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Mining for Bitcoins 
4imprint.com
In 2010, a programmer in Jacksonville, Fla., convinced a pizza shop to give him 
two piping-hot pizzas worth $30 for the 10,000 bitcoins he had “mined” on his 
computer. This is the fabled first-ever bitcoin transaction.1 Today, those bitcoins 
are worth about $3.6 million, but at one point they were worth $6 million. 
Welcome to the wild, wild world of Bitcoin. 
This headline-grabbing, digital currency promises consumers total control 
over their money and low fees for businesses. But it polarizes supporters and 
detractors. Fans believe it allows people to buy anything without interference 
from third parties, such as banks. Detractors, on the other hand, think Bitcoin is a 
house of cards that will collapse as soon as people realize that zeros and ones on 
a computer have no value. 
The reality may be somewhere in between. Bitcoin is unlikely to upend the 
world’s financial networks2, but it is having an impact, as companies look to adopt 
it and consumers seek opportunities to spend it. For companies, Bitcoin provides: 
• Reliable payments designed not to be reversible or fraudulent; 
• Low (less than 1 percent) or no fees—the 
customer pays for the transaction; and 
• Quick transfers. 
Bitcoin’s security is based on well-understood 
cryptography used by the U.S. Government3. 
Its algorithms are as trustworthy as credit card 
transactions or any type of electronic bank 
transfer. So people who doubt the security of its transactions should have similar 
doubts about the security of any credit card transaction. 
The system protects against fraud by ensuring the whole network sees the 
transactions that have happened and that bitcoins have moved. This is like the 
serial numbers being scanned every time money is spent, making it possible 
to trace money as it moves around, making it almost impossible to introduce 
counterfeit money.4 
And accepting bitcoins can be as easy as downloading an app onto a computer or 
phone that provides a bitcoin wallet that will take care of pretty much everything, 
1 Bilton, Nick. “Disruptions: Betting on a Coin With No Realm.” Bits.blogs.nytimes.com/. The New York Times 
Company, 22 Dec. 2013. Web. 10 Oct. 2014. <http://bits.blogs.nytimes.com/2013/12/22/disruptions-betting-on-bitcoin/?_ 
© 2014 4imprint, Inc. All rights reserved 
php=true&_type=blogs&_r=0>. 
2 Pagliery, Jose. Bitcoin and the Future of Money. Chicago: Triumph LLC, 2014. Print. 
3 “Myths.” En.bitcoin.it. Bitcoin Project, 20 Sept. 2014. Web. 10 Oct. 2014. <https://en.bitcoin.it/wiki/Myths>. 
4 Hill, Kashmir. “21 Things I Learned About Bitcoin From Living On It For A Week.” Forbes.com. Forbes, 9 May 
2013. Web. 13 Oct. 2014. <http://www.forbes.com/sites/kashmirhill/2013/05/09/25-things-i-learned-about-bitcoin- 
from-living-on-it-for-a-week/>.
including requesting and confirming payments, as well as converting bitcoins into 
dollars straight away. 
Customers are using bitcoins, too, but the numbers are small. For example, about 
three customers a day are using bitcoins to pay for their sandwiches at a Subway® 
location in Allentown, Pa.5 And in its first week accepting bitcoins, CheapAir.com® 
made sales worth $6,8006. Reno, Nev., barber Josh Arias7 also accepts bitcoins and 
would like to see customers adopting it as he does not have to pay the merchant 
fees incurred when customers swipe their credit cards. 
Before we go any further, let’s just say it: Bitcoin is weird. This is 
a payment network based on an “imaginary” currency. And most 
people when they first hear about Bitcoin say the same thing: 
“No, this cannot possibly work.” But to-date, it is defying the 
doubters, which is why we should all be paying attention to the 
rise of crypto-currencies. 
So, how does it work? Put simply, Bitcoin is electronic money—nothing more than 
bits in a computer or smartphone. First, let’s just say that electronic money is not 
money stored electronically. Whereas services like Google Wallet® stores credit 
cards, debit cards and loyalty cards. Bitcoin is different. It reimagines what money 
is. Anyone can receive it—and spend it—by simply transferring bitcoins between 
one another. Bitcoin is really more like cash than credit cards. Like cash, people 
either have bitcoins or they don’t. And if they have bitcoins, they are handed over 
to the business there and then, without any third-party involvement. There is no 
bank or other middle man. 
The Bitcoin network is a bit like a BitTorrent® peer-to-peer network8, which 
is created when two or more computers connect and share resources directly, 
without going through a separate server computer. These networks are best 
known for helping people share such files as films, games and music over the 
Internet. In Bitcoin’s case, however, instead of music or movies, the computers 
share a digital ledger, or a transaction database known as a blockchain, with 
every computer on the network. And this ledger is automatically updated 
anytime someone spends bitcoins. This ledger contains details of every single 
bitcoin transaction there has ever been. This provides Bitcoin’s transparency. Every 
transaction is visible to everyone in the network. Now before we get bogged 
5 “8 Things You Can Buy with Bitcoins Right Now.” Money.cnn.com/. CNN Money, n.d. Web. 3 Oct. 2014. 
<http://money.cnn.com/gallery/technology/2013/11/25/buy-with-bitcoin/>. 
6 “8 Things You Can Buy with Bitcoins Right Now.” Money.cnn.com/. CNN Money, n.d. Web. 3 Oct. 2014. 
<http://money.cnn.com/gallery/technology/2013/11/25/buy-with-bitcoin/>. 
7 “8 Things You Can Buy with Bitcoins Right Now.” Money.cnn.com/. CNN Money, n.d. Web. 3 Oct. 2014. 
<http://money.cnn.com/gallery/technology/2013/11/25/buy-with-bitcoin/>. 
8 Pagliery, Jose. Bitcoin and the Future of Money. Chicago: Triumph LLC, 2014. Print. 
© 2014 4imprint, Inc. All rights reserved
down in privacy concerns, let’s just say that transactions appear as strings of 
numbers and letters that are not associated with anyone’s real-world identity. 
The transactions in this ledger are not confirmed by banks or any other third 
party. They are confirmed using complex math problems, or algorithms. Bitcoin 
users are trusting math, not people, to verify transactions. Whoever solves these 
problems, through a process known as mining, verifies the bitcoin network’s 
transactions and wins new bitcoins for their trouble. So, people literally are 
mining for bitcoins. And it is the limited supply of this currency combined with 
the high demand for it that is the secret of its value9, and indeed the value of 
more traditional currencies. So, who is using this currency? In the U.S., the typical 
user is a tech-savvy male, aged 25 to 40, earning above-average income, and 
usually living on one of the coasts.10 
In this Blue Paper, we will discuss the history of Bitcoin, how it works, its pros and 
cons, and how companies can start accepting this digital currency. We will also run 
through how transactions work, and the tax implications of accepting bitcoins. 
© 2014 4imprint, Inc. All rights reserved 
The history of Bitcoin 
Let’s start at the beginning, which was Friday, 
October 31, 2008—Halloween, appropriately 
enough. On that day, the mysterious Satoshi 
Nakamoto posted a message on the cypherpunks 
mailing list entitled “Bitcoin P2P e-cash paper.”11 
His—hers, or their, no one knows—message was 
simple: “I’ve been working on a new electronic 
cash system that’s fully peer-to-peer, with no trusted third party.” And his initial 
paper is still available online, but be warned, it’s not an easy read. 
He argued: “What is needed is an electronic payment system based on 
cryptographic proof instead of trust, allowing any two willing parties to transact 
directly with each other without the need for a trusted third party.” Cryptography 
involves the enciphering and deciphering of messages in secret code, or cipher. 
Nakamoto wanted to create a math-based currency whose value couldn’t be 
“watered down” by a central authority, like the Federal Reserve. 
9 McMillan, Robert, and Cade Metz. “Bitcoin Survival Guide: Everything You Need to Know About the Future of 
Money.” Wired.com. Condé Nast, 25 Nov. 2013. Web. 18 Sept. 2014. <http://www.wired.com/2013/11/bitcoin-survival- 
guide/all/>. 
10 Brennan, Morgan. “Why More Businesses May Adopt Bitcoin.” Usatoday.com. CNBC, 12 Jan. 2014. 
Web. 10 Oct. 2014. <http://www.usatoday.com/story/money/personalfinance/2014/01/12/cnbc-bitcoin-business/ 
4393905/>. 
11 Pagliery, Jose. Bitcoin and the Future of Money. Chicago: Triumph LLC, 2014. Print.
But the concept of a “crypto-currency” predates Nakamoto and was actually first 
described in 1998 by Wei Dai on the cypherpunks mailing list.12 He suggested 
a new form of money could use cryptography to control its creation and 
transactions, rather than a central authority. 
But it wasn’t until after Nakamoto’s paper that the first crypto-currency came into 
being. And when Nakamoto left the project quietly in late-2010, without his/her 
identity ever being revealed, the Bitcoin community had taken up the challenge 
to create a new currency and since then, it has grown exponentially. 
To appreciate why people would take up Nakamoto’s challenge and help establish 
a digital currency, it is a good idea to look at the cypherpunk community. 
Nakamoto launched his idea on a mailing list for this community. Cypherpunks 
advocate using cryptography to drive social and political change and put a lot of 
store on privacy and personal liberties. They were attracted to Nakamoto’s idea 
that a network capable of processing tens of millions of transactions each day 
without the need to work through financial institutions would make it easier for 
people to make small, casual payments 
to one another. So, it was politics that 
got Bitcoin up and running. However, 
the Bitcoin community has broadened 
beyond cypherpunks. It now speaks to 
a wider audience that sees its potential 
for reducing the costs and friction 
of global e-commerce and other 
commercial transactions.13 
Nakamoto’s idea was for a digital currency that would reside on a network 
of computers. This network would support a system that verifies transactions 
and “mines” for new bitcoins, delivering new bitcoins at a steady rate, to help 
manage inflation.14 Bitcoins cannot be inflated by “printing” new money above 
and beyond the expected issuance rate. The name of the new system would 
be Bitcoin, with a capital “B”; a lowercase “b” would be used for the units of 
currency, bitcoins. 
Here’s where bitcoins get even weirder: the truth is they don’t exist, not even on 
a hard drive. So, while all the talk is of bitcoins, you cannot point to an account, 
like a bank account with dollars, that actually contains bitcoins. Instead, what you 
see in a bitcoin account, or address, are records of transactions between different 
addresses, with balances that increase and decrease. We will further explain 
12 Pagliery, Jose. Bitcoin and the Future of Money. Chicago: Triumph LLC, 2014. Print. 
13 “Myths.” En.bitcoin.it. Bitcoin Project, 20 Sept. 2014. Web. 10 Oct. 2014. <https://en.bitcoin.it/wiki/Myths>. 
14 Pagliery, Jose. Bitcoin and the Future of Money. Chicago: Triumph LLC, 2014. Print. 
© 2014 4imprint, Inc. All rights reserved
transactions a little later, but here’s a brief overview. Transactions comprise:15 
• An input—this is the bitcoin address, or account, that sent the bitcoins to the 
account holder that is now looking to spend them. This provides evidence 
that the bitcoin holder has the right to spend them. 
• An amount—this simply describes the amount of bitcoins that are being 
spent. 
• An output—this is the address to which the bitcoins are now being sent. The 
recipient will then have the right to spend these bitcoins. 
Every transaction that takes place is stored in the ledger, or block chain. 
Ok, let’s return to talking about bitcoins as if they were real. Only a few bitcoins 
were made available initially. But the system was designed to slowly expand the 
currency to produce a total of 21 million bitcoins—no more, no less. This number 
was completely random; it has no secret meaning. But that has not stopped a 
lot of speculation. It is worth noting that while the number of bitcoins is set at 
21 million, it is possible to divide each bitcoin into 100 million pieces, known as 
satoshis, after the anonymous Bitcoin founder. So the total number of currency 
units there will ever be is 2,100,000,000,000,000. Bear in mind that Bitcoin was 
viewed as an alternative way for people to make small payments to one another. 
It was never viewed as a replacement for existing systems, so a finite marketplace 
is not a major stumbling block for Bitcoin. But if you still think there may be more 
to this number, Bitcoin Magazine™ does a great job analyzing it. 
Nakamoto estimated that the amount of bitcoins produced would fall by half 
every four years—10.5 million by 2013, another 5.25 million by 2018, and 2.625 
million by 2023, and so on until the last bitcoin is mined some time around 2140, 
if the currency survives that long. As of October 2014, 
there were 13.38 million bitcoins in circulation, valued 
at around $5.06 billion, but the market is volatile. 
So, where is the value in these non-existing currencies? 
Bitcoin is designed so people can subjectively value the currency, which is 
happening because individuals are freely exchanging products and services for 
bitcoins. It’s also possible to think about the value of the network, like a phone 
network, rather than of individual bitcoins.16 Phones only have value because 
they are connected to a network. Without a network, phones are useless. 
Bitcoins are similar—their value comes from the global network of merchants, 
exchanges, wallets, etc., that accept them as a currency. Just like the phone is 
needed to transmit voice, text and multimedia messages, bitcoins are needed to 
15 “How Do Bitcoin Transactions Work?” Coindesk.com. CoinDesk, 6 Mar. 2014. Web. 10 Oct. 2014. 
<http://www.coindesk.com/information/how-do-bitcoin-transactions-work/>. 
16 “Myths.” En.bitcoin.it. Bitcoin Project, 20 Sept. 2014. Web. 10 Oct. 2014. <https://en.bitcoin.it/wiki/Myths>. 
© 2014 4imprint, Inc. All rights reserved
transmit economic information through the network. Ultimately, though, the 
value is determined by supply and demand—what people are prepared to give in 
exchange for bitcoins. 
And the number of businesses prepared to trade for bitcoins is growing. 
According to Bitcoin Pulse, there are more than 5,500 businesses now accepting 
bitcoins and that number is growing at around 5.14 percent per month: 
The number of businesses accepting bitcoins is growing at about 5.14 percent.17 
The increasing acceptance of bitcoins 
Weekly Avg. 
Growth Last 
30 Days 
© 2014 4imprint, Inc. All rights reserved 
Category Source Metric 
The Bitcoin ledger 
OK, so let’s start with getting our heads around Bitcoin. Deep down in the pit of 
the mine, at its core, Bitcoin is a digital file with a list of accounts and balances. 
Think of it as a typical business ledger, called a “blockchain” in the Bitcoin world. 
A copy of this ledger is stored on every computer in the Bitcoin network. When 
someone spends bitcoins, the transaction is broadcast across the network, so every 
copy of the ledger is updated, indicating which account is going down and by 
how much and which account now has a higher value. Computers update their 
copy of the ledger and pass along the transaction to other computers, which 
then pass it on, until every copy of the ledger has been updated. At the end of 
the day, just like business ledgers, the Bitcoin ledger has to reconcile to zero. 
This and some math-based security is all there really is to Bitcoin: A system that 
lets a network of computers maintain a ledger and in doing so lets people spend 
electronic cash. 
The beauty of the “ledger” is that it means for the first time two parties can 
exchange value online without a third-party intermediary, such as MasterCard®, 
PayPal® or Visa®, who maintain the ledger in traditional online transactions18. This 
third-party was needed because online transactions involve exchanging digital 
17 “Bitcoin Pluse.” Bitcoinpulse.com/. Bitcoin Pulse, n.d. Web. 13 Oct. 2014. <http://www.bitcoinpulse.com/>. 
18 “Everything You Need to Know About Bitcoin: VICE Podcast 027.” Youtube.com. Vice Media Inc., 9 Jan. 2014. 
Web. 1 Oct. 2014. <https://www.youtube.com/watch?v=SNssKmeXrGs>. 
Monthly Avg. 
Growth Last 
180 Days 
Absolute 
Consumer Blockchain 
My Wallet 
Number of Users 
0% 7.53% 2,331,810 
Consumer Coinbase Num Wallets 0% 7.52% 1,700,000 
Merchants Coinmap Num Venues 0% 5.14% 5,544 
Merchants Cointerest 
Num Bitcoin 
Venues 
0.72% 6.67% 6,248 
Technical Github 
Num Created 
Repositories 
1.14% 4.49% 4,395
files, which are pretty much like Word® documents or image files. Copies of these 
files remain on the sender’s computer when he or she sends them to someone 
else. There is nothing to stop the sender from sending the file to someone else. 
The same would apply with spending money using digital files. This is why third-parties 
have been needed: to ensure the same money is not spent more than 
once19. This is known as the double-spending problem—successfully spending 
the same money more than once—and this is what Bitcoin’s math solves with its 
ledger. 
Bitcoin mining 
Bitcoin has come up with an ingenious way of verifying transactions using the 
crowd, basically users. The process is called mining. Now, this mining doesn’t 
involve any hard hats, head lamps or long periods underground chipping away at 
rock or dirt. But like mining, it requires expertise in knowing where the valuable 
seam of gold is and what specialist tools are required to get access to that seam 
in a profitable way. With mining for gold, there was a time when panhandlers 
could get rich quick in a gold rush. But now, the major conglomerates dominate 
the mining businesses. Bitcoin has a similar story. There was a time when anyone 
could use their home computers to mine for bitcoins. But now the competition 
has become so tough that there are large businesses with rooms full of specialized 
machines that exclusively mine for bitcoins. 
Think of something like a giant crossword puzzle or game of Sudoku® when you 
consider bitcoin mining. And instead of miners chipping 
away at rock think of complex computers computing 
away with one thing in mind: solving that puzzle or 
game. This explains why even though receiving a payment 
is almost instant with Bitcoin, there is a 10-minute delay 
on average before the network confirms the transaction. 
This delay is needed to solve the puzzle, let every miner 
know the puzzle has been solved and update every copy 
of the ledger with the new solution. A confirmation 
means there is a network consensus that the bitcoins 
you have received have not been sent to anyone else and are considered your 
property.20 Mining is Bitcoin’s clearing house, but it uses complex algorithms, or 
math, rather than a bank, to balance accounts. Everything depends on math. And 
that is why complete strangers are prepared to trust bitcoins—the math means 
they don’t have to trust people. 
19 “Everything You Need to Know About Bitcoin: VICE Podcast 027.” Youtube.com. Vice Media Inc., 9 Jan. 2014. 
Web. 1 Oct. 2014. <https://www.youtube.com/watch?v=SNssKmeXrGs>. 
20 Pagliery, Jose. Bitcoin and the Future of Money. Chicago: Triumph LLC, 2014. Print. 
© 2014 4imprint, Inc. All rights reserved
To ensure puzzles are solved on time—every 10 minutes or so—Bitcoin does 
something really simple, in theory, not in practice: it adjusts the difficulty of the 
puzzle, making it easier or harder as required. Ok, so why every 10 minutes? This 
number is actually a compromise between the first confirmation time and the 
amount of work wasted by miners who were not the first to solve the puzzle21. 
After a block is mined, it takes time for the losing miners to learn about it. And 
until they do, they are still competing to solve the problem. So, 10 minutes 
helps get the word out that the problem has been solved and the miners should 
stop what they are doing on that puzzle and should update their copy of the 
ledger. It was also felt that shortening the confirm time, 
to say five minutes, would not provide that great a 
benefit to companies accepting bitcoins. Weighing the 
needs of miners and companies using bitcoins led to a 
compromise number of 10 minutes to verify transactions. 
As for changing the difficulty of the problem: If you were 
chipping away at rock down a mine, it’s like someone 
giving you a pick axe or a jackhammer depending on how 
fast they want you to work. In reality, what this means is 
that there is a sort of mining gold rush, with ever more 
computing power needed to solve bitcoin formulas.22 
So mining verifies transactions. But it has another role: introducing new bitcoins. 
The first miners to solve the puzzle are rewarded with new bitcoins—25 bitcoins, 
or about $8,640—but that number will fall over time as the system works to 
control the number of bitcoins on the market. That is where the motivation 
comes from for miners to monitor transactions on the site. When production stops 
after 21 million bitcoins hit the market, miners will most likely be supported by 
small transaction fees23. 
Bitcoin benefits 
That’s pretty much how Bitcoin works, but what benefits can companies expect 
for adopting this crypto-currency. 
• Easy payments—Users can send and receive any amount of money instantly, 
anywhere in the world at any time. 
• Low fees—Bitcoin payments involve little or no fees today. But users 
can include fees to have transactions confirmed faster than the standard 
10 minutes. 
21 “Bitcoin: Frequently Asked Questions.” Bitcoin.org. Bitcoin Project, n.d. Web. 3 Oct. 2014. 
© 2014 4imprint, Inc. All rights reserved 
<https://bitcoin.org/en/faq>. 
22 Popper, Nathaniel. “Dealbook: Into the Bitcoin Mines.” Http://dealbook.nytimes.com/. The New York Times 
Company, 21 Dec. 2013. Web. 3 Oct. 2014. <http://dealbook.nytimes.com/2013/12/21/into-the-bitcoin-mines/>. 
23 “Bitcoin: Frequently Asked Questions.” Bitcoin.org. Bitcoin Project, n.d. Web. 3 Oct. 2014. 
<https://bitcoin.org/en/faq>.
• Secure transactions—Bitcoin transactions are secure, irreversible, and do not 
require personal details. 
• No need for PCI compliance—This is the security standard for processing 
credit card transactions on the Web. 
• New markets—Businesses can enter new markets where credit cards may not 
be available. This can help keep fees and administrative costs lower. 
• No need to join a credit card merchant network—Businesses can simply 
download an app and start accepting bitcoins. 
• Identity protection—Payments can be made without personal information 
tied to the transaction, providing protection against identity theft. 
• Transparency—All bitcoin transactions are visible to everyone in the 
network. 
• Easy to get started—Businesses can get started by downloading an app that 
will accept payments and convert bitcoins into dollars immediately. 
© 2014 4imprint, Inc. All rights reserved 
How to get started 
Companies still interested in exploring Bitcoin now have a decision to make: 
How much control do they want? Most businesses will just want to accept bitcoin 
payments and have them converted into dollars straight away. But let’s quickly 
review the options: 
Full client 
Companies that want to handle Bitcoin 
transactions on their own, with no help, can opt 
for a full client service. This stores the bitcoin 
ledger, manages wallets and conducts transactions 
directly on the bitcoin network. Think of a 
standalone email server in a cool corner office. 
Lightweight client 
This is a middle option. The client stores the wallet but relies on third-parties to 
access the bitcoin transactions and network. This is similar to an email client that 
connects to a mail server for access to a mailbox, such as Microsoft Outlook®, in 
that it relies on a third party for interactions with the network. 
Web client 
This is like Gmail®. The client is accessed through a Web browser and stores the 
wallet on a server owned by a third party. 
The reality is that for most companies and consumers, Bitcoin will rarely be more 
than a mobile app or computer program that provides a personal Bitcoin wallet
that allows users to send and receive bitcoins. 
Let’s run how this would work in practice with a Bitcoin newbie, Alice. 
The first thing Alice needs to do is to get a wallet from a hosted service, such as 
blockchain.info®. Alice could also access bitcoin apps through the iPhone® and 
AndroidSM App Stores. The wallet’s software holds the addresses and manages the 
keys that are needed to complete bitcoin transactions. 
Bitcoin wallet makes it easy to send and receive bitcoins. 
© 2014 4imprint, Inc. All rights reserved 
Bitcoin wallet 
Addresses are critical for transactions. Like an email address, Alice can share 
her address and anyone can use it to send her bitcoins. A Bitcoin address looks 
something like this: 1Cdif9KGAaasrcxBaBttQcwXMOpvM9t7FK. But a QR-code, 
containing these address details is also usually available on the digital wallet. 
It is also possible to create a new address for every transaction. This provides 
transparency about every transaction. 
Once Alice has set up a wallet she faces the challenge of getting her first bitcoins. 
There are exchanges that buy and sell bitcoins for local currencies: Bitstamp, for 
example. But it can take a number of days to set up these accounts as they require 
various forms of identification. Other ways Alice may get her first bitcoins are: 
• From a friend who has some 
• From local services that sell bitcoins for cash, which can be found at 
localbitcoins.com 
• Selling something for bitcoins 
But let’s assume a friend, Bob, is giving Alice some bitcoins. Bob opens his Bitcoin
digital wallet, selects “send coins,” and provides the destination address, Alice’s, 
and how much he wants to deliver. Bob can type in the destination address 
or scan the QR code with the address information on Alice’s phone. Now, the 
transaction will initially appear in Alice’s wallet as “Unconfirmed”, as it still 
needs to be confirmed by a miner. Once that has happened, Alice is free to spend 
the money. 
So, let’s say Alice decides to buy lunch in a café that accepts bitcoins. The 
prices at the café are listed in dollars and bitcoin. The café could have point-of- 
sale hardware, such as CoinKite’s bitcoin terminals, to automatically convert 
the price into bitcoins at the market rate and display a QR code containing 
a payment request. Alice can now use her phone to scan the barcode, which 
will show the payment request in her bitcoin wallet. She then just needs to hit 
send to authorize the payment. Finally, in about the same time as a credit card 
authorization, the transaction will be visible on the register. And that’s it, the 
transaction is complete. 
Coinbase24 uses QR codes to make payment simple in its mobile app 
How a transaction works using the Coinbase® digital app to create QR codes: 
1. The merchant enters details of the sale 
2. The merchant taps “Request payment” to display the QR code 
3. The customer scans the QR code with her phone and taps to pay 
4. Both parties receive payment confirmation—sale complete! 
So, for businesses, there really isn’t a lot of difference between accepting bitcoins 
and accepting credit cards. But there is a lot going on behind the scene. 
24 “Point of Sale.” Coinbase.com. Coinbase, n.d. Web. 28 Oct. 2014. 
© 2014 4imprint, Inc. All rights reserved
© 2014 4imprint, Inc. All rights reserved 
Bitcoin privacy 
Bob and Alice’s identities are never revealed in the Bitcoin ecosystem—they are 
completely anonymous. They are known under pseudonyms called public keys. 
These keys are generated using addresses and private keys known only to the 
owner. Public keys are a string of letters and numbers that do not need to have 
any relationship to Bob and Alice’s real world identities. Anyone who knows the 
address can deposit bitcoins into it. It’s as simple as Bob hitting the send button. 
But only those with the right permissions can move bitcoins out of an account. 
This means access to the private key, another series of letters and numbers. So, the 
final step for Bob and Alice is for Bob to use his private 
key to confirm he has the right to send bitcoins from his 
wallet to Alice’s. And that is why it is so important to 
keep the private key safe. Anyone with access to it can 
move funds. This is one of the weaknesses of the Web-based 
services that most people use when using bitcoins. 
These Web services store the keys and the bitcoins. If they 
are compromised, hackers can access the bitcoins and 
move them across the Internet in a fraction of a second. 
But to summarize, to send bitcoins to a friend, you 
need his or her public key, which is kind of like a routing number on a checking 
account, to know where to send it and your private key to complete the deal. 
But even then, miners have to do their work before the money can be spent. The 
miners use the math associated with keys and addresses to check every transaction 
that happens on the network. If the math does not work, the transaction is 
rejected. If it works, the transaction is added to the Bitcoin ledger and every copy 
of the ledger on the network is then updated. 
Setting prices 
Every business has some choices to make about their bitcoin prices. Many apps 
will convert bitcoins into dollars automatically at the time of the transaction— 
merchant services like BitcoinPay, Bit-pay, Coinbase® and Paysius will do this 
automatically. Companies can also decide to do some trading in bitcoins by 
not converting them into dollars and keeping the bitcoins for investment 
purposes. Bitcoins can fluctuate quite a bit, so this decision really depends on 
each company’s attitude to risk. You can track bitcoin exchange rates at sites like 
BitcoinPrices.com. 
Pretty much, every kind of business can start to accept bitcoins: brick and mortar 
stores, ecommerce companies and business-to-business organizations.
Brick and mortar stores 
As with the previously mentioned café example, brick and mortar operations can 
have customers pay using hardware terminals; touch screen apps, on their phones 
or tablets; or simple wallet addresses through QR Codes. For example, merchants 
could have a QR code, with an address embedded in a poster near a cash register. 
Customers can scan this QR code with their phones and pay. Or, they can make it 
easier for the customer by using a dedicated app to generate the QR code with 
both the address and bill amount embedded. 
Merchants can also integrate custom hardware—such as Coinkite®, XBTerminal® 
and BitStraat®—with existing registers and point-of-sales solutions. 
Ecommerce companies 
Ecommerce websites can use a Bitcoin merchant solution, which provides payment 
processing services, to accept bitcoins and have them automatically converted 
to dollars. This avoids having to manage bitcoin prices based on the current 
exchange rate. Ecommerce companies, and any company with a website, can also 
help customers by creating a landing page that allows them to get the address to 
make a Bitcoin payment by typing in the invoice number. Customers can copy and 
paste an address generated by a form on the page. 
BitPay25 and other services allow websites to embed bitcoin invoices into pages. 
Services like BitPay also enable websites to embed bitcoin invoices into their 
website using iframes, which is really just a small separate Web page inside 
another Web page. 
Ecommerce companies can also use plugins, or software components that add 
a specific feature to an existing software application, with many shopping cart 
interfaces to accept bitcoins, including Wordpress®, Shopify®, Magento®, Woo 
Commerce®, and ZenCart®. And, invoices can be emailed out that include bitcoin 
payment requests. 
25 “Bitcoin Payment Gateway API.” Bitpay.com. BitPay, n.d. Web. 28 Oct. 2014. 
© 2014 4imprint, Inc. All rights reserved
Dell26 has teamed up with Coinbase to accept bitcoins. 
Buy a Dell® computer with bitcoins 
Dell now accepts bitcoins as payment online. After a consumer adds an item to a 
cart and chooses bitcoin as their payment option, they are sent to Coinbase.com 
to complete purchases. At Coinbase, customers can choose to pay directly from 
their bitcoin wallets by using the generated payment address or by scanning the 
QR codes with their smartphones. They can also log in to a Coinbase account if 
they have one and send payment directly. Dell says it is accepting bitcoins because 
transactions “can be made easily from anywhere in the world, and offer reduced 
payment processing costs.” 
Businesses that mail invoices to customers 
Businesses who regularly mail out invoices to clients can mention they accept 
bitcoins on their invoices, near where they list other payment options, such as 
Visa or MasterCard. It is a good idea to include the bitcoin price and the date by 
which the bill must be paid to avail of that price—this is important as the bitcoin 
exchange rate for dollars can fluctuate quite a bit. Companies should create a 
new address for every invoice for transparency. Bitcoin addresses are cumbersome 
to type, as they comprise a mix of uppercase and lowercase letters, but should still 
include them in the invoice, as it helps provide a paper trail. And the customer 
can also prove payment through the Bitcoin Block Explorer®, which keeps a record 
of every payment. Using each address just once removes any ambiguity for clients 
about who is making the payment. 
Paying taxes on Bitcoin income 
Tax compliance is a topic of concern for small businesses. But in many respects, 
Bitcoin transactions work very much like cash. According to the IRS, taxpayers 
who receive bitcoins as payment for goods or services must, “in computing gross 
26 “Dell Now Accepts Bitcoin.” Dell.com. Dell, n.d. Web. 28 Oct. 2014. 
© 2014 4imprint, Inc. All rights reserved
income, include the fair market value of the virtual currency, measured in U.S. 
dollars, as of the date that the virtual currency was received.27” 
The downside of bitcoins 
There are a number of disadvantages beyond the 
deflationary issue and threat of losing all bitcoins in 
the way you can lose cash:28 
• Deflationary currency—as the number of 
bitcoins will max out at 21 million, the value 
of coins will rise after the limit is reached. This 
creates an incentive for holding on to coins 
until they rise in value rather than spending 
them today. This can put downward pressure 
on product prices to create an incentive to 
spend. This is one of the main criticisms of the theory behind Bitcoin: It 
encourages people to not spend money. 
• The level of acceptance—while more businesses are accepting bitcoins, the 
level of market acceptance is low and has to grow to benefit from network 
effects. 
• Price fluctuations—the small market size of bitcoin means that relatively 
small events, trades, or business activities can significantly affect the price. 
Bitcoin supporters argue that this volatility will ease when the market grows 
and matures. 
• Beta status—Bitcoin remains incomplete. Security developments are still in 
process and most Bitcoin businesses are so new, they offer no insurance on 
transactions carried out using those services. Credit card companies, on the 
other hand, do offer insurance on transactions using their financial system. 
• Public/private key system security—the key system for transactions is 
only secure as long as the private key is kept secret. Web-based apps store 
everything on a server. If that server is compromised, all the bitcoins on that 
server can be lost. This is what happened with Japanese bitcoin exchange 
Mt Gox—almost $500 million worth of bitcoins were taken when hackers 
accessed the exchange’s server. There are two ways to store bitcoins. A hot 
wallet involves storing public and private keys on a device that’s connected 
to the Web, which is like walking around with all your cash in your pocket. 
A cold wallet means storing everything offline, on an external drive for 
example. However, if you lose your drive or it stops working—you lose your 
bitcoins. It is also possible to take a hybrid approach: Storing most of your 
27 Irs.gov. IRS, 25 Mar. 2014. Web. 1 Oct. 2014. <http://www.irs.gov/pub/irs-drop/n-14-21.pdf>. 
28 “Bitcoin: Frequently Asked Questions.” Bitcoin.org. Bitcoin Project, n.d. Web. 3 Oct. 2014. <https://bitcoin.org/ 
en/faq>. 
© 2014 4imprint, Inc. All rights reserved
bitcoins offline but moving coins to your hot wallet as you need them. 
• New digital currency—it is possible that a new digital currency could 
enter the marketplace and take the place of Bitcoin, reducing its value 
significantly. However, Bitcoin may now be too well-established for it to be 
easily replaced. 
Summary 
Bitcoin is a new crypto-currency that holds real benefits for business and 
consumers, including more control over their money, low fees and quick transfers, 
even internationally. And companies can easily start accepting bitcoins using apps 
on their phones or computers or using Bitcoin merchant solutions. There are a 
growing number of companies adopting this digital currency, including Subway 
and Dell. And there are consumers who want to use it. But the truth is that right 
now it is not a major source of new revenue. But Bitcoin may be heralding a new 
way for businesses and consumers to think about money. And in the next several 
years, it may develop into a niche electronic currency that serves as an alternative 
to other electronic payment processing platforms, such as credit cards and PayPal. 
It is easy set up, so does not take much effort to give it a try. Accepting bitcoins 
may also give a company’s public relations operations a shot in the arm, as there is 
a lot of local coverage for companies that adopt Bitcoin. 
4imprint serves more than 100,000 businesses with innovative promotional items throughout the United States, 
Canada, United Kingdom and Ireland. Its product offerings include giveaways, business gifts, personalized gifts, 
embroidered apparel, promotional pens, travel mugs, tote bags, water bottles, Post-it Notes, custom calendars, 
and many other promotional items. For additional information, log on to www.4imprint.com. 
© 2014 4imprint, Inc. All rights reserved

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Bitcoins

  • 1. Mining for Bitcoins 4imprint.com
  • 2. In 2010, a programmer in Jacksonville, Fla., convinced a pizza shop to give him two piping-hot pizzas worth $30 for the 10,000 bitcoins he had “mined” on his computer. This is the fabled first-ever bitcoin transaction.1 Today, those bitcoins are worth about $3.6 million, but at one point they were worth $6 million. Welcome to the wild, wild world of Bitcoin. This headline-grabbing, digital currency promises consumers total control over their money and low fees for businesses. But it polarizes supporters and detractors. Fans believe it allows people to buy anything without interference from third parties, such as banks. Detractors, on the other hand, think Bitcoin is a house of cards that will collapse as soon as people realize that zeros and ones on a computer have no value. The reality may be somewhere in between. Bitcoin is unlikely to upend the world’s financial networks2, but it is having an impact, as companies look to adopt it and consumers seek opportunities to spend it. For companies, Bitcoin provides: • Reliable payments designed not to be reversible or fraudulent; • Low (less than 1 percent) or no fees—the customer pays for the transaction; and • Quick transfers. Bitcoin’s security is based on well-understood cryptography used by the U.S. Government3. Its algorithms are as trustworthy as credit card transactions or any type of electronic bank transfer. So people who doubt the security of its transactions should have similar doubts about the security of any credit card transaction. The system protects against fraud by ensuring the whole network sees the transactions that have happened and that bitcoins have moved. This is like the serial numbers being scanned every time money is spent, making it possible to trace money as it moves around, making it almost impossible to introduce counterfeit money.4 And accepting bitcoins can be as easy as downloading an app onto a computer or phone that provides a bitcoin wallet that will take care of pretty much everything, 1 Bilton, Nick. “Disruptions: Betting on a Coin With No Realm.” Bits.blogs.nytimes.com/. The New York Times Company, 22 Dec. 2013. Web. 10 Oct. 2014. <http://bits.blogs.nytimes.com/2013/12/22/disruptions-betting-on-bitcoin/?_ © 2014 4imprint, Inc. All rights reserved php=true&_type=blogs&_r=0>. 2 Pagliery, Jose. Bitcoin and the Future of Money. Chicago: Triumph LLC, 2014. Print. 3 “Myths.” En.bitcoin.it. Bitcoin Project, 20 Sept. 2014. Web. 10 Oct. 2014. <https://en.bitcoin.it/wiki/Myths>. 4 Hill, Kashmir. “21 Things I Learned About Bitcoin From Living On It For A Week.” Forbes.com. Forbes, 9 May 2013. Web. 13 Oct. 2014. <http://www.forbes.com/sites/kashmirhill/2013/05/09/25-things-i-learned-about-bitcoin- from-living-on-it-for-a-week/>.
  • 3. including requesting and confirming payments, as well as converting bitcoins into dollars straight away. Customers are using bitcoins, too, but the numbers are small. For example, about three customers a day are using bitcoins to pay for their sandwiches at a Subway® location in Allentown, Pa.5 And in its first week accepting bitcoins, CheapAir.com® made sales worth $6,8006. Reno, Nev., barber Josh Arias7 also accepts bitcoins and would like to see customers adopting it as he does not have to pay the merchant fees incurred when customers swipe their credit cards. Before we go any further, let’s just say it: Bitcoin is weird. This is a payment network based on an “imaginary” currency. And most people when they first hear about Bitcoin say the same thing: “No, this cannot possibly work.” But to-date, it is defying the doubters, which is why we should all be paying attention to the rise of crypto-currencies. So, how does it work? Put simply, Bitcoin is electronic money—nothing more than bits in a computer or smartphone. First, let’s just say that electronic money is not money stored electronically. Whereas services like Google Wallet® stores credit cards, debit cards and loyalty cards. Bitcoin is different. It reimagines what money is. Anyone can receive it—and spend it—by simply transferring bitcoins between one another. Bitcoin is really more like cash than credit cards. Like cash, people either have bitcoins or they don’t. And if they have bitcoins, they are handed over to the business there and then, without any third-party involvement. There is no bank or other middle man. The Bitcoin network is a bit like a BitTorrent® peer-to-peer network8, which is created when two or more computers connect and share resources directly, without going through a separate server computer. These networks are best known for helping people share such files as films, games and music over the Internet. In Bitcoin’s case, however, instead of music or movies, the computers share a digital ledger, or a transaction database known as a blockchain, with every computer on the network. And this ledger is automatically updated anytime someone spends bitcoins. This ledger contains details of every single bitcoin transaction there has ever been. This provides Bitcoin’s transparency. Every transaction is visible to everyone in the network. Now before we get bogged 5 “8 Things You Can Buy with Bitcoins Right Now.” Money.cnn.com/. CNN Money, n.d. Web. 3 Oct. 2014. <http://money.cnn.com/gallery/technology/2013/11/25/buy-with-bitcoin/>. 6 “8 Things You Can Buy with Bitcoins Right Now.” Money.cnn.com/. CNN Money, n.d. Web. 3 Oct. 2014. <http://money.cnn.com/gallery/technology/2013/11/25/buy-with-bitcoin/>. 7 “8 Things You Can Buy with Bitcoins Right Now.” Money.cnn.com/. CNN Money, n.d. Web. 3 Oct. 2014. <http://money.cnn.com/gallery/technology/2013/11/25/buy-with-bitcoin/>. 8 Pagliery, Jose. Bitcoin and the Future of Money. Chicago: Triumph LLC, 2014. Print. © 2014 4imprint, Inc. All rights reserved
  • 4. down in privacy concerns, let’s just say that transactions appear as strings of numbers and letters that are not associated with anyone’s real-world identity. The transactions in this ledger are not confirmed by banks or any other third party. They are confirmed using complex math problems, or algorithms. Bitcoin users are trusting math, not people, to verify transactions. Whoever solves these problems, through a process known as mining, verifies the bitcoin network’s transactions and wins new bitcoins for their trouble. So, people literally are mining for bitcoins. And it is the limited supply of this currency combined with the high demand for it that is the secret of its value9, and indeed the value of more traditional currencies. So, who is using this currency? In the U.S., the typical user is a tech-savvy male, aged 25 to 40, earning above-average income, and usually living on one of the coasts.10 In this Blue Paper, we will discuss the history of Bitcoin, how it works, its pros and cons, and how companies can start accepting this digital currency. We will also run through how transactions work, and the tax implications of accepting bitcoins. © 2014 4imprint, Inc. All rights reserved The history of Bitcoin Let’s start at the beginning, which was Friday, October 31, 2008—Halloween, appropriately enough. On that day, the mysterious Satoshi Nakamoto posted a message on the cypherpunks mailing list entitled “Bitcoin P2P e-cash paper.”11 His—hers, or their, no one knows—message was simple: “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.” And his initial paper is still available online, but be warned, it’s not an easy read. He argued: “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” Cryptography involves the enciphering and deciphering of messages in secret code, or cipher. Nakamoto wanted to create a math-based currency whose value couldn’t be “watered down” by a central authority, like the Federal Reserve. 9 McMillan, Robert, and Cade Metz. “Bitcoin Survival Guide: Everything You Need to Know About the Future of Money.” Wired.com. Condé Nast, 25 Nov. 2013. Web. 18 Sept. 2014. <http://www.wired.com/2013/11/bitcoin-survival- guide/all/>. 10 Brennan, Morgan. “Why More Businesses May Adopt Bitcoin.” Usatoday.com. CNBC, 12 Jan. 2014. Web. 10 Oct. 2014. <http://www.usatoday.com/story/money/personalfinance/2014/01/12/cnbc-bitcoin-business/ 4393905/>. 11 Pagliery, Jose. Bitcoin and the Future of Money. Chicago: Triumph LLC, 2014. Print.
  • 5. But the concept of a “crypto-currency” predates Nakamoto and was actually first described in 1998 by Wei Dai on the cypherpunks mailing list.12 He suggested a new form of money could use cryptography to control its creation and transactions, rather than a central authority. But it wasn’t until after Nakamoto’s paper that the first crypto-currency came into being. And when Nakamoto left the project quietly in late-2010, without his/her identity ever being revealed, the Bitcoin community had taken up the challenge to create a new currency and since then, it has grown exponentially. To appreciate why people would take up Nakamoto’s challenge and help establish a digital currency, it is a good idea to look at the cypherpunk community. Nakamoto launched his idea on a mailing list for this community. Cypherpunks advocate using cryptography to drive social and political change and put a lot of store on privacy and personal liberties. They were attracted to Nakamoto’s idea that a network capable of processing tens of millions of transactions each day without the need to work through financial institutions would make it easier for people to make small, casual payments to one another. So, it was politics that got Bitcoin up and running. However, the Bitcoin community has broadened beyond cypherpunks. It now speaks to a wider audience that sees its potential for reducing the costs and friction of global e-commerce and other commercial transactions.13 Nakamoto’s idea was for a digital currency that would reside on a network of computers. This network would support a system that verifies transactions and “mines” for new bitcoins, delivering new bitcoins at a steady rate, to help manage inflation.14 Bitcoins cannot be inflated by “printing” new money above and beyond the expected issuance rate. The name of the new system would be Bitcoin, with a capital “B”; a lowercase “b” would be used for the units of currency, bitcoins. Here’s where bitcoins get even weirder: the truth is they don’t exist, not even on a hard drive. So, while all the talk is of bitcoins, you cannot point to an account, like a bank account with dollars, that actually contains bitcoins. Instead, what you see in a bitcoin account, or address, are records of transactions between different addresses, with balances that increase and decrease. We will further explain 12 Pagliery, Jose. Bitcoin and the Future of Money. Chicago: Triumph LLC, 2014. Print. 13 “Myths.” En.bitcoin.it. Bitcoin Project, 20 Sept. 2014. Web. 10 Oct. 2014. <https://en.bitcoin.it/wiki/Myths>. 14 Pagliery, Jose. Bitcoin and the Future of Money. Chicago: Triumph LLC, 2014. Print. © 2014 4imprint, Inc. All rights reserved
  • 6. transactions a little later, but here’s a brief overview. Transactions comprise:15 • An input—this is the bitcoin address, or account, that sent the bitcoins to the account holder that is now looking to spend them. This provides evidence that the bitcoin holder has the right to spend them. • An amount—this simply describes the amount of bitcoins that are being spent. • An output—this is the address to which the bitcoins are now being sent. The recipient will then have the right to spend these bitcoins. Every transaction that takes place is stored in the ledger, or block chain. Ok, let’s return to talking about bitcoins as if they were real. Only a few bitcoins were made available initially. But the system was designed to slowly expand the currency to produce a total of 21 million bitcoins—no more, no less. This number was completely random; it has no secret meaning. But that has not stopped a lot of speculation. It is worth noting that while the number of bitcoins is set at 21 million, it is possible to divide each bitcoin into 100 million pieces, known as satoshis, after the anonymous Bitcoin founder. So the total number of currency units there will ever be is 2,100,000,000,000,000. Bear in mind that Bitcoin was viewed as an alternative way for people to make small payments to one another. It was never viewed as a replacement for existing systems, so a finite marketplace is not a major stumbling block for Bitcoin. But if you still think there may be more to this number, Bitcoin Magazine™ does a great job analyzing it. Nakamoto estimated that the amount of bitcoins produced would fall by half every four years—10.5 million by 2013, another 5.25 million by 2018, and 2.625 million by 2023, and so on until the last bitcoin is mined some time around 2140, if the currency survives that long. As of October 2014, there were 13.38 million bitcoins in circulation, valued at around $5.06 billion, but the market is volatile. So, where is the value in these non-existing currencies? Bitcoin is designed so people can subjectively value the currency, which is happening because individuals are freely exchanging products and services for bitcoins. It’s also possible to think about the value of the network, like a phone network, rather than of individual bitcoins.16 Phones only have value because they are connected to a network. Without a network, phones are useless. Bitcoins are similar—their value comes from the global network of merchants, exchanges, wallets, etc., that accept them as a currency. Just like the phone is needed to transmit voice, text and multimedia messages, bitcoins are needed to 15 “How Do Bitcoin Transactions Work?” Coindesk.com. CoinDesk, 6 Mar. 2014. Web. 10 Oct. 2014. <http://www.coindesk.com/information/how-do-bitcoin-transactions-work/>. 16 “Myths.” En.bitcoin.it. Bitcoin Project, 20 Sept. 2014. Web. 10 Oct. 2014. <https://en.bitcoin.it/wiki/Myths>. © 2014 4imprint, Inc. All rights reserved
  • 7. transmit economic information through the network. Ultimately, though, the value is determined by supply and demand—what people are prepared to give in exchange for bitcoins. And the number of businesses prepared to trade for bitcoins is growing. According to Bitcoin Pulse, there are more than 5,500 businesses now accepting bitcoins and that number is growing at around 5.14 percent per month: The number of businesses accepting bitcoins is growing at about 5.14 percent.17 The increasing acceptance of bitcoins Weekly Avg. Growth Last 30 Days © 2014 4imprint, Inc. All rights reserved Category Source Metric The Bitcoin ledger OK, so let’s start with getting our heads around Bitcoin. Deep down in the pit of the mine, at its core, Bitcoin is a digital file with a list of accounts and balances. Think of it as a typical business ledger, called a “blockchain” in the Bitcoin world. A copy of this ledger is stored on every computer in the Bitcoin network. When someone spends bitcoins, the transaction is broadcast across the network, so every copy of the ledger is updated, indicating which account is going down and by how much and which account now has a higher value. Computers update their copy of the ledger and pass along the transaction to other computers, which then pass it on, until every copy of the ledger has been updated. At the end of the day, just like business ledgers, the Bitcoin ledger has to reconcile to zero. This and some math-based security is all there really is to Bitcoin: A system that lets a network of computers maintain a ledger and in doing so lets people spend electronic cash. The beauty of the “ledger” is that it means for the first time two parties can exchange value online without a third-party intermediary, such as MasterCard®, PayPal® or Visa®, who maintain the ledger in traditional online transactions18. This third-party was needed because online transactions involve exchanging digital 17 “Bitcoin Pluse.” Bitcoinpulse.com/. Bitcoin Pulse, n.d. Web. 13 Oct. 2014. <http://www.bitcoinpulse.com/>. 18 “Everything You Need to Know About Bitcoin: VICE Podcast 027.” Youtube.com. Vice Media Inc., 9 Jan. 2014. Web. 1 Oct. 2014. <https://www.youtube.com/watch?v=SNssKmeXrGs>. Monthly Avg. Growth Last 180 Days Absolute Consumer Blockchain My Wallet Number of Users 0% 7.53% 2,331,810 Consumer Coinbase Num Wallets 0% 7.52% 1,700,000 Merchants Coinmap Num Venues 0% 5.14% 5,544 Merchants Cointerest Num Bitcoin Venues 0.72% 6.67% 6,248 Technical Github Num Created Repositories 1.14% 4.49% 4,395
  • 8. files, which are pretty much like Word® documents or image files. Copies of these files remain on the sender’s computer when he or she sends them to someone else. There is nothing to stop the sender from sending the file to someone else. The same would apply with spending money using digital files. This is why third-parties have been needed: to ensure the same money is not spent more than once19. This is known as the double-spending problem—successfully spending the same money more than once—and this is what Bitcoin’s math solves with its ledger. Bitcoin mining Bitcoin has come up with an ingenious way of verifying transactions using the crowd, basically users. The process is called mining. Now, this mining doesn’t involve any hard hats, head lamps or long periods underground chipping away at rock or dirt. But like mining, it requires expertise in knowing where the valuable seam of gold is and what specialist tools are required to get access to that seam in a profitable way. With mining for gold, there was a time when panhandlers could get rich quick in a gold rush. But now, the major conglomerates dominate the mining businesses. Bitcoin has a similar story. There was a time when anyone could use their home computers to mine for bitcoins. But now the competition has become so tough that there are large businesses with rooms full of specialized machines that exclusively mine for bitcoins. Think of something like a giant crossword puzzle or game of Sudoku® when you consider bitcoin mining. And instead of miners chipping away at rock think of complex computers computing away with one thing in mind: solving that puzzle or game. This explains why even though receiving a payment is almost instant with Bitcoin, there is a 10-minute delay on average before the network confirms the transaction. This delay is needed to solve the puzzle, let every miner know the puzzle has been solved and update every copy of the ledger with the new solution. A confirmation means there is a network consensus that the bitcoins you have received have not been sent to anyone else and are considered your property.20 Mining is Bitcoin’s clearing house, but it uses complex algorithms, or math, rather than a bank, to balance accounts. Everything depends on math. And that is why complete strangers are prepared to trust bitcoins—the math means they don’t have to trust people. 19 “Everything You Need to Know About Bitcoin: VICE Podcast 027.” Youtube.com. Vice Media Inc., 9 Jan. 2014. Web. 1 Oct. 2014. <https://www.youtube.com/watch?v=SNssKmeXrGs>. 20 Pagliery, Jose. Bitcoin and the Future of Money. Chicago: Triumph LLC, 2014. Print. © 2014 4imprint, Inc. All rights reserved
  • 9. To ensure puzzles are solved on time—every 10 minutes or so—Bitcoin does something really simple, in theory, not in practice: it adjusts the difficulty of the puzzle, making it easier or harder as required. Ok, so why every 10 minutes? This number is actually a compromise between the first confirmation time and the amount of work wasted by miners who were not the first to solve the puzzle21. After a block is mined, it takes time for the losing miners to learn about it. And until they do, they are still competing to solve the problem. So, 10 minutes helps get the word out that the problem has been solved and the miners should stop what they are doing on that puzzle and should update their copy of the ledger. It was also felt that shortening the confirm time, to say five minutes, would not provide that great a benefit to companies accepting bitcoins. Weighing the needs of miners and companies using bitcoins led to a compromise number of 10 minutes to verify transactions. As for changing the difficulty of the problem: If you were chipping away at rock down a mine, it’s like someone giving you a pick axe or a jackhammer depending on how fast they want you to work. In reality, what this means is that there is a sort of mining gold rush, with ever more computing power needed to solve bitcoin formulas.22 So mining verifies transactions. But it has another role: introducing new bitcoins. The first miners to solve the puzzle are rewarded with new bitcoins—25 bitcoins, or about $8,640—but that number will fall over time as the system works to control the number of bitcoins on the market. That is where the motivation comes from for miners to monitor transactions on the site. When production stops after 21 million bitcoins hit the market, miners will most likely be supported by small transaction fees23. Bitcoin benefits That’s pretty much how Bitcoin works, but what benefits can companies expect for adopting this crypto-currency. • Easy payments—Users can send and receive any amount of money instantly, anywhere in the world at any time. • Low fees—Bitcoin payments involve little or no fees today. But users can include fees to have transactions confirmed faster than the standard 10 minutes. 21 “Bitcoin: Frequently Asked Questions.” Bitcoin.org. Bitcoin Project, n.d. Web. 3 Oct. 2014. © 2014 4imprint, Inc. All rights reserved <https://bitcoin.org/en/faq>. 22 Popper, Nathaniel. “Dealbook: Into the Bitcoin Mines.” Http://dealbook.nytimes.com/. The New York Times Company, 21 Dec. 2013. Web. 3 Oct. 2014. <http://dealbook.nytimes.com/2013/12/21/into-the-bitcoin-mines/>. 23 “Bitcoin: Frequently Asked Questions.” Bitcoin.org. Bitcoin Project, n.d. Web. 3 Oct. 2014. <https://bitcoin.org/en/faq>.
  • 10. • Secure transactions—Bitcoin transactions are secure, irreversible, and do not require personal details. • No need for PCI compliance—This is the security standard for processing credit card transactions on the Web. • New markets—Businesses can enter new markets where credit cards may not be available. This can help keep fees and administrative costs lower. • No need to join a credit card merchant network—Businesses can simply download an app and start accepting bitcoins. • Identity protection—Payments can be made without personal information tied to the transaction, providing protection against identity theft. • Transparency—All bitcoin transactions are visible to everyone in the network. • Easy to get started—Businesses can get started by downloading an app that will accept payments and convert bitcoins into dollars immediately. © 2014 4imprint, Inc. All rights reserved How to get started Companies still interested in exploring Bitcoin now have a decision to make: How much control do they want? Most businesses will just want to accept bitcoin payments and have them converted into dollars straight away. But let’s quickly review the options: Full client Companies that want to handle Bitcoin transactions on their own, with no help, can opt for a full client service. This stores the bitcoin ledger, manages wallets and conducts transactions directly on the bitcoin network. Think of a standalone email server in a cool corner office. Lightweight client This is a middle option. The client stores the wallet but relies on third-parties to access the bitcoin transactions and network. This is similar to an email client that connects to a mail server for access to a mailbox, such as Microsoft Outlook®, in that it relies on a third party for interactions with the network. Web client This is like Gmail®. The client is accessed through a Web browser and stores the wallet on a server owned by a third party. The reality is that for most companies and consumers, Bitcoin will rarely be more than a mobile app or computer program that provides a personal Bitcoin wallet
  • 11. that allows users to send and receive bitcoins. Let’s run how this would work in practice with a Bitcoin newbie, Alice. The first thing Alice needs to do is to get a wallet from a hosted service, such as blockchain.info®. Alice could also access bitcoin apps through the iPhone® and AndroidSM App Stores. The wallet’s software holds the addresses and manages the keys that are needed to complete bitcoin transactions. Bitcoin wallet makes it easy to send and receive bitcoins. © 2014 4imprint, Inc. All rights reserved Bitcoin wallet Addresses are critical for transactions. Like an email address, Alice can share her address and anyone can use it to send her bitcoins. A Bitcoin address looks something like this: 1Cdif9KGAaasrcxBaBttQcwXMOpvM9t7FK. But a QR-code, containing these address details is also usually available on the digital wallet. It is also possible to create a new address for every transaction. This provides transparency about every transaction. Once Alice has set up a wallet she faces the challenge of getting her first bitcoins. There are exchanges that buy and sell bitcoins for local currencies: Bitstamp, for example. But it can take a number of days to set up these accounts as they require various forms of identification. Other ways Alice may get her first bitcoins are: • From a friend who has some • From local services that sell bitcoins for cash, which can be found at localbitcoins.com • Selling something for bitcoins But let’s assume a friend, Bob, is giving Alice some bitcoins. Bob opens his Bitcoin
  • 12. digital wallet, selects “send coins,” and provides the destination address, Alice’s, and how much he wants to deliver. Bob can type in the destination address or scan the QR code with the address information on Alice’s phone. Now, the transaction will initially appear in Alice’s wallet as “Unconfirmed”, as it still needs to be confirmed by a miner. Once that has happened, Alice is free to spend the money. So, let’s say Alice decides to buy lunch in a café that accepts bitcoins. The prices at the café are listed in dollars and bitcoin. The café could have point-of- sale hardware, such as CoinKite’s bitcoin terminals, to automatically convert the price into bitcoins at the market rate and display a QR code containing a payment request. Alice can now use her phone to scan the barcode, which will show the payment request in her bitcoin wallet. She then just needs to hit send to authorize the payment. Finally, in about the same time as a credit card authorization, the transaction will be visible on the register. And that’s it, the transaction is complete. Coinbase24 uses QR codes to make payment simple in its mobile app How a transaction works using the Coinbase® digital app to create QR codes: 1. The merchant enters details of the sale 2. The merchant taps “Request payment” to display the QR code 3. The customer scans the QR code with her phone and taps to pay 4. Both parties receive payment confirmation—sale complete! So, for businesses, there really isn’t a lot of difference between accepting bitcoins and accepting credit cards. But there is a lot going on behind the scene. 24 “Point of Sale.” Coinbase.com. Coinbase, n.d. Web. 28 Oct. 2014. © 2014 4imprint, Inc. All rights reserved
  • 13. © 2014 4imprint, Inc. All rights reserved Bitcoin privacy Bob and Alice’s identities are never revealed in the Bitcoin ecosystem—they are completely anonymous. They are known under pseudonyms called public keys. These keys are generated using addresses and private keys known only to the owner. Public keys are a string of letters and numbers that do not need to have any relationship to Bob and Alice’s real world identities. Anyone who knows the address can deposit bitcoins into it. It’s as simple as Bob hitting the send button. But only those with the right permissions can move bitcoins out of an account. This means access to the private key, another series of letters and numbers. So, the final step for Bob and Alice is for Bob to use his private key to confirm he has the right to send bitcoins from his wallet to Alice’s. And that is why it is so important to keep the private key safe. Anyone with access to it can move funds. This is one of the weaknesses of the Web-based services that most people use when using bitcoins. These Web services store the keys and the bitcoins. If they are compromised, hackers can access the bitcoins and move them across the Internet in a fraction of a second. But to summarize, to send bitcoins to a friend, you need his or her public key, which is kind of like a routing number on a checking account, to know where to send it and your private key to complete the deal. But even then, miners have to do their work before the money can be spent. The miners use the math associated with keys and addresses to check every transaction that happens on the network. If the math does not work, the transaction is rejected. If it works, the transaction is added to the Bitcoin ledger and every copy of the ledger on the network is then updated. Setting prices Every business has some choices to make about their bitcoin prices. Many apps will convert bitcoins into dollars automatically at the time of the transaction— merchant services like BitcoinPay, Bit-pay, Coinbase® and Paysius will do this automatically. Companies can also decide to do some trading in bitcoins by not converting them into dollars and keeping the bitcoins for investment purposes. Bitcoins can fluctuate quite a bit, so this decision really depends on each company’s attitude to risk. You can track bitcoin exchange rates at sites like BitcoinPrices.com. Pretty much, every kind of business can start to accept bitcoins: brick and mortar stores, ecommerce companies and business-to-business organizations.
  • 14. Brick and mortar stores As with the previously mentioned café example, brick and mortar operations can have customers pay using hardware terminals; touch screen apps, on their phones or tablets; or simple wallet addresses through QR Codes. For example, merchants could have a QR code, with an address embedded in a poster near a cash register. Customers can scan this QR code with their phones and pay. Or, they can make it easier for the customer by using a dedicated app to generate the QR code with both the address and bill amount embedded. Merchants can also integrate custom hardware—such as Coinkite®, XBTerminal® and BitStraat®—with existing registers and point-of-sales solutions. Ecommerce companies Ecommerce websites can use a Bitcoin merchant solution, which provides payment processing services, to accept bitcoins and have them automatically converted to dollars. This avoids having to manage bitcoin prices based on the current exchange rate. Ecommerce companies, and any company with a website, can also help customers by creating a landing page that allows them to get the address to make a Bitcoin payment by typing in the invoice number. Customers can copy and paste an address generated by a form on the page. BitPay25 and other services allow websites to embed bitcoin invoices into pages. Services like BitPay also enable websites to embed bitcoin invoices into their website using iframes, which is really just a small separate Web page inside another Web page. Ecommerce companies can also use plugins, or software components that add a specific feature to an existing software application, with many shopping cart interfaces to accept bitcoins, including Wordpress®, Shopify®, Magento®, Woo Commerce®, and ZenCart®. And, invoices can be emailed out that include bitcoin payment requests. 25 “Bitcoin Payment Gateway API.” Bitpay.com. BitPay, n.d. Web. 28 Oct. 2014. © 2014 4imprint, Inc. All rights reserved
  • 15. Dell26 has teamed up with Coinbase to accept bitcoins. Buy a Dell® computer with bitcoins Dell now accepts bitcoins as payment online. After a consumer adds an item to a cart and chooses bitcoin as their payment option, they are sent to Coinbase.com to complete purchases. At Coinbase, customers can choose to pay directly from their bitcoin wallets by using the generated payment address or by scanning the QR codes with their smartphones. They can also log in to a Coinbase account if they have one and send payment directly. Dell says it is accepting bitcoins because transactions “can be made easily from anywhere in the world, and offer reduced payment processing costs.” Businesses that mail invoices to customers Businesses who regularly mail out invoices to clients can mention they accept bitcoins on their invoices, near where they list other payment options, such as Visa or MasterCard. It is a good idea to include the bitcoin price and the date by which the bill must be paid to avail of that price—this is important as the bitcoin exchange rate for dollars can fluctuate quite a bit. Companies should create a new address for every invoice for transparency. Bitcoin addresses are cumbersome to type, as they comprise a mix of uppercase and lowercase letters, but should still include them in the invoice, as it helps provide a paper trail. And the customer can also prove payment through the Bitcoin Block Explorer®, which keeps a record of every payment. Using each address just once removes any ambiguity for clients about who is making the payment. Paying taxes on Bitcoin income Tax compliance is a topic of concern for small businesses. But in many respects, Bitcoin transactions work very much like cash. According to the IRS, taxpayers who receive bitcoins as payment for goods or services must, “in computing gross 26 “Dell Now Accepts Bitcoin.” Dell.com. Dell, n.d. Web. 28 Oct. 2014. © 2014 4imprint, Inc. All rights reserved
  • 16. income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.27” The downside of bitcoins There are a number of disadvantages beyond the deflationary issue and threat of losing all bitcoins in the way you can lose cash:28 • Deflationary currency—as the number of bitcoins will max out at 21 million, the value of coins will rise after the limit is reached. This creates an incentive for holding on to coins until they rise in value rather than spending them today. This can put downward pressure on product prices to create an incentive to spend. This is one of the main criticisms of the theory behind Bitcoin: It encourages people to not spend money. • The level of acceptance—while more businesses are accepting bitcoins, the level of market acceptance is low and has to grow to benefit from network effects. • Price fluctuations—the small market size of bitcoin means that relatively small events, trades, or business activities can significantly affect the price. Bitcoin supporters argue that this volatility will ease when the market grows and matures. • Beta status—Bitcoin remains incomplete. Security developments are still in process and most Bitcoin businesses are so new, they offer no insurance on transactions carried out using those services. Credit card companies, on the other hand, do offer insurance on transactions using their financial system. • Public/private key system security—the key system for transactions is only secure as long as the private key is kept secret. Web-based apps store everything on a server. If that server is compromised, all the bitcoins on that server can be lost. This is what happened with Japanese bitcoin exchange Mt Gox—almost $500 million worth of bitcoins were taken when hackers accessed the exchange’s server. There are two ways to store bitcoins. A hot wallet involves storing public and private keys on a device that’s connected to the Web, which is like walking around with all your cash in your pocket. A cold wallet means storing everything offline, on an external drive for example. However, if you lose your drive or it stops working—you lose your bitcoins. It is also possible to take a hybrid approach: Storing most of your 27 Irs.gov. IRS, 25 Mar. 2014. Web. 1 Oct. 2014. <http://www.irs.gov/pub/irs-drop/n-14-21.pdf>. 28 “Bitcoin: Frequently Asked Questions.” Bitcoin.org. Bitcoin Project, n.d. Web. 3 Oct. 2014. <https://bitcoin.org/ en/faq>. © 2014 4imprint, Inc. All rights reserved
  • 17. bitcoins offline but moving coins to your hot wallet as you need them. • New digital currency—it is possible that a new digital currency could enter the marketplace and take the place of Bitcoin, reducing its value significantly. However, Bitcoin may now be too well-established for it to be easily replaced. Summary Bitcoin is a new crypto-currency that holds real benefits for business and consumers, including more control over their money, low fees and quick transfers, even internationally. And companies can easily start accepting bitcoins using apps on their phones or computers or using Bitcoin merchant solutions. There are a growing number of companies adopting this digital currency, including Subway and Dell. And there are consumers who want to use it. But the truth is that right now it is not a major source of new revenue. But Bitcoin may be heralding a new way for businesses and consumers to think about money. And in the next several years, it may develop into a niche electronic currency that serves as an alternative to other electronic payment processing platforms, such as credit cards and PayPal. It is easy set up, so does not take much effort to give it a try. Accepting bitcoins may also give a company’s public relations operations a shot in the arm, as there is a lot of local coverage for companies that adopt Bitcoin. 4imprint serves more than 100,000 businesses with innovative promotional items throughout the United States, Canada, United Kingdom and Ireland. Its product offerings include giveaways, business gifts, personalized gifts, embroidered apparel, promotional pens, travel mugs, tote bags, water bottles, Post-it Notes, custom calendars, and many other promotional items. For additional information, log on to www.4imprint.com. © 2014 4imprint, Inc. All rights reserved