The economics of the bitcoin currency

1. Bitcoin
Bitcoin is a digital currency which is decentralized, and which does not require any
single administrator or central bank. It is usually sent on a user-to-user basis, on the
bitcoin network which is a peer-to-peer one and does not require any intermediaries.
Network nodes use cryptography for verifying transactions and which are recorded
using blockchain which is a ledger distributed publicly. The invention of the
cryptocurrency took place in 2008 by either one person or a group of people the
identity of whom is not known. Bitcoins may be defined as the reward at the end of
the process of mining. They may be exchanged with other services, products, and
currencies. But there is extreme volatility in the real value of its coins. According to
research conducted by the Cambridge University, some estimations were made that in
the year 2017, there were between two hundred and ninety million to five hundred
and eighty million users of cryptocurrency wallet, and out of them, most were using
bitcoin. The users chose to be participants of this digital currency for various reasons
and which include ideologies like committed anarchism, libertarianism and
decentralization, convenience, use of currency as investment, and pseudonymity in
transactions.

2. Brief History: Creation, 2011-
2012, 2013-2016
Creation: On the 18th of August 2008, the registration of a domain name was done and which was
bitcoin.org. On the 31st of October that same year, a link was posted on a mailing list of cryptography. The
software of bitcoin was implemented as a code which was an open-source one and which was released in
January the next year. In early 2009, bitcoin’s network was created when the starting block of that chain
which was known as The Genesis Block was mined. The creator of the first system of reusable proof-of-work
was the one who received the first transaction of bitcoin. That person was Hal Finney. He had downloaded
the software of bitcoin in 2009
2011-2012: Following the earlier proof-of-concept transactions, black markets like Silk Road were the first
users of bitcoin in majority. During its first two-and-a-half years beginning in February 2011, Silk Road
accepted payment exclusively in bitcoin. In November that same year, the Bitcoin-QT 0.5.0 was released. Its
introduction of the Front End, making the use of the Qt toolkit for user interface. To manage its database,
the software previously made the use of Berkeley DB. Later on, developers switched to the LevelDB 0.8 for
reducing the time of blockchain synchronization. This update resulted in a blockchain fork, which was a
minor one, and which was soon resolved. Internet-Relay-Chat was used for seeding nodes but this was
discontinued in the version 0.8.2. from the version 0.9.0, this computer program was known as Bitcoin Core.
2013-2016: in 2013, prices of the currency rose. The temporary splitting of the currency into two chains,
which were independent from each other was done. These chains had different rules and this was caused by
the bug in the 0.8 version of bitcoin’s software. This resulted in the blockchain becoming the longest chain
and which was acceptable to all the participants, regardless of the version of their bitcoin software. The
People’s Bank of China prohibited financial institutions of the country from making the use of bitcoins. This
led to the value of bitcoins dropping substantially. The version of bitcoin which released in October 2016 had
a new soft fork feature called ‘’Segwit.’’ this was an improvement in its scaling for optimizing the blocksize of
bitcoin. Thirty-five developers deployed the patch. SegWit has been quite useful in the prevention of

3. Brief History: 2017-2019, 2020-Present
2017-2019: In mid-2017, the controversial software upgrade, Segregated Witness,
was approved and locked-in. This was done with the intention of not only
supporting the Lightening Network but even improving the scalability. SegWit was
subsequently activated over the network. The price of bitcoin rose by almost
around fifty percent in that week which followed SegWit’s approval.
https://www.youtube.com/watch?v=f3CFUbeehc8 (What is SegWit? Segregated
Witness explained simply). Prices of bitcoin had a negative effect due to several
thefts and hacks from exchanges of cryptocurrencies.
2020-Present: In early 2020, the prices of bitcoin fell during a market selloff which
was a broad one. In March that year, the selling of two hundred and eighty-one
thousand bitcoins, which had been held by owners for only a month, was done.
MicroStrategy https://www.microstrategy.com/en invested around two hundred
and fifty million dollars in bitcoin as an asset of treasury reserve. Towards the end
of that year, the value of bitcoin peaked a new high. Square Incorporation
https://squareup.com/us/en, an American company dealing in digital payments
and financial services, placed around one percent of its total assets in bitcoin.

4. Design: Units and Divisibility, Blockchain,
Supply, and Transactions
The elliptic curve forms the basis of bitcoin’s design. The algorithm of its encryption is with the
algorithm of ECDSA. The Bitcoin Improvement Proposal is intended for supporting Schnorr
Signatures.
Units and Divisibility: Bitcoin is the accounting unit in the bitcoin system. Smaller units of bitcoin,
used as alternative ones, are satoshi and millibitcoin. Satoshi is the smallest denominator
representing a bitcoin’s one hundred millionth part.
Blockchain: The blockchain of bitcoin is the public ledger which records all the transactions in the
currency. It is implemented using the block chain method wherein every block contains a hash from
the previous one up till the block of genesis.
Supply: The miner who succeeds in finding a new block has the allowance to be rewarded with the
transaction fees and the newly created bitcoin. The processed payments are inclusive of a special
transaction called Coinbase. All bitcoins are created in Coinbase transactions.
Transactions: Transactions of bitcoin include inputs and outputs which can be single or multiple. The
sending of bitcoins by users is followed by the designation of every address besides the total
amount of this currency which is sent to that particular address as an output.

5. Design: Ownership, Mining, Wallets,
Decentralization, Privacy and Fungibility
Ownership: With regard to blockchain, the registration of bitcoins is done to their addresses. The
creation of bitcoin addresses requires picking random valid keys which are private before computing
the bitcoin address which is the corresponding one. https://github.com/graingert/bitcoin-
IRP/blob/master/img/Bitcoin_Transaction_Visual.svg
Mining: This is the record-keeping service and it is done through using the processing power of
computers. The blockchain is kept complete, consistent, and unalterable by the miners who
repeatedly group all the new broadcast transactions into one block, the broadcast of which is then
done over the network.
Wallets: The first program of wallets, named Bitcoin, was released around 2009 as an open-source
software program. The use of public-key cryptography is done in bitcoin generating one private key
and one public one. So wallets can be described as collections of these keys.
Decentralization: The absence of any central authority in bitcoin is coupled with the lack of any
central server, since the network of bitcoin is peer-to-peer, forms the basis of its decentralization.
It’s ledger is a public one, hence it can be stored on any computer.
Privacy and Fungibility: Bitcoins are pseudonymous, hence they are not connected to any entities of
the real world and are just bitcoin addresses. Wallets and other software which is similar to them
establish basic fungibility through handling all the bitcoins as equivalents.

6. Ideology: Austrian Economic Roots and
Libertarianism and Anarchism
Austrian Economic Roots: According to Europe’s Central Bank, bitcoin’s
currency which is decentralized has its theory rooted in the Austrian
School of Economics. A British economist has advocated a market
which is completely free in the management of money besides the
production and distribution to end the monopolization of the central
banks.
Libertarianism and Anarchism: The main philosophy behind bitcoin
attracted anarchists and libertarians. Supporters of bitcoin believed
that everyone who became involved had philosophical reasons for
doing so. Bitcoin was described as a project which was a techno-
anarchist one for creating digital currency and de-centralizing
transactions.

7. Economics: Acceptance by Merchants, Financial
Institutions, As an Investment, Venture Capital,
and Price and Volatility
Bitcoin, which may even be described as an asset in digital form, is designed for peer-to-peer transactions like a
currency. The three qualities of bitcoin useful as a currency include: easily verifiable, limited as far as their
supply is concerned.
Acceptance by Merchants: The exchange of cryptocurrency is where most of the transactions in this digital
currency take place, rather than being done in business transactions. Merchants accepting bitcoin use payment
services for performing the conversions.
Financial Institutions: There is not much use of bitcoin as far as international remittances are concerned. Banks
and other money transfer companies like Western Union https://www.westernunion.com/in/en/send-
money.html?src=gg___&utm_content=sdc_pcrid_411255991634_mt_e_kw_western%20union&gclid=EAIaIQo
bChMIkbm39I_E8QIVVYdLBR0fnwswEAAYASAAEgLUqfD_BwE&gclsrc=aw.ds who are competing in this market
charge a very high fees.
As an Investment: In 2012, Adam Draper founded an incubator for bitcoin start-ups. The main aim of this
company was to fund one hundred businesses of bitcoin within a period of two to three years with ten
thousand to twenty thousand dollars for a stake of around six percent.
Price and Volatility: The price of bitcoin appreciate and depreciate through its cycles. The volatility of bitcoin is
seven times more than gold and eight times more than S&P 500, according to Mark T. Williams, an academic,
risk management expert, and financial author.

8. Legal Status, Tax, and Regulation: Regulatory
Warnings and Price Manipulation Investigation
Due to the decentralized nature of bitcoin and even its trading on internet-based
exchanges, regulating bitcoin has become difficult. However, using bitcoin can become a
criminal offence, and shutting down the exchanges and even the economy of peer-to-peer
in any particular country would constitute that ban which would bed a de facto one.
Bitcoin’s legal status may vary in every country and its definition is either undergoing a
change in most of them or remains undefined.
Regulatory Warnings: The Commodity Futures Trading Commission of the United States
issued four advisories for customers for bitcoin and investments related to it. Europe’s
Banking Authority had issued warnings concerning speculative nature of cryptocurrency
investments and even the risk of theft due to fraud and hacking. An “investor alert,’’ issued
earlier, warned that Ponzi schemes were using bitcoin.
Price Manipulation Investigation: In mid-2018, bitcoin trading was investigated officially.
The possible manipulation of price was inclusive of techniques like wash trades and
spoofing. Academic research was conclusive of price manipulation occurring in the bitcoin
theft of Mt. Gox and the vulnerability of the market towards manipulation. The history of
theft, fraud, and hacks goes back to 2011.

9. Analysis: Economic Concerns, Carbon Footprint
and Energy Consumption, and Illegal Transactional
Usage
The Bank for International Settlements has summarized several criticisms with regard to bitcoin in
their annual report published in 2018. These include instability in bitcoin’s price, high consumption
of energy, variable and high transaction costs, fraud at the level of cryptocurrency exchanges and
poor security, vulnerability towards debasement from forking, and miners’ influence.
• Economic Concerns: Bitcoin, and even other cryptocurrencies, has been defined to be one
economic bubble by many prize-winning laureates of economic sciences. Investors, economists,
journalists, and even the Central Bank of Estonia have been quite concerned about bitcoin being
one Ponzi scheme. A 2014 report of World Bank is conclusive that bitcoin was not a Ponzi scheme
deliberately.
• Carbon Footprint and Energy Consumption: The environmental impact related to the energy
consumption of bitcoin, specifically carbon emissions, has raised concerns. The translation of
energy consumption into emissions of carbon is difficult due to bitcoin being decentralized and
which impedes the miners’ localizing for the examination of the mixed use of electricity.
• Illegal Transactional Usage: Bitcoin, which is held in exchanges, are vulnerable towards theft
through hacking, scamming, and phishing. Bitcoin usage for criminal purposes has attracted not
only the attention of the media but even that of the law enforcement agencies, legislative bodies,
and even the media. Researchers have found evidence that enthusiasts of computer
programming besides illegal activity drive enthusiasm in bitcoin.

10. Software Implementation
Bitcoin Core is a free software and an open-source which serves like a bitcoin
node which, in a set, form the network of bitcoin and facilitates the provision
of bitcoin wallets which helps in the complete verification of payments.
Bitcoin Core is inclusive of transaction verification engines and helps in
connecting the network of bitcoin as one full node. Moreover, the inclusion
of cryptocurrency wallets, used for the transfer of funds, is done by default.
The wallet facilitates the receiving and sending of bitcoins. It helps in the
generation of QR codes by users for receiving payment. The full blockchain is
validated by the software, which is inclusive of every bitcoin transaction. The
distributed ledger we are elaborating upon here has become more than two
hundred and thirty-five gigabytes as far as its size is concerned.
https://bitcoincore.org/

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Saif Ali Sajid Amir