Unfolding Bitcoin: A Conceptual Overlook

Dr Ashumani Bhatia
HOD & Associate Professor,
Hindu Institute of Management & Technology, Rohtak
E-mail-ashibhatia2@gmail.com
Dr Jyoti Uppal
Assistant Professor,
Hindu Institute of Management & Technology, Rohtak
E-mail-jyotigandhi2013@gmail.com

Abstract

In the wake of increasing disturbance in different parts of the world there has been an increase in
the acceptance of essential currencies and ensuing instability in its prices. The paper discusses
one such essential currency. The paper highlights the advantages and issues with the convention
of bitcoin. Due to the scarce literature accessible on bitcoin, the paper presents different avenues
of opportunity research in this area. Bitcoin is behaving a lot like the Nasdaq did in the dot-com
effervesce but 15 times faster, Morgan Stanley says. Similarities in price moves and trading
volume could be signs that times gone by is repeating itself, according to a note published by
Morgan Stanley on Monday. Morgan Stanley also points out changes in bitcoin trading volume
into a crypto currency called tether. A closer look at the most profitable bit cion to buy in
2023The entire cryptocurrency is trading at massive lows. from a market capitalisation of close
to $3 trillion towards the end of 2021, it is now hovering around $900 billion. The term ‘stylised
facts’ has been extensively researched through the analysis of many different financial datasets.
More recently, bitcoin have been investigated as a new type of financial asset, and provide an
interesting example, with a current market value of over $500 billion. analyses the stylised facts
of the four most popular bitcoin ranked according to their market capitalisation.

“The Bitcoin rally was approximately 15 times the rapidity,” Sheena Shah, strategist at Morgan
Sta. We constructed daily networks and analyzed the network properties of the bitcoin users and
for attributed as edge circulated between users to focus on weekdays and weekends actions

KEYWORDS : Bitcoin, decentralized, transitional of exchange.

Introduction
The increase in economic and finance complex analysis has enabled the appearance and growth
of rich theories and methodologies over time which have a distinct effect on human decision-
making and are invasive. Thus, they are becoming the link between societies and economies.
Methodologically, graph theory has refined into a potent and compelling tool for abstruse
complex problems. Although it was difficult to construct fnancial networks at the start of this
decade, the rise of crypto-assets has enabled significant available fortuity, for network-related
research and analysis. Earlier, information about transaction details was usually considered
sensitive and not available for research (Baumann et al. 2014). The crypto-asset system
comprised of a repeatedly expanding list of information reserved in a chain is publicly reachable,
and bestows scope to analyze transaction networks in detail. The global fnancial crisis in 2008
exposed fnancial inequalities throughout the world economies. In January 2009, a mysterious
fgure named “Satoshi Nakamoto” introduced a virtual currency system called “Bitcoin”, which
functioned over a cryptography framework called “Blockchain” with an incentive scheme called
“Proof of work” (Nakamoto 2019). Bitcoin is a digital currency that archives transactions and
administers autonomously the generation of new units of currency inside the blockchain frame of
reference. No centralized authority dominates the operation and logging in a distributed system
with private key users proves ownership of coins. A consensus algorithm and a public history of
transactions have strengthened security to prevent duplication and double-spending (Narayanan
et al. 2016 The blockchain is formed using individual computing power from any person’s
computer. This person is actually someone who allows the blockchain to use their computing
power and effectively keep a record of the bitcoin transactions along with supporting the bitcoin
software. Anyone who allows their own computing power to be used for the purpose of
maintaining the blockchain gets a fraction or percentage of every new bitcoin that is mined.
Blockchain offers a secured payment network which is anonymous. This mechanism ensures
authenticity of each transaction, prevents double-counting of bitcoin tokens that has been an
issue with many digital currencies. Also, the immense computing power required to mine bitcoin
makes it almost impossible to duplicate a transaction block and commit fraud. Unlike fiat
currency that is created by mining metal coins, bitcoins are mined using mathematics. The
algorithm makes use of a private key while the verification process makes use of a public key.
Once these keys are mined, a new bitcoin is created. This does not mean that infinite bitcoins can
be created. The algorithm is such that Satoshi Nakamoto ensured that the total number of
bitcoins mined would remain limited to 21 million bitcoins. The total number of bitcoins mined
is programmed to reduce by half every year, until the number of bitcoins reaches 21 million. The
limited number of bitcoins, however, are perfectly divisible. They can be used to make
micropayments. A millibitcoin is 10-3, 10-6 is a microbitcoin and 10-8 is a Satoshi. The bitcoin
ecosystem consists of exchanges that permit trading between bitcoins and traditional currencies,
the transaction service providers that help individuals to store in bitcoin wallets and transact their
bitcoins via their bitcoin client software and the bitcoin miners. Bitcoins can be purchased over
the exchange from an individual or at a bitcoin ATM. With its features of deregulated currency
that promises anonymity, reduction in transaction costs and safety, Bitcoin has been gaining
popularity in the world that is treading to a cashless and digital society. There is an increase in
the acceptance of bitcoins as medium of exchange throughout the world that will result in an
increase in its volume to couple the increasing value of bitcoins. It is expected to soon overcome
the transactions via credit cards and debit cards. Despite the growing popularity, it has become
cynosure of the critiques. The anonymity of transactions puts a question on credibility of
transactions taking place in bitcoins. Bitcoin price has been volatile since 2013 where the price
spiked from approximately $10 to $1163 in the same year and then falling gradually to the
$200s. Again a very high volatility was witnessed in 2016 owing mainly to the devaluation of
Chinese currency, Yuan, as an escape response to the tight capital controls. In early 2017 bitcoin
price hit to all-time high at $1140. Many bitcoin exchanges have shut overnight. Mt. Gox, one of
the world’s first bitcoin exchanges that once accounted for 80% of trading volumes shut down
after operating for four years due to the heightened speculation. The question on reliability of
bitcoin has put the governments away to grant it a legal status.

Buying bitcoins
Buy on an ExchangeMany marketplaces called “bitcoin exchanges” allow using different
currencies. Coinbase is a leading exchange, along with Bitstamp and Bitfinex. But security can
be a concern: bitcoins worth tens of millions of dollars when it was hacked in 2016.

The Bitcoin system

In this section, we point out the main ideas that allow to understand the basic functionality of the
bitcoin virtual currency. Such background is needed to understand the meaning of the research
performed so far. However, the complexity of bitcoins makes impossible to provide a fully
description of the system in thisreview, so interested readers can refer to for a detailed and more
extendedexplanation on the bitcoin system.Bitcoin is a cryptocurrency based on accounting
entries. For that reason, It is not correct to look at bitcoins as digital tokens since bitcoins are
represented as a balance in a bitcoin account. A bitcoin account is defined by an Elliptic
Curve Cryptography key pair. The bitcoin account is publicly identified by itsbitcoin address,
obtained from its public key using an unidirectional function.Using this public information users
can send bitcoins to that address. Then,the corresponding private key is needed to spend the
bitcoins of the account. Regarding this definition, it is easy to understand that any user can create
any number of bitcoin addresses (generating the key pair) either using any standard crypto-
software or self purpose created programs, like bitcoin wallets. Notice that if the user creates
such bitcoin accounts in a private manner then, a priori,nobody can link the identity of the user
with the value of a bitcoin address. The bitcoin network. The bitcoin system needs to disseminate
different kinds of information, essen-tially, transactions and blocks. Since both data are
generated in a distributedway, the system transmits such information over the Internet through a
distributed peer to peer (P2P) network. Such distributed network is created bybitcoin users in a
dynamic way, and nodes of the bitcoin P2P network are computers running the software of the
bitcoin network node. This software is included by default into bitcoin’s full-client wallets, but it
is not usually incorporated in light wallet versions, such as those running in mobile devices. It is
important to stress such distinction in case to perform network analysis, because when
discovering nodes in the P2P bitcoin network, depending on the scanning techniques, not all
bitcoin users are identified, but only those running a fullclientand those running a special purpose
bitcoin P2P node. Furthermore, online bit-coin accounts, provided by major bitcoin Internet sites,
can also be considered as a light weight bitcoin clients, so they do not represent a full bitcoin
P2P node neither.
 Figure: Example of a bitcoin block (data from blockexplorer.com).

Blockchain Analysis
A direct approach to analyze the anonymity offered by the bitcoin system is todig information
out of the blockchain. Since the blockchain includes all trans-actions performed by the system, a
simple analysis provides information fromwhich bitcoin addresses the money comes and to
which bitcoin addresses it goes.However, since users in the bitcoin system can create any
number of addresses,the main goal is to cluster all addresses in the blockchain that belong to the
same user. As we will see, authors apply different techniques to perform suchclustering.The first
research article on Bitcoins was published by Reid and Harrigan ,a first version of which
appeared in arXiv in July 2011. From the blockchain in-formation, authors construct the
transaction network and the user network. The former represents the flow of bitcoins between
transactions, where each vert exrepresents a transaction and each directed edge indicates whether
or not there is an input/output address that links the transactions. The latter represents the flow of
bitcoin users over the time. To construct the user network, authors cluster addresses of the same
user assuming that all input addresses of a transaction belong to the same user. Then, external
information on bitcoin addresses is obtained from different Internet resources (like twitter posts,
forums, specialized bitcoin applications -like bitcoin faucet-) to help the clustering process and to
identify the users behind such clusters. All such information allow them to perform egocentric
analysis and visualization, context discovery, flow and temporal analyses and they conclude that
it is possible to associate many bitcoin addresses with each other, and with external identifying
information. Furthermore, with appropriate tools, the activity of known users can be observed in
detail. In , Androulaky et alter take another step into clustering addresses. Taking into account
the same idea of , where all input addresses of the same transaction are clustered, they added
another heuristic using the output addresses of a transaction. Assuming that most transactions
have only two output addresses, in the case that one of the two has already appeared in the
blockchain, the other one will be a shadow address and can be clustered with the input addresses.
Furthermore, they also apply behavior-based clustering techniques, KMeansand Hierarchical
Agglomerative Clustering, to enhance the cluster creation order to perform such analysis, the
authors generate synthetic data from a specific purpose bitcoin simulator that they developed.
Data from the simulation has also the advantage to provide a ground truth for evaluating their
clustering measures. With this simulation environment and the proposed techniques,authors
indicate that the profiles of 40% of bitcoin users can be unveiled. Ron and Shamir perform an
analysis of bitcoin user behavior from theblockchain data, rather than trying to deanonymize user
information. They alsouse the assumption that multiple input addresses belong to the same user
in order to characterize user behavior. They conclude that until May 13th 2019most of the new
created coins remain unexpended in the minted addresses and that there was a huge number of
tiny transactions that move fractions of bitcoins. Furthermore, they carefully analyze the largest
transactions of the network until that moment and provide a detailed graph structure of their
movements. Data from the simulationhas also the advantage to provide a ground truth for
evaluating their cluster-ing measures. With this simulation environment and the proposed
techniques,authors indicate that the profiles of 40% of bitcoin users can be unveiled.Ron and
Shamir perform an analysis of bitcoin user behavior from theblockchain data, rather than trying
to deanonymize user information. They alsouse the assumption that multiple input addresses
belong to the same user inorder to characterize user behavior. They conclude that until May 13th
2020 most of the new created coins remain unexpended in the minted addresses andthat there
was a huge number of tiny transactions that move fractions of bitcoins.Furthermore, they
carefully analyze the largest transactions of the network untilthat moment and provide a detailed
graph structure of their movements.Papers reviewed so far perform a passive analysis in the
sense that informa-tion of the blockchain is processed without any previous intervention. In
inorder to better understand the traceability of Bitcoin flows, Meiklejohnet alterperform an active
analysis. By performing payments from owned bitcoin ad-dresses to known services (like mining
pools, on-line wallets, gambling services,exchange sites, ...) they can identify such services later
on in the correspond-ing blockhain transactions. Furthermore, they also browse the Internet in
orderto obtain user identification of other addresses. Then, they used two heuristicsfor clustering:
the first one is the all input addresses belong to the same user(already used in [2, 6, 7]) and the
second one identifies the shadow address of atransaction by looking the one between all output
addresses that appeared forthe first time in the blockchain (a similar approach than in [6], but not
limited totwo output address transactions). With their analysis, authors conclude that forlarge
bitcoin transactions, it is possible to trace their movements and the bitcoinnetwork does not offer
enough anonymity, for instance for money laundry. Suchtraceability is even more sharp in case
the analyzer is (or has access) to a centralservice, like a mining pool, an eWallet provider or a
bitcoin exchange site.

Benefits of Bitcoin

Now that we have seen a brief overview of what bitcoin is, we can better understand how this
leading cryptocurrency provides potential benefits to its users.

1. User Autonomy

The primary draw of bitcoin for many users, and indeed one of the central tenets of
cryptocurrencies more generally, is autonomy. Digital currencies allow users more autonomy
over their own money than fiat currencies do, at least in theory. Users are able to control how
they spend their money without dealing with an intermediary authority like a bank or
government.

2. Discretion

Bitcoin purchases are discreet. Unless a user voluntarily publishes his Bitcoin transactions, his
purchases are never associated with his personal identity, much like cash-only purchases, and
cannot easily be traced back to him. In fact, the anonymous bitcoin address that is generated for
user purchases changes with each transaction. This is not to say that bitcoin transactions are truly
anonymous or entirely untraceable, but they are much less readily linked to personal identity
than some traditional forms of payment.
3. Peer-to-Peer Focus

The bitcoin payment system is purely peer-to-peer, meaning that users are able to send and
receive payments to or from anyone on the network around the world without requiring approval
from any external source or authority.

4. Elimination of Banking Fees

While it is considered standard among cryptocurrency exchanges to charge so-called, as well as

occasional deposit and withdrawal fees, bitcoin users are not subject to the litany of traditional
banking fees associated with fiat currencies. This means no account maintenance or minimum
balance fees, no overdraft charges and no returned deposit fees, among many others.

5. Very Low Transaction Fees for International Payments

Standard and foreign purchases typically involve fees and exchange costs. Since bitcoin
transactions have no intermediary institutions or government involvement, the costs of
transacting are kept very low. This can be a major advantage for travelers. Additionally, any
transfer in bitcoins happens very quickly, eliminating the inconvenience of typical authorization
requirements and wait periods.

6. Mobile Payments

Like with many online payment systems, bitcoin users can pay for their coins anywhere they
have Internet access. This means that purchasers never have to travel to a bank or a store to buy a
product. However, unlike online payments made with U.S. bank accounts or, personal
information is not necessary to complete any transaction.

7. Accessibility

Because users are able to send and receive bitcoins with only a smartphone or computer, bitcoin
is theoretically available to populations of users without access to traditional banking systems,
credit cards and other methods of payment.
Risks of Trading Forex with Bitcoin

 Different Exchange Rates: Bitcoin trades on multiple exchanges and exchange rates
vary. Traders must ensure they understand which bitcoin exchange rates the forex broker
will be using.
 U.S. Dollar Rate Risk: While receiving bitcoin deposits from clients, almost all brokers
instantly sell the bitcoins and hold the amount in U.S. dollars. Even if a trader does not
take a forex trade position immediately after the deposit, they are still exposed to
the bitcoin-to-U.S. dollar rate risk from deposit to withdrawal.
 Danger of Volatility: Historically, bitcoin prices have exhibited high volatility. In the
absence of regulations, volatility can be used by unregulated brokers to their advantage
and a trader’s disadvantage. For example, assume the intraday bitcoin rate fluctuates from
$5,000 to $5,300 U.S. dollars per bitcoin. For an incoming deposit of 2 bitcoins, the
unregulated broker may apply the lowest rates to credit the trader $10,000 (2 bitcoins *
$5,000 = $10,000). However, once the trader is ready to make a withdrawal, the broker
may use the lowest exchange rate. Instead of the original 2 bitcoins deposited, the trader
receives only 1.88679 bitcoins ($10,000/$5,300 = 1.88679 bitcoins). The unregulated
broker may be exchanging bitcoins and dollars at, say, $5,150, and pocketing the
difference at the expense of the client.
 Security Risks Inherent to Bitcoin: Deposited bitcoins are prone to theft by hacking,
even from a broker’s digital wallet. To reduce this risk, look for a broker who has
insurance protection against theft.
 RiskofLeverage:Using is risky for new traders who may not understand the exposure.
This risk is not unique to cryptocurrency forex trading and comes into play in traditional
forex transactions as well.
 AssetClassMixing: is a different asset class altogether and has its own valuation
mechanism.Trading forex with bitcoins essentially introduces a new intermediate
currency which can impact profit and loss in unexpected ways. Any money that is not
locked down in a trader’s base currency is a risk.

CONCLUSION –
Recent events such as slashing of interest rate by European Central Bank (ECB), devaluation of
Yuan, Britain’s exit from EU, demonetization of Indian currency had caused spikes in bitcoin’s
price. A high volatility in bitcoin prices has questioned its usage as a currency. People have been
buying bitcoin as a speculative investment which makes it difficult to be used as a medium of
exchange. Coupled with the fact this alternative investment avenue came at a time when the
world witnessed a financial crisis in 2018 makes it worthwhile to have some empirical studies on
the impact of economic factors on bitcoin prices and returns. Bitcoin arose to combat the crisis
situation and emerged as an alternative investment vehicle rather than as an alternative medium
of exchange. World over it is observed that when an economy faces turmoil, bitcoin’s popularity
increases. However, it is quite possible that bitcoin may put the economy in a downward spiral.
Growing demand with limited supply is resulting in a continuous growth in bitcoin’s value
without any supporting logic that may hint a bubble in the market that may burst. People have
been hoarding it with a belief that its price shall increase further. This is evident from fewer
volumes of transactions in bitcoin. Also, the anonymity in transactions may put a veil on
investment in illegal activities, money laundering and flight of capital. So, what began as an
escape response to the turmoil in the economy may further push the economy in a spiral. Thus,
there lies immense scope to investigate the macroeconomic factors that affect bitcoin prices and
returns. The regulatory environment of a country is an important factor to determine the adoption
of bitcoin by people. Stringent regulations may cause potential investors to invest more in bitcoin
and escape the regulations. This is precisely is happening in China as Chinese government has
strict capital controls. On the other hand, regulations of a country may be such that investments
in bitcoin may be tightened or banned. Besides the regulatory aspect, the development of
financial market may have an impact on the adoption of bitcoin. A well-developed financial
market may reduce the reliance on bitcoin. However, if bitcoin’s volatility is controlled due to
well developed markets it may emerge as a medium of exchange which is digital and shall help
the economy to become cashless. The economic environment may have an impact on adoption
on bitcoin. The birth of bitcoin in post-crisis period indicates that it may be used to overcome
economic irregularities. The legal environment is yet another important factor that may impact
bitcoin’s adoption and usage. Hence, a comprehensive framework that analyzes various levels of
macroeconomic factors should be assessed to determine what impacts the popularity of bitcoin.
An event study of the various spikes in bitcoin’s tenure since 2019 is also a promising avenue of
future research.

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