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Bitcoin logo.svg
A common logo from the Bitcoin reference client
Date of introduction 3 January 2009; 5 years ago (2009-01-03)
User(s) Worldwide
Supply 25 bitcoins per block (approximately every ten minutes) until approximately the year 2017[1]
 Source Number of bitcoins in circulation
10−8 satoshi[2]
Symbol BTC, XBT,[3] BitcoinSign.svg, ฿[citation needed][note 1]

Bitcoin is a peer-to-peer payment system introduced as open source software in 2009 by developer Satoshi Nakamoto. 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.[4] Conventionally, the capitalized word "Bitcoin" refers to the technology and network, whereas lowercase "bitcoin" refers to the digital currency.[5] The Bitcoin system is not controlled by a single entity, like a central bank, which has led the US Treasury to call bitcoin a decentralized currency,[6] although it does not meet the generally recognized definition of a currency.[citation needed]

Bitcoins are created by a process called mining, in which users who offer their computing power verify and record payments into a public ledger in exchange for transaction fees and newly minted bitcoins.[7] Users can buy, send and receive bitcoins electronically for a nominal fee 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.[8]

Bitcoin has been a subject of scrutiny amid concerns that it can be used for illegal activities.[9] 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.[10] The US is considered Bitcoin-friendly compared to other governments, however.[11] In China new rules restrict bitcoin exchange for local currency.[12]

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.[13] The European Banking Authority has warned that Bitcoin lacks consumer protections.[14] Bitcoins can be stolen and chargebacks are impossible.[15] Commercial use of Bitcoin is currently small compared to its use by speculators, which has fueled price volatility.[16]


The most important part of the Bitcoin system is a ledger that records financial transactions in the digital currency, bitcoins, which protects the system against fraud. This is accomplished without the intermediation of any single, central authority. Instead, computer servers running Bitcoin software form a network by connecting over the Internet, and anyone can run such a server. Transactions of the form "payer X wants to send Y bitcoins to payee Z" are broadcast to this network using readily available software applications. Bitcoin servers can validate these transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other servers. In this way, numerous copies of the ledger exist everywhere on the Internet, and are constantly being updated with new, validated entries.[17]

The block chain ledger and bitcoins[edit]

Just as a ledger can be used to record transfers of conventional money like dollars, all bitcoin transfers are recorded in a computer file that acts as a ledger called the block chain. Where a conventional ledger records the transfer of actual dollar bills or promissory notes that exist apart from it, in the case of Bitcoin, bitcoins are entries in the block chain and do not exist outside of it. In essence, the block chain records the transfer of numbers from payers to payees, and those numbers are called bitcoins.[18]


Maintaining the block chain is called mining, and those who do, are rewarded with newly created bitcoins and transaction fee.[19] Miners may be located on any continent and process payments by verifying each transaction as valid and adding it to the block chain.[19] 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. Mining will stop when an arbitrary limit of 21 million bitcoins is reached c. 2140 and transaction processing will then only be rewarded by the transaction fees.[20] Users that pay a fee may have their transactions processed more quickly.[21]

As of 2013 mining has become so competitive that the process has been compared to an arms race as ever more specialized technology has become indispensable. 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.[22] Without access to these purpose built machines, a bitcoin miner is unlikely to earn enough to even cover the cost of the electricity used in his or her mining efforts.[23]

Mining pools

The odds of finding a block depends on (computing) time and hash rate. While in the beginning of Bitcoin, individual or 'solo miner' were still successful, the chance -or mathematically speaking the variance- was calculated in 2011 to be quite low, and with ever increasing calculation time, as of 2014 it is most common for miners to join organized mining pools.[24] Since pools combine time and hash rate and they increase the collective chance. The reward is split among participants in proportion to their contribution using different schemes. The cost of electricity to power a computer for weeks to mine can be very high.[23] [25] Additionally, many jurisdictions require exchanges, where people can buy and sell bitcoins for cash, to collect personal information.[26] 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.[27]

It has further been suggested that Bitcoin payments should not be considered as more anonymous than credit card payments.[28]


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. If this occurs, the coins are lost and cannot be recovered. It is also important to keep the keys private since anybody knowing the keys can dispose of the bitcoins as the owner.[16]

Buying and selling[edit]

Bitcoins can be bought and sold for many different currencies from individuals and from companies like localbitcoins. The fastest[citation needed] way to obtain bitcoins is to purchase them in person or at a Bitcoin ATM for cash.[29] Bitcoin ATMs allow bitcoins to be purchased for cash,[30] and some also allow cash withdrawals from Bitcoin wallets stored on smartphones.[31] 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.[32] 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.[33] 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.[34]


Example of Casascius physical bitcoins[35]
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.[36] 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,[37] and the practical day-to-day security of Bitcoin wallets is a concern like the security of other forms of payment.[38] Risk of theft can be reduced by generating keys offline on an uncompromised computer and saving them on external storage or paper printouts.[39] "Physical bitcoins", ubiquitous in media coverage of Bitcoin, are produced by various vendors. They store a private key on paper, metal,[40] wood,[41] or plastic. There are also digital products known as "Hardware Wallets" to store bitcoins securely on a physical device.[42] 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.[43] 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".[44]

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.[45] 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.[45] As of version 0.9, Bitcoin-Qt has been renamed "Bitcoin Core" to more accurately describe its role in the network.[46] 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.[45]


Bitcoin was first mentioned in a 2008 paper published under the name Satoshi Nakamoto. In 2009, an exploit in an early Bitcoin client was found that allowed large numbers of bitcoins to be created.[47]

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.[48] In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2.[49] In the latter half of 2012 and during the 2012-2013 Cypriot Financial Crisis, the bitcoin price[50] began to rise, reaching a peak of US$266 on 10 April 2013, before crashing to around US$50.[51] In the end of 2013, the cost of one bitcoin rose to the all-round peak of US$1135, but fell to the price of US$693 three days later.[52]

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. Normal operation was restored when the majority of the network downgraded to version 0.7 of the Bitcoin software.[47]

C.[specify] 2013 some mainstream websites, such as Foodler, OKCupid, and WordPress, began accepting bitcoins[53] as well as certain non-profit or advocacy groups such as the Electronic Frontier Foundation.[54] (Although this organization subsequently stopped accepting donations in bitcoins.[55])

The first law enforcement events occurred in May 2013. Assets belonging to the Mt. Gox exchange were seized by Department of Homeland Security[56] and the Silk Road drug market website was shut down by the FBI.[57]

In October 2013, Chinese internet giant Baidu had allowed clients of website security services to pay with bitcoins.[58] 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.[59] 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.[60] On the same day, one bitcoin traded for over RMB¥6780 (US$1100) in China.[61] On 5 December 2013, the People's Bank of China prohibited Chinese financial institutions from using bitcoins.[12] After the announcement, the value of bitcoins dropped[62] and Baidu no longer accepted bitcoins for certain services.[63] Buying real-world goods with any virtual currency had been illegal in China since at least 2009.[64]

The first bitcoin ATM was installed in October 2013 in Vancouver, British Columbia, Canada.[65]

With roughly 12 million existing bitcoins as of November 2013,[66] the new price increased the market cap for Bitcoin to at least US$7.2 billion.[67] By 23 November 2013, the total market capitalization of Bitcoin exceeded US$10 billion for the first time.[68]

In the US 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.[69]

In early February 2014, one of the largest Bitcoin exchanges, Mt. Gox, suspended withdrawals, citing technical issues.[70] While the company worked on a fix, one week later the price of a bitcoin had dropped by 50%.[71] In late 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.[72] A class action lawsuit has been filed based on the questionable activity.[73] 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.[74]


Classification as money[edit]

Bitcoin is referred to as a currency, specifically a virtual currency which is the general form of a digital currency and is the term used by the US government, so far the Government Accountability Office, the US Federal Reserve and the Chicago Federal Reserve, the US Department of Justice, the SEC, the Department of Homeland Security the FBI.[75] Economists agree that to qualify as money, something must be a store of value, a medium of exchange, and a unit of account.[76] Bitcoins are used as a medium of exchange.[77] About 1,000 brick and mortar businesses were willing to accept payment in bitcoins as of November 2013,[78] in addition to more than 35,000 online merchants.[79] The bitcoin market currently suffers from volatility, limiting the ability of bitcoins to act as a stable store of value.[76] Bitcoin has been called, but is not commonly used as a unit of account. Instead, where people are allowed to buy in bitcoins, prices are often denominated in national currency not bitcoins.[76] The People's Bank of China has stated that Bitcoin "is fundamentally not a currency".[80] Nevertheless the central bank who has barred financial institutions from dealing with bitcoin, has said that people can buy and sell the virtual currency at their own risk.[81]

Price volatility[edit]

Bitcoin has an extremely volatile exchange rate.[77] According to Mark T. Williams of Boston University, its volatility is over seven times that of gold and over eight times that of the S&P 500.[82] The Bitcoin Foundation contends that high volatility is due to insufficient liquidity,[83] while a Forbes journalist claims that it is related to the uncertainty of its long-term value.[84] Volatility has little effect on the utility of Bitcoin as a payment processing system.[85]

Alternative to national currencies[edit]

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

Some in countries with problem plagued national currencies may use bitcoins to protect their savings against inflation or the possibility that governments could confiscate savings accounts. Bitcoins are used by some Argentinians as an alternative to the official currency,[86] which is stymied by inflation and strict capital controls.[87] It's been suggested that during the 2012–2013 Cypriot financial crisis bitcoins purchases rose due to fears that savings accounts would be confiscated or taxed.[88]

Speculative bubble[edit]

Many have labelled Bitcoin a speculative bubble including Former Federal Reserve Chairman Alan Greenspan[89] and economist John Quiggin.[90] Two lead software developers of Bitcoin, Gavin Andresen[91] and Mike Hearn, had warned that bubbles may occur.[92] One financial journalist correctly predicted the bursting of one such bitcoin bubble in April 2013.[93] Nobel Laureate Robert Shiller said that bitcoin "exhibited many of the characteristics of a speculative bubble."[94] Others reject the label and see bitcoin's quick rise in price as nothing more than normal economic forces at work.[95]

As investment[edit]

One way of investing in bitcoins is to buy and hold them as a long-term, high-risk investment.[96] FINRA, a United States self-regulatory organization, warns that investing in bitcoins carries significant risks.[97] The European Banking Authority warns that the risks of investment go beyond a potential fall in the value of bitcoins.[98] Bitcoins may be of limited value to unsophisticated investors.[99] Risk hasn't deterred some such as the Winklevoss twins, who made a US$1.5 million personal investment[100] and attempted to launch a bitcoin ETF.[16] Other investors, like Peter Thiel's Founders Fund, which invested US$3 million, don't purchase bitcoins themselves instead funding Bitcoin infrastructure like exchanges, companies that provide payment systems to merchants, and wallet services, etc.[100] Investors also invest in bitcoin mining.[101]

Money supply[edit]

Growth of the Bitcoin money supply is predefined by the Bitcoin protocol,[20] 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 every ten minutes. The total supply is capped at an arbitrary limit of 21 million,[7] 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[edit]

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."[90] In 2013, Bank of America FX and Rate Strategist David Woo forecast a maximum fair value per bitcoin of $1,300.[102] Bitcoin investor Cameron Winklevoss stated in 2013 that the "bull case scenario for bitcoin is... 40,000 USD a coin".[103] In late 2013, finance professor Mark Williams forecast a bitcoin would be worth less than ten US dollars by July 2014.[104]


Some economists have responded positively to Bitcoin, including François R. Velde, a Senior Economist at the Chicago Fed, who described it as "an elegant solution to the problem of creating a digital currency."[105] Other economists have not been so kind. Paul Krugman and Brad DeLong have found fault with Bitcoin asking questions why it should act as a reasonable stable store of value and or whether there is a floor on their value.[106] Economist John Quiggin has criticized Bitcoin as "the final refutation of the efficient-market hypothesis".[90]

David Andolfatto, a 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.[107]

Free software movement activist Richard Stallman has criticized the lack of anonymity and called for reformed development.[108]

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.[109]

As bitcoins proved popular, they have been increasingly covered by comics around the world.[110]

Acceptance by merchants[edit]

Established firms which accept bitcoins include Atomic Mall,[111] Clearly Canadian,[112],[113] the Sacramento Kings,[114] TigerDirect,[115] Virgin Galactic,[116] and Zynga.[117]

In November 2013, the University of Nicosia became the first university in the world to accept it.[118]

Skepticism by banks[edit]

As of 2014, Bitcoin companies have had difficulties opening traditional bank accounts because lenders have been leery of Bitcoin's links to illicit activity.[119] According to a co-founder of one such company, BitPay, "banks are scared to deal with Bitcoin companies, even if they really want to."[119] Indeed, some banks have been bullish on Bitcoin. In a 2013 report, Bank of America Merrill Lynch stated that “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."[120]


Numerous attempts to classify bitcoin demonstrate that it is not an easy task. While the varied results may make it appear that a lively debate over the nature of bitcoin is under way, many classifications simply allow bitcoins to be treated in a specific manner according to law. In the US, the IRS classified bitcoins as a capital asset[121] and subject to taxes on capital gains. Magistrate Judge Amos Maazant of a Texas court classified bitcoins as currency.[122] A German court found bitcoin to be a unit of account.[123] The Finnish Government judged it to be a commodity.[124]

Besides courts, others have pinned a label to bitcoin such as a WSJ journalist who, in December 2013, declared bitcoins a commodity.[125] A Forbes journalist referred to bitcoins as digital collectible.[126] And University of Amsterdam researchers classified it as a money-like informational commodity.[127]

Legal status and regulation[edit]

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,[128] a possibility that was mentioned in a 2013 SEC filing made by a Bitcoin investment vehicle.[129]


According to the European Central Bank, because Bitcoin does not involve traditional financial actors (issuers of bitcoins are non-financial companies), traditional financial sector regulation is not applicable.[130] Under other regimes, existing rules have been extended to include Bitcoin and Bitcoin companies.

Canadian regulation[edit]

In Canada, the federal government announced in February 2014 that it was going to regulate Bitcoin under existing anti-money laundering and counter-terrorist financing legislation.[131] In Quebec, The Financial Markets Authority stated in regards to Bitcoin ATMs, that it would prosecute any violation of the Securities Act, the Derivatives Act, or the Money Services Business Act.[132]

Hong Kong[edit]

Pre-existing Hong Kong law covers acts of fraud and money laundering involving virtual commodities.[133]

Singapore regulation[edit]

The Monetary Authority of Singapore requires Bitcoin intermediaries to collect personal details of their customers and report suspicious activity similar to what it requires from money changers.[134]

Swiss regulation[edit]

In Switzerland there are three independent authorities that regulate the Bitcoin business-related activities: FINMA, the Cybercrime Coordination Unit Switzerland, and the Money Laundering Reporting Office Switzerland at the Federal Office of Police.[135]

US regulation[edit]

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.[136][dubious ]

In 2013 the Treasury issued new rules regarding virtual currencies,[137] whereby exchanges (but not users) are considered money transmitters, and must comply with rules to prevent money laundering and terrorist financing.[138] Besides obtaining personal details of clients, Bitcoin exchanges must verify that their customers are not on the Office of Foreign Asset Control’s Specially Designated Nationals list.[139] \

The US Government Accountability Office reviewed virtual currencies upon request of the Senate Finance Committee and in May 2013 recommended [140] 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 guidance that virtual currency is treated 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."[141]

The US Commodity Futures Trading Commission stated in March 2014, that it has been considering regulation of digital currencies.[142] As of March 2014, there are no rules at the state level, 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. As of 11 March 2014, it has officially invited bitcoin exchangers to apply with them.[143]

International guidance[edit]

The 2013 G7's Financial Action Task Force 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" and warns that "Internet-based payment services that allow third party funding from anonymous sources may face an increased risk of [money laundering/terrorist financing]" concluding that this may "pose challenges to countries in [anti-money laundering/counter terrorist financing] regulation and supervision."[144]

Criminal activity[edit]

Bitcoins have become associated with online criminal behavior and so-called cybercriminals.[145] Used to obfuscate online transactions, bitcoins are seized when deep web black markets are shut by authorities.[146] This association with criminal activities has stigmatized the currency and attracted the attention of financial regulators, legislative bodies, and law enforcement.[147] CNN has referred to Bitcoin as a "shady online currency [that is] starting to gain legitimacy in certain parts of the world,"[148] and The Washington Post calls it "the currency of choice for seedy online activities."[149] 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".[145]

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."[7] Certain nation states may feel that its use in circumventing capital controls is also undesirable.[11]

Despite claims made by the non-profit Bitcoin Foundation that "cryptography is the reason no one can steal bitcoins," theft is widespread.[150]

Black markets[edit]

Several news outlets assert that the popularity of bitcoin hinges on the ability to use them to purchase illegal goods.[151] C. 2013 Non-drug transactions were thought to be far less than the number involved in the purchase of drugs,[152] and roughly one half of all transactions made using Bitcoin were bets placed at a single online gaming website.[153] Some also state that online gun dealers use Bitcoin to sell arms without background checks.[154]

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.[155] 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.[155] 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.[156] In a separate case, escrow accounts with bitcoins belonging to patrons of a different black market were hacked in early 2014.[157]

Money laundering[edit]

While some feel bitcoins are not ideal for money laundering because all transactions are public,[158] authorities have expressed concerns. The European Banking Authority and the FBI have both stated that Bitcoin may be used for money laundering.[159] In early 2014, an operator of a US bitcoin exchange was arrested for money laundering.[69]

Ponzi scheme[edit]

Many have voiced concerns that Bitcoin may be nothing more than a Ponzi scheme including journalists, prominent economists, and heads of central banks.[160] Bitcoin supporters disagree.[161] While no court has found Bitcoin to be a Ponzi scheme, a 2012 report by the European Central Bank concluded that "it [is not] easy to assess whether or not the Bitcoin system actually works like a pyramid or Ponzi scheme."[162]

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.[163] In 2013, the SEC charged the company and its founder "with defrauding investors in a Ponzi scheme involving Bitcoin..."[163]


While generating and storing keys offline mitigates theft of bitcoins, thefts occur on a regular basis.[32] A bitcoin theft is an unauthorized transfer from a wallet using the private key to unlock the wallet.[164] 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.[165] 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 $100 million in bitcoins were stolen from the online illicit goods marketplace Sheep Marketplace, which immediately closed.[166] Users tracked the coins as they were processed and converted to cash, but no funds were recovered and no culprits identified.[166] 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.[157] 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 approximately $477 million in bitcoins were stolen. Flexcoin, an Alberta, Canada-based bitcoin storage specialist, shut down on 3 March 2014 after it said it discovered the theft of about $650,000 in bitcoins.[167] Poloniex, a digital currency exchange, reported on 4 March 2014 that it lost bitcoins valued at around $50,000.[168]


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. Security company Dell SecureWorks said in February 2014 that it had identified 146 types of Bitcoin malware about half of it undetectable with standard antivirus scanners.[169]

Unauthorized mining[edit]

In June 2011, Symantec warned about the possibility that botnets could mine covertly for bitcoins.[170] Malware used the parallel processing capabilities of GPUs built into many modern video cards.[171] While bitcoin mining on an average computer is no longer lucrative, a botnet of tens of thousands can effectively mine bitcoins.[172]

Botnet cases

In mid-August 2011, bitcoin mining botnets were detected,[173] and less than three months later, bitcoin mining trojans had infected Mac OS X.[174]

In April 2013, electronic sports organization E-Sports Entertainment was accused of hijacking 14,000 computers to mine bitcoins; the company later settled the case with the State of New Jersey.[175]

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.[176]

For four days in December 2013 and January 2014, Yahoo Europe hosted an ad containing bitcoin mining malware that infected an estimated two million computers.[172] The software, called Sefnit, was first detected in mid-2013 and has been bundled with many software packages. Microsoft has been removing the malware through its Microsoft Security Essentials and other security software since January 2014.[177]

Malware stealing bitcoins[edit]

Some malware can steal private keys for bitcoin wallets allowing the bitcoins themselves to be stolen. The most common type searches computers for cryptocurrency wallets to upload to a remote server where they can be cracked and their coins stolen.[169] Many of these also log keystrokes to record passwords, often avoiding the need to crack the keys.[169] A different approach detects when a Bitcoin address is copied to a clipboard and quickly replaces it with a different address, tricking people into sending bitcoins to the wrong address.[169] This method is effective because bitcoin transactions are irreversible.

Cases of theft

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.[178] Security company Trustwave, which tracked the malware, reports that its latest version was able to steal 30 types of digital currency.[179]

A type Mac malware active in August 2013, Bitvanity posed as a vanity wallet address generator and stole addresses and private keys from other Bitcoin client software.[180]

A different trojan for Mac OS X, called CoinThief was reported in February 2014 to be responsible for multiple bitcoin thefts, including one user who lost 20 bitcoins.[180] The softare was hidden in versions of some cryptocurrency apps on and MacUpdate.[180]


Another type of Bitcoin-related malware is ransomware. One 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.[181] 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.[182] Linkup, a combination ransomware and bitcoin mining program that surfaced in February 2014, disables internet access and demands credit card information to restore it, while secretly mining bitcoins.[181]


There are two main ways the blockchain ledger can be corrupted to steal bitcoins: by fraudulently adding to or modifying it. The Bitcoin system protects the blockchain against both using a combination of digital signatures and cryptographic hashes.[183]

The Addition Attack and digital signatures[edit]

Payers and payees are identified in the blockchain by their public cryptographic keys: most Bitcoin transfers are from one public key to a different public key. (Actually, hashes of these keys are used in the blockchain, and are called "Bitcoin addresses".) In principle, an attacker Eve could steal money from Alice and Bob by simply adding transactions to the blockchain ledger like "Alice pays Eve 100 bitcoins", "Bob pays Eve 100 bitcoins", and so on, using of course these people's Bitcoin addresses instead of their names. The Bitcoin protocol prevents this kind of theft by requiring every transfer to be digitally signed with the payer's private key; only signed transfers can be added to the blockchain ledger. Since Eve cannot forge Alice's signature, Eve cannot defraud Alice by adding an entry to the blockchain equivalent to "Alice pays Eve 100 bitcoins". At the same time, anyone can verify Alice's signature using her public key, and therefore that she has authorized any transaction in the blockchain where she is the payer.[18]

The Modification Attack and mining[edit]

The other principal way to steal Bitcoins would be to modify blockchain ledger entries. Eve could buy something from Alice, like a sofa, by adding a signed entry to the blockchain ledger equivalent to "Eve pays Alice 100 bitcoins". Later, after receiving the sofa, Eve could modify that blockchain ledger entry to read instead: "Eve pays Alice 1 Bitcoin", or even delete the entry. Digital signatures cannot prevent against this attack: Eve can simply sign her entry again after modifying it!

To prevent against modification attacks, the Bitcoin system first requires entries be added to the blockchain not one at a time, but in groups or "blocks". More importantly, each block must be accompanied by a cryptographic hash of three things: the hash of the previous block, the block itself, and a number called a "nonce". A hash of only the first two items will, like any cryptographic hash, always have a fixed number of bits (eg 256 for SHA-256). The nonce is a number which, when included, yields a hash with a specified number of leading zero bits. Because cryptographic hashes are essentially random, in the sense that their output cannot be predicted from their inputs, there is only one known way to find the nonce: to try out integers one after the other, e.g. 1, then 2, then 3, and so on. This process is called mining. The larger the number of leading zeros, the longer on average it will take to find a requisite nonce. The Bitcoin system constantly adjusts the number of leading zeros so that the average time to find a nonce is about ten minutes. That way, as computer hardware gets faster over the years, the Bitcoin protocol will simply require more leading zero bits to make mining always last about ten minutes.[18]

This system prevents modification attacks in part because an attacker has to recalculate all the hashes of the blocks after the modified one. In the example above, if Eve wants to change "100 bitcoins" to "1 bitcon", she will not only have to recompute the hash of the block that transaction is in, but of all the blocks that come after it; she will have to recreate the chain of blocks. She can do this, but it will take her time, about ten minutes on average per block. However, during that time the network will continue to add blocks, and it will do so much faster than Eve alone can mine. Eve would have to recalculate all the blocks before the network could add a new one, or at least catch up with or overtake the network's miners. To do this, she would have to have roughly as much computing power as much of the existing Bitcoin miners combined. This would be very expensive and, if the Bitcoin network is large enough, likely infeasible. Furthermore, because of financial incentives to mine described below, it will make more financial sense for Eve to devote her resources to normal Bitcoin mining instead. Thus the system protects against fraudulent blockchain modifications by making them expensive and, if the attacker is rational, unappealing because they make less financial sense than becoming a miner. The more miners there are, the more expensive and less feasible such attacks become, making the whole system even more secure.[18]

Incentives to mine[edit]

Miners have two incentives to mine. First of all, as a reward for finding a nonce, they are allowed to allot themselves a certain number of Bitcoins "out of thin air". Second, every payer can include an optional "transaction fee", which can be thought of as a kind of tip before a service is rendered rather than after. A miner who finds a nonce can transfer all the transaction fees in that block to herself. Payers have an incentive to include transaction fees because their transactions will likely be added to the blockchain sooner: miners prefer to include such transactions in their blocks.

In the Bitcoin system, the number of Bitcoins that can be manufactured "out of thin air" decreases steadily over time, and will eventually be zero. After that, miners' only incentive will be transaction fees.


While the blockchain ledger fraud problems are particular to Bitcoin, the Bitcoin system also solves a problem common to all digital currency and payment schemes: that of so-called double-spending. With paper money or physical coins, when the payer transfers money to the payee, the payer cannot keep a copy of that dollar bill or coin. With digital money, which is just a computer file, this is not the case, and the payer could in principle spend the same money again and again, copying the file over and over. With Bitcoin, when Eve offers to pay Alice some bitcoins, Alice can always first check the blockchain ledger to verify that Alice actually owns that many bitcoins. Of course, Eve could try to pay many people simultaneously; but Bitcoin can defend against that as well, albeit somewhat cumbersomely. If Eve offers to pay Alice some bitcoins in exchange for goods, Alice can stipulate that she will not deliver the goods until Eve's payment to Alice appears in the blockchain, which typically involves waiting about ten minutes.[184]

Types of attacks[edit]

Race attack[edit]

If the transaction has no confirmations, shops and services which accept payment can be exposed to a so-called ‘race attack’. For example, two transactions are created from the same funds and are then sent to different shops/services. In this case, only one of those shops will receive the funds – a transaction from this shop will appear first in the block chain.[185]

Shops can take numerous precautions to reduce this type of attack but it is always good to remember should you accept transactions without any confirmation.

Finney Attack[edit]

Another type of attack. Shops or services which accept transactions without any confirmation are affected. “Finney Attack” is an attack which requires the participation of the mining expert to add repeated transactions to the block. The risk of such an attack cannot be reduced to nothing regardless of the preventative measures taken by shops or services, but it does require the participation of a mining expert and an ideal combination of contributing factors. It costs a lot of money and is no mean feat. Just as with the other type of attack, the shop or service must seriously consider its politics concerning transactions without any confirmation.[186]

Vector76 Attack[edit]

Also called an “attack with confirmation”. This is a combination of the 2 aforementioned attacks which gives the perpetrator the ability to spend funds twice simply with a confirmation.[187]

Brute Force Attack[edit]

This attack is possible even if the shop or service is expecting several transaction confirmations. It requires the attacker to be in possession of relatively high-performance hardware (hash frequency).

The perpetrator sends a transaction to the shop paying for a product/service and at the same time continues looking for a connection in the block chain (block chain fork) which recognizes this transaction. After a certain number of confirmations, the shop sends the product. If the perpetrator has found more than n blocks at this point, he breaks his block chain fork and regains his money, but if the perpetrator has not succeeded in doing this, the attack can be deemed a failure and the funds are sent to the shop, as should be the case.

The success of this attack depends on the speed (hash frequency) of the attacker and the number of confirmations for the shop/service. For example, if the attacker possesses 10% of the calculation power of the Bitcoin network and the shop expects 6 confirmations for a successful transaction, the probability of success of such an attack will be 0.1%. [188]

>50% Attack[edit]

If the perpetrator controls more than 50% of the Bitcoin network power, the probability of success of the aforementioned attack will be 100%. By virtue of the fact that the perpetrator can generate blocks more often than the other part of the network, he can create his own block chain until it becomes longer than the “integral” part of the network. [189]

See also[edit]


  1. ^ This also is the baht symbol


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