is decentralized and uses cryptography to control transactions and prevent double-spending, a problem for digital currencies.[10][11] Once validated, every individual transaction is permanently recorded in a public ledger known as the blockchain.[8] Payment processing is done by a network of private computers often specially tailored to this task.[12] The operators of these computers, known as "miners", are rewarded with transaction fees and newly minted Bitcoins. New bitcoins are created at an ever-decreasing rate.[8]

Bitcoins are stored by associating them with addresses called "wallets". Wallets can be stored on web services, on local hardware like PCs and mobile devices, or on paper print-outs. Thefts of bitcoins from web services and online wallets have been covered in the media, prompting assertions that the safest way to store bitcoins is in secure paper wallets.

In 2012, The Economist reasoned that Bitcoin has been popular because of "its role in dodgy online markets,"[13] and in 2013 the FBI shut down one such service, Silk Road, which specialized in illegal drugs (whereupon the FBI came into the control of approximately 1.5% of all bitcoins in circulation).[14] However, bitcoins are increasingly used as payment for legitimate products and services, and merchants have an incentive to accept the currency because transaction fees are lower than the 2 to 3% typically imposed by credit card processors.[15] Notable vendors include OkCupid, Reddit, WordPress, and Chinese Internet giant Baidu.[16]

Speculators have been attracted to Bitcoin, fueling volatility and price swings. As of July 2013, the use of Bitcoin in the retail and commercial marketplace is relatively small compared with the use by speculators.[17]

Transactions

Further information: Protocol of Bitcoin
A digital Bitcoin wallet
File:Sample Bitcoin Paper Wallet.png
A paper Bitcoin wallet

Integral to Bitcoin is a public transaction ledger and log known as the blockchain, which shows who owns how many bitcoins currently and records the participants in all prior transactions as well. By keeping a record of all transactions, the blockchain prevents double-spending (copying one bitcoin and spending it in multiple different places) because the record shows that once a bitcoin has been spent, the previous owner no longer controls it.[18] the blockchain is maintained not by a central body but by a distributed network of computers that run a program to solve cryptographic puzzles relating to information in the blockchain.[18] Users who devote computing power to maintaining the blockchain this way are called "miners" because they are awarded in bitcoin when they are first to solve such puzzles—mining is how new bitcoins are generated.[18] The mathematical calculations performed by miners' computers serve to verify that each transaction is valid and add the information to the blockchain.[19] As more bitcoins come into circulation, the puzzles involved in mining them become increasingly difficult, and the rewards are halved at regular intervals, until 21 million bitcoins have been created and production stops.[18] As Bitcoin achieves wider recognition and more people compete to mine the coins, competition for the limited number of bitcoins awarded for solving the cryptographic puzzles becomes more steep and more powerful computers are needed in order to compete—a fact which has spawned a technology boom in sales of Bitcoin mining technology.[19]

Wallets

Anyone wishing to use Bitcoin can create one or more Bitcoin addresses, which are collected and tracked in "wallets". Wallets have public addresses and private keys. Anyone can send Bitcoins to a wallet using the public address provided by the owner of the wallet, while the private key must be entered by the wallet owner to send bitcoins. Securing and protecting the private key is the essence of wallet security. Wallets allow a user to complete transactions between addresses by requesting an update to the blockchain, the public transaction log. Wallets come in a variety of forms: apps for mobile devices and computers, hardware devices, and paper tokens. When making a purchase with a mobile device, the use of QR codes to simplify transactions is ubiquitous.

Payment processing

Bitcoin payment processing fees are substantially lower than those of credit cards or money transfers.[20] The competitive advantage lower fees confer to Bitcoin may lessen or vanish in the future, however. Without a sustained increase in the value of Bitcoin relative to other currencies, payment processing fees must rise over time, and once the Bitcoin ceiling is reached, processing transactions will no longer be rewarded with new Bitcoins. This is due to the fact that the total number of Bitcoins is capped at 21 million and because the creation of each successive Bitcoin requires a larger amount of payment processing work than the last.[21] Fees are generally independent of the amount being sent, making Bitcoin attractive for those seeking to transfer larger amounts of money.[22] In one instance, Bitcoins worth millions of US dollars were transferred for only a few pennies.[23]

Anonymity

Bitcoin uses cryptography for digital signatures but not for encryption. It is possible though difficult to associate Bitcoin transactions with real-life identities.[24] In addition, Bitcoin intermediaries such as exchanges are required by law in many jurisdictions to collect personal customer data.[25]

Exchanges

Through various exchanges, Bitcoins are bought and sold at a variable price against the value of other currencies. On average, Bitcoins have appreciated rapidly in relation to other currencies including the US dollar, euro and British pound,[26] even though the issuing network halves the inflation rate at four-year intervals.[6]: 3 

While there may be a seemingly large number, exchanges regularly fail, taking client Bitcoins with them.[27]

History

Further information: History of Bitcoin

First mentioned in a 2008 paper published under the pseudonym Satoshi Nakamoto, Bitcoin became operational in early 2009.[21] The currency had early technical problems such as a 2009 exploit that allowed the creation of unlimited bitcoins.[28]

In 2011 the value of one Bitcoin rapidly rose from about $0.30 to $32, before falling back down to $2.[29]

Bitcoin began attracting media attention in late 2012, and numerous news articles have been written about it. In 2013, some mainstream services such as OkCupid, Baidu, Reddit, Humble Bundle and Foodler began accepting it.[30] That year also saw the first interventions by law enforcement. Assets belonging to the Mt. Gox exchange were seized, and the Silk Road drugs market was shut down.[31]

During November 2013, the China-based Bitcoin exchange BTC China overtook Japan-based Mt. Gox and Europe-based Bitstamp to become the largest Bitcoin trading exchange by trade volume.[32] On 19 November 2013, the value of Bitcoin on the Mt. Gox exchange soared to a peak of US$900 following a United States Senate committee hearing, at which the committee was informed that virtual currencies were a legitimate financial service.[33] On the same day, one bitcoin traded for RMB¥6780 (US$1100) on BTC China.[34] With roughly 12 million bitcoins in existence, the new price means that the market cap for Bitcoin is at least US$7.2 billion.[35]

Theft and exchange shutdowns

It is possible to steal bitcoins if the private key for an address is not kept secret; theft has been documented on numerous occasions. At other times, Bitcoin exchanges have shut down, taking their clients' bitcoins with them. A published research study showed that 45 percent of Bitcoin exchanges end up closing.[36]

Economics

Large fluctuations in the value of Bitcoin have led some to question its ability to function as a currency.[37] In addition, its deflationary bias encourages hoarding.[38] This reduces the use value[when defined as?] of a currency, and has been the downfall of other private currencies.[39][need quotation to verify] However, currently Bitcoin does see some use as a currency.[40][41]

Speculation

Bitcoins are often traded as an investment.[42] Bitcoins have been described as lacking intrinsic value as an investment because their value depends only on the willingness of users to accept them.[43]

Derivatives of bitcoins are thinly available. One organization offers futures contracts against multiple currencies.[44]

Certain investment funds have shown interest in Bitcoin with Peter Thiel's Founders Fund investing US$3 million, and the Winklevoss twins making a US$1.5 million personal investment.[45] A Bitcoin ETF may also soon be on offer.

Bubbles

Many have mentioned speculative bubbles in connection with Bitcoin.[46][47] Professor John Quiggin of the University of Queensland has noted that since Bitcoin by design has no intrinsic value, it is "perhaps the finest example of a pure bubble" currently known, but cautions that we have no way to predict when the value of bitcoins will return to zero.[48][49]

Alternative to fiat currency

Some have suggested that Bitcoin is gaining popularity in countries with problem-plagued national currencies, as it can be used to circumvent inflation, capital controls, and international sanctions. Bitcoins are used by some Argentinians as an alternative to the official fiat currency,[50] which is stymied by inflation and strict capital controls.[25] In addition, some Iranians use Bitcoins to evade currency sanctions.[51]

Financial journalists and analysts have suggested that there was a link between higher Bitcoin usage in Spain and the 2012–2013 Cypriot financial crisis.[52]

Criminal activities

Bitcoin's association with criminal activities has historically hindered the currency from attaining widespread, mainstream use and has attracted the attention of financial regulators, legislative bodies, and law enforcement[53] The Washington Post has labelled it "the currency of choice for seedy online activities,"[54] and CNN has called Bitcoin a "shady online currency."[55] Its links to criminal activities have prompted scrutiny from the FBI, US Senate, and the State of New York. The FBI stated in a 2012 report that "Bitcoins will likely continue to attract cybercriminals who view it as a means to move or steal funds".[56]

Some have suggested that due to its close association with illegal purchases, governments could outlaw Bitcoin. This assertion has been made by Steven Strauss, a Harvard public policy professor, and was also mentioned in 2013 SEC filing made by a Bitcoin investment vehicle.[57]

Mining

In June 2011, Symantec warned about the possibility of botnets engaging in covert mining of bitcoins,[58][59] consuming computing cycles, using extra electricity and possibly increasing the temperature of the computer. Some malware also used the parallel processing capabilities of the GPUs built into many modern-day video cards.[60] In mid-August 2011, Bitcoin miner botnets were detected again,[61] and less than three months later Bitcoin-mining trojans infecting Mac OS X were also discovered.[62] In April 2013 electronic sports organisation E-Sports Entertainment were accused of hijacking 14,000 computers to mine Bitcoins; the case was settled in November with the organisation fined $1 million USD if it breaks the law within the following 10 years, or $325,000 if it does not.[63]

Illegal purchases

Several news outlets assert that the popularity of Bitcoin hinges on the ability to use them to purchase illegal substances.[13] In 2013 The Guardian reported that the currency was primarily used to purchase illegal drugs and for online gambling,[64] and The Huffington Post stated that "online gambling accounts for a huge portion of Bitcoin activity."[65] Legitimate transactions are thought to be far less than the number involved in the purchase of drugs,[66] and roughly one half of all transactions made using Bitcoin are bets placed at a single online gaming website.[67] In 2012, an academic from the Carnegie Mellon CyLab and the Information Networking Institute estimated that 4.5 to 9% of all bitcoins spent were for purchases of drugs at a single online market, Silk Road.[68] As the majority of the Bitcoin transactions were at this time speculative in nature, this academic asserts that drugs constituted a much larger percentage of the products and services bought using the currency, however.[68] The Huffington Post stated in 2013 that online gun dealers use Bitcoin to sell arms without background checks.[69]

Money laundering

Fears have arisen that Bitcoin may be used to launder money, and a 2012 report by the FBI acknowledged these fears but stated that there were no known instances of this occurring.[56] However, in 2013 US authorities seized assets belonging to Mt. Gox, a service that allowed users to exchange bitcoins for US dollars.[70] Some say one obstacle to bitcoins becoming widely used to launder money may be the fact that the transaction history is public.[71]

Reception

Many economists have responded positively to Bitcoin, including François R. Velde, senior economist of the Federal Reserve in Chicago who described it as "an elegant solution to the problem of creating a digital currency."[72][73] In November 2013 Richard Branson announced that Virgin Galactic would accept Bitcoin as payment, saying that he had invested in Bitcoin and found it "fascinating how a whole new global currency has been created", encouraging others to also invest in Bitcoin.[74]

Some economists commenting on Bitcoin have been critical. Economist Paul Krugman has suggested that the structure of the currency incentivizes hoarding[75] and that its value derives from the expectation that others will accept it as payment.[76] Economist Larry Summers has expressed a "wait and see" attitude when it comes to Bitcoin.[77] Nick Colas, a market strategist for ConvergEx Group, has remarked on the effect of increasing use of Bitcoin and its restricted supply, noting, "When incremental adoption meets relatively fixed supply, it should be no surprise that prices go up. And that’s exactly what is happening to BTC prices."[78]

On the 18th 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.[79] 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][81] It was noted, however, that the Justice Department's Criminal Division has seen an increased use of virtual currencies for illegal purposes such as drugs and child pornography.[82]

See also

References

  1. ^ "XBT – Bitcoin". XE. Retrieved 11 June 2013.
  2. ^ Matonis, Jon (22 January 2013). "Bitcoin Casinos Release 2012 Earnings". Forbes. New York. Archived from the original on 16 February 2013. Responsible for more than 50% of daily network volume on the Bitcoin blockchain, SatoshiDice reported first year earnings from wagering at an impressive ฿33,310. {{cite news}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help)
  3. ^ Another Bitcoin Identity
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  5. ^ Barber, Simon; Boyen, Xavier; Shi, Elaine and Uzun, Esrin (2012). "Bitter to Better — how to make Bitcoin a better currency" (PDF). Financial Cryptography and Data Security. Lecture Notes in Computer Science. 7397. Springer: 399. doi:10.1007/978-3-642-32946-3_29. ISBN 978-3-642-32945-6.{{cite journal}}: CS1 maint: multiple names: authors list (link)
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  7. ^ XBT - Bitcoin rates, news, and tools
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  10. ^ Wary of Bitcoin? A guide to some other cryptocurrencies, ars technica, 26-05-2013
  11. ^ What does Cryptocurrency mean?, technopedia, 01-07-2013
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  16. ^ "Bitcoin Says Goodbye To Silk Road And Hello To Baidu, China's Google". Forbes. New York. 10 October 2013. Retrieved 21 October 2013.
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  22. ^ Bitcoin block chain, 4 November 2013
  23. ^ [1], blockchain.info, 4 November 2013
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  28. ^ "Vulnerability Summary for CVE-2010-5139". National Vulnerability Database. 8 June 2012. Archived from the original on 9 April 2013. Retrieved 22 March 2013. {{cite web}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help)
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  34. ^ 2013-11-19, Bitcoin Trades Over $1000 On BTC China Exchange And Crashes 30% … Then Rebounds, Prison Planet
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  43. ^ Hough, Jack (10 June 2011). "The Bitcoin Triples Again". The Wall Street Journal. New York. Archived from the original on 12 April 2013. To recap, it's is a purely online currency with no intrinsic value; its worth is based solely on the willingness of holders and merchants to accept it in trade. {{cite web}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help)
  44. ^ Foxman, Simone (2 April 2013). "How to short bitcoins (if you really must)". Quartz. Archived from the original on 29 April 2013. {{cite web}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help)
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  64. ^ Ball, James (22 March 2013). "Silk Road: the online drug marketplace that officials seem powerless to stop". theguardian.com. Guardian News and Media Limited. Retrieved 20 October 2013.
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  66. ^ Mardlin, John Jeffrey (2 October 2013). "How Will The FBI Shut Down Of Silk Road Affect Bitcoins?". Quora. Forbes. Retrieved 21 October 2013.
  67. ^ Geuss, Megan (24 August 2013). "Firm says online gambling accounts for almost half of all Bitcoin transactions". Ars Technica. Retrieved 21 October 2013.
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The Wikibook Professionalism has a page on the topic of: BitTorrent and BitCoin
The Wikibook Strategy for Information Markets has a page on the topic of: Micropayments
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