Introduction

Bitcoin is a cryptocurrency and worldwide payment system. It is the first decentralized digital currency,
as the system works without a central bank or single administrator. The network is peer-to-peer and
transactions take place between users directly, without an intermediary. These transactions are verified by
network nodes through the use of cryptography and recorded in a public distributed ledger called a
blockchain. Bitcoin was invented by an unknown person or group of people under the name Satoshi
Nakamoto and released as open-source software in 2009.Bitcoins are created as a reward for a process
known as mining. They can be exchanged for other currencies, products, and services. As of February
2015, over 100,000 merchants and vendors accepted bitcoin as payment. Research produced by the
University of Cambridge estimates that in 2017, there were 2.9 to 5.8 million unique users using a
cryptocurrency wallet, most of them using bitcoin.

Definition
Bitcoin is a digital currency that is not backed by any country’s central bank or government. Bitcoins can
be traded for goods or services with vendors who accept Bitcoins as payment. It is not controlled or
issued by any bank or government – instead it is an open network which is managed by its users. Bitcoins
aren’t printed, like dollars or euros – they’re produced by people, and increasingly businesses, running
computers all around the world, using software that solves mathematical problems. It can be used to buy
things electronically. In that sense, it’s like conventional dollars, euros, or yen, which are also traded
digitally.

Etymology
The word bitcoin first occurred and was defined in the white paper that was published on 31 October
2008. It is a compound of the words bit and coin. The white paper frequently uses the shorter coin. There
is no uniform convention for bitcoin capitalization. Some sources use Bitcoin, capitalized, to refer to the
technology and network and bitcoin, lowercase, to refer to the unit of account.

Units

The unit of account of the bitcoin system is bitcoin. Ticker symbols used to represent bitcoin are BTC and
XBT. Its Unicode character is ₿. Small amounts of bitcoin used as alternative units are millibitcoin
(mBTC) and satoshi (sat). Named in homage to bitcoin's creator, a satoshi is the smallest amount within
bitcoin representing 0.00000001 bitcoins, one hundred millionth of a bitcoin. A bit equals 0.000001
bitcoins, one millionth of a bitcoin or 100 satoshis. A millibitcoin equals 0.001 bitcoins, one thousandth
of a bitcoin or 100,000 satoshis.

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History
On 18 August 2008, the domain name "bitcoin.org" was registered. In November that year, a link to a
paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to
a cryptography mailing list. Nakamoto implemented the bitcoin software as open source code and
released it in January 2009 on SourceForge. The identity of Nakamoto remains unknown.

In January 2009, the bitcoin network came into existence after Satoshi Nakamoto mined the first ever
block on the chain, known as the genesis block. Embedded in the coinbase of this block was the following
text: The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.

This note has been interpreted as both a timestamp of the genesis date and a derisive comment on the
instability caused by fractional-reserve banking.

The receiver of the first bitcoin transaction was cypherpunk Hal Finney, who created the first reusable
proof-of-work system (RPOW) in 2004. Finney downloaded the bitcoin software the day it was released,
and received 10bitcoins from Nakamoto. Other early cypherpunk supporters were Wei Dai, creator of
bitcoin predecessor b-money, and Nick Szabo, creator of bitcoin predecessor bit gold.

In the early days, Nakamoto is estimated to have mined 1 million bitcoins. In 2010, Nakamoto handed the
network alert key and control of the Bitcoin Core code repository over to Gavin Andresen, who later
became lead developer at the Bitcoin Foundation. Nakamoto subsequently disappeared from any
involvement in bitcoin. Andresen stated he then sought to decentralize control, saying: "As soon as
Satoshi stepped back and threw the project onto my shoulders, one of the first things I did was try to
decentralize that. So, if I get hit by a bus, it would be clear that the project would go on." This left
opportunity for controversy to develop over the future development path of bitcoin.

On 1 August 2017, a hard fork of bitcoin was created, known as Bitcoin Cash. Bitcoin Cash has a larger
block size limit and had an identical blockchain at the time of fork. On 12 November another hard fork,
Bitcoin Gold, was created. Bitcoin Gold changes the proof-of-work algorithm used in mining.

Uses of Bitcoin
 Donations to entities that the government does not like.
 Purchasing goods that the government does not like.
 Gambling in jurisdictions that the government does not like.
 Purchasing services that the government does not like.
 Hiding assets from a spouse.
 Hiding assets from the government.
 Transferring assets across borders. It is the real innovation of Bitcoin, and what will make it
relevant globally.

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Types of Bitcoin
Bitcoins are stored in a “digital wallet,” which exists either in the cloud or on a user’s computer. The
wallet is a kind of virtual bank account that allows users to send or receive bitcoins, pay for goods or save
their money. Unlike bank accounts, bitcoin wallets are not insured by the FDIC. Value of Bitcoin is
constantly jumping up and sinking down. FirstBitcoins were sold for nearly $0.3 and now due toincreased
attention to this cryptocurrency value of 1 BTC grew rapidly and even reached $1000.
To store Bitcoins people can use one of the next 3 types of wallets: online wallets, mobile wallets and
software (or full-featured) wallets.

Online Wallets are dedicated to store user’s digital keys on the Web. It means that Bitcoin wallet is
stored not on their computer, but on some faraway server of service provider. There are different online
wallet providers. And depending on the provider, features of Bitcoin wallet can vary. Some online wallets
are created with minimum features, while others can be used as a full-featured Bitcoin wallet.

The main advantage of online wallet is that it enables people to enter their wallet in any place of the
world. Online wallets are very easy to start using and have simple interface. Disadvantage of this kind of
wallet is security.

Mobile Wallet, which is almost the same as online wallet, but it is supported by mobile device. Due to
the fact that people cannot run full Bitcoin client on mobile device, Simplified Payment Verification
(SPV) is used here. So security of storing Bitcoins in mobile wallet comes in question.

Mobile Wallets are very useful if people wish to make payments when they are in the street and away
from any computer. The main advantage is convenience, of course. It is possible to pay in stores at POS
locations of course, in case merchant supports such kind of payment.

Desktop Wallets are installed on people’s computer. These are full-featured Bitcoin clients, with the the
highest security level and the widest variety of features. Once people install this wallet on their computer
they need to update it by downloading all blockchains which were created from the very beginning. This
can cause some difficulties in using desktop client, as it takes time to download gigabytes of blockchains.
Of course, it is recommended to have powerful hardware if they wish to run desktop client.

Advantages
The following are some of the major advantages of using Bitcoin versus other currency systems:

i. No Third-Party Seizure

Since there are multiple redundant copies of the transactions database, no one can seize bitcoins. The
most someone can do is force the user, by other means, to send the thebitcoins to someone else. This
means that governments can’t freeze someone’s wealth, and thus users of Bitcoins will have complete
freedom to do anything they want with their money.

ii. No Taxes

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There is no way for a third party to intercept transactions of Bitcoins, and therefore there is no viable way
to implement a Bitcoin taxation system. The only way to pay a tax would be, if someone voluntarily
sends a percentage of the amount being sent as tax.

iii. No Tracking

Unless users publicize their wallet addresses publicly, no one can trace transactions back to them. No one,
other than the wallet owners, will know how many Bitcoins they have. Even if the wallet address was
publicized, a new wallet address can be easily generated. This greatly increases privacy when compared
to traditional currency systems, where third parties potentially have access to personal financial data.

iv. No Transaction Costs

Sending and receiving Bitcoins requires users to keep the Bitcoin client running and connected to other
nodes. Essentially, by using bitcoins users will be contributing to the network, and thus sharing the
burden of authorizing transactions. Sharing this work greatly reduces transaction costs, and thus makes
transaction costs negligible.

v. No Risk of “Charge-backs”

Once Bitcoins are sent, the transaction cannot be reversed. Since the ownership address of Bitcoins will
be changed to the new owner, once it is changed, it is impossible to revert. Since only the new owner has
the associated private key, only he/she can change ownership of the coins. This ensures that there is no
risk involved when receiving Bitcoins.

vi. Bitcoins Cannot be Stolen

Bitcoins’ ownership address can only be changed by the owner. No one can steal Bitcoins unless they
have physical access to a user’s computer, and they send the bitcoins to their account. Unlike convential
currency systems, where only a few authentication details are required to gain access to finances, this
system requires physical access, which makes it much harder to steal.

Disadvantages
Like any currency, there are disadvantages associated with using Bitcoin:

I. Bitcoins Are Not Widely Accepted

Bitcoins are still only accepted by a very small group of online merchants. This makes it unfeasible to
completely rely on Bitcoins as a currency. There is also a possibility that governments might force
merchants to not use Bitcoins to ensure that users’ transactions can be tracked.

II. Wallets Can Be Lost

If a hard drive crashes, or a virus corrupts data , and the wallet file is corrupted, Bitcoins have essentially
been “lost”. There is nothing that can done to recover it. These coins will be forever orphaned in the

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system. This can bankrupt a wealthy Bitcoin investor within seconds with no way form of recovery. The
coins the investor owned will also be permanently orphaned.

III. Bitcoin Valuation Fluctuates

The value of Bitcoins is constantly fluctuating according to demand. As of June 2nd 2011, one Bitcoins
was valued at $9.9 on a popular bitcoin exchange site. It was valued to be less than $1 just 6 months ago.
This constant fluctuation will cause Bitcoin accepting sites to continually change prices. It will also cause
a lot of confusion if a refund for a product is being made. For example, if a t shirt was initially bought for
1.5 BTC, and returned a week later, should 1.5 BTC be returned, even though the valuation has gone up,
or should the new amount (calculated according to current valuation) be sent? Which currency should
BTC tied to when comparing valuation? These are still important questions that the Bitcoin community
still has no consensus over.

IV. No Buyer Protection

When goods are bought using Bitcoins, and the seller doesn’t send the promised goods, nothing can be
done to reverse the transaction. This problem can be solved using a third party escrow service like
ClearCoin, but then, escrow services would assume the role of banks, which would cause Bitcoins to be
similar to a more traditional currency.

V. Risk of Unknown Technical Flaws

The Bitcoin system could contain unexploited flaws. As this is a fairly new system, if Bitcoins were
adopted widely, and a flaw was found, it could give tremendous wealth to the exploiter at the expense of
destroying the Bitcoin economy.

VI. Built in Deflation

Since the total number of bitcoins is capped at 21 million, it will cause deflation. Each bitcoin will be
worth more and more as the total number of Bitcoins maxes out. This system is designed to reward early
adopters. Since each bitcoin will be valued higher with each passing day, the question of when to spend
becomes important. This might cause spending surges which will cause the Bitcoin economy to fluctuate
very rapidly, and unpredictably.

VII. No Physical Form

Since Bitcoins do not have a physical form, it cannot be used in physical stores. It would always have to
be converted to other currencies. Cards with Bitcoin wallet information stored in them have been
proposed, but there is no consensus on a particular system. Since there would be multiple competing
systems, merchants would find it unfeasible to support all Bitcoin cards, and therefore users would be
forced to convert Bitcoins anyway, unless a universal system is proposed and implemented.

VIII. No Valuation Guarantee

Since there is no central authority governing Bitcoins, no one can guarantee its minimum valuation. If a
large group of merchants decide to “dump” Bitcoins and leave the system, its valuation will decrease

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greatly which will immensely hurt users who have a large amount of wealth invested in Bitcoins. The
decentralized nature of bitcoin is both a curse and blessing.

Economics of Bitcoin
According to research produced by Cambridge University, there were between 2.9 million and 5.8 million
unique users using a cryptocurrency wallet, as of 2017, most of them using bitcoin. The number of users
has grown significantly since 2013, when there were 300,000 to 1.3 million users.

 Acceptance by merchants

In 2015, the number of merchants accepting bitcoin exceeded 100,000. Instead of 2–3% typically
imposed by credit card processors, merchants accepting bitcoins often pay fees under 2%, down to 0%.
Firms that accepted payments in bitcoin as of December 2014 included PayPal, Microsoft, Dell, and
Newegg. In 2017 bitcoin's acceptance among major online retailers included three out of the top 500
online merchants, down from five in 2016. Reasons for this fall include high transaction fees due to
bitcoin's scalability issues, long transaction times and a rise in value making consumers unwilling to
spend it. In November 2017 PwC accepted bitcoin at its Hong Kong office in exchange for providing
advisory services to local companies who are specialists in blockchain technology and cryptocurrencies,
the first time any Big Four accounting firm accepted the cryptocurrency as payment.

 Payment service providers

Merchants accepting bitcoin ordinarily use the services of bitcoin payment service providers such as
BitPay or Coinbase. When a customer pays in bitcoin, the payment service provider accepts the bitcoin on
behalf of the merchant, converts it to the local currency, and sends the obtained amount to merchant's
bank account, charging a fee for the service.

 Financial institutions

Bitcoins can be bought on digital currency exchanges. According to Tony Gallippi, a co-founder of
BitPay, "banks are scared to deal with bitcoin companies, even if they really want to". In 2014, the
National Australia Bank closed accounts of businesses with ties to bitcoin, and HSBC refused to serve a
hedge fund with links to bitcoin. Australian banks in general have been reported as closing down bank
accounts of operators of businesses involving the currency; this has become the subject of an
investigation by the Australian Competition and Consumer Commission. Nonetheless, Australian banks
have trialled trading between each other using the blockchain technology on which bitcoin is based.

In a 2013 report, Bank of America Merrill Lynch stated that "we believe bitcoin can become a major
means of payment for e-commerce and may emerge as a serious competitor to traditional money-transfer
providers." In June 2014, the first bank that converts deposits in currencies instantly to bitcoin without
any fees was opened in Boston.

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

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  As an investment

Some Argentinians have bought bitcoins to protect their savings against high inflation or the possibility
that governments could confiscate savings accounts. During the 2012–2013 Cypriot financial crisis,
bitcoin purchases in Cyprus rose due to fears that savings accounts would be confiscated or taxed.

The Winklevoss twins have invested into bitcoins. In 2013 The Washington Post claimed that they owned
1% of all the bitcoins in existence at the time.

Other methods of investment are bitcoin funds. The first regulated bitcoin fund was established in Jersey
in July 2014 and approved by the Jersey Financial Services Commission. Forbes started publishing
arguments in favor of investing in December 2015.

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

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

 Venture capital

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

 Price and volatility

The price of bitcoins has gone through various cycles of appreciation and depreciation referred to by
some as bubbles and busts. In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32
before returning to US$2. In the latter half of 2012 and during the 2012–13 Cypriot financial crisis, the
bitcoin price began to rise, reaching a high of US$266 on 10 April 2013, before crashing to around
US$50. On 29 November 2013, the cost of one bitcoin rose to a peak of US$1,242. In 2014, the price fell
sharply, and as of April remained depressed at little more than half 2013 prices. As of August 2014 it was
under US$600.

According to Mark T. Williams, as of 2014, bitcoin has volatility seven times greater than gold, eight
times greater than the S&P 500, and 18 times greater than the US dollar. According to Forbes, there are
uses where volatility does not matter, such as online gambling, tipping, and international remittances.

According to an article in The Wall Street Journal, as of 19 April 2016, bitcoin had been more stable than
gold for the preceding 24 days, and it was suggested that its value might be more stable in the future. On
3 March 2017, the price of a bitcoin surpassed the market value of an ounce of gold for the first time as its

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price surged to an all-time high of $1,268. A study in Electronic Commerce Research and Applications,
going back through the network's historical data, showed the value of the bitcoin network as measured by
the price of bitcoins, to be roughly proportional to the square of the number of daily unique users
participating on the network, i.e. that the network is "fairly well modeled by the Metcalfe's law".

Prospects and Future

Bitcoin is a digital currency that enables an individual to transfer money and make payments to anyone
across the globe. However, the first thing to understand about Bitcoin is that it is not just money transfer
or upgraded money. It is only a component that gives Bitcoin great value. Bitcoin is rather a programming
environment, a publicly audited ledger which accounts for all transaction in terms of property, ownership
and contracts. Developed by Satoshi Nakamoto in 2009, it uses advanced encryption technology whereby
users transfer money by sending digitally signed messages to a network. The encryption also helps to
keep the identity of both sender and receiver private.

In the past four years, Bitcoin has seen tremendous growth as more and more businesses and small
merchants are shifting from conventional modes of payment. Companies like WordPress and
Overstock.com and many small brick and mortar stores have already started accepting bitcoins as
payment. Even some not for profit organisations and advocacy groups like Electronic Frontier Foundation
have also started accepting donations in bitcoins.

 Case for Bitcoins

The proponents of Bitcoin network argue that the advantages of this technology outweigh the risks
involved. They argue that Bitcoin incorporates all the benefits of online funds transfer without the
associated costs. Transacting on a Bitcoin platform is easy and hassle-free. The user can start as soon as
he/she obtains a Bitcoin wallet which takes only a few minutes. As compared to fiat currencies, Bitcoins
offer several advantages:

 Decentralization

Bitcoin environment uses Peer-to-Peer (P2P) exchange so there is no bank or intermediary acting in
between. This, in addition to minimising the cost of transactions by reducing commissions, also leads to
less labor involvement in financial transactions, heavy duty accounting and conflict resolution.

 No Counterfeit Currency

Every time a Rs. 500 note changes hands, people check for its authenticity by holding it against a light
source. This is because 2 out of every 3 bank notes in India are fake. This surge in volume of counterfeit
currency has led to increase in prices and a reduction in the value of real money as more money is into
circulation than is required. With bitcoins however, such a scenario is less plausible as they can be created
only by miners after doing certain amount of work for each block.

 Less Inflationary

With fiat currency the government always has the option of printing more money. If a monetary
instrument works properly, the supply changes as the quantity demanded changes. In other words, when
there is more demand, it goes up, and comes down when there is less demand. This leads to increased

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money supply followed by inflation. However, since the maximum value of Bitcoins is capped at 21
million, Bitcoins are partially if not entirely inflation-proof. Thus, many inflation hit countries like
Argentina and Cyprus are seeing an increased use of Bitcoins.

 Not Based on Debt

Many governments including India are hugely burdened by the loads of debt financing that they have
raised for government spending. With increasing amounts of debt also comes the increased cost of rolling
over debt and accumulating interest. With bitcoins however, the concept of debt totally vanishes. This
also reduces the cost of insurance.

 Reduced Prices

Currently, credit and debit card companies charge very high commissions for their services. This seems
fit as these companies spend approximately 30%-40% of their profits fighting lawsuits on fraud. This
commission cost is transferred to end consumers leading to high prices. However, since Bitcoins cannot
be impersonated, if there is a way of transferring these kind of transactions to Bitcoins - through
smartphones or Bitcoin cards - the costs would reduce substantially.

 Transparency

When making a transfer using Bitcoin network, both the sender and receiver are required to agree on the
terms set by them. Only then the transaction can go through. This means that there is no unnecessary fees
that the seller can impose on the buyer without his approval.

 Case against Bitcoins

Currently, 25 bitcoins are created every 10 minutes. Although still in its nascent stage, the Bitcoin
network has consistently faced criticism from the proponents of age old fiat currency system. This
criticism can be explained in part by the fact that the fiat system is the monopoly of the respective
governments with vested political, financial and military interests. Nevertheless, some criticism stems
from genuine concerns expresses by economists.

 Jobs Lost

The acceptance of Bitcoins as national currency would render many professions out of date. These would
include accountants, forex professionals, credit and debit card companies, clearing houses and other
financial intermediaries. Since most of these jobs are dream jobs for many and are very well paying, it
will be difficult to find alternate means of employment. Not to forget the substantial lobbying power this
soon-to-be-unemployed community has.

 Bubble

Many critics view Bitcoin as a bubble that will soon burst. They argue that the value of a bitcoin in terms
of fiat currencies has been extremely volatile with the price rising from US$0.30 to US$200 in just one
year. Also, many speculative and arbitrage opportunities exist within this niche market further fuelling
this volatility. However, since the concept is still in its embryonic stage, there are no hedging contracts
available in terms of forwards or futures. Thus, there are serious questions on its viability as a currency.

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  Illegal Activity

Bitcoin network is seen as a haven for money laundering and many other criminal activities. Recently,
Silk Road, an online market which used bitcoins as a medium of exchange was closed under the federal
law. It turned out that this clandestine currency was being used for many nefarious purposes. What further
aggravates the situation is the fact that it is not possible to trace the source or the destination of money,
much less what is being traded.

 Legality ofbitcoin by country

Because of bitcoin's decentralized nature, nation-states cannot shut down the network or alter its technical
rules. However, the use of bitcoin can be criminalized, and shutting down exchanges and the peer-to-peer
economy in a given country would constitute a "de facto ban". The legal status of bitcoin varies
substantially from country to country and is still undefined or changing in many of them. While some
countries have explicitly allowed its use and trade, others have banned or restricted it. Regulations and
bans that apply to bitcoin probably extend to similar cryptocurrency systems.

 No Backing

With regard to national currencies, a government is required to back the money supply with assets like
gold. However, the same does not apply to Bitcoins. They are neither backed by hard assets nor by faith
of the government. This makes them a risky proposition during bankruptcy. Some analysts however argue
that Bitcoins are backed by the “processing power”. This seems illogical as there is no fundamental
means of repayment in case the process crashes.

Conclusion
Bitcoin is going to gain popularity and might even replace official currencies.
Bitcoins can be helpful to a lot of people. Since they are an international currency, you can use them in
any country without having to convert between currencies. The Blockchain is really secure and it lets you
make sure your money goes to/comes from the right person. People receiving Bitcoins won't have to pay
anything for the transactions, and Bitcoins have a lot of support. All of these will definitely help Bitcoin
get more users, and if everyone uses Bitcoin it could replace official currencies. Sure, it has some
disadvantages, but some of those are because Bitcoin is a new thing, so as time goes on they will be less
of a problem. The others can easily be avoided.

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