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Bitcoin - Wikipedia
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Bitcoin

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Bitcoin
Prevailing bitcoin logo
Prevailing bitcoin logo
Denominations
Pluralbitcoins
Symbol₿ (Unicode: U+20BF BITCOIN SIGN (HTML ₿))[a]
Ticker symbolBTC, XBT[b]
Precision10−8
Subunits
11000millibitcoin
1100000000satoshi[2]
Development
Original author(s)Satoshi Nakamoto
White paper"Bitcoin: A Peer-to-Peer Electronic Cash System"[4]
Implementation(s)Bitcoin Core
Initial release0.1.0 / 9 January 2009 (12 years ago) (2009-01-09)
Latest release0.21.1 / 2 May 2021 (45 days ago) (2021-05-02)[3]
Code repositoryhttps://github.com/bitcoin/bitcoin
Development statusActive
Websitebitcoin.org
Ledger
Ledger start3 January 2009 (12 years ago) (2009-01-03)
Timestamping schemeProof-of-work (partial hash inversion)
Hash functionSHA-256
Issuance scheduleDecentralized (block reward)
Initially ₿50 per block, halved every 210,000 blocks[7]
Block reward₿6.25[c]
Block time10 minutes
Block explorerMany implementations
Circulating supply₿18,660,000 (as of 20 March 2021)
Supply limit₿21,000,000[5][d]
  1. ^ The symbol was encoded in Unicode version 10.0 at position U+20BF BITCOIN SIGN in the Currency Symbols block in June 2017.[1]
  2. ^ Compatible with ISO 4217.
  3. ^ May 2020 to approximately 2024, halved approximately every four years
  4. ^ The supply will approach, but never reach, ₿21 million. Issuance will permanently halt c. 2140 at ₿20,999,999.9769.[6]:ch. 8

Bitcoin () is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.[7] Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain. The cryptocurrency was invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto.[8] The currency began use in 2009[9] when its implementation was released as open-source software.[6]:ch. 1

Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services,[10] but the real-world value of the coins is extremely volatile.[11] Research produced by the University of Cambridge estimated that in 2017, there were 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using bitcoin.[12] Users choose to participate in the digital currency for a number of reasons: ideologies such as commitment to anarchism, decentralization and libertarianism, convenience, using the currency as an investment and pseudonymity of transactions. Increased use has led to a desire among governments for regulation in order to tax, facilitate legal use in trade and for other reasons (such as investigations for money laundering and price manipulation).

Bitcoin has been criticized for its use in illegal transactions, the large amount of electricity (and thus carbon footprint) used by mining, price volatility, and thefts from exchanges. Some economists and commentators have characterized it as a speculative bubble at various times. Bitcoin has also been used as an investment, although several regulatory agencies have issued investor alerts about bitcoin.[11][13][14]

The word bitcoin was defined in a white paper published on 31 October 2008.[4][15] It is a compound of the words bit and coin.[16] No uniform convention for bitcoin capitalization exists; some sources use Bitcoin, capitalized, to refer to the technology and network and bitcoin, lowercase, for the unit of account.[17] The Wall Street Journal,[18] The Chronicle of Higher Education,[19] and the Oxford English Dictionary[16] advocate the use of lowercase bitcoin in all cases.

History

Creation

The domain name bitcoin.org was registered on 18 August 2008.[20] On 31 October 2008, a link to a paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System[4] was posted to a cryptography mailing list.[21] Nakamoto implemented the bitcoin software as open-source code and released it in January 2009.[22][23][9] Nakamoto's identity remains unknown.[8]

On 3 January 2009, the bitcoin network was created when Nakamoto mined the starting block of the chain, known as the genesis block.[24][25] Embedded in the coinbase of this block was the text "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks".[9] This note references a headline published by The Times and has been interpreted as both a timestamp and a comment on the instability caused by fractional-reserve banking.[26]:18

The receiver of the first bitcoin transaction was cypherpunk Hal Finney, who had created the first reusable proof-of-work system (RPoW) in 2004.[27] Finney downloaded the bitcoin software on its release date, and on 12 January 2009 received ten bitcoins from Nakamoto.[28][29] Other early cypherpunk supporters were creators of bitcoin predecessors: Wei Dai, creator of b-money, and Nick Szabo, creator of bit gold.[24] In 2010, the first known commercial transaction using bitcoin occurred when programmer Laszlo Hanyecz bought two Papa John's pizzas for ₿10,000.[30]

Blockchain analysts estimate that Nakamoto had mined about one million bitcoins[31] before disappearing in 2010 when he handed the network alert key and control of the code repository over to Gavin Andresen. Andresen later became lead developer at the Bitcoin Foundation.[32][33] Andresen then sought to decentralize control. This left opportunity for controversy to develop over the future development path of bitcoin, in contrast to the perceived authority of Nakamoto's contributions.[34][33]

2011–2012

After early "proof-of-concept" transactions, the first major users of bitcoin were black markets, such as Silk Road. During its 30 months of existence, beginning in February 2011, Silk Road exclusively accepted bitcoins as payment, transacting 9.9 million in bitcoins, worth about $214 million.[35]:222

In 2011, the price started at $0.30 per bitcoin, growing to $5.27 for the year. The price rose to $31.50 on 8 June. Within a month, the price fell to $11.00. The next month it fell to $7.80, and in another month to $4.77.[36]

In 2012, bitcoin prices started at $5.27, growing to $13.30 for the year.[36] By 9 January the price had risen to $7.38, but then crashed by 49% to $3.80 over the next 16 days. The price then rose to $16.41 on 17 August, but fell by 57% to $7.10 over the next three days.[37]

The Bitcoin Foundation was founded in September 2012 to promote bitcoin's development and uptake.[38]

On 1 November 2011, the reference implementation Bitcoin-Qt version 0.5.0 was released. It introduced a front end that used the Qt user interface toolkit.[39] The software previously used Berkeley DB for database management. Developers switched to LevelDB in release 0.8 in order to reduce blockchain synchronization time.[citation needed] The update to this release resulted in a minor blockchain fork on 11 March 2013. The fork was resolved shortly afterwards.[citation needed] Seeding nodes through IRC was discontinued in version 0.8.2. From version 0.9.0 the software was renamed to Bitcoin Core. Transaction fees were reduced again by a factor of ten as a means to encourage microtransactions.[citation needed] Although Bitcoin Core does not use OpenSSL for the operation of the network, the software did use OpenSSL for remote procedure calls. Version 0.9.1 was released to remove the network's vulnerability to the Heartbleed bug.[citation needed]

2013–2016

In 2013, prices started at $13.30 rising to $770 by 1 January 2014.[36]

In March 2013 the blockchain temporarily split into two independent chains with different rules due to a bug in version 0.8 of the bitcoin software. The two blockchains operated simultaneously for six hours, each with its own version of the transaction history from the moment of the split. Normal operation was restored when the majority of the network downgraded to version 0.7 of the bitcoin software, selecting the backwards-compatible version of the blockchain. As a result, this blockchain became the longest chain and could be accepted by all participants, regardless of their bitcoin software version.[40] During the split, the Mt. Gox exchange briefly halted bitcoin deposits and the price dropped by 23% to $37[40][41] before recovering to the previous level of approximately $48 in the following hours.[42]

The US Financial Crimes Enforcement Network (FinCEN) established regulatory guidelines for "decentralized virtual currencies" such as bitcoin, classifying American bitcoin miners who sell their generated bitcoins as Money Service Businesses (MSBs), that are subject to registration or other legal obligations.[43][44][45]

In April, exchanges BitInstant and Mt. Gox experienced processing delays due to insufficient capacity[46] resulting in the bitcoin price dropping from $266 to $76 before returning to $160 within six hours.[47] The bitcoin price rose to $259 on 10 April, but then crashed by 83% to $45 over the next three days.[37]

On 15 May 2013, US authorities seized accounts associated with Mt. Gox after discovering it had not registered as a money transmitter with FinCEN in the US.[48][49] On 23 June 2013, the US Drug Enforcement Administration listed ₿11.02 as a seized asset in a United States Department of Justice seizure notice pursuant to 21 U.S.C. § 881. This marked the first time a government agency had seized bitcoin.[50] The FBI seized about ₿30,000[51] in October 2013 from the dark web website Silk Road, following the arrest of Ross William Ulbricht.[52][53][54] These bitcoins were sold at blind auction by the United States Marshals Service to venture capital investor Tim Draper.[51] Bitcoin's price rose to $755 on 19 November and crashed by 50% to $378 the same day. On 30 November 2013, the price reached $1,163 before starting a long-term crash, declining by 87% to $152 in January 2015.[37]

On 5 December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoins.[55] After the announcement, the value of bitcoins dropped,[56] and Baidu no longer accepted bitcoins for certain services.[57] Buying real-world goods with any virtual currency had been illegal in China since at least 2009.[58]

In 2014, prices started at $770 and fell to $314 for the year.[36] On 30 July 2014, the Wikimedia Foundation started accepting donations of bitcoin.[59]

In 2015, prices started at $314 and rose to $434 for the year. In 2016, prices rose and climbed up to $998 by 1 January 2017.[36]

Release 0.10 of the software was made public on 16 February 2015. It introduced a consensus library which gave programmers easy access to the rules governing consensus on the network. In version 0.11.2 developers added a new feature which allowed transactions to be made unspendable until a specific time in the future.[60] Bitcoin Core 0.12.1 was released on 15 April 2016, and enabled multiple soft forks to occur concurrently.[61] Around 100 contributors worked on Bitcoin Core 0.13.0 which was released on 23 August 2016.

In July 2016, the CheckSequenceVerify soft fork activated.[62]

In October 2016, Bitcoin Core's 0.13.1 release featured the "Segwit" soft fork that included a scaling improvement aiming to optimize the bitcoin blocksize.[citation needed] The patch which was originally finalised in April, and 35 developers were engaged to deploy it.[citation needed] This release featured Segregated Witness (SegWit) which aimed to place downward pressure on transaction fees as well as increase the maximum transaction capacity of the network.[63][non-primary source needed] The 0.13.1 release endured extensive testing and research leading to some delays in its release date.[citation needed] SegWit prevents various forms of transaction malleability.[64][non-primary source needed]

2017–2019

On 15 July 2017, the controversial Segregated Witness [SegWit] software upgrade was approved ("locked-in"). Segwit was intended to support the Lightning Network as well as improve scalability.[65] SegWit was subsequently activated on the network on 24 August 2017. The bitcoin price rose almost 50% in the week following SegWit's approval.[65] On 21 July 2017, bitcoin was trading at $2,748, up 52% from 14 July 2017's $1,835.[65] Supporters of large blocks who were dissatisfied with the activation of SegWit forked the software on 1 August 2017 to create Bitcoin Cash, becoming one of many forks of bitcoin such as Bitcoin Gold.[66]

Prices started at $998 in 2017 and rose to $13,412.44 on 1 January 2018,[36] after reaching its all-time high of $19,783.06 on 17 December 2017.[67]

China banned trading in bitcoin, with first steps taken in September 2017, and a complete ban that started on 1 February 2018. Bitcoin prices then fell from $9,052 to $6,914 on 5 February 2018.[37] The percentage of bitcoin trading in the Chinese renminbi fell from over 90% in September 2017 to less than 1% in June 2018.[68]

Throughout the rest of the first half of 2018, bitcoin's price fluctuated between $11,480 and $5,848. On 1 July 2018, bitcoin's price was $6,343.[69][70] The price on 1 January 2019 was $3,747, down 72% for 2018 and down 81% since the all-time high.[69][71]

In September 2018, an anonymous party discovered and reported an invalid-block denial-of-server vulnerability to developers of Bitcoin Core, Bitcoin ABC and Bitcoin Unlimited. Further analysis by bitcoin developers showed the issue could also allow the creation of blocks violating the 21 million coin limit and CVE-2018-17144 was assigned and the issue resolved.[72][non-primary source needed]

Bitcoin prices were negatively affected by several hacks or thefts from cryptocurrency exchanges, including thefts from Coincheck in January 2018, Bithumb in June, and Bancor in July. For the first six months of 2018, $761 million worth of cryptocurrencies was reported stolen from exchanges.[73] Bitcoin's price was affected even though other cryptocurrencies were stolen at Coinrail and Bancor as investors worried about the security of cryptocurrency exchanges.[74][75][76] In September 2019 the Intercontinental Exchange (the owner of the NYSE) began trading of bitcoin futures on its exchange called Bakkt.[77] Bakkt also announced that it would launch options on bitcoin in December 2019.[78] In December 2019, YouTube removed bitcoin and cryptocurrency videos, but later restored the content after judging they had "made the wrong call."[79]

In February 2019, Canadian cryptocurrency exchange Quadriga Fintech Solutions failed with approximately $200 million missing.[80] By June 2019 the price had recovered to $13,000.[81]

2020–present

On 13 March 2020, bitcoin fell below $4000 during a broad market selloff, after trading above $10,000 in February 2020.[82] On 11 March 2020, 281,000 bitcoins were sold, held by owners for only thirty days.[81] This compared to ₿4,131 that had laid dormant for a year or more, indicating that the vast majority of the bitcoin volatility on that day was from recent buyers. During the week of 11 March 2020, cryptocurrency exchange Kraken experienced an 83% increase in the number of account signups over the week of bitcoin's price collapse, a result of buyers looking to capitalize on the low price.[81] These events were attributed to the onset of the COVID-19 pandemic.

In August 2020, MicroStrategy invested $250 million in bitcoin as a treasury reserve asset.[83] In October 2020, Square, Inc. placed approximately 1% of total assets ($50 million) in bitcoin.[84] In November 2020, PayPal announced that US users could buy, hold, or sell bitcoin.[85] On 30 November 2020, the bitcoin value reached a new all-time high of $19,860, topping the previous high of December 2017.[86] Alexander Vinnik, founder of BTC-e, was convicted and sentenced to five years in prison for money laundering in France while refusing to testify during his trial.[87] In December 2020 Massachusetts Mutual Life Insurance Company announced a bitcoin purchase of USD $100 million, or roughly 0.04% of its general investment account.[88]

On 19 January 2021, Elon Musk placed the handle #Bitcoin in his Twitter profile, tweeting "In retrospect, it was inevitable", which caused the price to briefly rise about $5000 in an hour to $37,299.[89] On 25 January 2021 Microstrategy announced that it continued to buy bitcoin and as of the same date it had holdings of ₿70,784 worth $2.38 billion.[90] On 8 February 2021 Tesla's announcement of a bitcoin purchase of USD $1.5 billion and the plan to start accepting bitcoin as payment for vehicles, pushed the bitcoin price to $44,141.[91] On 18 February 2021, Elon Musk stated that "owning bitcoin was only a little better than holding conventional cash, but that the slight difference made it a better asset to hold".[92]

In September 2020, the Canton of Zug, Switzerland, announced to start to accepting tax payments in bitcoin by February 2021.[93][94]

In June 2021, the Legislative Assembly of El Salvador voted legislation to make Bitcoin legal tender in El Salvador.[a][101][98][102]

In the same month, a bitcoin network software upgrade called "Taproot", which adds support for Schnorr signatures, and improved functionality of Smart contracts and Lightning Network, was approved with the actual change to the network scheduled for November 2021.[103]

Design

Graph of the elliptic curve named secp256k1 in real coordinate space

Bitcoin is based on an elliptic curve called secp256k1 and encrypted with the ECDSA algorithm.[104][better source needed] The equation for the Bitcoin secp256k1 curve is 2=3+7.[105][better source needed] Bitcoin has a proposed Bitcoin Improvement Proposal (BIP) that would add support for Schnorr signatures.[106]:101

Units and divisibility

The unit of account of the bitcoin system is a bitcoin. Ticker symbols used to represent bitcoin are BTC[b] and XBT.[c][110]:2 Its Unicode character is ₿.[1] Small amounts of bitcoin used as alternative units are millibitcoin (mBTC), and satoshi (sat). Named in homage to bitcoin's creator, a satoshi is the smallest amount within bitcoin representing 1100000000 bitcoins, one hundred millionth of a bitcoin.[2] A millibitcoin equals 11000 bitcoins; one thousandth of a bitcoin or 100,000 satoshis.[111]

Blockchain

Data structure of blocks in the ledger.
Number of bitcoin transactions per month, semilogarithmic plot[112]

The bitcoin blockchain is a public ledger that records bitcoin transactions.[114] It is implemented as a chain of blocks, each block containing a hash of the previous block up to the genesis block[d] of the chain. A network of communicating nodes running bitcoin software maintains the blockchain.[35]:215–219 Transactions of the form payer X sends Y bitcoins to payee Z are broadcast to this network using readily available software applications.

Network nodes can validate transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes. To achieve independent verification of the chain of ownership each network node stores its own copy of the blockchain.[115] At varying intervals of time averaging to every 10 minutes, a new group of accepted transactions, called a block, is created, added to the blockchain, and quickly published to all nodes, without requiring central oversight. This allows bitcoin software to determine when a particular bitcoin was spent, which is needed to prevent double-spending. A conventional ledger records the transfers of actual bills or promissory notes that exist apart from it, but the blockchain is the only place that bitcoins can be said to exist in the form of unspent outputs of transactions.[6]:ch. 5

Individual blocks, public addresses and transactions within blocks can be examined using a blockchain explorer.[citation needed]

Supply

Total bitcoins in circulation.[113]

The successful miner finding the new block is allowed by the rest of the network to reward themselves with newly created bitcoins and transaction fees.[116] As of 11 May 2020,[citation needed] the reward amounted to 6.25 newly created bitcoins per block added to the blockchain,[citation needed] plus any transaction fees from payments processed by the block. To mine half of the supply of bitcoins took four years but the remainder will take another 120 years, because of an artificial process called "bitcoin halving" according to which miners are compensated by fewer BTC as time goes on.[citation needed] To claim the reward, a special transaction called a coinbase is included with the processed payments.[6]:ch. 8 All bitcoins in existence have been created in such coinbase transactions. The bitcoin protocol specifies that the reward for adding a block will be halved every 210,000 blocks (approximately every four years). Eventually, the reward will decrease to zero, and the limit of 21 million bitcoins[e] will be reached c. 2140; the record keeping will then be rewarded solely by transaction fees.[117]

In other words, Nakamoto set a monetary policy based on artificial scarcity at bitcoin's inception that the total number of bitcoins could never exceed 21 million. New bitcoins are created roughly every ten minutes and the rate at which they are generated drops by half about every four years until all will be in circulation.[118]

Transactions

Transactions are defined using a Forth-like scripting language.[6]:ch. 5 Transactions consist of one or more inputs and one or more outputs. When a user sends bitcoins, the user designates each address and the amount of bitcoin being sent to that address in an output. To prevent double spending, each input must refer to a previous unspent output in the blockchain.[119] The use of multiple inputs corresponds to the use of multiple coins in a cash transaction. Since transactions can have multiple outputs, users can send bitcoins to multiple recipients in one transaction. As in a cash transaction, the sum of inputs (coins used to pay) can exceed the intended sum of payments. In such a case, an additional output is used, returning the change back to the payer.[119] Any input satoshis not accounted for in the transaction outputs become the transaction fee.[119]

Though transaction fees are optional, miners can choose which transactions to process and prioritize those that pay higher fees.[119] Miners may choose transactions based on the fee paid relative to their storage size, not the absolute amount of money paid as a fee. These fees are generally measured in satoshis per byte (sat/b). The size of transactions is dependent on the number of inputs used to create the transaction, and the number of outputs.[6]:ch. 8

The blocks in the blockchain were originally limited to 32 megabytes in size. The block size limit of one megabyte was introduced by Satoshi Nakamoto in 2010. Eventually the block size limit of one megabyte created problems for transaction processing, such as increasing transaction fees and delayed processing of transactions.[120] Andreas Antonopoulos has stated Lightning Network is a potential scaling solution and referred to lightning as a second layer routing network.[6]:ch. 8

Ownership

Simplified chain of ownership as illustrated in the bitcoin whitepaper.[4] In practice, a transaction can have more than one input and more than one output.[119]

In the blockchain, bitcoins are registered to bitcoin addresses. Creating a bitcoin address requires nothing more than picking a random valid private key and computing the corresponding bitcoin address. This computation can be done in a split second. But the reverse, computing the private key of a given bitcoin address, is practically unfeasible.[6]:ch. 4 Users can tell others or make public a bitcoin address without compromising its corresponding private key. Moreover, the number of valid private keys is so vast that it is extremely unlikely someone will compute a key-pair that is already in use and has funds. The vast number of valid private keys makes it unfeasible that brute force could be used to compromise a private key. To be able to spend their bitcoins, the owner must know the corresponding private key and digitally sign the transaction. The network verifies the signature using the public key; the private key is never revealed.[6]:ch. 5

If the private key is lost, the bitcoin network will not recognize any other evidence of ownership;[35] the coins are then unusable, and effectively lost. For example, in 2013 one user claimed to have lost 7,500 bitcoins, worth $7.5 million at the time, when he accidentally discarded a hard drive containing his private key.[121] About 20% of all bitcoins are believed to be lost -they would have had a market value of about $20 billion at July 2018 prices.[122]

To ensure the security of bitcoins, the private key must be kept secret.[6]:ch. 10 If the private key is revealed to a third party, e.g. through a data breach, the third party can use it to steal any associated bitcoins.[123] As of December 2017, around 980,000 bitcoins have been stolen from cryptocurrency exchanges.[124]

Regarding ownership distribution, as of 16 March 2018, 0.5% of bitcoin wallets own 87% of all bitcoins ever mined.[125]

Mining

Early bitcoin miners used GPUs for mining, as they were better suited to the proof-of-work algorithm than CPUs.[126]
Later amateurs mined bitcoins with specialized FPGA and ASIC chips. The chips pictured have become obsolete due to increasing difficulty.
Today, bitcoin mining companies dedicate facilities to housing and operating large amounts of high-performance mining hardware.[127]
Semi-log plot of relative mining difficulty[f][113]

Mining is a record-keeping service done through the use of computer processing power.[g] Miners keep the blockchain consistent, complete, and unalterable by repeatedly grouping newly broadcast transactions into a block, which is then broadcast to the network and verified by recipient nodes.[114] Each block contains a SHA-256 cryptographic hash of the previous block,[114] thus linking it to the previous block and giving the blockchain its name.[6]:ch. 7[114]

To be accepted by the rest of the network, a new block must contain a proof-of-work (PoW).[114] The system used is based on Adam Back's 1997 anti-spam scheme, Hashcash.[129][failed verification][4] The PoW requires miners to find a number called a nonce, such that when the block content is hashed along with the nonce, the result is numerically smaller than the network's difficulty target.[6]:ch. 8 This proof is easy for any node in the network to verify, but extremely time-consuming to generate, as for a secure cryptographic hash, miners must try many different nonce values (usually the sequence of tested values is the ascending natural numbers: 0, 1, 2, 3, ...[6]:ch. 8) before meeting the difficulty target.

Every 2,016 blocks (approximately 14 days at roughly 10 min per block), the difficulty target is adjusted based on the network's recent performance, with the aim of keeping the average time between new blocks at ten minutes. In this way the system automatically adapts to the total amount of mining power on the network.[6]:ch. 8 Between 1 March 2014 and 1 March 2015, the average number of nonces miners had to try before creating a new block increased from 16.4 quintillion to 200.5 quintillion.[130]

The proof-of-work system, alongside the chaining of blocks, makes modifications of the blockchain extremely hard, as an attacker must modify all subsequent blocks in order for the modifications of one block to be accepted.[131] As new blocks are mined all the time, the difficulty of modifying a block increases as time passes and the number of subsequent blocks (also called confirmations of the given block) increases.[114]

Computing power is often bundled together by a Mining pool to reduce variance in miner income. Individual mining rigs often have to wait for long periods to confirm a block of transactions and receive payment. In a pool, all participating miners get paid every time a participating server solves a block. This payment depends on the amount of work an individual miner contributed to help find that block.[132]

Wallets

Bitcoin Core, a full client
Electrum, a lightweight client

The first wallet program, simply named Bitcoin, and sometimes referred to as the Satoshi client, was released in 2009 by Satoshi Nakamoto as open-source software.[9] In version 0.5 the client moved from the wxWidgets user interface toolkit to Qt, and the whole bundle was referred to as Bitcoin-Qt.[133] After the release of version 0.9, the software bundle was renamed Bitcoin Core to distinguish itself from the underlying network.[134][135] Bitcoin Core is, perhaps, the best known implementation or client. Alternative clients (forks of Bitcoin Core) exist, such as Bitcoin XT, Bitcoin Unlimited,[34] and Parity Bitcoin.[136]

A wallet stores the information necessary to transact bitcoins. While wallets are often described as a place to hold[137] or store bitcoins, due to the nature of the system, bitcoins are inseparable from the blockchain transaction ledger. A wallet is more correctly defined as something that "stores the digital credentials for your bitcoin holdings" and allows one to access (and spend) them.[6]:ch. 1, glossary Bitcoin uses public-key cryptography, in which two cryptographic keys, one public and one private, are generated.[138] At its most basic, a wallet is a collection of these keys.

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

  • Full clients verify transactions directly by downloading a full copy of the blockchain (over 150 GB as of January 2018).[139] They are the most secure and reliable way of using the network, as trust in external parties is not required. Full clients check the validity of mined blocks, preventing them from transacting on a chain that breaks or alters network rules.[6]:ch. 1 Because of its size and complexity, downloading and verifying the entire blockchain is not suitable for all computing devices.
  • Lightweight clients consult full nodes to send and receive transactions without requiring a local copy of the entire blockchain (see simplified payment verificationSPV). This makes lightweight clients much faster to set up and allows them to be used on low-power, low-bandwidth devices such as smartphones. When using a lightweight wallet, however, the user must trust full nodes, as it can report faulty values back to the user. Lightweight clients follow the longest blockchain and do not ensure it is valid, requiring trust in full nodes.[140]

Third-party internet services called online wallets offer similar functionality but may be easier to use. In this case, credentials to access funds are stored with the online wallet provider rather than on the user's hardware.[141] As a result, the user must have complete trust in the online wallet provider. A malicious provider or a breach in server security may cause entrusted bitcoins to be stolen. An example of such a security breach occurred with Mt. Gox in 2011.[142]

A paper wallet with a banknote-like design. Both the private key and the address are visible in text form and as 2D barcodes.
A paper wallet with the address visible for adding or checking stored funds. The part of the page containing the private key is folded over and sealed.
A brass token with a private key hidden beneath a tamper-evident security hologram. A part of the address is visible through a transparent part of the hologram.
A hardware wallet peripheral which processes bitcoin payments without exposing any credentials to the computer.

Physical wallets store the credentials necessary to spend bitcoins offline and can be as simple as a paper printout of the private key:[6]:ch. 10 a paper wallet or more advanced such as a hardware wallet. A paper wallet is created with a keypair generated on a computer with no internet connection; the private key is written or printed onto the paper[h] and then erased from the computer. The paper wallet can then be stored in a safe physical location for later retrieval. Bitcoins stored using a paper wallet are said to be in cold storage.[143]:39

Cameron and Tyler Winklevoss, the founders of the Gemini Trust Co. exchange, reported that they had cut their paper wallets into pieces and stored them in envelopes distributed to safe deposit boxes across the United States.[144] Through this system, the theft of one envelope would neither allow the thief to steal any bitcoins nor deprive the rightful owners of their access to them.[145]

Physical wallets can also take the form of metal token coins[146] with a private key accessible under a security hologram in a recess struck on the reverse side.[147]:38 The security hologram self-destructs when removed from the token, showing that the private key has been accessed.[148] Originally, these tokens were struck in brass and other base metals, but later used precious metals as bitcoin grew in value and popularity.[147]:80 Coins with stored face value as high as ₿1000 have been struck in gold.[147]:102–104 The British Museum's coin collection includes four specimens from the earliest series[147]:83 of funded bitcoin tokens; one is currently on display in the museum's money gallery.[149] In 2013, a Utahn manufacturer of these tokens was ordered by the Financial Crimes Enforcement Network (FinCEN) to register as a money services business before producing any more funded bitcoin tokens.[146][147]:80

Another type of physical wallet called a hardware wallet keeps credentials offline while facilitating transactions.[150] The hardware wallet acts as a computer peripheral and signs transactions as requested by the user, who must press a button on the wallet to confirm that they intended to make the transaction. Hardware wallets never expose their private keys, keeping bitcoins in cold storage even when used with computers that may be compromised by malware.[143]:42–45

Decentralization

Bitcoin is decentralized thus:[7]

  • Bitcoin does not have a central authority.[7]
  • There is no central server; the bitcoin network is peer-to-peer.[9]
  • There is no central storage; the bitcoin ledger is distributed.[151]
  • The ledger is public; anybody can store it on their computer.[6]:ch. 1
  • There is no single administrator;[7] the ledger is maintained by a network of equally privileged miners.[6]:ch. 1
  • Anybody can become a miner.[6]:ch. 1
  • The additions to the ledger are maintained through competition. Until a new block is added to the ledger, it is not known which miner will create the block.[6]:ch. 1
  • The issuance of bitcoins is decentralized. They are issued as a reward for the creation of a new block.[116]
  • Anybody can create a new bitcoin address (a bitcoin counterpart of a bank account) without needing any approval.[6]:ch. 1
  • Anybody can send a transaction to the network without needing any approval; the network merely confirms that the transaction is legitimate.[152]:32

Conversely, researchers have pointed out at a "trend towards centralization". Although bitcoin can be sent directly from user to user, in practice intermediaries are widely used.[35]:220–222 Bitcoin miners join large mining pools to minimize the variance of their income.[35]:215, 219–222[153]:3[154] Because transactions on the network are confirmed by miners, decentralization of the network requires that no single miner or mining pool obtains 51% of the hashing power, which would allow them to double-spend coins, prevent certain transactions from being verified and prevent other miners from earning income.[155] As of 2013 just six mining pools controlled 75% of overall bitcoin hashing power.[155] In 2014 mining pool Ghash.io obtained 51% hashing power which raised significant controversies about the safety of the network. The pool has voluntarily capped their hashing power at 39.99% and requested other pools to act responsibly for the benefit of the whole network.[156] Around the year 2017, over 70% of the hashing power and 90% of transactions were operating from China.[157]

According to researchers, other parts of the ecosystem are also "controlled by a small set of entities", notably the maintenance of the client software, online wallets and simplified payment verification (SPV) clients.[155]

Privacy & Fungibility

Bitcoin is pseudonymous, meaning that funds are not tied to real-world entities but rather bitcoin addresses. Owners of bitcoin addresses are not explicitly identified, but all transactions on the blockchain are public. In addition, transactions can be linked to individuals and companies through "idioms of use" (e.g., transactions that spend coins from multiple inputs indicate that the inputs may have a common owner) and corroborating public transaction data with known information on owners of certain addresses.[158] Additionally, bitcoin exchanges, where bitcoins are traded for traditional currencies, may be required by law to collect personal information.[159] To heighten financial privacy, a new bitcoin address can be generated for each transaction.[160]

Wallets and similar software technically handle all bitcoins as equivalent, establishing the basic level of fungibility. Researchers have pointed out that the history of each bitcoin is registered and publicly available in the blockchain ledger, and that some users may refuse to accept bitcoins coming from controversial transactions, which would harm bitcoin's fungibility.[161] For example, in 2012, Mt. Gox froze accounts of users who deposited bitcoins that were known to have just been stolen.[162]

Ideology

Satoshi Nakamoto stated in his white paper that: "The root problem with conventional currencies is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust."[163]

Austrian economics roots

According to the European Central Bank, the decentralization of money offered by bitcoin has its theoretical roots in the Austrian school of economics, especially with Friedrich von Hayek in his book Denationalisation of Money: The Argument Refined,[164] in which Hayek advocates a complete free market in the production, distribution and management of money to end the monopoly of central banks.[165]:22

Anarchism and libertarianism

According to The New York Times, libertarians and anarchists were attracted to the philosophical idea behind bitcoin. Early bitcoin supporter Roger Ver said: "At first, almost everyone who got involved did so for philosophical reasons. We saw bitcoin as a great idea, as a way to separate money from the state."[163] The Economist describes bitcoin as "a techno-anarchist project to create an online version of cash, a way for people to transact without the possibility of interference from malicious governments or banks".[166] Economist Paul Krugman argues that cryptocurrencies like bitcoin are "something of a cult" based in "paranoid fantasies" of government power.[167]

External video
video icon The Declaration Of Bitcoin's Independence, BraveTheWorld, 4:38[168]

Nigel Dodd argues in The Social Life of Bitcoin that the essence of the bitcoin ideology is to remove money from social, as well as governmental, control.[169] Dodd quotes a YouTube video, with Roger Ver, Jeff Berwick, Charlie Shrem, Andreas Antonopoulos, Gavin Wood, Trace Meyer and other proponents of bitcoin reading The Declaration of Bitcoin's Independence. The declaration includes a message of crypto-anarchism with the words: "Bitcoin is inherently anti-establishment, anti-system, and anti-state. Bitcoin undermines governments and disrupts institutions because bitcoin is fundamentally humanitarian."[169][168]

David Golumbia says that the ideas influencing bitcoin advocates emerge from right-wing extremist movements such as the Liberty Lobby and the John Birch Society and their anti-Central Bank rhetoric, or, more recently, Ron Paul and Tea Party-style libertarianism.[170] Steve Bannon, who owns a "good stake" in bitcoin, considers it to be "disruptive populism. It takes control back from central authorities. It's revolutionary."[171]

A 2014 study of Google Trends data found correlations between bitcoin-related searches and ones related to computer programming and illegal activity, but not libertarianism or investment topics.[172]

Economics

Liquidity,[i] semilogarithmic plot.[113]

Bitcoin is a digital asset designed to work in peer-to-peer transactions as a currency.[4][173] Bitcoins have three qualities useful in a currency, according to The Economist in January 2015: they are "hard to earn, limited in supply and easy to verify."[174] Per some researchers, as of 2015, bitcoin functions more as a payment system than as a currency.[35]

Economists define money as serving the following three purposes: a store of value, a medium of exchange, and a unit of account.[175] According to The Economist in 2014, bitcoin functions best as a medium of exchange.[175] However, this is debated, and a 2018 assessment by The Economist stated that cryptocurrencies met none of these three criteria.[166] Yale economist Robert J. Shiller writes that bitcoin has potential as a unit of account for measuring the relative value of goods, as with Chile's Unidad de Fomento, but that "Bitcoin in its present form [...] doesn't really solve any sensible economic problem".[176]

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

Acceptance by merchants

The overwhelming majority of bitcoin transactions take place on a cryptocurrency exchange, rather than being used in transactions with merchants.[177] Delays processing payments through the blockchain of about ten minutes make bitcoin use very difficult in a retail setting. Prices are not usually quoted in units of bitcoin and many trades involve one, or sometimes two, conversions into conventional currencies.[35] Merchants that do accept bitcoin payments may use payment service providers to perform the conversions.[178]

In 2017 and 2018 bitcoin's acceptance among major online retailers included only three of the top 500 U.S. online merchants, down from five in 2016.[177] Reasons for this decline include high transaction fees due to bitcoin's scalability issues and long transaction times.[179]

Bloomberg reported that the largest 17 crypto merchant-processing services handled $69 million in June 2018, down from $411 million in September 2017. Bitcoin is "not actually usable" for retail transactions because of high costs and the inability to process chargebacks, according to Nicholas Weaver, a researcher quoted by Bloomberg. High price volatility and transaction fees make paying for small retail purchases with bitcoin impractical, according to economist Kim Grauer. However, bitcoin continues to be used for large-item purchases on sites such as Overstock.com, and for cross-border payments to freelancers and other vendors.[180]

Financial institutions

Bitcoins can be bought on digital currency exchanges.

Per researchers, "there is little sign of bitcoin use" in international remittances despite high fees charged by banks and Western Union who compete in this market.[35] The South China Morning Post, however, mentions the use of bitcoin by Hong Kong workers to transfer money home.[181]

In 2014, the National Australia Bank closed accounts of businesses with ties to bitcoin,[182] and HSBC refused to serve a hedge fund with links to bitcoin.[183] Australian banks in general have been reported as closing down bank accounts of operators of businesses involving the currency.[184]

On 10 December 2017, the Chicago Board Options Exchange started trading bitcoin futures,[185] followed by the Chicago Mercantile Exchange, which started trading bitcoin futures on 17 December 2017.[186]

In September 2019 the Central Bank of Venezuela, at the request of PDVSA, ran tests to determine if bitcoin and ether could be held in central bank's reserves. The request was motivated by oil company's goal to pay its suppliers.[187]

As an investment

The Winklevoss twins have purchased bitcoin. In 2013, The Washington Post reported a claim that they owned 1% of all the bitcoins in existence at the time.[188]

Other methods of investment are bitcoin funds. The first regulated bitcoin fund was established in Jersey in July 2014 and approved by the Jersey Financial Services Commission.[189]

Forbes named bitcoin the best investment of 2013.[190] In 2014, Bloomberg named bitcoin one of its worst investments of the year.[191] In 2015, bitcoin topped Bloomberg's currency tables.[192]

According to bitinfocharts.com, in 2017 there are 9,272 bitcoin wallets with more than $1 million worth of bitcoins.[193] The exact number of bitcoin millionaires is uncertain as a single person can have more than one bitcoin wallet.

In August 2020, MicroStrategy invested in Bitcoin.[194][195]

In May 2021, the Bitcoin's market share on exchanges dropped from 70% to 45% as investors pursued altcoins.[196]

Venture capital

Peter Thiel's Founders Fund invested US$3 million in BitPay.[197] In 2012, an incubator for bitcoin-focused start-ups was founded by Adam Draper, with financing help from his father, venture capitalist Tim Draper, one of the largest bitcoin holders after winning an auction of 30,000 bitcoins,[198] at the time called "mystery buyer".[199] The company's goal is to fund 100 bitcoin businesses within 2–3 years with $10,000 to $20,000 for a 6% stake.[198] Investors also invest in bitcoin mining.[200] According to a 2015 study by Paolo Tasca, bitcoin startups raised almost $1 billion in three years (Q1 2012 – Q1 2015).[201]

Price and volatility

Price in US$, semilogarithmic plot.[113]
Annual volatility[112]

The price of bitcoins has gone through cycles of appreciation and depreciation referred to by some as bubbles and busts.[202] In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2.[203] In the latter half of 2012 and during the 2012–13 Cypriot financial crisis, the bitcoin price began to rise,[204] reaching a high of US$266 on 10 April 2013, before crashing to around US$50. On 29 November 2013, the cost of one bitcoin rose to a peak of US$1,242.[205] In 2014, the price fell sharply, and as of April remained depressed at little more than half 2013 prices. As of August 2014 it was under US$600.[206]

According to Mark T. Williams, as of 30 September 2014, bitcoin has volatility seven times greater than gold, eight times greater than the S&P 500, and 18 times greater than the US dollar.[207] Hodl is a meme created in reference to holding (as opposed to selling) during periods of volatility. Unusual for an asset, bitcoin weekend trading during December 2020 was higher than for weekdays.[208] Hedge funds (using high leverage and derivates)[209] have attempted to use the volatility to profit from downward price movements. At the end of January 2021, such positions were over $1 billion, their highest of all time.[210][211] As of 8 February 2021, the closing price of bitcoin equals US$44,797.[212]

Legal status, tax and regulation

Because of bitcoin's decentralized nature and its trading on online exchanges located in many countries, regulation of bitcoin has been difficult. However, the use of bitcoin can be criminalized, and shutting down exchanges and the peer-to-peer economy in a given country would constitute a de facto ban.[213] The legal status of bitcoin varies substantially from country to country and is still undefined or changing in many of them. Regulations and bans that apply to bitcoin probably extend to similar cryptocurrency systems.[201]

According to the Library of Congress, an "absolute ban" on trading or using cryptocurrencies applies in nine countries: Algeria, Bolivia, Egypt, Iraq, Morocco, Nepal, Pakistan, Vietnam, and the United Arab Emirates. An "implicit ban" applies in another 15 countries, which include Bahrain, Bangladesh, China, Colombia, the Dominican Republic, Indonesia, Kuwait, Lesotho, Lithuania, Macau, Oman, Qatar, Saudi Arabia and Taiwan.[214]

In October 2020, the Islamic Republic News Agency announced pending regulations that would require bitcoin miners in Iran to sell bitcoin to the Central Bank of Iran, and the central bank would use it for imports.[215] Iran, as of October 2020, had issued over 1,000 bitcoin mining licenses.[215] The Iranian government initially took a stance against cryptocurrency, but later changed it after seeing that digital currency could be used to circumvent sanctions.[216] The US Office of Foreign Assets Control listed two Iranians and their bitcoin addresses as part of its Specially Designated Nationals and Blocked Persons List for their role in the 2018 Atlanta cyberattack whose ransom was paid in bitcoin.[217]

Regulatory warnings

The U.S. Commodity Futures Trading Commission has issued four "Customer Advisories" for bitcoin and related investments.[13] A July 2018 warning emphasized that trading in any cryptocurrency is often speculative, and there is a risk of theft from hacking, and fraud.[218] In May 2014 the U.S. Securities and Exchange Commission warned that investments involving bitcoin might have high rates of fraud, and that investors might be solicited on social media sites.[219] An earlier "Investor Alert" warned about the use of bitcoin in Ponzi schemes.[220]

The European Banking Authority issued a warning in 2013 focusing on the lack of regulation of bitcoin, the chance that exchanges would be hacked, the volatility of bitcoin's price, and general fraud.[221] FINRA and the North American Securities Administrators Association have both issued investor alerts about bitcoin.[222][223]

Price manipulation investigation

An official investigation into bitcoin traders was reported in May 2018.[224] The U.S. Justice Department launched an investigation into possible price manipulation, including the techniques of spoofing and wash trades.[225][226][227]

The U.S. federal investigation was prompted by concerns of possible manipulation during futures settlement dates. The final settlement price of CME bitcoin futures is determined by prices on four exchanges, Bitstamp, Coinbase, itBit and Kraken. Following the first delivery date in January 2018, the CME requested extensive detailed trading information but several of the exchanges refused to provide it and later provided only limited data. The Commodity Futures Trading Commission then subpoenaed the data from the exchanges.[228][229]

State and provincial securities regulators, coordinated through the North American Securities Administrators Association, are investigating "bitcoin scams" and ICOs in 40 jurisdictions.[230]

Academic research published in the Journal of Monetary Economics concluded that price manipulation occurred during the Mt Gox bitcoin theft and that the market remains vulnerable to manipulation.[231] The history of hacks, fraud and theft involving bitcoin dates back to at least 2011.[232]

Research by John M. Griffin and Amin Shams in 2018 suggests that trading associated with increases in the amount of the Tether cryptocurrency and associated trading at the Bitfinex exchange account for about half of the price increase in bitcoin in late 2017.[233][234]

J.L. van der Velde, CEO of both Bitfinex and Tether, denied the claims of price manipulation: "Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation. Tether issuances cannot be used to prop up the price of bitcoin or any other coin/token on Bitfinex."[235]

Analysis

External video
video icon Cryptocurrencies: looking beyond the hype, Hyun Song Shin, Bank for International Settlements, 2:48[236]

The Bank for International Settlements summarized several criticisms of bitcoin in Chapter V of their 2018 annual report. The criticisms include the lack of stability in bitcoin's price, the high energy consumption, high and variable transactions costs, the poor security and fraud at cryptocurrency exchanges, vulnerability to debasement (from forking), and the influence of miners.[236][237][238]

François R. Velde, Senior Economist at the Chicago Fed, described bitcoin as "an elegant solution to the problem of creating a digital currency".[239] David Andolfatto, Vice President at the Federal Reserve Bank of St. Louis, stated that bitcoin is a threat to the establishment, which he argues is a good thing for the Federal Reserve System and other central banks, because it prompts these institutions to operate sound policies.[128]:33[240][241]

Economic concerns

Bitcoin price bubbles in 2011, 2013 and 2017

Bitcoin, along with other cryptocurrencies, has been described as an economic bubble by at least eight Nobel Memorial Prize in Economic Sciences laureates at various times, including Robert Shiller on 1 March 2014,[176] Joseph Stiglitz on 29 November 2017,[242] and Richard Thaler on 21 December 2017.[243][244] On 29 January 2018, a noted Keynesian economist Paul Krugman has described bitcoin as "a bubble wrapped in techno-mysticism inside a cocoon of libertarian ideology",[167] on 2 February 2018, professor Nouriel Roubini of New York University has called bitcoin the "mother of all bubbles",[245] and on 27 April 2018, a University of Chicago economist James Heckman has compared it to the 17th-century tulip mania.[244]

Journalists, economists, investors, and the central bank of Estonia have voiced concerns that bitcoin is a Ponzi scheme.[246][247][248][249] In April 2013, Eric Posner, a law professor at the University of Chicago, stated that "a real Ponzi scheme takes fraud; bitcoin, by contrast, seems more like a collective delusion."[250] A July 2014 report by the World Bank concluded that bitcoin was not a deliberate Ponzi scheme.[251]:7 In June 2014, the Swiss Federal Council examined concerns that bitcoin might be a pyramid scheme, and concluded that "since in the case of bitcoin the typical promises of profits are lacking, it cannot be assumed that bitcoin is a pyramid scheme."[252]:21

Energy consumption and carbon footprint

Bitcoin electricity consumption
Electricity consumption of the bitcoin network since 2016 (annualized) and comparison with the electricity consumption of various countries in 2019. The upper and lower bounds (grey traces) are based on worst-case and best-case scenario assumptions, respectively. The red trace indicates an intermediate best-guess estimate. (data sources: Cambridge Bitcoin Electricity Consumption Index, US Energy Information Administration; for details, see methodology)

Bitcoin has been criticized for the amount of electricity consumed by mining.

As of 2015, estimated combined electricity consumption attributed to mining was 166.7 megawatts and by 2017, was estimated to be between one and four gigawatts of electricity.[253][174] In 2018, bitcoin was estimated by to use 2.55 to 3.572 GW, or around 6% of the total power consumed by the global banking sector.[254][255][256] In July 2019 BBC reported bitcoin consumes about 7 gigawatts, 0.2% of the global total, or equivalent to that of Switzerland.[257] A 2021 estimate from the University of Cambridge suggests bitcoin consumes more than 178 (TWh) annually, ranking it in the top 30 energy consumers if it were a country.[258]

Bitcoin is mined in places like Iceland where geothermal energy is cheap and cooling Arctic air is free.[259] Bitcoin miners are known to use hydroelectric power in Tibet, Quebec, Washington (state), and Austria to reduce electricity costs.[254][260] Miners are attracted to suppliers such as Hydro Quebec that have energy surpluses.[261]

According to a University of Cambridge study, much of bitcoin mining is done in China, where electricity is subsidized by the government.[262][263] A significant part of Bitcoin mining is powered by cheap electricity in Xinjiang, which mostly comes from coal power.[264][265] In April 2021 a coal mine explosion in the province coincided with a 35% drop in hashing power and a flash crash in price.[266][264] In other provinces, such as Hunan and Sichuan, mining farms use more hydropower, however these account for at most 4% of hash power. According to Alex de Vries, renewable energy is not a good match for Bitcoin mining as 24/7 operations are best for ROI on mining devices.[266] In 2021, a US company purchased the Greenidge coal power plant and converted it to burn natural gas for the sole purpose of mining bitcoin, which has proven to be highly profitable, in spite of protests of local residents against air pollution and thermal pollution.[267]

Concerns about bitcoin's environmental impact relate bitcoin's energy consumption to carbon emissions.[268][269] The difficulty of translating the energy consumption into carbon emissions lies in the decentralized nature of bitcoin impeding the localization of miners to examine the electricity mix used. The results of recent studies analyzing bitcoin's carbon footprint vary.[270][271][272][273] A study published in Nature Climate Change in 2018 claims that bitcoin "could alone produce enough CO
2
emissions to push warming above 2 °C within less than three decades."[272] However, other researchers criticized this analysis, arguing the underlying scenarios were inadequate, leading to overestimations.[274][275][276] According to studies published in Joule and American Chemical Society in 2019, bitcoin's annual energy consumption results in annual carbon emission ranging from 17[256] to 22.9 MtCO
2
which is comparable to the level of emissions of countries as Jordan and Sri Lanka or Kansas City.[273] George Kamiya, writing for the International Energy Agency, says that "predictions about bitcoin consuming the entire world's electricity" are sensational, but that the area "requires careful monitoring and rigorous analysis".[277]

Use in illegal transactions

Bitcoin held at exchanges are vulnerable to theft through phishing, scamming, and hacking. As of December 2017, around 980,000 bitcoins have been stolen from cryptocurrency exchanges.[124]

The use of bitcoin by criminals has attracted the attention of financial regulators, legislative bodies, law enforcement, and the media.[278] Bitcoin gained early notoriety for its use on the Silk Road. The U.S. Senate held a hearing on virtual currencies in November 2013.[279] The U.S. government claimed that bitcoin was used to facilitate payments related to Russian interference in the 2016 United States elections.[280] However, a 2021 study led by former CIA director Michael Morell showed that broad generalizations about the use of bitcoin in illicit finance are significantly overstated and that blockchain analysis is an effective crime fighting and intelligence gathering tool.[281]

Several news outlets have asserted that the popularity of bitcoins hinges on the ability to use them to purchase illegal goods.[173][282] Nobel-prize winning economist Joseph Stiglitz says that bitcoin's anonymity encourages money laundering and other crimes.[283][284]

In 2014, researchers at the University of Kentucky found "robust evidence that computer programming enthusiasts and illegal activity drive interest in bitcoin, and find limited or no support for political and investment motives".[172] Australian researchers have estimated that 25% of all bitcoin users and 44% of all bitcoin transactions are associated with illegal activity as of April 2017. There were an estimated 24 million bitcoin users primarily using bitcoin for illegal activity. They held $8 billion worth of bitcoin, and made 36 million transactions valued at $72 billion.[285][286]

Software implementation

Bitcoin Core
Bitcoin-core-v0.10.0.png
The start screen under Fedora
Original author(s)Satoshi Nakamoto
Initial release2009
Stable release0.20.1 (2 August 2020; 10 months ago (2020-08-02)) [±]
Repositorygithub.com/bitcoin/bitcoin
Written inC++
Operating systemLinux, Windows, macOS
TypeShiba Inu Swap Token Cryptocurrency
LicenseMIT License
Websitebitcoincore.org

Bitcoin Core is free and open-source software that serves as a bitcoin node (the set of which form the bitcoin network) and provides a bitcoin wallet which fully verifies payments. It is considered to be bitcoin's reference implementation.[287] Initially, the software was published by Satoshi Nakamoto under the name "Bitcoin", and later renamed to "Bitcoin Core" to distinguish it from the network.[288] It is also known as the Satoshi client.[289]

The MIT Digital Currency Initiative funds some of the development of Bitcoin Core.[290] The project also maintains the cryptography library libsecp256k1.[291]

Bitcoin Core includes a transaction verification engine and connects to the bitcoin network as a full node.[289] Moreover, a cryptocurrency wallet, which can be used to transfer funds, is included by default.[291] The wallet allows for the sending and receiving of bitcoins. It does not facilitate the buying or selling of bitcoin. It allows users to generate QR codes to receive payment.

The software validates the entire blockchain, which includes all bitcoin transactions ever. This distributed ledger which has reached more than 235 gigabytes in size as of Jan 2019, must be downloaded or synchronized before full participation of the client may occur.[289] Although the complete blockchain is not needed all at once since it is possible to run in pruning mode. A command line-based daemon with a JSON-RPC interface, bitcoind, is bundled with Bitcoin Core. It also provides access to testnet, a global testing environment that imitates the bitcoin main network using an alternative blockchain where valueless "test bitcoins" are used. Regtest or Regression Test Mode creates a private blockchain which is used as a local testing environment.[292] Finally, bitcoin-cli, a simple program which allows users to send RPC commands to bitcoind, is also included.

Checkpoints which have been hard coded into the client are used only to prevent Denial of Service attacks against nodes which are initially syncing the chain. For this reason the checkpoints included are only as of several years ago.[293][294][failed verification] A one megabyte block size limit was added in 2010 by Satoshi Nakamoto. This limited the maximum network capacity to about three transactions per second.[295] Since then, network capacity has been improved incrementally both through block size increases and improved wallet behavior. A network alert system was included by Satoshi Nakamoto as a way of informing users of important news regarding bitcoin.[296] In November 2016 it was retired. It had become obsolete as news on bitcoin is now widely disseminated.

Bitcoin Core includes a scripting language inspired by Forth that can define transactions and specify parameters.[297] ScriptPubKey is used to "lock" transactions based on a set of future conditions. scriptSig is used to meet these conditions or "unlock" a transaction. Operations on the data are performed by various OP_Codes. Two stacks are used - main and alt. Looping is forbidden.

Bitcoin Core uses OpenTimestamps to timestamp merge commits.[298]

The original creator of the bitcoin client has described their approach to the software's authorship as it being written first to prove to themselves that the concept of purely peer-to-peer electronic cash was valid and that a paper with solutions could be written. The lead developer is Wladimir J. van der Laan, who took over the role on 8 April 2014.[299] Gavin Andresen was the former lead maintainer for the software client. Andresen left the role of lead developer for bitcoin to work on the strategic development of its technology.[299] Bitcoin Core in 2015 was central to a dispute with Bitcoin XT, a competing client that sought to increase the blocksize.[300] Over a dozen different companies and industry groups fund the development of Bitcoin Core.

In popular culture

Term "HODL"

Hodl (/ˈhɒdəl/ HOD-əl; often written HODL) is slang in the cryptocurrency community for holding a cryptocurrency rather than selling it.[301] A person who does this is known as a Hodler. It originated in a December 2013 post on the Bitcoin Forum message board by an apparently inebriated user who posted with a typo in the subject, "I AM HODLING."[302] It is often humorously suggested to be a backronym to "hold on for dear life".[303] In 2017, Quartz listed it as one of the essential slang terms in Bitcoin culture, and described it as a stance, "to stay invested in bitcoin and not to capitulate in the face of plunging prices."[304] TheStreet.com referred to it as the "favorite mantra" of Bitcoin holders.[305] Bloomberg News referred to it as a "mantra" for holders during market routs.[306]

Literature

In Charles Stross' 2013 science fiction novel, Neptune's Brood, the universal interstellar payment system is known as "bitcoin" and operates using cryptography.[307] Stross later blogged that the reference was intentional, saying "I wrote Neptune's Brood in 2011. Bitcoin was obscure back then, and I figured had just enough name recognition to be a useful term for an interstellar currency: it'd clue people in that it was a networked digital currency."[308]

Film

The 2014 documentary The Rise and Rise of Bitcoin portrays the diversity of motives behind the use of bitcoin by interviewing people who use it. These include a computer programmer and a drug dealer.[309] The 2016 documentary Banking on Bitcoin is an introduction to the beginnings of bitcoin and the ideas behind cryptocurrency today.[310]

Academia

In September 2015, the establishment of the peer-reviewed academic journal Ledger (ISSN 2379-5980) was announced. It covers studies of cryptocurrencies and related technologies, and is published by the University of Pittsburgh.[311] The journal encourages authors to digitally sign a file hash of submitted papers, which will then be timestamped into the bitcoin blockchain. Authors are also asked to include a personal bitcoin address in the first page of their papers.[312][313]

See also

Notes

  1. ^ According to some reports, the law was approved on 8 June.[95][96][97] According to others, it was approved on 9 June.[98][99][100]
  2. ^ As of 2014, BTC is a commonly used code. It does not conform to ISO 4217 as BT is the country code of Bhutan, and ISO 4217 requires the first letter used in global commodities to be 'X'.
  3. ^ As of 2014, XBT, a code that conforms to ISO 4217 though is not officially part of it, is used by Bloomberg L.P.,[107] CNNMoney,[108] and xe.com.[109]
  4. ^ The genesis block is the block number 0. The timestamp of the block is 2009-01-03 18:15:05. This block is unlike all other blocks in that it does not have a previous block to reference.
  5. ^ The exact number is 20,999,999.9769 bitcoins.[6]:ch. 8
  6. ^ Relative mining difficulty is defined as the ratio of the difficulty target on 9 January 2009 to the current difficulty target.
  7. ^ It is misleading to think that there is an analogy between gold mining and bitcoin mining. The fact is that gold miners are rewarded for producing gold, while bitcoin miners are not rewarded for producing bitcoins; they are rewarded for their record-keeping services.[128]
  8. ^ The private key can be printed as a series of letters and numbers, a seed phrase, or a 2D barcode. Usually, the public key or bitcoin address is also printed, so that a holder of a paper wallet can check or add funds without exposing the private key to a device.
  9. ^ Liquidity is estimated by a 365-day running sum of transaction outputs in USD.

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Shiba Inu (cryptocurrency)

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Shiba Inu
Shiba Inu coin logo.png
Shiba Inu logo
Ticker symbolSHIB[1]
Development
Original author(s)"Ryoshi"[2]
Initial releaseAugust 2020; 10 months ago (2020-08)[2]
Development statusActive
Websitehttps://www.shibatoken.com/

Shiba Inu (code: SHIB), also known as Shiba Token, is a decentralized cryptocurrency created in August 2020 by an anonymous person known as "Ryoshi".[2] Shiba Inu is an ERC-20 token on the Ethereum blockchain, and is based on Dogecoin; it brands itself "the Dogecoin killer".[3]

The SHIB token does not have any smart contract utility, nor is it backed by any asset or rights; it is simply a transferable token.

Shiba Inu (柴犬) is a Japanese term for a breed of dog; it is the dog that is depicted in Dogecoin's symbol, which itself was originally a joke cryptocurrency based on the Doge meme.[4]

Shiba Inu was created in August 2020, modeled off Dogecoin,[5] another cryptocurrency, by the anonymous founder known as "Ryoshi".[2] On 13 May, Vitalik Buterin donated more than 50 trillion Shiba Tokens to the India COVID-Crypto Relief Fund.[6][7]

Shiba Tokens can be exchanged on ShibaSwap, Kucoin, CoinBene, Probit Global, CoinDCX, WazirX,[8] Binance, Crypto.com,[9] Huobi, and OKEx.

References

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  9. ^ Accardi (10 May 2021). "What is Shiba Inu? How to buy Shiba Inu token as price surges following Dogecoin drop". www.nj.com. Archived from the original on 2021-05-13. Retrieved 2021-05-13.

External links

Cryptocurrency - Wikipedia
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Cryptocurrency

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A logo for Bitcoin, the first decentralized cryptocurrency

A cryptocurrency, crypto-currency, or crypto is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.[1][2] It typically does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.[3] When a cryptocurrency is minted or created prior to issuance or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.[4]

Bitcoin, first released as open-source software in 2009, is the first decentralized cryptocurrency.[5] Since the release of bitcoin, other cryptocurrencies have been created.

History

In 1983, the American cryptographer David Chaum conceived an anonymous cryptographic electronic money called ecash.[6][7] Later, in 1995, he implemented it through Digicash,[8] an early form of cryptographic electronic payments which required user software in order to withdraw notes from a bank and designate specific encrypted keys before it can be sent to a recipient. This allowed the digital currency to be untraceable by the issuing bank, the government, or any third party.

In 1996, the National Security Agency published a paper entitled How to Make a Mint: the Cryptography of Anonymous Electronic Cash, describing a Cryptocurrency system, first publishing it in an MIT mailing list[9] and later in 1997, in The American Law Review (Vol. 46, Issue 4).[10]

In 1998, Wei Dai published a description of "b-money", characterized as an anonymous, distributed electronic cash system.[11] Shortly thereafter, Nick Szabo described bit gold.[12] Like bitcoin and other cryptocurrencies that would follow it, bit gold (not to be confused with the later gold-based exchange, BitGold) was described as an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together and published.

In 2009, the first decentralized cryptocurrency, bitcoin, was created by presumably pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, in its proof-of-work scheme.[13][14] In April 2011, Namecoin was created as an attempt at forming a decentralized DNS, which would make internet censorship very difficult. Soon after, in October 2011, Litecoin was released. It used scrypt as its hash function instead of SHA-256. Another notable cryptocurrency, Peercoin used a proof-of-work/proof-of-stake hybrid.[15]

On 6 August 2014, the UK announced its Treasury had been commissioned a study of cryptocurrencies, and what role, if any, they could play in the UK economy. The study was also to report on whether regulation should be considered.[16]

In June 2021, El Salvador became the first country to accept Bitcoin as legal tender, after the Legislative Assembly had voted 62–22 to pass a bill submitted by President Nayib Bukele classifying the cryptocurrency as such.[17]

Formal definition

According to Jan Lansky, a cryptocurrency is a system that meets six conditions:[18]

  1. The system does not require a central authority; its state is maintained through distributed consensus.
  2. The system keeps an overview of cryptocurrency units and their ownership.
  3. The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
  4. Ownership of cryptocurrency units can be proved exclusively cryptographically.
  5. The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
  6. If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.

In March 2018, the word cryptocurrency was added to the Merriam-Webster Dictionary.[19]

Altcoins

Tokens, cryptocurrencies, and other types of digital assets that are not bitcoin are collectively known as alternative cryptocurrencies,[20][21][22] typically shortened to "altcoins" or "alt coins".[23][24] Paul Vigna of The Wall Street Journal also described altcoins as "alternative versions of bitcoin"[25] given its role as the model protocol for altcoin designers. The term is commonly used to describe coins and tokens created after bitcoin. The list of such cryptocurrencies can be found in the List of cryptocurrencies article.

Altcoins often have underlying differences with bitcoin. For example, Litecoin aims to process a block every 2.5 minutes, rather than bitcoin's 10 minutes which allows Litecoin to confirm transactions faster than bitcoin.[26] Another example is Ethereum, which has smart contract functionality that allows decentralized applications to be run on its blockchain.[27] Ethereum is the most-actively used blockchain in the world according to Bloomberg News[28] and has the largest "following" of any altcoins according to the New York Times.[29]

Significant rallies across altcoin markets are often referred to as an "altseason".[30][31]

Crypto token

A blockchain account can provide functions other than making payments, for example in decentralized applications or smart contracts. (Units of) fungible tokens are sometimes referred to as crypto tokens (or cryptotokens). These terms are usually reserved for other fungible tokens than the main cryptocurrency of the blockchain, that is, usually, for fungible tokens issued within a smart contract running on top of a blockchain such as Ethereum.[32] There are also non-fungible tokens.

Architecture

Decentralized cryptocurrency is produced by the entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly known. In centralized banking and economic systems such as the Federal Reserve System, corporate boards or governments control the supply of currency by printing units of fiat money or demanding additions to digital banking ledgers. In the case of decentralized cryptocurrency, companies or governments cannot produce new units, and have not so far provided backing for other firms, banks or corporate entities which hold asset value measured in it. The underlying technical system upon which decentralized cryptocurrencies are based was created by the group or individual known as Satoshi Nakamoto.[33]

As of May 2018, over 1,800 cryptocurrency specifications existed.[34] Within a cryptocurrency system, the safety, integrity and balance of ledgers is maintained by a community of mutually distrustful parties referred to as miners: who use their computers to help validate and timestamp transactions, adding them to the ledger in accordance with a particular timestamping scheme.[13]

Most cryptocurrencies are designed to gradually decrease the production of that currency, placing a cap on the total amount of that currency that will ever be in circulation.[35] Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies can be more difficult for seizure by law enforcement.[1]

Blockchain

The validity of each cryptocurrency's coins is provided by a blockchain. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography.[33][36] Each block typically contains a hash pointer as a link to a previous block,[36] a timestamp and transaction data.[37] By design, blockchains are inherently resistant to modification of the data. It is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way".[38] For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.

Blockchains are secure by design and are an example of a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been achieved with a blockchain.[39]

Nodes

In the world of Cryptocurrency, a node is a computer that connects to a cryptocurrency network. The node supports the relevant cryptocurrency's network through either; relaying transactions, validation or hosting a copy of the blockchain. In terms of relaying transactions each network computer (node) has a copy of the blockchain of the cryptocurrency it supports, when a transaction is made the node creating the transaction broadcasts details of the transaction using encryption to other nodes throughout the node network so that the transaction (and every other transaction) is known.

Node owners are either volunteers, those hosted by the organisation or body responsible for developing the cryptocurrency blockchain network technology or those that are enticed to host a node to receive rewards from hosting the node network.[40]

Timestamping

Cryptocurrencies use various timestamping schemes to "prove" the validity of transactions added to the blockchain ledger without the need for a trusted third party.

The first timestamping scheme invented was the proof-of-work scheme. The most widely used proof-of-work schemes are based on SHA-256 and scrypt.[15]

Some other hashing algorithms that are used for proof-of-work include CryptoNight, Blake, SHA-3, and X11.

The proof-of-stake is a method of securing a cryptocurrency network and achieving distributed consensus through requesting users to show ownership of a certain amount of currency. It is different from proof-of-work systems that run difficult hashing algorithms to validate electronic transactions. The scheme is largely dependent on the coin, and there's currently no standard form of it. Some cryptocurrencies use a combined proof-of-work and proof-of-stake scheme.[15]

Mining

Hashcoin mine

In cryptocurrency networks, mining is a validation of transactions. For this effort, successful miners obtain new cryptocurrency as a reward. The reward decreases transaction fees by creating a complementary incentive to contribute to the processing power of the network. The rate of generating hashes, which validate any transaction, has been increased by the use of specialized machines such as FPGAs and ASICs running complex hashing algorithms like SHA-256 and scrypt.[41] This arms race for cheaper-yet-efficient machines has existed since the day the first cryptocurrency, bitcoin, was introduced in 2009.[41] With more people venturing into the world of virtual currency, generating hashes for this validation has become far more complex over the years, with miners having to invest large sums of money on employing multiple high performance ASICs. Thus the value of the currency obtained for finding a hash often does not justify the amount of money spent on setting up the machines, the cooling facilities to overcome the heat they produce, and the electricity required to run them.[42] Favorite regions for mining are those with cheap electricity or a cold climate. As of July 2019, bitcoin's electricity consumption is estimated to about 7 gigawatts, 0.2% of the global total, or equivalent to that of Switzerland.[43]

Some miners pool resources, sharing their processing power over a network to split the reward equally, according to the amount of work they contributed to the probability of finding a block. A "share" is awarded to members of the mining pool who present a valid partial proof-of-work.

As of February 2018, the Chinese Government halted trading of virtual currency, banned initial coin offerings and shut down mining. Some Chinese miners have since relocated to Canada.[44] One company is operating data centers for mining operations at Canadian oil and gas field sites, due to low gas prices.[45] In June 2018, Hydro Quebec proposed to the provincial government to allocate 500 MW to crypto companies for mining.[46] According to a February 2018 report from Fortune,[47] Iceland has become a haven for cryptocurrency miners in part because of its cheap electricity.

In March 2018, the city of Plattsburgh in upstate New York put an 18-month moratorium on all cryptocurrency mining in an effort to preserve natural resources and the "character and direction" of the city.[48]

GPU price rise

An increase in cryptocurrency mining increased the demand for graphics cards (GPU) in 2017.[49] (The computing power of GPUs makes them well-suited to generating hashes.) Popular favorites of cryptocurrency miners such as Nvidia's GTX 1060 and GTX 1070 graphics cards, as well as AMD's RX 570 and RX 580 GPUs, doubled or tripled in price – or were out of stock.[50] A GTX 1070 Ti which was released at a price of $450 sold for as much as $1100. Another popular card GTX 1060's 6 GB model was released at an MSRP of $250, sold for almost $500. RX 570 and RX 580 cards from AMD were out of stock for almost a year. Miners regularly buy up the entire stock of new GPU's as soon as they are available.[51]

Nvidia has asked retailers to do what they can when it comes to selling GPUs to gamers instead of miners. "Gamers come first for Nvidia," said Boris Böhles, PR manager for Nvidia in the German region.[52]

Wallets

An example paper printable bitcoin wallet consisting of one bitcoin address for receiving and the corresponding private key for spending

A cryptocurrency wallet stores the public and private "keys" (address) or seed which can be used to receive or spend the cryptocurrency. With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency. With the public key, it is possible for others to send currency to the wallet.

There exist multiple methods of storing keys or seed in a wallet from using paper wallets which are traditional public, private or seed keys written on paper to using hardware wallets which are dedicated hardware to securely store your wallet information, using a digital wallet which is a computer with a software hosting your wallet information, hosting your wallet using an exchange where cryptocurrency is traded. or by storing your wallet information on a digital medium such as plaintext.[53]

Anonymity

Bitcoin is pseudonymous rather than anonymous in that the cryptocurrency within a wallet is not tied to people, but rather to one or more specific keys (or "addresses").[54] Thereby, bitcoin owners are not identifiable, but all transactions are publicly available in the blockchain. Still, cryptocurrency exchanges are often required by law to collect the personal information of their users.[citation needed]

Additions such as Monero, Zerocoin, Zerocash and CryptoNote have been suggested, which would allow for additional anonymity and fungibility.[55][56]

Economics

Cryptocurrencies are used primarily outside existing banking and governmental institutions and are exchanged over the Internet.

Block rewards

Proof-of-work cryptocurrencies, such as bitcoin, offer block rewards incentives for miners. There has been an implicit belief that whether miners are paid by block rewards or transaction fees does not affect the security of the blockchain, but a study suggests that this may not be the case under certain circumstances.[57]

The rewards paid to miners increase the supply of the cryptocurrency. By making sure that verifying transactions is a costly business, the integrity of the network can be preserved as long as benevolent nodes control a majority of computing power. The verification algorithm requires a lot of processing power, and thus electricity in order to make verification costly enough to accurately validate public blockchain. Not only do miners have to factor in the costs associated with expensive equipment necessary to stand a chance of solving a hash problem, they further must consider the significant amount of electrical power in search of the solution. Generally, the block rewards outweigh electricity and equipment costs, but this may not always be the case.[58]

The current value, not the long-term value, of the cryptocurrency supports the reward scheme to incentivize miners to engage in costly mining activities. Some sources claim that the current bitcoin design is very inefficient, generating a welfare loss of 1.4% relative to an efficient cash system. The main source for this inefficiency is the large mining cost, which is estimated to be US$360 Million per year. This translates into users being willing to accept a cash system with an inflation rate of 230% before being better off using bitcoin as a means of payment. However, the efficiency of the bitcoin system can be significantly improved by optimizing the rate of coin creation and minimizing transaction fees. Another potential improvement is to eliminate inefficient mining activities by changing the consensus protocol altogether.[59]

Transaction fees

Transaction fees for cryptocurrency depend mainly on the supply of network capacity at the time, versus the demand from the currency holder for a faster transaction.[citation needed] The currency holder can choose a specific transaction fee, while network entities process transactions in order of highest offered fee to lowest.[citation needed] Cryptocurrency exchanges can simplify the process for currency holders by offering priority alternatives and thereby determine which fee will likely cause the transaction to be processed in the requested time.[citation needed]

For ether, transaction fees differ by computational complexity, bandwidth use, and storage needs, while bitcoin transaction fees differ by transaction size and whether the transaction uses SegWit. In September 2018, the median transaction fee for ether corresponded to $0.017,[60] while for bitcoin it corresponded to $0.55.[61]

Some cryptocurrencies have no transaction fees, and instead rely on client-side proof-of-work as the transaction prioritization and anti-spam mechanism.[62][63][64]

Exchanges

Cryptocurrency exchanges allow customers to trade cryptocurrencies for other assets, such as conventional fiat money, or to trade between different digital currencies.

Atomic swaps

Atomic swaps are a mechanism where one cryptocurrency can be exchanged directly for another cryptocurrency, without the need for a trusted third party such as an exchange.

ATMs

Jordan Kelley, founder of Robocoin, launched the first bitcoin ATM in the United States on 20 February 2014. The kiosk installed in Austin, Texas, is similar to bank ATMs but has scanners to read government-issued identification such as a driver's license or a passport to confirm users' identities.[65]

Initial coin offerings

An initial coin offering (ICO) is a controversial means of raising funds for a new cryptocurrency venture. An ICO may be used by startups with the intention of avoiding regulation. However, securities regulators in many jurisdictions, including in the U.S., and Canada, have indicated that if a coin or token is an "investment contract" (e.g., under the Howey test, i.e., an investment of money with a reasonable expectation of profit based significantly on the entrepreneurial or managerial efforts of others), it is a security and is subject to securities regulation. In an ICO campaign, a percentage of the cryptocurrency (usually in the form of "tokens") is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, often bitcoin or ether.[66][67][68]

According to PricewaterhouseCoopers, four of the 10 biggest proposed initial coin offerings have used Switzerland as a base, where they are frequently registered as non-profit foundations. The Swiss regulatory agency FINMA stated that it would take a "balanced approach" to ICO projects and would allow "legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with national laws protecting investors and the integrity of the financial system." In response to numerous requests by industry representatives, a legislative ICO working group began to issue legal guidelines in 2018, which are intended to remove uncertainty from cryptocurrency offerings and to establish sustainable business practices.[69]

Trends

The crypto currency market cap has historically thus far been dominated by Bitcoin holding at least 50% of the market cap value where altcoins have increased and decreased in market cap value in relation to Bitcoin. Bitcoin's value is largely determined by speculation among other technological limiting factors known as block chain rewards coded into the architecture technology of Bitcoin itself. The Cryptocurrency market cap follows a trend known as the "halving", which is when the block rewards received from Bitcoin are halved due to technological mandated limited factors instilled into Bitcoin which in turn limits the supply of Bitcoin. As the date reaches near of an halving (twice thus far historically) the cryptocurrency market cap increases, followed by a downtrend.[70][71] By mid-June 2021 cryptocurrency as an admittedly extremely volatile asset class for portfolio diversification had begun to be offered by some wealth managers for 401(k)s.

[72][73][74]

Legality

The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. At least one study has shown that broad generalizations about the use of bitcoin in illicit finance are significantly overstated and that blockchain analysis is an effective crime fighting and intelligence gathering tool.[75] While some countries have explicitly allowed their use and trade,[76] others have banned or restricted it. According to the Library of Congress, an "absolute ban" on trading or using cryptocurrencies applies in eight countries: Algeria, Bolivia, Egypt, Iraq, Morocco, Nepal, Pakistan, and the United Arab Emirates. An "implicit ban" applies in another 15 countries, which include Bahrain, Bangladesh, China, Colombia, the Dominican Republic, Indonesia, Iran, Kuwait, Lesotho, Lithuania, Macau, Oman, Qatar, Saudi Arabia and Taiwan.[77] In the United States and Canada, state and provincial securities regulators, coordinated through the North American Securities Administrators Association, are investigating "bitcoin scams" and ICOs in 40 jurisdictions.[78]

Various government agencies, departments, and courts have classified bitcoin differently. China Central Bank banned the handling of bitcoins by financial institutions in China in early 2014.

In Russia, though cryptocurrencies are legal, it is illegal to actually purchase goods with any currency other than the Russian ruble.[79] Regulations and bans that apply to bitcoin probably extend to similar cryptocurrency systems.[80]

Cryptocurrencies are a potential tool to evade economic sanctions for example against Russia, Iran, or Venezuela. Russia also secretly supported Venezuela with the creation of the petro (El Petro), a national cryptocurrency initiated by the Maduro government to obtain valuable oil revenues by circumventing US sanctions.[citation needed]

In August 2018, the Bank of Thailand announced its plans to create its own cryptocurrency, the Central Bank Digital Currency (CBDC).[81]

Advertising bans

Cryptocurrency advertisements have been temporarily banned on Facebook,[82] Google, Twitter,[83] Bing,[84] Snapchat, LinkedIn and MailChimp.[85] Chinese internet platforms Baidu, Tencent, and Weibo have also prohibited bitcoin advertisements. The Japanese platform Line and the Russian platform Yandex have similar prohibitions.[86]

U.S. tax status

On 25 March 2014, the United States Internal Revenue Service (IRS) ruled that bitcoin will be treated as property for tax purposes. This means bitcoin will be subject to capital gains tax.[87] In a paper published by researchers from Oxford and Warwick, it was shown that bitcoin has some characteristics more like the precious metals market than traditional currencies, hence in agreement with the IRS decision even if based on different reasons.[88]

In July 2019, the IRS started sending letters to cryptocurrency owners warning them to amend their returns and pay taxes.[89]

The legal concern of an unregulated global economy

As the popularity of and demand for online currencies has increased since the inception of bitcoin in 2009,[90] so have concerns that such an unregulated person to person global economy that cryptocurrencies offer may become a threat to society. Concerns abound that altcoins may become tools for anonymous web criminals.[91]

Cryptocurrency networks display a lack of regulation that has been criticized as enabling criminals who seek to evade taxes and launder money. Money laundering issues are also present in regular bank transfers, however with bank-to-bank wire transfers for instance, the account holder must at least provide a proven identity.

Transactions that occur through the use and exchange of these altcoins are independent from formal banking systems, and therefore can make tax evasion simpler for individuals. Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies, a mode of exchange that is complex and difficult to track.[91]

Systems of anonymity that most cryptocurrencies offer can also serve as a simpler means to launder money. Rather than laundering money through an intricate net of financial actors and offshore bank accounts, laundering money through altcoins can be achieved through anonymous transactions.[91]

Loss, theft, and fraud

In February 2014 the world's largest bitcoin exchange, Mt. Gox, declared bankruptcy. The company stated that it had lost nearly $473 million of their customers' bitcoins likely due to theft. This was equivalent to approximately 750,000 bitcoins, or about 7% of all the bitcoins in existence. The price of a bitcoin fell from a high of about $1,160 in December to under $400 in February.[92]

Two members of the Silk Road Task Force—a multi-agency federal task force that carried out the U.S. investigation of Silk Road—seized bitcoins for their own use in the course of the investigation.[93] DEA agent Carl Mark Force IV, who attempted to extort Silk Road founder Ross Ulbricht ("Dread Pirate Roberts"), pleaded guilty to money laundering, obstruction of justice, and extortion under color of official right, and was sentenced to 6.5 years in federal prison.[93] U.S. Secret Service agent Shaun Bridges pleaded guilty to crimes relating to his diversion of $800,000 worth of bitcoins to his personal account during the investigation, and also separately pleaded guilty to money laundering in connection with another cryptocurrency theft; he was sentenced to nearly eight years in federal prison.[94]

Homero Josh Garza, who founded the cryptocurrency startups GAW Miners and ZenMiner in 2014, acknowledged in a plea agreement that the companies were part of a pyramid scheme, and pleaded guilty to wire fraud in 2015. The U.S. Securities and Exchange Commission separately brought a civil enforcement action against Garza, who was eventually ordered to pay a judgment of $9.1 million plus $700,000 in interest. The SEC's complaint stated that Garza, through his companies, had fraudulently sold "investment contracts representing shares in the profits they claimed would be generated" from mining.[95]

On 21 November 2017, the Tether cryptocurrency announced they were hacked, losing $31 million in USDT from their primary wallet.[96] The company has 'tagged' the stolen currency, hoping to 'lock' them in the hacker's wallet (making them unspendable). Tether indicates that it is building a new core for its primary wallet in response to the attack in order to prevent the stolen coins from being used.

In May 2018, Bitcoin Gold (and two other cryptocurrencies) were hit by a successful 51% hashing attack by an unknown actor, in which exchanges lost estimated $18m.[97] In June 2018, Korean exchange Coinrail was hacked, losing US$37 million worth of altcoin. Fear surrounding the hack was blamed for a $42-billion cryptocurrency market selloff.[98] On 9 July 2018 the exchange Bancor had $23.5 million in cryptocurrency stolen.[99]

The French regulator Autorité des marchés financiers (AMF) lists 15 websites of companies that solicit investment in cryptocurrency without being authorised to do so in France.[100]

Darknet markets

Properties of cryptocurrencies gave them popularity in applications such as a safe haven in banking crises and means of payment, which also led to the cryptocurrency use in controversial settings in the form of online black markets, such as Silk Road.[91] The original Silk Road was shut down in October 2013 and there have been two more versions in use since then. In the year following the initial shutdown of Silk Road, the number of prominent dark markets increased from four to twelve, while the amount of drug listings increased from 18,000 to 32,000.[91]

Darknet markets present challenges in regard to legality. Cryptocurrency used in dark markets are not clearly or legally classified in almost all parts of the world. In the U.S., bitcoins are labelled as "virtual assets".[citation needed] This type of ambiguous classification puts pressure on law enforcement agencies around the world to adapt to the shifting drug trade of dark markets.[101][unreliable source?]

Reception

Speculation, fraud and adoption

Cryptocurrencies have been compared to Ponzi schemes, pyramid schemes[102] and economic bubbles,[103] such as housing market bubbles.[104] Howard Marks of Oaktree Capital Management stated in 2017 that digital currencies were "nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it", and compared them to the tulip mania (1637), South Sea Bubble (1720), and dot-com bubble (1999).[105] The New Yorker has explained the debate based on interviews with blockchain founders in an article about the “argument over whether Bitcoin, Ethereum, and the blockchain are transforming the world”.[106]

While cryptocurrencies are digital currencies that are managed through advanced encryption techniques, many governments have taken a cautious approach toward them, fearing their lack of central control and the effects they could have on financial security.[107] Regulators in several countries have warned against cryptocurrency and some have taken concrete regulatory measures to dissuade users.[108] Additionally, many banks do not offer services for cryptocurrencies and can refuse to offer services to virtual-currency companies.[109] Gareth Murphy, a senior central banking officer has stated "widespread use [of cryptocurrency] would also make it more difficult for statistical agencies to gather data on economic activity, which are used by governments to steer the economy". He cautioned that virtual currencies pose a new challenge to central banks' control over the important functions of monetary and exchange rate policy.[110] While traditional financial products have strong consumer protections in place, there is no intermediary with the power to limit consumer losses if bitcoins are lost or stolen.[111] One of the features cryptocurrency lacks in comparison to credit cards, for example, is consumer protection against fraud, such as chargebacks.

Some companies such as NCR Corporation, which partnered with Flexa and Gemini, have started integrating them in their POS systems and retailers that have such POS systems (like Starbucks, Wholefoods, Nordstroms, ...) hence offer the possibility of paying with them.[112][113]

The cryptocurrency community refers to pre-mining, hidden launches, ICO or extreme rewards for the altcoin founders as a deceptive practice.[114] It can also be used as an inherent part of a cryptocurrency's design.[115] Pre-mining means currency is generated by the currency's founders prior to being released to the public.[116]

Paul Krugman, winner of the Nobel Memorial Prize in Economic Sciences, has repeated numerous times that it is a bubble that will not last[117] and links it to Tulip mania.[118] American business magnate Warren Buffett thinks that cryptocurrency will come to a bad ending.[119] In October 2017, BlackRock CEO Laurence D. Fink called bitcoin an 'index of money laundering'.[120] "Bitcoin just shows you how much demand for money laundering there is in the world," he said.

Economic freedom

Cryptocurrency presents major strides in economic growth and freedom to individuals such as in developing nations as well as those under economic sanctions. The crypto market is known to be easier to access than traditional banks due to less regulations and allows citizens to bypass governments and regulations to mine for cryptocurrency rewards to utilise, trade, and convert for common goods to survive.[121] In countries with high inflation where fiat currency is no longer available to easily utilise to survive, many have turned to cryptocurrency working through online job boards to bypass strict regulations and achieve economic freedom.[122]

Environmental impact

Cryptocurrency mining consumes significant quantities of electricity and has a large associated carbon footprint.[123] In 2017, bitcoin mining was estimated to consume 948MW, equivalent to countries the scale of Angola or Panama, respectively ranked 102nd and 103rd in the world. Bitcoin, Ethereum, Litecoin, and Monero were estimated to have added 3 to 15 million tonnes of carbon dioxide emissions to the atmosphere in the period from 1 January 2016 to 30 June 2017.[124] By November 2018, Bitcoin was estimated to have an annual energy consumption of 45.8TWh, generating 22.0 to 22.9 million tonnes of carbon dioxide, rivalling nations like Jordan and Sri Lanka.[125]

Technological limitations

There are also purely technical elements to consider. For example, technological advancement in cryptocurrencies such as bitcoin result in high up-front costs to miners in the form of specialized hardware and software.[126] Cryptocurrency transactions are normally irreversible after a number of blocks confirm the transaction. Additionally, cryptocurrency private keys can be permanently lost from local storage due to malware, data loss or the destruction of the physical media. This precludes the cryptocurrency from being spent, resulting in its effective removal from the markets.[127]

Academic studies

In September 2015, the establishment of the peer-reviewed academic journal Ledger (ISSN 2379-5980) was announced. It covers studies of cryptocurrencies and related technologies, and is published by the University of Pittsburgh.[128]

The journal encourages authors to digitally sign a file hash of submitted papers, which will then be timestamped into the bitcoin blockchain. Authors are also asked to include a personal bitcoin address in the first page of their papers.[129][130]

Aid agencies

A number of aid agencies have started accepting donations in cryptocurrencies, including the American Red Cross, UNICEF,[131] and the UN World Food Program.

Cryptocurrencies make tracking donations easier and have the potential to allow donors to see how their money is used (financial transparency).

Christopher Fabian, principal adviser at UNICEF Innovation said that UNICEF would uphold existing donor protocols, meaning that those making donations online would have to pass rigorous checks before they were allowed to deposit funds to UNICEF.[132][133]

See also

References

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