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Dave Weisbrich
Dr. George
Eng 1010
9 November 2015
What is Bitcoin
It is said that money makes the world go around. Every developed society on Earth is
reliant on money for daily operation and survival. With the technological developments of the
21st century providing us with revolutionizing contributions to the world, the way society thinks
of money may begin to morph into something new in the near future. For the past six years, there
has been a new method of exchanging services known as digital currency, or cryptocurrency.
There are many variations of cryptocurrencies being established with staggering frequency;
however, the superstar of this world is Bitcoin. Therefore, Bitcoin will be the cryptocurrency that
this paper will focus on. This essay will explain what this new currency is, how it operates, the
risks and rewards associated with it, and how it may shape our brave, new, technology-driven
world.
Bitcoins can be incredibly confusing for those unfamiliar with their workings, so the
question must be asked: What are Bitcoins? Bitcoins are generated by a process termed
mining, which is accomplished by solving an incredibly complex algorithm known as the
block chain. Zohar writes that the block chain is an incremental log of all transactions that
have ever occurred since the creation of Bitcoin if one reads the log from start to finish, every
transfer of money can be verified and funds can be followed to compute the balance of each
Bitcoin address (107). Every ten minutes, a new block chain is released onto the internet, which
allows Bitcoin miners, with computers of exceptional processing power, to crack the algorithm
and seize the newly minted Bitcoins. When Bitcoin was in its first four years of existence, one
block chain would generate 50 Bitcoins (Zohar 109). However, as of late 2013, the number of
Bitcoins created per block chain has decreased by 50%. This pattern will continue every four

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years until the year 2140 when the final Bitcoin will be mined. In the year 2140, there will be a
total of 21 million Bitcoins in circulation, but there will never be new Bitcoins created. This may
sound like a bad idea, but all cryptocurrencies are created with this design as a means of
prohibiting inflation, which is one of the key features that makes Bitcoin attractive to many
(Zohar 109).
Aside from curbing inflation, which has always been a problem for government-backed
currencies, Bitcoin has found other unique ways to gain advantages over fiat currency in the eyes
of consumers and businesses alike. Bitcoin is exchanged solely on the internet, which makes
their transfer almost instantaneous no matter where on earth they are being sent to. In todays
world of e-commerce, where massive amounts of funds are exchanged via the internet, operating
in a system that allows instantaneous money transfer is advantageous. Bitcoin was designed to
allow for the efficient, secure and pseudonymous transfer of value between two parties
Bitcoin removes middlemen and friction from any transaction process (Lord 66). Therefore,
exchanges of Bitcoin do not include transaction fees, unlike credit card or bank transfers.
Another attractive feature of Bitcoin is that there is no centralized system to book and clear
Bitcoin trades; at least not in the manner familiar to most financial professionals (Lord 66).
Having no centralized agency controlling the flow, tax, and over-abundance of money is
advantageous but can also be inherently dangerous for many reasons.
Many proponents of Bitcoin wish to see its usage become widespread enough to rival the
commonality of fiat currency; however, the possibility of Bitcoin being used by upwards of one
billion people raises fears in those that see Bitcoin as illegitimate and dangerous. Many people
fear that one day the populace will decide that Bitcoins are essentially worthless, reminiscent of
the beanie-baby craze of the mid 1990s. Polasik et al. explains that there is still no obvious
theory delineating how Bitcoin should be priced since, by its very nature, it yields no dividends,

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cash flows, or earnings (36). If the value of Bitcoin were to crash today, the effect would not be
widely noticed by the public as Bitcoin is not currently used to the extent to cause financial
chaos. In fact, there was recently a disastrous crash in the value of Bitcoin. In 2010 the price per
Bitcoin was only a few pennies and had risen to several dollars by early 2013. Towards the end
of 2013, the price had reached an all-time high of over $1100. This created a craze among
Bitcoin investors, and fortunes were created out of practically nothing for many people.
However, in the following year that price had plummeted to just over $200. At the time, Bitcoin
wasnt used on a large enough scale for most people to notice, but if this were to happen on a
grand scale, across several of the worlds economic superpowers, the results would be
devastating. One of the causes for this plummet in value was due to the collapse of the Japanese
Mt. Gox, which was one of the first Bitcoin online trading platforms and the leader in this field
for several years. Although at its peak in July 2011, the company claimed to carry out over 80
percent of transactions in the market for this cryptocurrency, by February 2014 it had filed for
bankruptcy (Polasik et al. 17). Over $460 million in Bitcoins were lost during the collapse of
Mt. Gox, which led many to believe this spelled the beginning of the end for Bitcoin. Bitcoin has
recovered to an extent, but its future ultimately rests on the endorsement or opposition from the
worlds economic powerhouses.
With Bitcoin being so new, as well as being incredibly complicating for many,
governments around the world are still straddling the fence on which course of action they
should take regarding accepting Bitcoin as a legitimate currency. For example, most of the
largest Bitcoin exchanges are based in China, yet the Chinese government has prohibited their
banks from dealing with any of these exchanges (Bohme et al. 224). Bitcoin poses an interesting
problem for many governments, as some see it as a threat to their own monetary system and wish
to outlaw its use completely. On the other hand, if Bitcoin can be regulated it would serve these

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same governments in many ways. Governmental regulation would certainly make taxing Bitcoin
more of a possibility than it currently is. While the United States government has yet to take a
hardline stance on the legitimacy of Bitcoin, it is clear that the US is eager to find ways to tax it.
In fact, as recent as March of 2014, the IRS issued guidance that transactions to and from
virtual currencies may create taxable events for federal tax purposes. Thus, if a user converts
dollars to Bitcoin at one exchange rate, then later converts back at a higher rate, the user may
owe tax on the appreciation; conversely, losses could offset gains elsewhere. Depending on the
users purpose and primary activity, the gains and losses could be ordinary income or capital
(Bohme et al. 231-2). Aside from generating potential fortunes from the taxation of Bitcoin,
another benefit the government might reap from regulation is tighter security on the exchange of
illicit contraband. One of the most talked-about stories related to Bitcoin, is the FBI shut down of
the notorious Silk Road website in 2013. The Silk Road was a dark web marketplace, which
carried many products for sale, but was mainly known as place for dark web users to purchase
illegal drugs anonymously. Due to the anonymous nature of Bitcoin and the disreputable nature
of the Silk Road, the two quickly formed an ideal relationship that became quite lucrative, as it
oversaw $15 million in Bitcoin transfers in just one year (Bohme et al. 222). Those who
understand the economic powerhouse that Bitcoin may become, and the current dangers inherent
in its uninhibited openness, can see that regulation is the best option for legitimizing Bitcoin as a
taxable currency and reducing its use in purchasing illicit goods. If Bitcoin eventually falls under
the control of the government, another side-effect may emerge that would serve all of Bitcoins
users, which is the ability to regain lost or stolen Bitcoins. Bohme et al, states that once stolen
cash enters circulation, little can be done to reclaim it. In contrast, Bitcoin blacklists could let
law enforcement claw back all ill-gotten or stolen Bitcoins (Bohme et al. 231).

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Bitcoin is still in its infancy, and it is easy to understand how complex of an issue it is,
even for those who have dedicated their careers to solving its riddles. It is hard to say what will
happen to Bitcoin in the near future, let alone in the distant future of 2140 when the last Bitcoin
will be mined and the 21 million Bitcoin cap will be reached. There are many questions that still
need to be answered. Will the world find a way to attach a direct value to Bitcoin so that a
sudden, catastrophic crash in price can be avoided? Will regulation help to move Bitcoin into the
mainstream, or will it infringe upon the freedom and anonymity that makes Bitcoin as appealing
as it is to so many? These are problems that can only be solved over time and experience, both of
which are currently severely lacking in the short lifespan of Bitcoin. The only thing that can be
said with certainty regarding Bitcoin is that it is a revolutionary idea that is indicative of the
radical changes that technology will bring about in the 21st century.

Work Cited
Bohme, R, N Christin, B Edelman, and T Moore. "Bitcoin: Economics, Technology, and
Governance." Journal of Economic Perspectives. 29.2 (2015): 213-238. Print.
Lord, Steven. Bitcoin Coming of Age. Modern Trader. July, 2015: 66-67.
Polasik, Michal, Anna I. Piotrowska, Tomasz P. Wisniewski, Radoslaw Kotkowski, and Geoffrey
Lightfoot. "Price Fluctuations and the Use of Bitcoin: an Empirical
Inquiry."International Journal of Electronic Commerce. 20.1 (2015): 9-49. Print.
Zohar, Aviv. Bitcoin: Under the Hood. Communications of the ACM. 58.9 (2015): 104-113.
Print.