What is bitcoin?
Bitcoins can be thought of as entries in a ledger.
- When ownership changes hands, the transaction is recorded in the appropriate blockchain for that bitcoin – the bitcoin is never physically transferred anywhere.
- The information in the blockchain is kept up-to-date and public so anyone can check if the transfer is from the rightful owner.
- Bitcoin mining is the process of computing the transactions from operators all over the world, with no one individual or group having control.
The concept of the bitcoin
has been likened to a very old currency, the large limestone disks known as rai stones used as currency on the Pacific island of Yap.
The rai stones are so large and heavy that they are not practically moved. Instead, the owners of the stones are recorded through oral history so the history of ownership is known for each stone, even though the stone never moves.
Origin of the Bitcoin
- August 15th, 2008 – Neal Kin, Vladimir Oksman and Charles Bry file for an encryption patent application that would later come to be used for bitcoins.
- August 18th, 2008 – bitcoin.org is anonymously registered as a domain name.
- October 31th, 2008 – A paper outlining a peer-to-peer electronic cash system is published under the mysterious name Satoshi Nakamoto, who was never identified.
- January 3rd, 2009 – The first block is mined.
- October 5th, 2009 – The first exchange rate is established, valuing US $1 = 1,309.03 BTC. New Library Standard created the equation by calculating the cost of electricity to run a computer that generated bitcoins.
- May 22nd, 2010 – The first real-world transaction using bitcoins takes place when programmer Laszlo Hanyecz pays 10,000 BTC (valued at $25 at the time) for a pizza on the Bitcoin Forum.
- Bitcoin reached parity with U.S. dollar and Euro.
- Large bitcoin theft reported 25,000 BTC stolen worth $375,000 at the time.
- First bitcoin conference and World Expo held in New York, NY.
- Bitcoin magazine launches.
- FBU produces report – Bitcoin Virtual Currency: Unique Features Present Distinct
- Challenges for Deterring Illicit Activity.
- Bitcoin savings and Trust investigated for running bitcoin Ponzi scheme.
- May 2013 – First Bitcoin ATM debuts in San Diego, CA.
- November 2013 – Bitcoin surpasses $1,000 USD $1,000 USD = 1 BTC
- December 2013 – Largest heist makes off with 96,000 BTC from online black market.
Regulation of the Bitcoin
Regulation of this new currency is ever-evolving and as of yet policies are nonexistent, ambiguous or inadequate for dealing with virtual currencies.
- January 26th, 2014: A U.S. federal judge ruled that bitcoins are a legal form of exchange. This ruling follows the U.S. Treasury’s support of bitcoin as a currency and allows the SEC to regulate bitcoin as a security under the Securities Exchange Act.
- February 16th, 2014: The NewYork Department of Financial Services (NYDFS) conducted regulatory hearings on virtual currencies in the hopes of creating a regulatory framework to lend credibility and ease uncertainty over virtual currencies.
- March 25th, 2014: The IRS issued a notice that it will treat bitcoin and other virtual currencies like property rather than like currency. Investors who purchase virtual currencies would have a capital gain or loss versus a foreign currency gain or loss. Payments received in virtual currency will be considered income, determined by the fair market value of the virtual currency on the date it was received.
- 54 countries are considered permissive. They have policies, laws, or regulations that allow the use of the bitcoin, including the U.S.
- 7 countries are considered contentious. There are some specific limitations: China, India, Jordan, Kazakhstan, Mexico, Russia, Thailand.
- 2 countries are considered hostile: Iceland forbids domestic entities from buying bitcoins, making it illegal to purchase bitcoins with Icelandic krona. Vietnam bans financial institutions from using bitcoins.
Problems with Bitcoins
- Theft is still much of an issue for financial institutions and some major thefts have included the loss of tens of thousands of bitcoins – some of which are now considered permanently removed from circulation.
- Fraud is also still possible such as with the Bitcoin Savings and Trust Ponzi scheme.
- Money laundering may be easier with other currencies given the open nature of bitcoin blockchains, but that didn’t stop Charlie Shrem from being arrested for money laundering.
Used for Illicit Purchases
2011 – Silk Road, an anonymous online black market fro drags and narcotics solely using bitcoins was created. Other similar marketplaces have since cropped up. Estimated $1.9 million sold every month on the Silk Road.
Volatile Nature and Plagued with Problems
On March 11th, 2014, Mt. Gox, the long time dominant trade exchange for bitcoins since 2010, filed for bankruptcy in the U.S. Mt. Gox has admitted to losing $490 million of their customers’ bitcoins.
Majority Rule: If in the future a significant change is needed, it will require a near consensus among users in order to effectively make the change.
Future of the Bitcoin
The future is largely uncertain due to the volatile nature of the bitcoin and evolving regulations, but the exchange rate of the bitcoin is expected to stabilize over time, especially once the final bitcoin is generated and the marketplace deals with a finite amount of currency.
Should quantum computing (such as the D-Wave system) be confirmed as truly quantum and ever come into use for bitcoin mining, the cryptography used would need to be updated to use post-quantum algorithms.
If nothing else, even if the bitcoin fails, it has launched significant financial innovation and will be the inspiration for future decentralized and/or virtual currencies.