cryptocurrency and the bitcoin

Cryptocurrency and the Bitcoin

Cryptocurrency and the BitcoinContents

Cryptocurrency2Defining and explaining Cryptocurrency2History of Cryptocurrencies3List of cryotpcurrencies3Criticism4Bitcoin4Defining and explaining Bitcoin4History of Bitcoin5Prices and value history5Bubbles6Interesting facts about bitcoin610 Scary facts about Bitcoin6Economics8A solution for national Economies?8Increasing concerns8Speculations9Wide spread vision9Black markets9Money laundering10Unauthorized mining10Top 10 Bitcoin Merchant Sites10Bibliography12

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CryptocurrencyDefining and explaining Cryptocurrency According to the Investopedia website, a Cryptocurrency is defined as: A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency is that it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation. The anonymous nature of cryptocurrency transactions makes them well-suited for a host of nefarious activities such as money laundering and tax evasion.Acryptocurrencyis a digitalmedium of exchange. When comparing cryptocurrencies tofiat money, the most notable difference is in how no group or individual may gain any significant control over the production of money, instead only a certain amount of cryptocurrency can possibly be produced by the entire cryptocurrency system collectively, at a rate which is always both prior defined and publicly known, which means it only has value if people agree to such and use it as a medium of exchange. However, because it is not tied to any country, its value cannot be affected by a central bank.Since prices are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely.Techopedia explains cryptocurrency as being an attempt to bring back a decentralized "currency of the people," one that is not subject to inflationary moves by a central bank. Because cryptocurrency transactions are anonymous and virtually untraceable, they have created a niche market for illegal transactions such as in illegal drugs. Because there is no central repository for the currency, neither law enforcement nor payment processors have jurisdiction to freeze users accounts. However, for supporters of cryptocurrency, this anonymity is one of the technologys main strengths, despite its abuse for illicit purposes, because it allows for a power shift from institutions to individuals.In cryptocurrency systems the safety, integrity and balance of allledgersis ensured by miners who are for the most part general members of the public actively protecting the network by maintaining a high hash-rate difficulty for their chance at receiving a randomly distributed small fee. Averting the underlying security of a cryptocurrency is a controversial process called 'derailing'. Dozens of cryptocurrency specifications have been defined; most are similar to andderived fromthe first fully implemented cryptocurrency protocol,Bitcoin. Most cryptocurrencies are designed to gradually introduce new units of currency, placing an ultimate cap on the total amount of currency that will ever be in circulation. This is done both to mimic the scarcity (and value) ofprecious metalsand to avoidhyperinflation.Compared with ordinary currencies held by financial institutions or kept ascashon hand, cryptocurrencies are less susceptible toseizureby law enforcement.An article found on Forbes explains that bitcoins derive their value partly through their scarcity, which is defined not by how much can be dug up with shovels but by a cryptographic lottery. Anyone can get Bitcoins without paying cash for them by downloading and running Bitcoins mining program. The machines in Bitcoins mining network, now in the thousands, compute an encryption function called a hash on a set of random numbers, and coins are awarded every ten minutes to whichever miner happens to compute a number below a certain threshold. That lottery tightly controls how many Bitcoins are created. No banker can control it. No evil dictator tyrant can print zillions and destroy the value, says Bruce Wagner, organizer of New Yorks Bitcoin developers meet-up.Gavin Andresen, the technical lead at Bitcoin, told Forbes that cryptocurrency is an attempt to bring back a decentralized "currency of the people," one that is not subject to inflationary moves by a central bank. Bitcoins must be cryptographically signed each time they are transferred. This means that each Bitcoin user has both a public key and an individual private key.

Bitcoins anonymity was no accident. The system was originally designed by Satoshi Nakamoto, a mysterious, privacy-obsessed figure who first described the currencys specs in a series of posts on a cryptography e-mail list in late 2008. Nakamoto declined to be interviewed for this story, and not even Andresen, who took over the project as technical lead in May 2010, has communicated with Bitcoins founder except through e-mail and posts on Web forums. Nakamoto has compared Bitcoin to the systems of anonymous financial transactions sought by the anarchist cypherpunk movement in the 1990s, whose adherents saw cryptography as a way to shift power from institutions to individuals.Bitcoins are completely untraceable, a fact that annoys governments and regulators no end. This libertarian ethos makes Bitcoin the currency of choice for people trading onSilk Road, the online black marketwhere illegal drugs and other contraband can be purchased. But not every vendor who accepts Bitcoins is trading in illegal commodities - a growing number of legitimate vendors are accepting crypto-currencies because some customers insist on extreme privacy as a matter of principle.

History of Cryptocurrencies With the arrival of so-called peer-to-peer money transfer, the average person in the street can now directly participate in banking activities that until recently were the sole province of established banks and financial institutions. If you have a computer and an internet connection, you can plug yourself into the global economy and be your own banker.Western Unionis a well-known early example of the traditional method of wiring money to people in other parts of the world. PayPalhas dominated the internet-based money transfer business since beingacquired by eBayin 2002. PayPal has extended its reach around the world and now processes transactions in the order ofhundreds of millions of dollarsdaily.Now, some new players have taken to the field, their business models having fresh appeal to internet-savvy consumers such as Google Wallet,Square cash,TransferWiseandBitCoinare representative of thegrowing numberof peer-to-peer money transfer technologies now available to citizens of the online economy.Early attempts to integrate cryptography withelectronic moneywere made byDavid Chaum, viaDigiCashandecash, which used cryptography to anonymise electronic money transactions.

List of cryotpcurrencies The first cryptocurrency was Bitcoin, which was created in 2009 bypseudonymousdeveloperSatoshi Nakamoto.Later on, other major cryptocurrencies such asNamecoin,Litecoin andPeercoin were created. According to coinmarketcap.com there are a number of 52 cryptocurrencies, as being last updated on: Dec 17, 2013 8:18 AM UTC, with a Total Market Cap of $ 9,809,608,824. (All prices based on BTC/USD exchange rate). For example Bitcoin, has a Market cap of $ 8,935,974,670 and the Price of $ 736.40Litecoin has a Market cap of $ 602,015,041 and the price of $ 25.06. Peercoin has a Market cap of $ 71,657,716 with a price of $ 3.42. Namecoin has a market cap of $ 34,983,861 with a price of $ 4.66. There are also other cryptocurrencies, but their value is rather low in comparison to the Bitcoin.

Criticism Some people, such as bitcoin developerGavin Andresen, have expressed concern that some cryptocurrencies might be scams. Some have expressed concern that the smaller cryptocurrencies arepump and dumpschemes. Some of these coins are pre-mined by parties affiliated with coin, have hidden launches, or have erroneous rewards for the first miners of the coin. Many smaller cryptocurrencies have very few users and are only traded on cryptocurrency markets.

BitcoinDefining and explaining Bitcoin The Investopedia website defines Bitcoin as: A digital or virtual currency that uses peer-to-peer technology to facilitate instant payments. Bitcoin is a type of alternative currency known as a cryptocurrency, which uses cryptography for security, making it difficult to counterfeit. Bitcoin issuance and transactions are carried out collectively by the network, with no central authority. The total number of Bitcoins that will be issued is capped at 21 million to ensure they are not devalued by limitless supply. They are divisible to 8 decimal places; Bitcoin fractions are called satoshis. Users store their Bitcoins in a digital wallet, while transactions are verified by a digital signature known as a public-encryption key.

History of BitcoinIn November 2008, a paper was posted on the internet under the name Satoshi Nakamoto titledBitcoin: A Peer-to-Peer Electronic Cash System. This paper detailed methods of using apeer-to-peernetwork to generate what was described as "a system for electronic transactions without relying on trust".In January 2009, the Bitcoin network came into existence with the release of the firstopen sourceBitcoin client and the issuance of the first bitcoins,with Satoshi Nakamoto mining the first block of bitcoins ever (known as the "genesis block"), which had a reward of 50 bitcoins. The value of the first bitcoin transactions were negotiated by individuals on thebitcointalkaforums with one notable transaction involving a 10,000 BTC pizza. It is widely believed thatthe first real-world bitcoin transactiontook place on May 21st, 2010. Laszlo Hanyecz, a programmer living in Florida, sent 10,000 bitcoin (BTC), the online-only,open source cryptocurrency, to a volunteer in England, who then spent about $25 to order Hanyecz some Papa John's. It was a major milestone in bitcoin's short history. And as of right now, it cost Hanyecz three-quarters of a million dollars. You are looking at a $750,000 pizza. Thanks largely to the financial crisis in Cyprus, which has spurred Europeans tobuy up bitcoins at a blistering rate, a single BTC is now worth a record 75 US dollars. But three years ago, when the currency was unveiled in February 2010, one bitcoin was worth just $0.03.On 6 August 2010, a major vulnerability in the Bitcoin protocol was spotted. Transactions weren't properly verified before they were included in the transaction log or "block chain" which let users bypass Bitcoin's economic restrictions and create an indefinite number of bitcoins.On 15 August, the vulnerability was exploited; over 184 billion bitcoins were generated in a transaction, and sent to two addresses on the network. Within hours, the transaction was spotted and erased from the transaction log after the bug was fixed and the network forked to an updated version of the Bitcoin protocol.This was the only major security flaw found and exploited in Bitcoin's history.Wikileaksand other organizations began to accept bitcoins for donations. In January 2012, Bitcoin was featured as the main subject within a fictionalized trial on theCBSlegal dramaThe Good Wifein the third season episode "Bitcoin for Dummies". The host ofCNBC'sMad Money,Jim Cramer, played himself in a courtroom scene where he testifies that he doesn't consider Bitcoin a true currency, saying "There's no central bank to regulate it; it's digital and functions completely peer to peer".In October 2012, BitPay reported having over 1,000 merchants accepting Bitcoin under its payment processing service. On February 8th 2013 customers of Coinbase,a platform for buying and selling the digital currency, have bought or sold more than $1 million worth of Bitcoins. Coinbase CEO Brian Armstrong told VentureBeat : There is an incredible amount of demand for people who want to buy Bitcoins now. Coinbase launched last year and aims to be the PayPal of Internet-only currency. The company has seen huge growth after it started letting users buy and sell Bitcoins by connecting any U.S. bank account.

Prices and value historyJan 2009 Jan 2010 the bitcoin had no valueFeb 2010 May 2010 the price for 1 Bitcoin was less than $0.01June 2010 in five days the price grew 1000% rising from $0.008 to $0.08 for 1 bitcoinDuring Feb 2011 April 2011 Bitcoin takes parity with US dollar8 July 2011 it rose to 31$ only to drop to 2$ in December 2011Dec 2012 13$ for a bitcoin,slowly rising for a yearApril 11, 2013 266$ the value was growing 5-10% dailyMay 2013 - $130 stable and slowly risingIn November exponentially rising to $400, then $600, eventually reaching $900 on 19 and breaking $1000 threshold on 27 November 2013.

BubblesMany have mentioned speculative bubbles in connection with Bitcoin,bubble meaning Trade in high volumes at prices that are considerably at variance with intrinsic values(fundamental values). The value of all the bitcoins in the world blew past $1 billion for the 1st time ever. That is quiet an achievement for a purely virtual currency backed by no central bank or other authority. Were in a middle of a bitcoin bubble at the moment and it will surely burst because bitcoins are an uncomfortable combination of commodity and currency. The commodity value of bitcoins is rooted in their currency value, but the more of a commodity they become, the less useful they are as a currency.Bitcoin has risen or fallen based on media hype and fallen based on security breaches. The biggest crash came in 2011, following a hack of the worlds biggest Bitcoin exchange Mt.Gox(site). Theft is also a major concern as Bitcoins in literal form are lines of code, they can be stolen from your computer.

Interesting facts about bitcoin1. No more than 21 million bitcoins will ever be created2. One bitcoin can actually be divided up to 0.000000013. Bitcoins are created by computational calculations called mining which has become a very competitive industry over time.4. Bitcoin is international and allows sending any amount of money anywhere, instantly and cheaply5. Bitcoin transactions are irreversible6. The network holds all transactions in whats called the blockchain, which is 100% transparent7. The network is also responsible for verifying that no one is cheating the transactions. The network has no transaction errors up-to-date8. Bitcoin is not anonymous by default but it is the most private way to send money online9. Bitcoins value is regulated purely by free market10. Bitcoins value is very volatile but that is also what allows it to gain value11. Most of all, bitcoin is very secure

10 Scary facts about Bitcoin1. Digital Bitcoin wallets are stored unencrypted by defaultMany in the current Bitcoin community are well-versed in technology, and would opt in to encrypt their wallets as soon as they register. However, Bitcoin in the past six months has turned the corner into the mainstream, and will continue to attract the attention of those who are not as tech-savvy as its early adopters2. Bitcoin thefts have occurred, sometimes in large quantitiesIn June 2011 one user in the Bitcoin forum claimed that 25.000 Bitcoins, the equivalent of $375.000 was stolen from his wallet. Mt.Gox leaked 60.000 user names, passwords hashes and email addresses, they reversed the trades and fixed the problem but the leak led to the theft of Bitcoins from about 600 users who used the same user names and passwords for their MyBitcoin accounts.3. Old wallets, and their contents can be retrieved pretty easilyAnother potential issue for those who are less educated on technology is what changing the password means for and eWallet. An old copy of a wallet with its old password is often easily retrievable via an existing backup facility (particularly Apple Time-Machine): draining that old wallet, with its old password, drains the current wallet with the current password 4. DoS is possible on Bitcoin, just like any other site.Just like banking websites, which have been the target of denial-of-service attacks in the past, Bitcoin services are susceptible to DoS attacks.5. There are no guarantees that any eWallet service wont one day take al your bitcoins and disappearThat quote is taken directly from the Bitcoins Wiki on anonymity, alongside a warning to use at your own risk.6. Speaking of legal issues, it is a bit murkyThe Electronic Frontier Foundation, an early adopter of Bitcoin for its donations page, stopped accepting the currency in June 2011, citing the complex legal issues involved with a currency system as its top reason. The EFF did, however, reverse that decision just a couple of weeks ago, after spending two years researching Bitcoin and how it relates to the complex regulation of currency on a global scale.7. Bitcoin is not really all that anonymous.Sure, Bitcoin transactions are conducted anonymously, without any names or a bank tracking your move. But that doesnt mean they cant be tracked.8. Hoarding could pop Bitcoins bubbleHoarding, or saving, in the Bitcoin community is a highly debatable issue. Harvey, when asked about hoarding and the fact that many Bitcoin users have stashed the currency away, says its good for a community looking to establish savings rather than rely on credit. A research found that 78% of all Bitcoin were not being used in circulation and if the users begin exchanging their coins for U.S. dollars the value could plummet and may have difficulty rising again.9. If Bitcoin fails, it has no safety net.Another much-discussed attribute of Bitcoin is that it doesnt rely on a governing body, like the U.S. dollar. That prevents it from being subjected to inflation and transfer fees for international purchases.However, the support of a governing body comes in handy when someone needs to bear the brunt of a drop in value.10. Leaders in the Bitcoin community call it riskyIn 2011, after the data leak atMt. Goxwreaked havoc on Bitcoins value, Gavin Andresen, a lead developer on the Bitcoin Project, issued a stern warning to those caught up in the hype of the currency.I've said it before, and I'll say it again: Bitcoin is an experiment. Treat it like you would a promising Internet start-up company: maybe it will change the world, but realize that investing your money or time in new ideas is always risky.EconomicsLarge fluctuations in thevalue of Bitcoinhave led to many questions regarding its ability to function as a currency since people may be scared to hold onto their money in the form of bitcoin for fear that it can lose exchange power. Stability in a currency's value plays a very important role in people's choice of whether they will use it or not.However, the volatility has little effect on the currency's utility as a medium of transfer from one currency to another since the amount of time money is stored as bitcoin is small so fluctuations should also be minor.The fees and delays involved in transferring money across borders via bitcoin are small compared to those imposed by banks and their intermediaries in the standard way: pennies compared to dollars and minutes compared to days.As of November 2013, the main use for bitcoins was likely for international money transferring purposes. For the moment, bitcoin is an encouraging exchange tool. By November 2013 there were about 1000 businesses willing to accept payment in bitcoin, and more than 20 000 merchants online.For example, a NGO, theBoys and Girls Club of Santa Monicaaccepts donations in bitcoin.Economic emergence JPMorgans intervention strengthens the argument that something like Bitcoin will eventually become a serious part of the online economy. The price of a bitcoin reached previous all-time high of US$1124.76 on 29 November 2013, up from just US$13.36 of 5 January at the start of the year; an 84.19 times increase.

A solution for national Economies?Bitcoins are accepted even in the Netherlands with many more countries aligning themselves in the pursuit for currency stability method.Some have suggested that Bitcoin is gaining popularity in countries with problem-plagued national currencies, as it can be used to circumvent inflation, capital controls, and international sanctions. Bitcoins are used by some people in Argentina as an way of coping with the inflation and strict capital controls. Also, some people from Iran use bitcoins to evade currency sanctions. Financial journalists and analysts have suggested that there was a link between higher Bitcoin usage in Spain and the2012-2013 Cypriot financial crisis.

Increasing concernsMany have mentioned speculativebubblesin connection with Bitcoin.ProfessorJohn Quigginof the University of Queensland has noted that since Bitcoin by design hasno intrinsic value, it is "perhaps the finest example of a pure bubble" currently known and "represent[s] the sharpest ever refutation of theefficient-markets hypothesis", but cautions that we have no way to predict when the value of bitcoins will return to zero. Nick Colas, a market strategist for ConvergEx Group, has stated out the effect of increasing use of Bitcoin and its restricted supply, noting: "When incremental adoption meets relatively fixed supply, it should be no surprise that prices go up. And that's exactly what is happening to BTC prices."

SpeculationsBitcoins are often traded as an investmentby speculators who expect the currency to increase in value as its popularity widens.Bitcoins have been described as lackingintrinsic value as an investment because their value depends only on the willingness of users to accept them. Their vulnerability to hacking also makes their use as an investment more questionable. Derivativesof bitcoins are in short supply. One organization offersfutures contractsagainst multiple currencies. Certaininvestment fundshave shown interest in Bitcoin withPeter Thiel'sFounders FundinvestingUS$3million, and theWinklevoss twinsmaking aUS$1.5million personal investment.

Wide spread visionBitcoin's association with criminal activities has historically hindered the currency from attaining widespread, mainstream use and has attracted the attention of financial regulators, legislative bodies, and law enforcement.The Washington Posthas labeled it "the currency of choice for seedy online activities,"and CNN has called Bitcoin a "shady online currency."Its links to criminal activities have prompted scrutiny from the FBI, US Senate, and the State of New York. The FBI stated in a 2012 report that "Bitcoins will likely continue to attract cyber-criminals who view it as a means to move or steal funds".In March 2013 the USFinancial 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 services businesses(or MSBs), that may be subject to registration and other legal obligations.In August 2013 theGerman Finance Ministrycharacterized Bitcoin as aunit of account,usable inmultilateral clearing circlesand subject to capital gains tax if held less than one year.TheNew York State Department of Financial Services, citing its authority to regulate money transmissions and its concern with criminal activity (Silk Road in particular), announced an inquiry in late 2013 into possible regulations and guidelines for Bitcoin (a "BitLicense") and the holding of public hearings in New York City. The US Internal Revenue Service has also stated that it is actively working on its own rules for Bitcoin.

Black marketsSeveral news outlets assert that the popularity of Bitcoin hinges on the ability to use them to purchase illegal substances. In 2013The Guardianreported that the currency was primarily used to purchase illegal drugs and for online gambling, andThe Huffington Poststated that "online gambling accounts for a huge portion of Bitcoin activity." An experiment, conducted by two young American citizens last year ended with the conclusion that bitcom is actually not that highly secure and private. They bought marihuana from three other countries, using bitcoin and the result was that they got caught. If anyone were to pay close attention to the entries and goings of bitcoin tracers, it would be really easy to identify the culprits. Legitimate transactions are thought to be far less than the number involved in the purchase of drugs, and roughly one half of all transactions made using Bitcoin are bets placed at a single online gaming website. In 2012, an academic from the Carnegie Mellon CyLab and the Information Networking Institute estimated that 4.5 to 9% of all bitcoins spent were for purchases of drugs at a single online market, Silk Road.As the majority of the Bitcoin transactions were at this time speculative in nature, this academic asserts that drugs constituted a much larger percentage of the products and services bought using the currency, however. The Huffington Poststated in 2013 that online gun dealers use Bitcoin to sell arms without background checks.Money launderingWhile some regulatory authorities, including theEuropean Banking Authority, feel Bitcoin may be used for money laundering. A 2012 report by the FBI acknowledged such fears but stated that there were no known instances of this occurring. Some say one obstacle to bitcoins becoming widely used to launder money may be the fact that the transaction history is public.During the US Senate hearing in 2013, Jennifer Shasky Calvery, director of the Treasury Department's Financial Crimes Enforcement Network said that despite the possibility for using Bitcoin that "Cash is probably still the best medium for money laundering."

Unauthorized miningIn June 2011,Symantecwarned about the possibility ofbotnetsengaging in covert mining of bitcoins,consuming computing cycles, using extra electricity and increasing computer temperatures. Some malware used theparallel processingcapabilities of theGPUsbuilt into many modernvideo cards. In mid-August 2011, bitcoin miner botnets were detected again, and less than three months later Bitcoin-mining trojans infecting Mac OS X were also discovered. In April 2013electronic sportsorganization E-Sports Entertainment were accused of hijacking 14,000 computers to mine bitcoins; the case was settled in November with the organization fined US$1 million if it breaks the law within the following ten years, or $325,000 if it does not.There are guidelines for Bitcoin (a "BitLicense") and the holding of public hearings in New York City.The USInternal Revenue Servicehas also stated that it is actively working on its own rules for Bitcoin.TheNorwegian Tax Administrationstated in 2013 that they don't define Bitcoin as money but regard it as anasset. Profits are subjected to wealth tax. In business the use of Bitcoin falls under thesales taxregulation.Some have suggested that due to its close association with illegal purchases, governments could outlaw Bitcoin. This assertion has been made by Steven Strauss, a Harvard public policy professor, and was also mentioned in 2013SECfiling made by a Bitcoin investment vehicle.Bitcoins are not currently illegal, however. FBI Special Agent Christopher Tarbell has stated that "Bitcoins are not illegal in and of themselves and have known legitimate uses".

Top 10 Bitcoin Merchant Sites1. WordPress.com Site offers free blogs managed by the developers of the WordPress software and includes custom design templates, integrated statistics, and automatic spam protection. WordPressannouncedtheir decision to start accepting bitcoin in November 2012.

2. The Pirate Bay As a large BitTorrent directory for music, movies and software, The Pirate Bay startedacceptingbitcoin for donations in April 2013.

3. Reddit The social news and entertainment site focuses on user-generated news links with votes promoting top stories to the front page. Reddit startedaccepting bitcoin for the purchase of reddit gold in February 2013.

4. The Internet Archive The Internet Archive is a nonprofit organization established to provide a permanent digital library by preserving Web sites. The Wayback Machine provides links to older versions of various webpages. They startedacceptingbitcoin donations and paying some employees in bitcoin in February 2013.

5. OkCupid The free friendship, dating and social networking site started acceptingbitcoin to pay for bonus features in April 2013.

6. 4chan.org 4chan is a simple image-based bulletin board where anyone can post comments and share images without a requirement to register. The boards are dedicated to a variety of topics, from Japanese animation and culture to video games, music, and photography. They startedacceptingbitcoin for premium subscriptions in December 2012.

7. Namecheap it offers affordable domain name registration, parking, e-mail, URL forwarding, and SSL certificates. They beganacceptingbitcoin in March 2013.

8. EZTV It is your one-stop source for all your favourite TV shows and they startedacceptingbitcoin donations in April 2013.9. Mega.co.nz MEGA offers 50 GB of free storage space and uploaded files are encrypted with only the user holding the decryption keys. Processed by Bitvoucher, the Kim Dotcom site started acceptingbitcoin for private package upgrades in February 2013.10. Lumfile It is a free cloud-based file server that has been accepting bitcoin for premium accounts since at least December 2012.

Bibliography

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