Bitcoin: the future money, or a scam?


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Overview of what Bitcoin is, how it works, and what it's worth

Published in: Economy & Finance, Business
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  • Bitcoin price is volatileThe price of a bitcoin can unpredictably increase or decrease over a short period of time due to its young economy, novel nature, and sometimes illiquid markets. Consequently, keeping your savings with Bitcoin is not recommended at this point. Bitcoin should be seen like a high risk asset, and you should never store money that you cannot afford to lose with Bitcoin. If you receive payments with Bitcoin, many service providers can convert them to your local currency.Bitcoin payments are irreversibleAny transaction issued with Bitcoin cannot be reversed, they can only be refunded by the person receiving the funds. That means you should take care to do business with people and organizations you know and trust, or who have an established reputation. For their part, businesses need to keep control of the payment requests they are displaying to their customers. Bitcoin can detect typos and usually won't let you send money to an invalid address by mistake. Additional services might exist in the future to provide more choice and protection for the consumer.Bitcoin is not anonymousSome effort is required to protect your privacy with Bitcoin. All Bitcoin transactions are stored publicly and permanently on the network, which means anyone can see the balance and transactions of any Bitcoin address. However, the identity of the user behind an address remains unknown until information is revealed during a purchase or in other circumstances. This is one reason why Bitcoin addresses should only be used once. Always remember that it is your responsibility to adopt good practices in order to protect your privacy. Read more about protecting your privacy.Instant transactions are less secureA Bitcoin transaction is usually deployed within a few seconds and begins to be confirmed in the following 10 minutes. During that time, a transaction can be considered authentic but still reversible. Dishonest users could try to cheat. If you can't wait for a confirmation, asking for a small transaction fee or using a detection system for unsafe transactions can increase security. For larger amounts like 1000 US$, it makes sense to wait for 6 confirmations or more. Each confirmationexponentially decreases the risk of a reversed transaction.Bitcoin is still experimentalBitcoin is an experimental new currency that is in active development. Although it becomes less experimental as usage grows, you should keep in mind that Bitcoin is a new invention that is exploring ideas that have never been attempted before. As such, its future cannot be predicted by anyone.
  • Software walletsSoftware wallets are installed on your computer. They give you complete control over your wallet. You are responsible for protecting your money and doing backups.Mobile walletsMobile wallets allow you to bring Bitcoin with you in your pocket. You can exchange coins easily and pay in physical stores by scanning a QR code or using NFC "tap to pay".Web walletsWeb wallets allow you to use Bitcoin anywhere with less effort to protect your wallet. However, you must choose your web wallet with care as they host your bitcoins.
  • Multi-signature to protect against theftBitcoin includes a multi-signature feature that allows a transaction to require the signature of more than one private key to be spent. It is currently only usable for technical users but a greater availability for this feature can be expected in the future. Multi-signature can, for example, allow an organization to give access to its treasury to its members while only allowing a withdrawal if 3 of 5 members sign the transaction. It can also allow future online wallets to share a multi-signature address with their users, so that a thief would need to compromise both your computer and the online wallet servers in order to steal your funds.Think about your testamentYour bitcoins can be lost forever if you don't have a backup plan for your peers and family. If the location of your wallets or your passwords are not known by anyone when you are gone, there is no hope that your funds will ever be recovered. Taking a bit of time on these matters can make a huge difference.
  • As a new user, you can get started with Bitcoin without understanding the technical details. Once you have installed a Bitcoin wallet on your computer or mobile phone, it will generate your first Bitcoin address and you can create more whenever you need one. You can disclose your addresses to your friends so that they can pay you or vice versa. In fact, this is pretty similar to how email works, except that Bitcoin addresses should only be used once.
  • A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet. The signature also prevents the transaction from being altered by anybody once it has been issued. All transactions are broadcast between users and usually begin to be confirmed by the network in the following 10 minutes, through a process called mining.From original paper:We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership.
  • The block chain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the block chain. This way, Bitcoin wallets can calculate their spendable balance and new transactions can be verified to be spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the block chain are enforced with cryptography.
  • Mining is a distributed consensus system that is used to confirm waiting transactions by including them in the block chain. It enforces a chronological order in the block chain, protects the neutrality of the network, and allows different computers to agree on the state of the system. To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. These rules prevent previous blocks from being modified because doing so would invalidate all following blocks. Mining also creates the equivalent of a competitive lottery that prevents any individual from easily adding new blocks consecutively in the block chain. This way, no individuals can control what is included in the block chain or replace parts of the block chain to roll back their own spends.
  • Bitcoin mining profitability calculator:
  • For the number of existing euro, see
  • Look, BTC 500 ! At this particular date, the value would be approximately EUR 30,000.-
  • Except for exchanges, who can use a number of fixed addresses to manage a very large number of transactions
  • You can loose your wallet, it can get stolen, hacked, etc.
  • Is Bitcoin some kind of Ponzi scheme? See: is Satoshi? Why is he anonymous?
  • Is Bitcoin some kind of Ponzi scheme? See: is Satoshi? Why is he anonymous?
  • Bitcoin: the future money, or a scam?

    1. 1. Bitcoin The future money, or a scam? Cronos, 17/12/2013
    2. 2. Contents • • • • • • A quick overview How it works What is it worth? Open source Is it safe? Other cryptocurrencies 17/12/2013 Archimiddle 2
    3. 3. A QUICK OVERVIEW 17/12/2013 Archimiddle 3
    4. 4. Bitcoin is money 17/12/2013 Archimiddle 4
    5. 5. Cryptocurrency • • • • • 17/12/2013 Peer-to-peer Decentralized Digital Cryptography Transactions Archimiddle 5
    6. 6. Inform Yourself Volatile Irreversible Not anonymous Instant Experimental 17/12/2013 Archimiddle 6
    7. 7. The Wallet Software wallet Mobile wallet Web wallet 17/12/2013 Archimiddle 7
    8. 8. Secure The Wallet Regularly backup 17/12/2013 Archimiddle Encrypt 8
    9. 9. Obtaining Bitcoins Buying 17/12/2013 Services Archimiddle Mining 9
    10. 10. Buying Exchange Mt. Gox Etc. 17/12/2013 TRUST Cash / Money Transfer Archimiddle 10
    11. 11. Services Deliver services for BTC 17/12/2013 Archimiddle 11
    12. 12. Mining Just like gold mining, but using computers Maximum # BTC is 21 M 17/12/2013 Archimiddle 12
    13. 13. Spending Bitcoins Still fairly limited 17/12/2013 Archimiddle 13
    14. 14. First ATM Vancouver October 2013 Within 1 month > 106 CND 17/12/2013 Archimiddle 14
    15. 15. HOW IT WORKS 17/12/2013 Archimiddle 15
    16. 16. The Origins • November 2008: paper published by Satoshi Nakamoto – You can find it here: 17/12/2013 Archimiddle 16
    17. 17. A definition A ledger is the principal book or computer file for recording and totalling monetary transactions by account, with debits and credits in separate columns and a beginning balance and ending balance for each account. Source: Wikipedia 17/12/2013 Archimiddle 17
    18. 18. A definition The block chain is a shared public ledger on which the entire Bitcoin network relies. A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Source: 17/12/2013 Archimiddle 18
    19. 19. Peer-to-peer Transaction wallet BTC address wallet BTC address Block chain 17/12/2013 Archimiddle 19
    20. 20. No Bank 17/12/2013 Archimiddle 20
    21. 21. Transactions A coin is a chain of digital signatures. Transfer BTC by signing a hash of previous tx and public key of next owner. Add this to the coin. Issue: avoid double spending! 17/12/2013 Archimiddle 21
    22. 22. Avoiding double spending • Traditionally: introduce a central ledger/mint – You have to trust these 17/12/2013 Archimiddle 22
    23. 23. Avoiding double spending • Alternatively: announce each transaction publicly – Everyone can now be aware of all (previous) transactions, so you can know about double spending – A single history of order of transactions is required • Timestamping, vector clocks – The receiver of a BTC needs proof of his transaction being the first one. This can be given once the majority of nodes agree upon this. 17/12/2013 Archimiddle 23
    24. 24. The Block chain • • • • • • • • • Contains the “Proof-of-Work” (Pow) Each tx is broadcast to all nodes Each node collects txs into a block Each node works on the PoW for its block If PoW is found, the block is broadcast to all nodes Block is only accepted if all txs are valid and no double spending is detected If accepted, all nodes start working on the next block, using the hash of the accepted block If two different blocks are finished simultaneously, the longest one survives January 2009: the Genesis Block ( 17/12/2013 Archimiddle 24
    25. 25. Mining • Incentive for block calculations: – Each first transaction in a block is a new coin! – This makes it worthwhile to add nodes to the network • Calculations cost money (hardware + electricity) – Earning Bitcoins makes up for that cost – Charging transaction costs could also be considered • • October 2013: 57% of all Bitcoins are mined The algorithm becomes progressively more complex – This slows down mining efforts • Last Bitcoin is expected for mining in the year 2140 – 21 million Bitcoins reached 17/12/2013 Archimiddle 25
    26. 26. Mining hardware 17/12/2013 Archimiddle 26
    27. 27. Mining in the Cloud 17/12/2013 Archimiddle 27
    28. 28. Mining rate 17/12/2013 Archimiddle 28
    29. 29. Compare Bitcoin • • • Gold 21 million coins Spend only once Mining slows down • • • EUR/GBP/USD/SFR/… 21 m3 Spend only once Mining slows down Scarcity has a cost 17/12/2013 • • • Just make some more Just make some more Just make some more Scarcity has no cost Archimiddle 29
    30. 30. WHAT IS BITCOIN WORTH? 17/12/2013 Archimiddle 30
    31. 31. The BTC value • • November 2008: May 2010: Laszlo buys 2 pizza’s for BTC 10,000.– First BTC transaction – Value BTC 1 < USD 0,01 – • • April 2011: BTC 1 = USD 1 June 2011: BTC 1 = USD 31 – First bubble explodes • • June 2013: BTC 1 = USD 100.November 2013: BTC 1 = USD 1,000.- 17/12/2013 Archimiddle 31
    32. 32. The BTC value 17/12/2013 Archimiddle 32
    33. 33. BTC reaches Gold price 17/12/2013 Archimiddle 33
    34. 34. Bubble? 17/12/2013 Archimiddle 34
    35. 35. 1637 ? 17/12/2013 Archimiddle 35
    36. 36. What is it worth? • • Of course, what a fool is willing to give for it Simple math: – BTC 21 106 maximum – EUR 1012 exist in actual bank notes – Potentially: BTC 1 can reach EUR 106 ! – Therefore, you can do business with 1 millionth of BTC, called a Satoshi • • • • • • But if there is no fool, BTC 1 is worth nothing: BTC is volatile! Businesses require some stability in the value of their assets So we need people to trust BTC and to hold on to them for a while If businesses accept BTC as payment, personnel must accept being paid in BTC as well Wide adoption and trust is required, as well as a stable rate THIS IS NOT THE CASE TODAY! 17/12/2013 Archimiddle 36
    37. 37. BTC IS OPEN SOURCE 17/12/2013 Archimiddle 37
    38. 38. Bitcoin addresses • • • A Bitcoin address is unique, but not private! A wallet manages addresses 17/12/2013 Archimiddle 38
    39. 39. Examining a transaction 17/12/2013 Archimiddle 39
    40. 40. Examining the network 17/12/2013 Archimiddle 40
    41. 41. Examing a BTC address 17/12/2013 Archimiddle 41
    42. 42. Your BTC balance is public Protect your privacy! Make it hard for others to track your BTCs If you publish your address once, the graph of related transactions can be followed forever! 17/12/2013 Archimiddle 42
    43. 43. IS YOUR BITCOIN SAFE? 17/12/2013 Archimiddle 43
    44. 44. The wallet • • • • • You can loose your wallet You can forget your password It can get stolen, but without password, the money cannot be spent Bitcoin is lost Your wallet can be hacked once your password is known – Easy to steal the money in this case • Make backups, store them in several places, encrypt them 17/12/2013 Archimiddle 44
    45. 45. Oops, no backup? 17/12/2013 Archimiddle 45
    46. 46. Robbing the Bank • Several Bitcoin exchanges have already been robbed! – Millions worth of bitcoins have been stolen on-line 17/12/2013 Archimiddle 46
    47. 47. Money laundering • • • • Bitcoin cannot avoid money laundering Bitcoin addresses can be disposed off easily Bitcoins can be transferred using bots Laundering will be very difficult to trace – Or will it? All transactions are public and can be traced in real time • It’s no different with cash, though, and you still have to buy the bitcoins somehow – Not easy for large amounts 17/12/2013 Archimiddle 47
    48. 48. Paying taxes • • • • Is bitcoin the perfect currency to avoid paying taxes? All transactions are public Complex to follow transactions Bitcoin addresses are anonymous – Coupled to a wallet, not a person – Who owns the wallet? • • • Cash is also anonymous, but still taxed, so why not Bitcoin? Bitcoin is not backed by any government Mining may legally be different because it creates Bitcoin – US guidelines March 2013 17/12/2013 Archimiddle 48
    49. 49. Buying drugs Shut down by FBI in October 2013 17/12/2013 Archimiddle 49
    50. 50. Gambling 17/12/2013 Archimiddle 50
    51. 51. Liquidity • • Well, there is no bank! When lending bitcoin, hmm, liquidity can rapidly be an issue if the rate falls – What is it worth anyway? 17/12/2013 Archimiddle 51
    52. 52. Charles Ponzi • • • • • • From Italy 1920 “Make money fast” Fraudulent investment Related to pyramid schemes Ends in liquidity problems and disappearance of the person on the top 17/12/2013 Archimiddle 52
    53. 53. Satoshi Nakamoto From where? 2009 “Make money fast” Fraudulent investment? Is it worth anything? Related to pyramid schemes? Ends in liquidity problems and disappearance of the person on the top? • Satoshi took the easy early bitcoins and is cashing them for real money? • Who is Satoshi anyway? • Are we mere idiots who make Satoshi rich? • • • • • • 17/12/2013 Archimiddle 53
    54. 54. OTHER CRYPTOCURRENCIES 17/12/2013 Archimiddle 54
    55. 55. Litecoin Based on Bitcoin, but uses faster block rates, and the total number is four times that of Bitcoin. Two blocks were pre-mined. 17/12/2013 Archimiddle 55
    56. 56. Freicoin Similar to Bitcoin, but it slowly looses value if you hold onto it. So you should spend it! 17/12/2013 Archimiddle 56
    57. 57. Other coins • • • • PeerCoin NameCoin QuarkCoin … 17/12/2013 Archimiddle 57
    58. 58. Will Bitcoin survive? No, of course not! But hey, it’s fun, and you get to learn some interesting stuff! 17/12/2013 Archimiddle 58