Bitcoin

Bitcoin

A common logo from the Bitcoin reference client
Unit
Symbol	BTC, XBT, , ฿‎
Denominations
Subunit
10−8	satoshi
Demographics
Date of introduction	3 January 2009 (2009-01-03)
User(s)	Worldwide
Valuation
Money Supply	25 bitcoins per block (approximately every ten minutes) until approximately the year 2017
Source	Number of bitcoins in circulation

Bitcoin is a peer-to-peer payment system introduced as open source software in 2009. The digital currency created and used in the system is alternatively referred to as a virtual currency, electronic money, or a cryptocurrency because cryptography is used to control its creation and transfer, resulting in it being the same as conventional money. The Bitcoin system is not controlled by a single entity, like a central bank, and this has led the US Treasury to call Bitcoin a decentralized currency. Conventionally, the capitalized word "Bitcoin" refers to the technology and network, whereas lowercase "bitcoin" refers to the digital currency.

Bitcoins are created by a process called mining, in which computer network participants, i.e. users who provide their computing power, verify and record payments into a public ledger in exchange for transaction fees and newly minted bitcoins. Users send and receive bitcoins using wallet software on a personal computer, mobile device, or a web application. Bitcoins can be obtained by mining or in exchange for products, services, or other currencies.

Bitcoin has been a subject of scrutiny amid concerns that it can be used for illegal activities. In October 2013 the US FBI shut down the Silk Road online black market and seized 144,000 bitcoins worth US$28.5 million at the time. The US is considered Bitcoin-friendly compared to other governments. In China new rules restrict bitcoin exchange for local currency. The European Banking Authority has warned that Bitcoin lacks consumer protections. Bitcoins can be stolen and chargebacks are impossible.

Commercial use of Bitcoin, illicit or otherwise, is currently small compared to its use by speculators, which has fueled price volatility. Bitcoin as a form of payment for products and services has seen growth, and merchants have an incentive to accept the currency because transaction fees are lower than the 2–3% typically imposed by credit card processors. The largest purchase using Bitcoin as of March 20, 2014 was payment for buying a villa in Bali, worth over $500,000.

Transactions

Further information: Bitcoin network

When a Bitcoin user makes a purchase, the payment triggers a broadcast of the financial transaction to the Bitcoin network. The Bitcoin transaction is a digitally signed message, transferring the ownership of bitcoins from one "Bitcoin address" to another. For the transaction to take effect, it is recorded in a public ledger or public transaction database.

Block chain

Integral to Bitcoin is a sequential record of all transactions known as the block chain. There is only one block chain, and it records bitcoin ownership both present and at all points in the past. By keeping a record of all transactions, the block chain mitigates double-spending, a core design challenge of digital currency. Approximately every ten minutes a new bundle of transactions, called a block, is added to the block chain.

Mining

Maintaining the block chain by offering one's computer system is called mining; those who do so are rewarded with newly created bitcoins and transaction fee. Mining is becoming ever more high tech; the process has been compared to an "arms race" as ever more specialized technology has become indispensable. Miners may be located on any continent and process payments by verifying each transaction as valid and adding it to the block chain. As of 2014 payment processing is rewarded with 25 newly created bitcoins per block. To claim the reward, the miner includes in the block a special transaction called the "coinbase" that assigns the rewarded bitcoins to an address of the miner's choosing. All bitcoins in circulation can be traced back to such coinbase transactions. The Bitcoin protocol specifies that the block reward will be halved to 12.5 bitcoins in 2017 and again approximately every four years thereafter. By 2140 there will be 21 million bitcoins, and transaction processing will only be rewarded by the transaction fees. Users that pay a fee may have their transactions processed more quickly.

The most efficient mining hardware makes use of custom designed application-specific integrated circuits, which are much faster and use less power compared to general purpose microprocessors, such as x86 processors.

Anonymity

The public nature of Bitcoin means that, while those who use it are not identified by name, linking transactions to individuals and companies can be done. Additionally, many jurisdictions require exchanges, where people can buy and sell bitcoins for cash, to collect personal information. In order to obfuscate the link between individual and transaction, some use a different bitcoin address for each transaction and others rely on so-called mixing services that allow users to trade bitcoins whose transaction history implicates them for coins with different transaction histories.

It has further been suggested that Bitcoin payments should not be considered as more anonymous than credit card payments.

Ownership

The ownership of bitcoins associated with certain Bitcoin address can be asserted by demonstrating the knowledge of the private key belonging to the address. For the owner, it is important to keep his private keys safe backing them up to make sure the keys cannot be lost. When the private keys are lost, the user cannot prove his ownership by other means. It is also important to keep the keys private since anybody knowing the keys can dispose the bitcoins as the owner.

Buying and selling

Bitcoins can be bought and sold for many different currencies from individuals and from companies. The fastest way to obtain bitcoins is to purchase them in person or at a Bitcoin ATM for cash. Bitcoin ATMs allow bitcoins to be purchased for cash, and some also allow cash withdrawals from Bitcoin wallets stored on smartphones. Participants in online exchanges offer bitcoin buy and sell bids. Companies buy or sell bitcoin in bulk on exchanges and offer their customers the option via ATM to buy or sell bitcoin at market price. Using an online exchange to obtain bitcoins entails some risk, since according to one study 45% of exchanges have failed and taken client bitcoins with them. Since bitcoin transactions are irreversible, sellers of bitcoins must take extra measures to ensure they have received traditional funds from the buyer.Bitcoin payment processing fees are optional, and generally substantially lower than those of credit cards or money transfers.

Wallets

File:Bitcoin-coins.jpg

Example of Casascius physical bitcoins

A paper wallet with QR codes

Bitcoin uses public-key cryptography, in which a pair of a public and a private cryptographic key is generated. A collection of keys is called a wallet. Note that sometimes the term is used to mean the software in the sense of digital wallet. A Bitcoin transaction transfers ownership to a new address, a string having the form of random letters and numbers derived from public keys by application of a hash function and encoding scheme. The corresponding private keys act as a safeguard for the owner; a valid payment message from an address must contain the associated public key and a digital signature proving possession of the associated private key. Because anyone with a private key can spend all of the bitcoins sent to the corresponding address, the essence of Bitcoin security is protection of private keys. Theft of bitcoins has occurred on numerous occasions, and the practical day-to-day security of Bitcoin wallets is a concern like the security of other forms of payment. Risk of theft can be reduced by generating keys offline on an uncompromised computer and saving them on external storage or paper printouts. "Physical bitcoins", ubiquitous in media coverage of Bitcoin, are produced by various vendors. They store a private key on paper, metal, wood, or plastic. There are also digital products known as "Hardware Wallets" to store bitcoins securely on a physical device. Bitcoins can be lost. In 2013 one user said he lost 7,500 bitcoins, worth $7.5m at the time, when he discarded a hard drive containing his private key. Bitcoins can be found; in March 2014, former Bitcoin exchange Mt. Gox reported it found an "old wallet, which was used before June 2011, [that] held about 200,000 Bitcoins".

Software

Electrum – sample Bitcoin client

Bitcoin wallet software, sometimes called a Bitcoin client software, allows a user to transact bitcoins. A wallet program generates and stores private keys, and communicates with peers on the Bitcoin network. The first wallet program called Bitcoin-Qt was released in 2009 by Satoshi Nakamoto as open source code. It can be used as a desktop wallet for payments or as a server utility for merchants and other payment services. Bitcoin-Qt, also called "Satoshi client" is sometimes referred to as the reference client because it serves to define the Bitcoin protocol and acts as a standard for other implementations. As of version 0.9, Bitcoin-Qt has been renamed "Bitcoin Core" to more accurately describe its role in the network. When making a purchase with a mobile device, QR codes are used ubiquitously to simplify transactions. Several server software implementations of the Bitcoin protocol exist. So-called "full" nodes on the network validate transactions and blocks they receive, and relay them to connected peers.

History

Main article: History of Bitcoin

Bitcoin was first mentioned in a 2008 paper published under the name Satoshi Nakamoto. In early 2009, the first open source client (or wallet software), called Bitcoin-Qt, was released and the first bitcoins were issued. In 2009, a feature in the Bitcoin-Qt software was exploited and large numbers of bitcoins were created. This was due, in large part, because Bitcoin-Qt was the only software that facilitated bitcoin transactions and mining. This feature was later removed because specialized mining software turned out to be more efficient. Since then , the bitcoin open-source software has been maintained and enhanced by a group of core developers and other contributors.

By May 2011, interest in Bitcoin was growing as were concerns. The price of bitcoins has fluctuated wildly since its inception, going through various cycles of appreciation and depreciation, which have been referred to by some as bubbles and busts. In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2. In the latter half of 2012 and during the 2012-2013 Cypriot Financial Crisis, the bitcoin price began to rise, reaching a peak of US$266 on 10 April 2013, before crashing to around US$50.

In March 2013, a technical glitch caused a fork in the block chain, with one half of the network adding blocks to one version of the chain and the other half adding to another. For six hours two Bitcoin networks operated at the same time, each with its own version of the transaction history. The core developers called for a temporary halt to transactions, sparking a sharp sell-off. Normality was restored only when the majority of the network downgraded to version 0.7 of the Bitcoin software from the flawed version 0.8.

Mainstream services began accepting bitcoins as a form of payment as well as certain non-profit or advocacy groups such as the Electronic Frontier Foundation. The first law enforcement events occurred in May 2013: Assets belonging to the Mt. Gox exchange were seized by Department of Homeland Security and the Silk Road drug market website was shut down by the FBI.

In October 2013, Chinese internet giant Baidu had allowed clients of website security services to pay with bitcoins. During November 2013, the China-based bitcoin exchange BTC China overtook the Japan-based Mt. Gox and the Europe-based Bitstamp to become the largest bitcoin trading exchange by trade volume. On 19 November 2013, the value of a bitcoin on the Mt. Gox exchange soared to a peak of US$900 after a United States Senate committee hearing was told that virtual currencies were a legitimate financial service. On the same day, one bitcoin traded for over RMB¥6780 (US$1100) in China. On 5 December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoins. After the announcement, the value of bitcoins dropped and Baidu no longer accepted bitcoins for certain services. Buying real-world goods with any virtual currency had been illegal in China since at least 2009.

The first bitcoin ATM was installed in October 2013 in Vancouver, British Columbia, Canada.

With roughly 12 million existing bitcoins as of November 2013, the new price increased the market cap for Bitcoin to at least US$7.2 billion. By 23 November 2013, the total market capitalization of Bitcoin exceeded US$10 billion for the first time.

Since US bitcoin exchanges are regulated as money services businesses, they are obligated to report activity suspicious of money laundering (see Legal status and regulation). Two men were arrested in January 2014 on charges of money-laundering using bitcoins: Charlie Shrem, the head of defunct bitcoin exchange BitInstant and vice chairman of the Bitcoin Foundation, and Robert Faiella. Shrem allegedly allowed Faiella to purchase large quantities of bitcoins and to use them to buy illegal drugs on black-market websites.

In early February 2014, one of the largest Bitcoin exchanges, Mt. Gox, suspended withdrawals, citing technical issues related to "transaction malleability". While the company worked on a fix, one week later the price of a bitcoin had come down from over US$800 on 1 February to US$400. On 24 February 2014, Mt. Gox's website was taken offline and all trading stopped, amid reports that 744,408 bitcoins (worth $350 million at the time the loss was discovered) had been stolen over several years because of flaws in its payment software. A class action lawsuit has been filed based on the questionable activity. In a more recent report (dating March 11, 2014) it was stated that the numbers in-fact were 850,000 Bitcoin, worth nearly $500 million at the time.

Economics

Economists generally agree that to qualify as money, something must be a store of value, a medium of exchange, and a unit of account. As of 2014 economists do not agree, to what degree Bitcoin is truly money: Economists in all US government agencies have used the term virtual currency to describe Bitcoin, including the Department of Treasury, the Federal Reserve, the SEC and GAO. (see regulation) Bitcoin has not yet achieved the status of "a unit of account, against which the value of an economy is measured". This is because of its money supply problems, both the disappearance of large exchangers, and because of its finite reserves, the arbitrary cap of 21 million bitcoins. Economists at the Chicago Federal Reserve called Bitcoin a “fiduciary currency”, although not of stable value, and not a broadly accepted medium of exchange. The disagreement of economists has not prevented bitcoins from being used as a medium of exchange. About 1,000 brick and mortar businesses were willing to accept payment in bitcoins as of November 2013, in addition to more than 35,000 online merchants.

The bitcoins market currently suffers from volatility, limiting bitcoins to act as a stable store of value. Where people are allowed to buy in bitcoins, prices are denominated in fiat currency at the amount of bitcoins paid is determined by the prevailing exchange rate.

Price volatility

According to Mark T. Williams of Boston University, bitcoin is over 7 times as volatile as gold and over 8 times as volatile as the S&P 500. The extremely volatile bitcoin exchange rate has led people to question its ability to function as a currency. The Bitcoin Foundation contends that this is due to insufficient liquidity and claims volatility will lessen if its popularity continues to increase. Volatility has little effect on the utility of Bitcoin as a payment processing system. Volatility has damaged the ability of bitcoin to be a store of value; it has not hampered its function as a medium of exchange. Bitcoin volatility is linked to uncertainty about its long-term value per Forbes contributor Timothy B. Lee.

Alternative to national currencies

Bitcoins are accepted in this café in the Netherlands as of 2013

Bitcoin detractors and supporters have suggested that Bitcoin is gaining popularity in countries with problem-plagued national currencies because it can be used to circumvent inflation, capital controls, and international sanctions. For example, bitcoins are used by some Argentinians as an alternative to the official currency, stymied by inflation and strict capital controls. In addition, some Iranians use bitcoins to evade currency sanctions. A link between higher Bitcoin usage in Spain and the 2012–2013 Cypriot financial crisis has been suggested. Mistrust in traditional financial institutions and central banks fostered by the financial crisis of 2007–08 has probably helped to bolster Bitcoin popularity. Bitcoin has also gained recognition as a network able to serve the customers of international remittance business.

Speculation and bubbles

Bitcoins are traded by speculators who want to profit on short to medium term price changes. A separate organization offers futures contracts against multiple currencies allowing speculators to short bitcoin. The European Banking Authority warned in December 2013, that the risks of engaging in speculation go beyond a potential loss of bitcoin value. Unable to find any intrinsic value, former Federal Reserve Chairman Alan Greenspan has called it a speculative bubble as has economist John Quiggin. Two lead software developers of Bitcoin, Gavin Andresen and Mike Hearn, had warned that bubbles may occur. One financial journalist correctly predicted the bursting of one such bitcoin bubble in April 2013. Nobel Laureate Robert Shiller said that bitcoin "exhibited many of the characteristics of a speculative bubble." Others reject the existence of bubbles and see bitcoin's quick rise in price as nothing more than normal economic forces at work.

As investment

One way of investing in Bitcoin is to buy bitcoins and hold them as a long-term, high-risk investment. FINRA, a United States self-regulatory organization, has warned that investing in Bitcoin carries significant risks. Bitcoins may be of limited value to unsophisticated investors. Risk hasn't deterred all investors. The Winklevoss twins made a US$1.5 million personal investment and attempted to launch a bitcoin ETF. Some investors, like Peter Thiel's Founders Fund, which invested US$3 million, don't purchase bitcoins instead funding Bitcoin infrastructure like bitcoin exchanges, companies that provide bitcoin payment systems to merchants, or bitcoin wallet services, etc. Investors also invest in bitcoin mining.

Money supply

Growth of the Bitcoin money supply is predefined by the Bitcoin protocol, and in this way inflation is kept in check. Currently there are over twelve million bitcoins in circulation with an approximate creation rate of 25 bitcoins every ten minutes. The total supply is capped at the arbitrary limit of 21 million, and every four years the creation rate is halved. This means new bitcoins will continue to be released for more than a hundred years.

Value forecasts

Financial journalists and analysts, economists, and investors have attempted to predict the possible future value of bitcoin. Economist John Quiggin stated, "bitcoins will attain their true value of zero sooner or later, but it is impossible to say when." In 2013, Bank of America FX and Rate Strategist David Woo forecast a maximum fair value per bitcoin of $1,300. Bitcoin investor Cameron Winklevoss stated in 2013 that the "bull case scenario for bitcoin is... 40,000 USD a coin". In late 2013, finance professor Mark Williams forecast a bitcoin would be worth less than ten US dollars by July 2014.

Reception

Some economists have responded positively to Bitcoin, including François R. Velde, a senior economist at the Federal Reserve in Chicago, who described it as "an elegant solution to the problem of creating a digital currency." Economists Paul Krugman and Brad DeLong have found fault with Bitcoin asking questions why bitcoins should be a reasonably stable store of value or whether there is a floor on their value. Economist John Quiggin has criticized Bitcoin as "the final refutation of the efficient-market hypothesis". Free software movement activist Richard Stallman has criticized the lack of anonymity and called for reformed development. PayPal President David A. Marcus calls bitcoin a "great place to put assets" but claims it will not be a currency until price volatility is reduced.

As bitcoins proved popular, they have been increasingly covered by comics around the world.

Acceptance by merchants

Large, established firms that accept bitcoins include Overstock.com, the Sacramento Kings, TigerDirect, Clearly Canadian, and Zynga. In November 2013, Richard Branson announced that Virgin Galactic would accept bitcoin as a method of payment. In November 2013, the University of Nicosia became the first accredited university in the world to accept it as a method of payment for tuition and fees.

Scepticism by banks

As of 2014, Bitcoin companies have had difficulties opening traditional bank accounts, because lenders have been leery of Bitcoin's contentious reputation and do not "share investors' enthusiasm for the virtual currency craze". Yet Bank of America Merrill Lynch published a report beginning of December 2013 stating “We believe Bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money-transfer providers. As a medium of exchange, Bitcoin has clear potential for growth” and that in a long-term fair-value analysis maximum market capitalization for bitcoins could be $15 billion.

Classifications

Numerous attempts to classify bitcoin demonstrate that it is not an easy task. Magistrate Judge Amos Maazant of Texas federal court has classified bitcoin as currency. A German court found bitcoin to be a unit of account. The Finnish Government judged it to be a commodity in January 2014 as did a WSJ journalist in December 2013 A Forbes journalist referred to bitcoins as "digital collectible". University of Amsterdam researchers classified it as a money-like informational commodity.

Legal status and regulation

While some governments have taken a hands-off approach, others have moved to regulate bitcoin and similar private currencies. Steven Strauss, a Harvard public policy professor, suggested governments could outlaw Bitcoin, a possibility that was mentioned in a 2013 SEC filing made by a Bitcoin investment vehicle.

Regulation

Main article: Legal status of Bitcoin

Because Bitcoin does not involve traditional financial actors, and both issuers of bitcoins and software/hardware owners are non-financial private companies, traditional financial sector regulation is not applicable. In the US the first step of regulation occurred in July 2011, when the US Department of Treasury's Financial Crimes Enforcement Network added "other value that substitutes for currency" to its definition of Money services businesses. In 2013 the Treasury issued an interpretive guidance regarding virtual currencies, according to which, exchangers and administrators of convertible virtual currency, but not users are considered money transmitters, and must comply with rules to prevent money laundering/terrorist financing ("AML/CFT") and other forms of financial crime. Besides checking the identification, the money transmitter needs to check the customer is not on the Office of Foreign Asset Control’s Specially Designated Nationals list. The US Government Accountability Office reviewed virtual currencies upon request of the Senate Finance Committee and in May 2013 recommended that the Internal Revenue Service formulate a tax guidance for Bitcoin business. On 25 March 2014, in time for 2013 tax filing, the IRS issued a guidance that it treats virtual currency as property for US federal tax purposes and that "an individual who “mines” virtual currency as a trade or business [is] subject to self-employment tax." In August 2013 SEC Chairman Mary Jo White had written in a letter to the Senate Committee dated August 30, 2013,“Whether a virtual currency is a security under the federal securities laws, and therefore subject to our regulation, is dependent on the particular facts and circumstances at issue” and “Regardless of whether an underlying virtual currency is itself a security, interests issued by entities owning virtual currencies or providing returns based on assets such as virtual currencies likely would be securities, and therefore subject to our regulation.” The US Commodity Futures Trading Commission stated in March 2014, that it has been considering regulation of digital currencies.There are no rules at the state level as of 3/2014, although the New York State Department of Financial Services intends to propose its regulations no later than the end of the second quarter of 2014, and as of March 11 has officially invited bitcoin exchangers to apply with them.

The 2013 G7's Financial Action Task Force(FATF) guidance for internet-based payment services defines "exchangers buying or selling digital currency for cash (or other digital currencies) [...] as a virtual bureau de change"(p10) and warns "internet-based payment services that allow third party funding from anonymous sources may face an increased risk of ML/TF [money laundering/terrorist financing]"(p16) and that "such exchangers can circumvent an Internet-based payment service provider’s ban on certain funding methods (e.g. a ‘no cash funding’ policy) if they accept the banned payment methods when reselling the issued digital currency..." so "the provider will only see the exchanger´s name in its monitoring, but will not see who actually instructed the exchanger to fund the account"(p16) and this may "pose challenges to countries in AML/CFT regulation and supervision because their cross-border functionality"(p31), wherefore as a minimum countries "should be licensed or registered and subject to effective monitoring systems...."(p34)

The Monetary Authority of Singapore requires Bitcoin intermediaries to check the identity of their customers and report suspicious activities as of March 2014, similar to what it requires from money changers. Hong Kong has laws already covering acts of fraud and money laundering involving “virtual commodities”. In Canada, the federal government announced in February 2014 that it was going to regulate Bitcoin under its anti-money laundering and counter-terrorist financing legislation, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. The Financial Markets Authority, the Autorité des marchés financiers (Québec), announced that it would prosecute violations of the Securities Act (Loi sur les valeurs mobilières), the Derivatives Act (Loi sur les instruments dérivés) and the Money Services Business Act (Loi sur les enterprises de services monétaires) for Bitcoin transactions, particularly those involving Bitcoin ATMs.

Criminal activity

Bitcoins have become associated with online criminal behavior and so-called cybercriminals. Used to obfuscate online transactions, bitcoins are seized when dark web black markets are shut by authorities. This association with criminal activities has stigmatized the currency and attracted the attention of financial regulators, legislative bodies, and law enforcement. CNN has referred to Bitcoin as a "shady online currency [that is] starting to gain legitimacy in certain parts of the world," and The Washington Post calls it "the currency of choice for seedy online activities." The FBI stated in a 2012 report that "bitcoin will likely continue to attract cyber-criminals who view it as a means to move or steal funds".

Criminal activity involving Bitcoin has largely centered around theft of the currency, money laundering, the use of botnets for mining, and the use of bitcoins in exchange for illegal items or services. "Like cash, it can be used for ill as well as for good." Certain nation states may feel that its use in circumventing capital controls is also undesirable.

Despite claims made by the non-profit Bitcoin Foundation that "cryptography is the reason no one can steal bitcoins," theft is widespread.

Black markets

Several news outlets assert that the popularity of bitcoin hinges on the ability to use them to purchase illegal goods. C. 2013 Non-drug transactions were thought to be far less than the number involved in the purchase of drugs, and roughly one half of all transactions made using Bitcoin were bets placed at a single online gaming website. Some also state that online gun dealers use Bitcoin to sell arms without background checks. In 2012, an academic from the Carnegie Mellon CyLab and the Information Networking Institute estimated that 4.5 to 9% of all bitcoins transacted were for purchases of drugs at a single online market, Silk Road. As the majority of the Bitcoin transactions were then speculative, the academic asserts that drugs constituted a much larger percentage of the purchases with the currency. Silk Road was later shut by US law enforcement. Some feel dark web black markets are operated in order to steal bitcoins from shoppers. The Bitcoin community branded one site, Sheep Marketplace, as a scam when it prevented withdrawals and shut down after an alleged bitcoins theft. In a separate case, escrow accounts with bitcoins belonging to patrons of a different black market were hacked in early 2014.

Money laundering

While some feel bitcoins are not ideal for money laundering because all transactions are public, authorities have expressed concerns. The European Banking Authority and the FBI have both stated that Bitcoin may be used for money laundering. In early 2014, an operator of a US bitcoin exchange was arrested for money laundering.

Ponzi scheme

Many have voiced concerns that Bitcoin may be nothing more than a Ponzi scheme including journalists, prominent economists, and heads of central banks. Bitcoin supporters disagree. While no court has found Bitcoin to be a Ponzi scheme, a 2012 report by the European Central Bank noted that Bitcoin has some features of Ponzi schemes concluding that "it [is not] easy to assess whether or not the Bitcoin system actually works like a pyramid or Ponzi scheme."

In an alleged Ponzi scheme that utilized bitcoins, The Bitcoin Savings and Trust promised investors up to 7 percent weekly interest, and raised at least 700,000 bitcoins from 2011 to 2012. In 2013, the SEC charged the company and its founder "with defrauding investors in a Ponzi scheme involving Bitcoin..."

Thefts

While generating and storing keys offline mitigates theft of bitcoins, thefts occur on a regular basis. Theft occurs when an unauthorized transfer of bitcoins is made from a wallet using the private key to unlock the wallet. Most large-scale thefts occur at payment processors, exchanges, or online wallet services that store the private keys of many bitcoin users: The thief hacks an online wallet service by finding a bug in its website or spreading malware to computers holding the private keys. When they have control of the website or its database, they gain access to many users' private keys and can thereby steal those users' bitcoins.

Many high-profile bitcoin thefts have been reported: In late November 2013, an estimated 96,000 bitcoins, then valued at around $100 million, were stolen from the online illicit goods marketplace Sheep Marketplace, which immediately closed. Users tracked the coins as they were processed by the bitcoin exchange BTC-e, where they were apparently converted to cash, but no funds were recovered or culprits identified. A black market called Silk Road 2, stated that during a February 2014 hack bitcoins valued at $2.7 million were taken from escrow accounts. On 28 February 2014 Mt. Gox, one of the world's biggest virtual currency exchanges filed for bankruptcy in Tokyo after its computer system was hacked and lost 850,000 bitcoins (750,000 of customer bitcoins and 100,000 of Mt. Gox own bitcoins) worth approximately $477 million at the time, representing around 7 percent of the world's supply. Flexcoin, an Alberta, Canada-based bitcoin storage specialist, shut down on 3 March 2014 after it said it discovered the theft of 896 bitcoins, worth roughly $650,000. The theft exploited a software flaw handling multiple, rapid inter-account transfers. The company differentiated itself by incentivizing users to store bitcoins on their website. Only bitcoins stored in hot wallets (i.e., connected to the internet) were stolen, and the company said it would return customer bitcoins kept offline in cold storage, an optional service that was available for a 0.5% fee. Poloniex, a digital currency exchange, reported on 4 March 2014 that it lost 76.69 bitcoins to hackers, or 12.3% of its bitcoin holdings, valued at around $50,000. Multiple withdrawals were placed at nearly the same time in the attack, and the exchange did not adequately guard against negative balances. Poloniex said it would reduce customer account balances by 12.3%, and repay the deductions in the future.

Malware

Bitcoin-related malware includes software that steals bitcoins from users using a variety of techniques, software that uses infected computers to mine bitcoins, and different types of ransomware, which disable computers or prevent files from being accessed until some payment is made.

Unauthorized mining

In June 2011, Symantec warned about the possibility that botnets could mine covertly for bitcoins. Malware used the parallel processing capabilities of GPUs built into many modern video cards. In mid-August 2011, bitcoin mining botnets were detected again, and less than three months later, bitcoin mining trojans had infected Mac OS X. In April 2013, electronic sports organization E-Sports Entertainment was accused of hijacking 14,000 computers to mine bitcoins; the case was settled in November with a fine of $325,000 increasing to US$1 million if the organization were to break the law within the following ten years. While bitcoin mining on an average PC is no longer lucrative, botnet networks of tens of thousands of infected computers can mine for bitcoins without concern for power costs. German police arrested two people in December 2013 who customized existing botnet software to perform bitcoin mining, which police said had been used to mine at least $950,000 worth of bitcoins. For four days in December 2013 and January 2014, Yahoo's European servers served an ad that contained Windows bitcoin mining malware which infected an estimated 2 million PCs. Bitcoin-mining botnet software called Sefnit, first detected in mid-2013, was bundled with many software packages; Microsoft has been removing the malware through its Microsoft Security Essentials and other security software since January 2014.

Malware stealing bitcoins

Security company Dell SecureWorks said in February 2014 that they had identified 146 strains of bitcoin malware in circulation, almost all of it targeting Windows users, and about half of the malware undetected by standard antivirus scanners. The most common type searches computers for cryptocurrency wallets to upload to a remote server, where they can be cracked and their coins stolen. Many of these also log keystrokes to record passwords, often avoiding the need to crack the keys. A different approach taken by some malware is to detect when Bitcoin addresses are copied to a clipboard, and replace it with a different address, tricking people into sending bitcoins to the wrong address.

One virus, spread through the Pony botnet, was reported in February 2014 to have stolen up to $220,000 in cryptocurrencies, including 335 bitcoins, from 85 wallets. Security company Trustwave tracked the malware since September 2013, reporting that it had also stolen millions of passwords to various websites, and that its latest version was able to steal from 30 types of digital currency wallets.

A trojan horse for Mac OS X, called CoinThief, hidden in versions of some cryptocurrency apps on Download.com and MacUpdate, was reported in February 2014 to be responsible for multiple bitcoin thefts, including one user who lost 20 bitcoins. It bore similarities to a piece of Mac malware active in August 2013, Bitvanity, which posed as a vanity wallet address generator, and stole addresses and private keys from other Bitcoin client software.

Ransomware

Another type of Bitcoin-related malware is a type of ransomware. A program called Cryptolocker, typically spread through legitimate-looking email attachments, encrypts the hard drive of an infected computer, then displays a countdown timer and demands a ransom, usually two bitcoins, to decrypt it. Police in Massachusetts said they paid a 2 bitcoin ransom in November 2013, worth more than $1300 at the time, to decrypt one of their hard drives. Linkup, a combination ransomware and bitcoin mining program that surfaced in February 2014, disables a user's internet access and demands credit card information to restore it, while secretly mining bitcoins. Researchers did not test whether entering the information really restored internet access.

See also

• Alternative currency
• Crypto-anarchism
• Cryptocurrency
• Electronic money
• Private currency

External links

• Bitcoin Wiki
• History of Bitcoin timeline
• Bitcoin: A Peer-to-Peer Electronic Cash System, the original paper on Bitcoin by Satoshi Nakamoto
• Bitcoin video series at Khan Academy
• BITCOIN A Cryptographic currency