The price of bitcoin continued to plunge on Tuesday as it fell another 7% to $4,387, taking its

losses to almost 30% in the past week.

A 14% tumble in the price of the world’s biggest and best-known cryptocurrency on Monday had
taken bitcoin below $5,000 for the first time in 13 months. It is now at its lowest level since
October last year.

Other cryptocurrencies have also declined in the past days.

Why central bank digital currencies will destroy bitcoin

Nouriel Roubini

Last December the cryptocurrency surged to an all-time high of $19,511 in highly volatile trading
but fell back to $13,500 at the start of this year.

As 2018 draws to a close….

… we’re asking readers to make an end of year or ongoing contribution in support of The
Guardian’s independent journalism.

Three years ago we set out to make The Guardian sustainable by deepening our relationship with
our readers. The same technologies that connected us with a global audience had also shifted
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More than one million readers have now supported our independent, investigative journalism
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Sustained support from our readers enables us to continue pursuing difficult stories in challenging
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editorially independent – our journalism is free from commercial bias and not influenced by
1
billionaire owners, politicians or shareholders. No one edits our editor. No one steers our opinion.
This is important because it enables us to give a voice to those less heard, challenge the powerful
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minute. Thank you.

On december 17th 2017 the price of bitcoin on CoinMarketCap, a cryptocurrency exchange,

neared $20,000. True believers hoped that was just the beginning. One analyst at a Danish
investment bank predicted bitcoin could be worth $100,000 by the end of 2018. The year is not
yet over. But as The Economist went to press, bitcoin’s price was $4,223, and trending
downwards (see chart). Where bitcoin goes, other cryptocurrencies follow. Ether, the second-
most popular cryptocurrency, is down from $1,432 in January to $120 today.

All this marks the deflating of the third cryptocurrency bubble (the others were in 2011 and
2013). The trigger is unclear. Explaining the movements of deep, liquid markets is tricky at the
best of times. Cryptocurrency markets are neither. One popular theory is that the the supply of
brave buyers willing to take a punt has now been exhausted.

Cryptocurrencies are quite new but the history of money is very old. People have used something
as money for at least 20,000 years. Paper money is only a few hundred years old in Europe but
was used a couple of thousand years ago by the Chinese. The classic functions of money are
threefold: they are a medium of exchange, a unit of account and a store of value. The second is
simply something we can price things in, thereby measuring comparative values, and the first and
third are obvious.

On this tally, none of the cybercurrencies stack up. They have a marginal use as a medium of
exchange because some people will accept them in exchange for goods and services, but they are
too volatile to be useful as a unit of account or store of value. Indeed in most transactions they
don’t really serve as mediums of exchange because they have to be switched into real money
first. They are, however, an asset class like gold, fine wines or classic cars.

“The crypto bloodbath continues,” said Neil Wilson, the chief market analyst at Markets.com.
“Things looks like they only get worse from here. Where is the incentive to buy? It does rather
look like the bottom is coming out of this market.”

2
On Friday, the US Securities and Exchange Commission took action against two cryptocurrency
startups that staged initial coin offerings, or ICOs, selling cryptocurrency tokens to the public.
Airfox and Paragon Coin agreed to pay civil penalties for conducting token sales last year
without registering them as securities offerings.

As 2018 draws to a close….

… we’re asking readers to make an end of year or ongoing contribution in support of The
Guardian’s independent journalism.

Three years ago we set out to make The Guardian sustainable by deepening our relationship with
our readers. The same technologies that connected us with a global audience had also shifted
advertising revenues away from news publishers. We decided to seek an approach that would
allow us to keep our journalism open and accessible to everyone, regardless of where they live or
what they can afford.

More than one million readers have now supported our independent, investigative journalism
through contributions, membership or subscriptions, which has played such an important part in
helping The Guardian overcome a perilous financial situation globally. We want to thank you for
all of your support. But we have to maintain and build on that support for every year to come.

Sustained support from our readers enables us to continue pursuing difficult stories in challenging
times of political upheaval, when factual reporting has never been more critical. The Guardian is
editorially independent – our journalism is free from commercial bias and not influenced by
billionaire owners, politicians or shareholders. No one edits our editor. No one steers our opinion.
This is important because it enables us to give a voice to those less heard, challenge the powerful
and hold them to account. Readers’ support means we can continue bringing The Guardian’s
independent journalism to the world.

Please make an end of year contribution today to help us deliver the independent journalism the
world needs for 2019 and beyond.

Bitcoin — the online currency used to buy Alpaca wool socks and illegal drugs whose value
dropped from $17.50 to "pennies" after a June 19, 2011 hack into its currency exchanger, Mt.Gox
— has gotten plenty of media attention, I wrote seven years ago.

3
If you had bought, say $10,000 worth, of bitcoin back then, let's say at 10 cents apiece, it would
be worth $678 million as of June 11.

In case you were drawn into the world of bitcoin in December 2017 when it hit $19,500 apiece,
logic would suggest you are feeling pain now that it trades down 65% at $6,782.42.

A bigger basket of cryptocurrencies is down 64% since their peak in early January. According to
Bloomberg, digital assets tracked by Coinmarketcap.com were valued June 11 at $298 billion --
in early January 2018, their value was $830 billion.

The latest trigger for the plunge in bitcoin was the freezing of Coinrail, the 99th biggest exchange
with 24-hour volume of $2.66 million. The South Korea-based exchange stated, “On June 10,
there was a system check due to the hacking attempt at dawn. At present, 70% of your coin rail
total coin / token reserves have been confirmed to be safely stored and moved to a cold wallet
and are in storage.”

This brings up a broad question — how do people make decisions? I like the theory proposed by
Daniel Kahneman, who won the Nobel Prize in 2002 for his work on behavioral economics.
Kahneman argues that people have two systems for deciding — System 1, going with their gut
reactions, and System 2, methodically weighing costs and benefits.

Bitcoin is in the middle of an astounding price drop, reaching prices as low as $3,520 in recent
days and wiping out all gains from coins purchased this year. As of press time, the price was
hovering around $3,900, a roughly 40 percent drop from two weeks ago. The result is the worst
price drop since April 2013, refreshing old doubts about the soundness of bitcoin as an
investment vehicle.

It’s a dramatic turn from 2017, when the value passed $15,000 in the beginning of December to
peak just below $20,000. After that, prices plummeted. By January of this year, it lost half of its
peak value, and continued to drop. The drop has been particularly dramatic in the last couple of
weeks.

The price drop is likely the result of a series of forks this year, which produced parallel currencies
like Bitcoin Cash. A planned fork of Bitcoin Cash took place on November 15th, and was

4
accompanied by considerable angst from traders ahead of time. CoinDesk notes that Bitcoin Cash
and several other bitcoin forks have reported losses of more than 10 percent in a 24 hour period.

Bitcoin (₿) is a cryptocurrency, a form of electronic cash. It is a decentralized digital currency

without a central bank or single administrator that can be sent from user-to-user on the peer-to-
peer bitcoin network without the need for intermediaries.[7]

Transactions are verified by network nodes through cryptography and recorded in a public
distributed ledger called a blockchain. Bitcoin was invented by an unknown person or group of
people using the name Satoshi Nakamoto[9] and released as open-source software in 2009.[10]
Bitcoins are created as a reward for a process known as mining. They can be exchanged for other
currencies,[11] products, and services. Research produced by the University of Cambridge
estimates that in 2017, there were 2.9 to 5.8 million unique users using a cryptocurrency wallet,
most of them using bitcoin.[12]

Bitcoin has been criticized for its use in illegal transactions, its high electricity consumption,
price volatility, thefts from exchanges, and the possibility that bitcoin is an economic bubble.[13]
Bitcoin has also been used as an investment, although several regulatory agencies have issued
investor alerts about bitcoin.[14]

Creation

The domain name "bitcoin.org" was registered on 18 August 2008.[15] On 31 October 2008, a
link to a paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash
System[5] was posted to a cryptography mailing list.[16] Nakamoto implemented the bitcoin
software as open-source code and released it in January 2009.[17][18][10] Nakamoto's identity
remains unknown.[9]

In January 2009, the bitcoin network was created when Nakamoto mined the first block of the
chain, known as the genesis block.[19][20] Embedded in the coinbase of this block was the
following text: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks."[10]
This note has been interpreted as both a timestamp and a comment on the instability caused by
fractional-reserve banking.[21]:18

The receiver of the first bitcoin transaction was cypherpunk Hal Finney, who created the first
reusable proof-of-work system (RPOW) in 2004.[22] Finney downloaded the bitcoin software on
its release date, and on 12 January 2009 received ten bitcoins from Nakamoto.[23][24] Other

5
early cypherpunk supporters were creators of bitcoin predecessors: Wei Dai, creator of b-money,
and Nick Szabo, creator of bit gold.[25] In 2010, the first known commercial transaction using
bitcoin occurred when programmer Laszlo Hanyecz bought two Papa John's pizzas for 10,000
bitcoin.[26]

Nakamoto is estimated to have mined one million bitcoins[27] before disappearing in 2010, when
he handed the network alert key and control of the code repository over to Gavin Andresen.
Andresen later became lead developer at the Bitcoin Foundation.[28][29] Andresen then sought
to decentralize control. This left opportunity for controversy to develop over the future
development path of bitcoin.[30][29]

2011–2012

After early "proof-of-concept" transactions, the first major users of bitcoin were black markets,
such as Silk Road. During its 30 months of existence, beginning in February 2011, Silk Road
exclusively accepted bitcoins as payment, transacting 9.9 million in bitcoins, worth about $214
million.[31]:222

In 2011, the price started at $0.30 per bitcoin, growing to $5.27 for the year. The price rose to
$31.50 on 8 June. Within a month the price fell to $11.00. The next month it fell to $7.80, and in
another month to $4.77.[32]

Litecoin, an early bitcoin spin-off or altcoin, appeared in October 2011.[33] Many altcoins have
been created since then.[34]

In 2012, bitcoin prices started at $5.27 growing to $13.30 for the year.[32] By 9 January the price
had risen to $7.38, but then crashed by 49% to $3.80 over the next 16 days. The price then rose to
$16.41 on 17 August, but fell by 57% to $7.10 over the next three days.[35]

The Bitcoin Foundation was founded in September 2012 to promote bitcoin's development and
uptake.[36]

6
2013–2016

In 2013, prices started at $13.30 rising to $770 by 1 January 2014.[32]

In March 2013 the blockchain temporarily split into two independent chains with different rules.
The two blockchains operated simultaneously for six hours, each with its own version of the
transaction history. Normal operation was restored when the majority of the network downgraded
to version 0.7 of the bitcoin software.[37] The Mt. Gox exchange briefly halted bitcoin deposits
and the price dropped by 23% to $37[38][39] before recovering to previous level of
approximately $48 in the following hours.[40] The US Financial Crimes Enforcement Network
(FinCEN) established regulatory guidelines for "decentralized virtual currencies" such as bitcoin,
classifying American bitcoin miners who sell their generated bitcoins as Money Service
Businesses (MSBs), that are subject to registration or other legal obligations.[41][42][43] In
April, exchanges BitInstant and Mt. Gox experienced processing delays due to insufficient
capacity[44] resulting in the bitcoin price dropping from $266 to $76 before returning to $160
within six hours.[45] The bitcoin price rose to $259 on 10 April, but then crashed by 83% to $45
over the next three days.[35] On 15 May 2013, US authorities seized accounts associated with
Mt. Gox after discovering it had not registered as a money transmitter with FinCEN in the
US.[46][47] On 23 June 2013, the US Drug Enforcement Administration (DEA) listed 11.02
bitcoins as a seized asset in a United States Department of Justice seizure notice pursuant to 21
U.S.C. § 881.[48] This marked the first time a government agency had seized bitcoin.[49][50]
The FBI seized about 26,000 bitcoins in October 2013 from the dark web website Silk Road
during the arrest of Ross William Ulbricht.[51][52][53] Bitcoin's price rose to $755 on 19
November and crashed by 50% to $378 the same day. On 30 November 2013 the price reached
$1,163 before starting a long-term crash, declining by 87% to $152 in January 2015.[35] On 5
December 2013, the People's Bank of China prohibited Chinese financial institutions from using
bitcoins.[54] After the announcement, the value of bitcoins dropped,[55] and Baidu no longer
accepted bitcoins for certain services.[56] Buying real-world goods with any virtual currency had
been illegal in China since at least 2009.[57]

In 2014, prices started at $770 and fell to $314 for the year.[32] In February 2014 the Mt. Gox
exchange, the largest bitcoin exchange at the time, said that 850,000 bitcoins had been stolen
from its customers, amounting to almost $500 million. Bitcoin's price fell by almost half, from
$867 to $439 (a 49% drop). Prices remained low until late 2016.[citation needed]

In 2015. prices started at $314 and rose to $434 for the year. In 2016 prices rose to $998 on 1
January 2017.[32]

7
2017–2018

Prices started at $998 in 2017 and rose to $13,412.44 on 1 January 2018.[32] On 17 December
bitcoin's price reached an all-time high of $19,666.[35]

China banned trading in bitcoin, with the first steps taken in September 2017, and a complete ban
starting 1 February 2018. Bitcoin prices then fell from $9,052 to $6,914 on 5 February 2018.[35]
The percentage of bitcoin trading in renminbi fell from over 90% in September 2017 to less than
1% in June.[58]

Throughout the rest of the first half of 2018, bitcoin's price fluctuated between $11,480 and
$5,848. On 1 July 2018 bitcoin's price was $6,469.[59][60]

Bitcoin prices were negatively affected by several hacks or thefts from cryptocurrency
exchanges, including thefts from Coincheck in January 2018, Coinrail and Bithumb in June, and
Bancor in July. For the first six months of 2018, $761 million worth of cryptocurrencies was
reported stolen from exchanges.[61] Bitcoin's price was affected even though other
cryptocurrencies were stolen at Coinrail and Bancor, as investors worried about the security of
cryptocurrency exchanges.[62][63][64]

In November 2018, the state of Ohio, in the United States, became the first North American
government agency to allow businesses to pay various state taxes through an intermediary that
converts bitcoin into dollars.[65]

Design

Blockchain

For a broader coverage of this topic, see Blockchain.

Number of bitcoin transactions per month (logarithmic scale)[66]

8
Number of unspent transaction outputs

The bitcoin blockchain is a public ledger that records bitcoin transactions.[67] It is implemented
as a chain of blocks, each block containing a hash of the previous block up to the genesis block[a]
of the chain. A network of communicating nodes running bitcoin software maintains the
blockchain.[31]:215–219 Transactions of the form payer X sends Y bitcoins to payee Z are
broadcast to this network using readily available software applications.

Network nodes can validate transactions, add them to their copy of the ledger, and then broadcast
these ledger additions to other nodes. To achieve independent verification of the chain of
ownership each network node stores its own copy of the blockchain.[68] About every 10 minutes,
a new group of accepted transactions, called a block, is created, added to the blockchain, and
quickly published to all nodes, without requiring central oversight. This allows bitcoin software
to determine when a particular bitcoin was spent, which is needed to prevent double-spending. A
conventional ledger records the transfers of actual bills or promissory notes that exist apart from
it, but the blockchain is the only place that bitcoins can be said to exist in the form of unspent
outputs of transactions.[3]:ch. 5

Transactions

See also: Bitcoin network

Transactions are defined using a Forth-like scripting language.[3]:ch. 5 Transactions consist of

one or more inputs and one or more outputs. When a user sends bitcoins, the user designates each
address and the amount of bitcoin being sent to that address in an output. To prevent double
spending, each input must refer to a previous unspent output in the blockchain.[69] The use of
multiple inputs corresponds to the use of multiple coins in a cash transaction. Since transactions
can have multiple outputs, users can send bitcoins to multiple recipients in one transaction. As in
a cash transaction, the sum of inputs (coins used to pay) can exceed the intended sum of
payments. In such a case, an additional output is used, returning the change back to the payer.[69]
Any input satoshis not accounted for in the transaction outputs become the transaction fee.[69]

Units

The unit of account of the bitcoin system is a bitcoin. Ticker symbols used to represent bitcoin
are BTC[b] and XBT.[c][74]:2 Small amounts of bitcoin used as alternative units are millibitcoin
(mBTC), and satoshi (sat). Named in homage to bitcoin's creator, a satoshi is the smallest amount
within bitcoin representing 0.00000001 bitcoins, one hundred millionth of a bitcoin.[2] A

9
millibitcoin equals 0.001 bitcoins, one thousandth of a bitcoin or 100000 satoshis.[75] Its
Unicode character is ₿.[1]

Transaction fees

Though transaction fees are optional, miners can choose which transactions to process and
prioritize those that pay higher fees.[69] Miners may choose transactions based on the fee paid
relative to their storage size, not the absolute amount of money paid as a fee. These fees are
generally measured in satoshis per byte (sat/b). The size of transactions is dependent on the
number of inputs used to create the transaction, and the number of outputs.[3]:ch. 8

Ownership

Simplified chain of ownership as illustrated in the Bitcoin whitepaper.[5] In practice, a

transaction can have more than one input and more than one output.[69]

In the blockchain, bitcoins are registered to bitcoin addresses. Creating a bitcoin address requires
nothing more than picking a random valid private key and computing the corresponding bitcoin
address. This computation can be done in a split second. But the reverse, computing the private
key of a given bitcoin address, is mathematically unfeasible. Users can tell others or make public
a bitcoin address without compromising its corresponding private key. Moreover, the number of
valid private keys is so vast that it is extremely unlikely someone will compute a key-pair that is
already in use and has funds. The vast number of valid private keys makes it unfeasible that brute
force could be used to compromise a private key. To be able to spend their bitcoins, the owner
must know the corresponding private key and digitally sign the transaction. The network verifies
the signature using the public key.[3]:ch. 5

If the private key is lost, the bitcoin network will not recognize any other evidence of
ownership;[31] the coins are then unusable, and effectively lost. For example, in 2013 one user
claimed to have lost 7,500 bitcoins, worth $7.5 million at the time, when he accidentally
discarded a hard drive containing his private key.[76] A backup of his key(s) would have
prevented this.

10
About 20% of all bitcoins are believed to be lost. They would have a market value of about $20
billion at July 2018 prices.[77][78] Approximately one million bitcoins, valued at $7 billion in
July 2018, have been stolen.[79]

Mining

Early bitcoin miners used GPUs for mining, as they were better suited to the proof-of-work
algorithm than CPUs.[80]

Amateur bitcoin mining with specialized ASIC chips. This was when mining difficulty was much
lower, and this is no longer feasible.

Today, bitcoin mining companies dedicate facilities to housing and operating high performance
mining hardware.[81]

Semi-log plot of relative mining difficulty[d][66]

Mining is a record-keeping service done through the use of computer processing power.[e]
Miners keep the blockchain consistent, complete, and unalterable by repeatedly grouping newly
broadcast transactions into a block, which is then broadcast to the network and verified by
recipient nodes.[67] Each block contains a SHA-256 cryptographic hash of the previous
block,[67] thus linking it to the previous block and giving the blockchain its name.[3]:ch. 7[67]

To be accepted by the rest of the network, a new block must contain a proof-of-work (PoW).[67]
The system used is based on Adam Back's 1997 anti-spam scheme, Hashcash.[5][83] The PoW
requires miners to find a number called a nonce, such that when the block content is hashed along
with the nonce, the result is numerically smaller than the network's difficulty target.[3]:ch. 8 This
proof is easy for any node in the network to verify, but extremely time-consuming to generate, as
for a secure cryptographic hash, miners must try many different nonce values (usually the
sequence of tested values is the ascending natural numbers: 0, 1, 2, 3, ...[3]:ch. 8) before meeting
the difficulty target.

11
Every 2,016 blocks (approximately 14 days at roughly 10 min per block), the difficulty target is
adjusted based on the network's recent performance, with the aim of keeping the average time
between new blocks at ten minutes. In this way the system automatically adapts to the total
amount of mining power on the network.[3]:ch. 8 Between 1 March 2014 and 1 March 2015, the
average number of nonces miners had to try before creating a new block increased from 16.4
quintillion to 200.5 quintillion.[84]

The proof-of-work system, alongside the chaining of blocks, makes modifications of the
blockchain extremely hard, as an attacker must modify all subsequent blocks in order for the
modifications of one block to be accepted.[85] As new blocks are mined all the time, the
difficulty of modifying a block increases as time passes and the number of subsequent blocks
(also called confirmations of the given block) increases.[67]

Pooled mining

For a broader coverage of this topic, see Mining pool.

Computing power is often bundled together or "pooled" to reduce variance in miner income.
Individual mining rigs often have to wait for long periods to confirm a block of transactions and
receive payment. In a pool, all participating miners get paid every time a participating server
solves a block. This payment depends on the amount of work an individual miner contributed to
help find that block.[86]

Supply

Total bitcoins in circulation.[66]

The successful miner finding the new block is rewarded with newly created bitcoins and
transaction fees.[87] As of 9 July 2016,[88] the reward amounted to 12.5 newly created bitcoins
per block added to the blockchain. To claim the reward, a special transaction called a coinbase is
included with the processed payments.[3]:ch. 8 All bitcoins in existence have been created in
such coinbase transactions. The bitcoin protocol specifies that the reward for adding a block will
be halved every 210,000 blocks (approximately every four years). Eventually, the reward will
decrease to zero, and the limit of 21 million bitcoins[f] will be reached c. 2140; the record
keeping will then be rewarded solely by transaction fees.[89]

12
In other words, bitcoin's inventor Nakamoto set a monetary policy based on artificial scarcity at
bitcoin's inception that there would only ever be 21 million bitcoins in total. Their numbers are
being released roughly every ten minutes and the rate at which they are generated would drop by
half every four years until all were in circulation.[90]

Wallets

For a broader coverage of this topic, see Cryptocurrency wallet.

Bitcoin Core, a full client

Electrum, a lightweight client

A paper wallet with the credentials required to send and receive bitcoin payments printed to the
page as 2D barcodes

A brass token with credentials usable to redeem bitcoins hidden beneath a tamper-evident
security hologram

A hardware wallet peripheral which processes bitcoin payments without exposing any credentials
to the computer

A wallet stores the information necessary to transact bitcoins. While wallets are often described
as a place to hold[91] or store bitcoins,[92] due to the nature of the system, bitcoins are
inseparable from the blockchain transaction ledger. A better way to describe a wallet is
something that "stores the digital credentials for your bitcoin holdings"[92] and allows one to
access (and spend) them. Bitcoin uses public-key cryptography, in which two cryptographic keys,
one public and one private, are generated.[93] At its most basic, a wallet is a collection of these
keys.

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

13
Full clients verify transactions directly by downloading a full copy of the blockchain (over 150
GB As of January 2018).[94] They are the most secure and reliable way of using the network, as
trust in external parties is not required. Full clients check the validity of mined blocks, preventing
them from transacting on a chain that breaks or alters network rules.[95] Because of its size and
complexity, downloading and verifying the entire blockchain is not suitable for all computing
devices.

Lightweight clients consult full clients to send and receive transactions without requiring a local
copy of the entire blockchain (see simplified payment verification – SPV). This makes
lightweight clients much faster to set up and allows them to be used on low-power, low-
bandwidth devices such as smartphones. When using a lightweight wallet, however, the user
must trust the server to a certain degree, as it can report faulty values back to the user.
Lightweight clients follow the longest blockchain and do not ensure it is valid, requiring trust in
miners.[96]

Third-party internet services called online wallets offer similar functionality but may be easier to
use. In this case, credentials to access funds are stored with the online wallet provider rather than
on the user's hardware.[97][98] As a result, the user must have complete trust in the wallet
provider. A malicious provider or a breach in server security may cause entrusted bitcoins to be
stolen. An example of such a security breach occurred with Mt. Gox in 2011.[99] This has led to
the often-repeated meme "Not your keys, not your bitcoin".[100]

Physical wallets store the credentials necessary to spend bitcoins offline.[92] One notable
example was a novelty coin with these credentials printed on the reverse side.[101] Paper wallets
are simply paper printouts.

Another type of wallet called a hardware wallet keeps credentials offline while facilitating
transactions.[102]

Implementations

Further information: Bitcoin Core

The first wallet program, simply named Bitcoin, and sometimes referred to as the Satoshi client,
was released in 2009 by Satoshi Nakamoto as open-source software.[10] In version 0.5 the client
moved from the wxWidgets user interface toolkit to Qt, and the whole bundle was referred to as

14
Bitcoin-Qt.[103] After the release of version 0.9, the software bundle was renamed Bitcoin Core
to distinguish itself from the underlying network.[104][105]

Forks

See also: Fork (blockchain) and List of bitcoin forks

Bitcoin Core is, perhaps, the best known implementation or client. Alternative clients (forks of
Bitcoin Core) exist, such as Bitcoin XT, Bitcoin Unlimited,[30] and Parity Bitcoin.[106]

On 1 August 2017, a hard fork of bitcoin was created, known as Bitcoin Cash.[107] Bitcoin Cash
has a larger block size limit and had an identical blockchain at the time of fork. On 24 October
2017 another hard fork, Bitcoin Gold, was created. Bitcoin Gold changes the proof-of-work
algorithm used in mining, as the developers felt that mining had become too specialized.[108]

Decentralization and centralization

Decentralization

Bitcoin does not have a central authority and the bitcoin network is decentralized:[7]

There is no central server, bitcoin network is peer-to-peer.[10]

There is no central storage, bitcoin ledger is distributed.[109]

The ledger is public, anybody can store it on their computer.[3]:ch. 1

There is no single administrator,[7] the ledger is maintained by a network of equally privileged

miners.[3]:ch. 1

Anybody can become a miner.[3]:ch. 1

The additions to the ledger are maintained through competition. Until a new block is added to the
ledger, it is not known which miner will create the block.[3]:ch. 1

The issuance of bitcoins is decentralized. They are issued as a reward for the creation of a new
block.[87]

Anybody can create a new bitcoin address (a bitcoin counterpart of a bank account) without
needing any approval.[3]:ch. 1
15
Anybody can send a transaction to the network without needing any approval, the network
merely confirms that the transaction is legitimate.[110]:32

Trend towards centralization

Researchers have pointed out at a "trend towards centralization". Although bitcoin can be sent
directly to the bitcoin network, in practice intermediaries are widely used.[31]:220–222 Bitcoin
miners join large mining pools to minimize the variance of their income.[31]:215, 219–
222[111]:3[112] Because transactions on the network are confirmed by miners, decentralization
of the network requires that no single miner or mining pool obtains 51% of the hashing power,
which would allow them to double-spend coins, prevent certain transactions from being verified
and prevent other miners from earning income.[113] As of 2013 just six mining pools controlled
75% of overall bitcoin hashing power.[113] In 2014 mining pool Ghash.io obtained 51% hashing
power which raised significant controversies about the safety of the network. The pool has
voluntarily capped their hashing power at 39.99% and requested other pools to act responsibly for
the benefit of the whole network.[114]

According to researchers, other parts of the ecosystem are also "controlled by a small set of
entities", notably the maintenance of the official client software, online wallets and simplified
payment verification (SPV) clients.[113]

Privacy

Bitcoin is pseudonymous, meaning that funds are not tied to real-world entities but rather bitcoin
addresses. Owners of bitcoin addresses are not explicitly identified, but all transactions on the
blockchain are public. In addition, transactions can be linked to individuals and companies
through "idioms of use" (e.g., transactions that spend coins from multiple inputs indicate that the
inputs may have a common owner) and corroborating public transaction data with known
information on owners of certain addresses.[115] Additionally, bitcoin exchanges, where bitcoins
are traded for traditional currencies, may be required by law to collect personal information.[116]

To heighten financial privacy, a new bitcoin address can be generated for each transaction.[117]
For example, hierarchical deterministic wallets generate pseudorandom "rolling addresses" for
every transaction from a single seed, while only requiring a single passphrase to be remembered
to recover all corresponding private keys.[118] Researchers at Stanford and Concordia
universities have also shown that bitcoin exchanges and other entities can prove assets, liabilities,
and solvency without revealing their addresses using zero-knowledge proofs.[119]
"Bulletproofs," a version of Confidential Transactions proposed by Greg Maxwell, have been

16
tested by Professor Dan Boneh of Stanford.[120] Other solutions such Merkelized Abstract
Syntax Trees (MAST), pay-to-script-hash (P2SH) with MERKLE-BRANCH-VERIFY, and "Tail
Call Execution Semantics", have also been proposed to support private smart contracts.

Fungibility

Wallets and similar software technically handle all bitcoins as equivalent, establishing the basic
level of fungibility. Researchers have pointed out that the history of each bitcoin is registered and
publicly available in the blockchain ledger, and that some users may refuse to accept bitcoins
coming from controversial transactions, which would harm bitcoin's fungibility.[121]

Scalability

Main article: Bitcoin scalability problem

The blocks in the blockchain were originally limited to 32 megabytes in size. The block size limit
of one megabyte was introduced by Satoshi Nakamoto in 2010. Eventually the block size limit of
one megabyte created problems for transaction processing, such as increasing transaction fees
and delayed processing of transactions.[122]

On 24 August 2017 (at block 481,824), Segregated Witness (SegWit) went live. Transactions
contain some data which is only used to verify the transaction, and does not otherwise effect the
movement of coins. SegWit introduced a new transaction format that moved this data into a new
field in a backwards-compatible way. The segregated data, the so-called witness, is not sent to
non-SegWit nodes and therefore does not form part of the blockchain as seen by legacy nodes.
This lowers the size of the average transaction in such nodes' view, thereby increasing the block
size without incurring the hard fork implied by other proposals for block size increases. Thus, per
computer scientist Jochen Hoenicke, the actual block capacity depends on the ratio of SegWit
transactions in the block, and on the ratio of signature data. Based on his estimate, if the ratio of
SegWit transactions is 50%, the block capacity may be 1.25 megabytes. According to Hoenicke,
if native SegWit addresses from Bitcoin Core version 0.16.0 are used, and SegWit adoption
reaches 90% to 95%, a block size of up to 1.8 megabytes is possible.[citation needed]

Ideology

17
Satoshi Nakamoto stated in his white paper that: "The root problem with conventional currencies
is all the trust that’s required to make it work. The central bank must be trusted not to debase the
currency, but the history of fiat currencies is full of breaches of that trust."[123]

Austrian economics

According to the European Central Bank, the decentralization of money offered by bitcoin has its
theoretical roots in the Austrian school of economics, especially with Friedrich von Hayek in his
book Denationalisation of Money: The Argument Refined,[124] in which he advocates a
complete free market in the production, distribution and management of money to end the
monopoly of central banks.[125]:22

Anarchist and libertarian theories

Further information: Crypto-anarchism

According to The New York Times, libertarians and anarchists were attracted to the idea. Early
bitcoin supporter Roger Ver said: "At first, almost everyone who got involved did so for
philosophical reasons. We saw bitcoin as a great idea, as a way to separate money from the
state."[123] The Economist describes bitcoin as "a techno-anarchist project to create an online
version of cash, a way for people to transact without the possibility of interference from
malicious governments or banks".[126]

External video

The Declaration Of Bitcoin's Independence, BraveTheWorld, 4:38[127]

Nigel Dodd argues in The Social Life of Bitcoin that the essence of the bitcoin ideology is to
remove money from social, as well as governmental, control.[128] Dodd quotes a YouTube
video, with Roger Ver, Jeff Berwick, Charlie Shrem, Andreas Antonopoulos, Gavin Wood, Trace
Meyer and other proponents of bitcoin reading The Declaration of Bitcoin's Independence. The
declaration includes a message of crypto-anarchism with the words: "Bitcoin is inherently anti-
establishment, anti-system, and anti-state. Bitcoin undermines governments and disrupts
institutions because bitcoin is fundamentally humanitarian."[128][127]

David Golumbia says that the ideas influencing bitcoin advocates emerge from right-wing
extremist movements such as the Liberty Lobby and the John Birch Society and their anti-Central

18
Bank rhetoric, or, more recently, Ron Paul and Tea Party-style libertarianism.[129] Steve
Bannon, who owns a "good stake" in bitcoin, considers it to be "disruptive populism. It takes
control back from central authorities. It's revolutionary."[130]

However, researchers looking to uncover the reasons for interest in bitcoin did not find evidence
in Google search data that this was linked to libertarianism.[131]

Economics

Main article: Economics of bitcoin

Bitcoin is a digital asset designed to work in peer-to-peer transactions as a currency.[5][132]

Bitcoins have three qualities useful in a currency, according to The Economist in January 2015:
they are "hard to earn, limited in supply and easy to verify".[133] However, as of 2015 bitcoin
functions more as a payment processor than as a currency.[134][31]

Economists define money as a store of value, a medium of exchange, and a unit of account.[135]
According to The Economist in 2014, bitcoin functions best as a medium of exchange.[135]
However, this is debated,[136] and a 2018 assessment by The Economist found that
cryptocurrencies met none of these three criteria.[126]

Liquidity (estimated, USD/year, logarithmic scale).[66]

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

Acceptance by merchants

The overwhelming majority of bitcoin transactions take place on a cryptocurrency exchange,

rather than being used in transactions with merchants.[137] Delays processing payments through
the blockchain of about ten minutes make bitcoin use very difficult in a retail setting. Prices are
not usually quoted in units of bitcoin and many trades involve one, or sometimes two,

19
conversions into conventional currencies.[31] Merchants that do accept bitcoin payments may
use payment service providers to perform the conversions.[138]

In 2017 and 2018 bitcoin's acceptance among major online retailers included only three of the top
500 U.S. online merchants, down from five in 2016.[137] Reasons for this decline include high
transaction fees due to bitcoin's scalability issues and long transaction times.[139]

Bloomberg reported that the largest 17 crypto merchant-processing services handled $69 million
in June 2018, down from $411 million in September 2017. Bitcoin is "not actually usable" for
retail transactions because of high costs and the inability to process chargebacks, according to
Nicholas Weaver, a researcher quoted by Bloomberg. High price volatility and transaction fees
make paying for small retail purchases with bitcoin impractical, according to economist Kim
Grauer. However, bitcoin continues to be used for large-item purchases on sites such as
Overstock.com, and for cross-border payments to freelancers and other vendors.[140]

Financial institutions

Bitcoins can be bought on digital currency exchanges.

Bitcoin has not gained acceptance for use in international remittances despite high fees charged
by banks and Western Union who compete in this market. Unlike bitcoin, these competitors
accept and dispense cash and do not require the use of the Internet which is a distinct advantage
in lower income countries.[31]

In 2014, the National Australia Bank closed accounts of businesses with ties to bitcoin,[141] and
HSBC refused to serve a hedge fund with links to bitcoin.[142] Australian banks in general have
been reported as closing down bank accounts of operators of businesses involving the
currency.[143]

Plans were announced to include a bitcoin futures option on the Chicago Mercantile Exchange in
2017.[144] Trading in bitcoin futures was announced to begin on 10 December 2017.[145]

20
As an investment

The Winklevoss twins have purchased bitcoin. In 2013 The Washington Post reported a claim
that they owned 1% of all the bitcoins in existence at the time.[146]

Other methods of investment are bitcoin funds. The first regulated bitcoin fund was established in
Jersey in July 2014 and approved by the Jersey Financial Services Commission.[147]

In 2013 and 2014, the European Banking Authority[148] and the Financial Industry Regulatory
Authority (FINRA), a United States self-regulatory organization,[149] warned that investing in
bitcoins carries significant risks. Forbes named bitcoin the best investment of 2013.[150] In 2014,
Bloomberg named bitcoin one of its worst investments of the year.[151] In 2015, bitcoin topped
Bloomberg's currency tables.[152]

According to bitinfocharts.com, in 2017 there are 9,272 bitcoin wallets with more than $1 million
worth of bitcoins.[153] The exact number of bitcoin millionaires is uncertain as a single person
can have more than one bitcoin wallet.

Venture capital

Venture capitalists, such as Peter Thiel's Founders Fund, which invested US$3 million in BitPay,
do not purchase bitcoins themselves, but instead fund bitcoin infrastructure that provides payment
systems to merchants, exchanges, wallet services, etc.[154] In 2012, an incubator for bitcoin-
focused start-ups was founded by Adam Draper, with financing help from his father, venture
capitalist Tim Draper, one of the largest bitcoin holders after winning an auction of 30,000
bitcoins,[155] at the time called "mystery buyer".[156] The company's goal is to fund 100 bitcoin
businesses within 2–3 years with $10,000 to $20,000 for a 6% stake.[155] Investors also invest in
bitcoin mining.[157] According to a 2015 study by Paolo Tasca, bitcoin startups raised almost $1
billion in three years (Q1 2012 – Q1 2015).[158]

Price and volatility

Bitcoin price bubbles in 2011, 2013 and 2017

21
Price[g] (left y-axis, logarithmic scale) and volatility[h] (right y-axis).[66]

The price of bitcoins has gone through cycles of appreciation and depreciation referred to by
some as bubbles and busts.[159] In 2011, the value of one bitcoin rapidly rose from about
US$0.30 to US$32 before returning to US$2.[160] In the latter half of 2012 and during the 2012–
13 Cypriot financial crisis, the bitcoin price began to rise,[161] reaching a high of US$266 on 10
April 2013, before crashing to around US$50.[162] On 29 November 2013, the cost of one
bitcoin rose to a peak of US$1,242.[163] In 2014, the price fell sharply, and as of April remained
depressed at little more than half 2013 prices. As of August 2014 it was under US$600.[164]
During their time as bitcoin developers, Gavin Andresen[165] and Mike Hearn[166] warned that
bubbles may occur.

According to Mark T. Williams, as of 2014, bitcoin has volatility seven times greater than gold,
eight times greater than the S&P 500, and 18 times greater than the US dollar.[167]

Legal status, tax and regulation

Main article: Legality of bitcoin by country or territory

Because of bitcoin's decentralized nature and its trading on online exchanges located in many
countries, regulation of bitcoin has been difficult. However, the use of bitcoin can be
criminalized, and shutting down exchanges and the peer-to-peer economy in a given country
would constitute a de facto ban.[168] The legal status of bitcoin varies substantially from country
to country and is still undefined or changing in many of them. Regulations and bans that apply to
bitcoin probably extend to similar cryptocurrency systems.[169]

According to the Library of Congress, an "absolute ban" on trading or using cryptocurrencies

applies in eight countries: Algeria, Bolivia, Egypt, Iraq, Morocco, Nepal, Pakistan, and the
United Arab Emirates. An "implicit ban" applies in another 15 countries, which include Bahrain,
Bangladesh, China, Colombia, the Dominican Republic, Indonesia, Iran, Kuwait, Lesotho,
Lithuania, Macau, Oman, Qatar, Saudi Arabia and Taiwan.[170]

Seventeen other countries have similar AML requirements.[170] As of 2018 U.S. FinCEN
receives more than 1,500 SARs per month involving cryptocurrencies.[171]

22
Regulatory warnings

The U.S. Commodity Futures Trading Commission has issued four "Customer Advisories" for
bitcoin and related investments.[14] A July 2018 warning emphasized that trading in any
cryptocurrency is often speculative, and there is a risk of theft from hacking, and fraud.[172] A
February 2018 advisory warned against investing an IRA fund into virtual currencies.[173] A
December 2017 advisory warned that virtual currencies are risky because:

the exchanges are not regulated or supervised by a government agency

the exchanges may lack system safeguards and customer protections

large price swings and "flash crashes"

market manipulation

theft and hacking

self-dealing by the exchanges[174]

The U.S. Securities and Exchange Commission has also issued warnings. A May 2014 "Investor
Alert" warned that investments involving bitcoin might have high rates of fraud, and that
investors might be solicited on social media sites.[175] An earlier "Investor Alert" warned about
the use of bitcoin in Ponzi schemes.[176]

The European Banking Authority issued a warning in 2013 focusing on the lack of regulation of
bitcoin, the chance that exchanges would be hacked, the volatility of bitcoin's price, and general
fraud.[148]

The self-regulatory organization FINRA and the North American Securities Administrators
Association have both issued investor alerts about bitcoin.[177][178]

Price manipulation investigation

An official investigation into bitcoin traders was reported in May 2018.[179] The U.S. Justice
Department launched an investigation into possible price manipulation, including the techniques
of spoofing and wash trades.[180][181][182] Traders in the U.S., the U.K, South Korea, and

23
possibly other countries are being investigated.[179] Brett Redfearn, head of the U.S. Securities
and Exchange Commission's Division of Trading and Markets, had identified several
manipulation techniques of concern in March 2018.

The U.S. federal investigation was prompted by concerns of possible manipulation during futures
settlement dates. The final settlement price of CME bitcoin futures is determined by prices on
four exchanges, Bitstamp, Coinbase, itBit and Kraken. Following the first delivery date in
January 2018, the CME requested extensive detailed trading information but several of the
exchanges refused to provide it and later provided only limited data. The Commodity Futures
Trading Commission then subpoenaed the data from the exchanges.[183][184]

State and provincial securities regulators, coordinated through the North American Securities
Administrators Association, are investigating "bitcoin scams" and ICOs in 40 jurisdictions.[185]

Academic research published in the Journal of Monetary Economics concluded that price
manipulation occurred during the Mt Gox bitcoin theft and that the market remains vulnerable to
manipulation.[186] The history of hacks, fraud and theft involving bitcoin dates back to at least
2011.[187]

Research by John M. Griffin and Amin Shams in 2018 suggests that trading associated with
increases in the amount of the Tether cryptocurrency and associated trading at the Bitfinex
exchange account for about half of the price increase in bitcoin in late 2017.[188][189]

J.L. van der Velde, CEO of both Bitfinex and Tether, denied the claims of price manipulation:
"Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation. Tether
issuances cannot be used to prop up the price of bitcoin or any other coin/token on
Bitfinex."[190]

Criticism

External video

24
Cryptocurrencies: looking beyond the hype, Hyun Song Shin, Bank for International
Settlements, 2:48[191]

The Bank for International Settlements summarized several criticisms of bitcoin in Chapter V of
their 2018 annual report. The criticisms include the lack of stability in bitcoin's price, the high
energy consumption, high and variable transactions costs, the poor security and fraud at
cryptocurrency exchanges, vulnerability to debasement (from forking), and the influence of
miners.[191][192][193]

The Economist wrote in 2015 that these criticisms are unfair, predominantly because the shady
image may compel users to overlook the capabilities of the blockchain technology, but also due
to the fact that the volatility of bitcoin is changing in time.[194]

Identification as a speculative bubble

Main article: Cryptocurrency bubble

Bitcoin and other cryptocurrencies have been identified as economic bubbles by at least eight
Nobel Memorial Prize in Economic Sciences laureates, including Robert Shiller,[195] Joseph
Stiglitz,[196] and Richard Thaler.[197][13] Noted Keyensian economist Paul Krugman wrote in
his New York Times column criticizing bitcoin, calling it a bubble and a fraud;[198] and
professor Nouriel Roubini of New York University called bitcoin the "mother of all
bubbles."[199] Central bankers, including former Federal Reserve Chairman Alan
Greenspan,[200] investors such as Warren Buffett,[201][202] and George Soros[203] have stated
similar views, as have business executives such as Jamie Dimon and Jack Ma.[204]

Energy consumption

Bitcoin has been criticized for the amount of electricity consumed by mining. As of 2015, The
Economist estimated that even if all miners used modern facilities, the combined electricity
consumption would be 166.7 megawatts (1.46 terawatt-hours per year).[133] At the end of 2017,
the global bitcoin mining activity was estimated to consume between one and four gigawatts of
electricity.[205] Politico noted that the even high-end estimates of bitcoin's total consumption
levels amount to only about 6% of the total power consumed by the global banking sector, and
even if bitcoin's consumption levels increased 100 fold from today's levels, bitcoin's consumption
would still only amount to about 2% of global power consumption.[206]

25
To lower the costs, bitcoin miners have set up in places like Iceland where geothermal energy is
cheap and cooling Arctic air is free.[207] Bitcoin miners are known to use hydroelectric power in
Tibet, Quebec, Washington (state), and Austria to reduce electricity costs.[206][208][209][210]
Miners are attracted to suppliers such as Hydro Quebec that have energy surpluses.[211]
According to a University of Cambridge study, much of bitcoin mining is done in China, where
electricity is subsidized by the government.[212][213]

Ponzi scheme and pyramid scheme concerns

Various journalists,[207][214] economists,[215][216] and the central bank of Estonia[217] have

voiced concerns that bitcoin is a Ponzi scheme. In 2013, Eric Posner, a law professor at the
University of Chicago, stated that "a real Ponzi scheme takes fraud; bitcoin, by contrast, seems
more like a collective delusion."[218] A 2014 report by the World Bank concluded that bitcoin
was not a deliberate Ponzi scheme.[219]:7 The Swiss Federal Council[220]:21 examined the
concerns that bitcoin might be a pyramid scheme; it concluded that, "Since in the case of bitcoin
the typical promises of profits are lacking, it cannot be assumed that bitcoin is a pyramid
scheme." In July 2017, billionaire Howard Marks referred to bitcoin as a pyramid scheme.[221]

Security issues

Main article: Cryptocurrency and security

Bitcoin is vulnerable to theft through phishing, scamming, and hacking. As of December 2017,
around 980,000 bitcoins have been stolen from cryptocurrency exchanges.[222]

Use in illegal transactions

See also: Bitcoin network § Alleged criminal activity

The use of bitcoin by criminals has attracted the attention of financial regulators, legislative
bodies, law enforcement, and the media.[223] In the United States, the FBI prepared an
intelligence assessment,[224] the SEC issued a pointed warning about investment schemes using
virtual currencies,[223] and the U.S. Senate held a hearing on virtual currencies in November
2013.[225] The U.S. government claimed that bitcoin was used to facilitate payments related to
Russian interference in the 2016 United States elections.[226]

26
Several news outlets have asserted that the popularity of bitcoins hinges on the ability to use them
to purchase illegal goods.[132][227] Nobel-prize winning economist Joseph Stiglitz says that
bitcoin's anonymity encourages money laundering and other crimes, "If you open up a hole like
bitcoin, then all the nefarious activity will go through that hole, and no government can allow
that." He's also said that if "you regulate it so you couldn’t engage in money laundering and all
these other [crimes], there will be no demand for Bitcoin. By regulating the abuses, you are going
to regulate it out of existence. It exists because of the abuses."[228][229]

In 2014, researchers at the University of Kentucky found "robust evidence that computer
programming enthusiasts and illegal activity drive interest in bitcoin, and find limited or no
support for political and investment motives".[131] Australian researchers have estimated that
25% of all bitcoin users and 44% of all bitcoin transactions are associated with illegal activity as
of April 2017. There were an estimated 24 million bitcoin users primarily using bitcoin for illegal
activity. They held $8 billion worth of bitcoin, and made 36 million transactions valued at $72
billion.[230][231] A group of researches analyzed bitcoin transactions in 2016 and came to a
conclusion that "some recent concerns regarding the use of bitcoin for illegal transactions at the
present time might be overstated".[232]

Advertising bans

Bitcoin and other cryptocurrency advertisements are banned on Facebook,[233] Google,

Twitter,[234] Bing,[235] Snapchat, LinkedIn, and MailChimp.[236] Chinese internet platforms
Baidu, Tencent, and Weibo have also prohibited bitcoin advertisements. The Japanese platform
Line and the Russian platform Yandex have similar prohibitions.[237]

In popular culture

Literature

In Charles Stross' 2013 science fiction novel, Neptune's Brood, the universal interstellar payment
system is known as "bitcoin" and operates using cryptography.[238] Stross later blogged that the
reference was intentional, saying "I wrote Neptune's Brood in 2011. Bitcoin was obscure back
then, and I figured had just enough name recognition to be a useful term for an interstellar
currency: it'd clue people in that it was a networked digital currency."[239]

Film

27
The 2014 documentary The Rise and Rise of Bitcoin portrays the diversity of motives behind the
use of bitcoin by interviewing people who use it. These include a computer programmer and a
drug dealer.[240] The 2016 documentary Banking on Bitcoin is an introduction to the beginnings
of bitcoin and the ideas behind cryptocurrency today.[241]

Academia

In September 2015, the establishment of the peer-reviewed academic journal Ledger (ISSN 2379-
5980) was announced. It covers studies of cryptocurrencies and related technologies, and is
published by the University of Pittsburgh.[242] The journal encourages authors to digitally sign a
file hash of submitted papers, which will then be timestamped into the bitcoin blockchain.
Authors are also asked to include a personal bitcoin address in the first page of their
papers.[243][244]

28