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Bitcoin is a virtual crypto-currency regulated by a peer-to-peer network that creates a time-stamped register yielding chains of valid transactions. Unlike other digital currency systems or credit payments, Bitcoins are treated like cash and transactions cannot be reversed.
The need for a digital currency based in cryptography was discussed in two separate academic papers published in 1993 by researchers at Carnegie Mellon University and the University of Southern California. Five years later, the idea was introduced to the the Cypherpunks mailing list by cryptography advocate Wei Dai, who suggested a system in which the currency would be both regulated and created through crowdsourced cryptography, thus eliminating the risk of double-spending altogether.
On November 1st, 2008, a person or group of people under the pseudonym Satoshi Nakamoto distributed a papersolidifying this idea into a proposal for something called “Bitcoin” via the Cryptography Mailing List. The first blockchain was generated on or before January 3rd, 2009, as its Genesis Block, or first block, references the title of an article published that day in the UK newspaper The Times about a physical bank bailout. The announcement of the system and its open source client was posted on the Cryptography Mailing List on January 9th. This post also stated that the total circulation would consist of 21 million coins, made available in increments with the full amount made available by 2140.
On July 18th, 2010, the exchange market Mt. Gox launched, allowing people to buy and sell Bitcoins as well as providing software for merchants to accept Bitcoins as payment on their online storefronts. The site also offers a live ticker of Bitcoin exchange rates (shown below). They claim to facilitate more than 80% of all Bitcoin trading as of March 2013.
Bitcoins are generated through a process known as “mining,” which adds transaction records to Bitcoin’s public register known as a block chain. The chain exists as a record of Bitcoins spent in actual monetary value and to bar attempts from double-spending, or spending previously used coins. The process is meant be challenging, requiring a piece of data known as a proof of work that has an ever-changing very low probability for getting the hash for each transaction correct on the first try. The actual act of mining can be completed by dozens of different programs for multiple operating systems, including Android. A ledger of the most recent blocks is provided by BlockExplorer. A handful of miners have shared their mining hardware setups made from both desktops (shown below, left) and mobile phones (shown below, right) on YouTube.
On March 18th, 2013, the United States Financial Crimes Enforcement Network issued a clarification to the regulation regarding virtual currencies. Though the statement does not explicitly address Bitcoin, it stipulates that businesses that exchange American dollars for digital currencies qualify as Money Services Businesses (MSBs) and should thus be subject to federal regulations and must comply with money laundering laws. However, users of the currency, or people who mine the currency for themselves, do not qualify as an MSB.
In February 2013, Bitcoin’s value began increasing drastically and by mid-February, the price of Bitcoins had doubled from $13.50 per coin at the beginning of the year and risen above $27 per coin for the first time since 2011. Despite a glitch that caused the price to drop 23% in mid-March, the Bitcoin value continued to rise throughout the month and reached $100 for the first time on April 1st. Many analysts cautiously declared the trend a bubble, including Wall Street analyst Nick Colas who noted that the inflating value of Bitcoin was a “perfect storm” attributed to a combination of a tech-savvy userbase, a large group of people unhappy with traditional banks and their policies, deposit taxes in European countries, constrained and predictable supply, and a clarification of U.S. regulations on its trade.
On April 3rd, Bitcoin’s trading value hit an all-time high of $147, leading to more concerns about the currency’s possible hyperdeflation, or a sudden, drastic collapse of its value. The same day, Bitcoin service Instawallet shut down indefinitely following a hack that revealed the vulnerabilities in their system’s architecture. Despite this, the value continued to rise through the first week of April, reaching an all-time high of $194.90 on April 8th, 2013. The same week, a handful of other Bitcoin sites including Mt. Gox and Bitcoin-Central reported security breaches and DDoS attacks.
During the first few days of April, more than 75,000 new accounts were created on the Bitcoin exchange site Mt. Gox, or 125% more than the total number of signups in the previous month. On April 10th, 2013, Mt.Gox saw triple the average amount of daily trades, which their servers could not handle. The same day, Bitcoin prices dropped from $265 to $156 over the course of six hours, hitting a low of $105 at one point. In early speculation, Ars Technica noted that the price drop came several hours after Redditor bitcoinbillionaire gave away nearly $12,000 USD to 13 seemingly random Redditors in a thread titled “I wish for the price to crash.” on the Bitcoin subreddit. The Verge reported that the crash was likely caused by DDoS attacks targeting Mt. Gox and other Bitcoin exchange sites earlier in the day, prompting investors to sell off their Bitcoins. During the time of the price drop, people were reporting a trade lag of 73 minutes on Mt. Gox.
In the early morning of April 11th, Mt. Gox’s Twitter account confirmed that the site was still under a DDoS attack and issued a press release stating that the recent massive interest in Bitcoin trade had caused the site to lag. In response to the attacks and the server issues, they also announced that that they were going to shut down trading completely for 24 hours to let the market “cool down.” Within three hours, news of Mt. Gox’s temporary shutdown resulted in nearly 400 comments on a Reddit thread and launched another discussion on whether or not Mt. Gox should be phased out as the default Bitcoin exchange.
As of March 2013, Bitcoin users and miners congregate on Reddit and the Bitcoin Talk Forums, among numerous other smaller groups. There is also a Wiki and the online publication Bitcoin Magazine that gathers information about the currency and keeps track of its exchange rates. Since 2011, Bitcoin conferences have been held annually throughout Europe, with the first US conference scheduled for May 2013.
Since Bitcoin transactions cannot be reversed, if Bitcoins are stolen from a user’s digital wallet, they cannot be replaced. One of the earliest Bitcoin robberies occurred in June 2011, when a user known as Allinvain reported25,000 Bitcoins (approximately $467,000 at the time) stolen from his account. It was later believed to have been caused by a Trojan virus that would hack into unencrypted wallets and forcefully carry out the transfers. between 2012 and 2013, there have been several reports of large sums of Bitcoins stolen from exchange sites, leading some enthusiasts to suggest offline storage of Bitcoin codes, either on encrypted hard drives that are not connected to the Internet or by physically writing them down. Bitcoin owner Charlie Shrem has a ring with an engraving of his codes (shown below, left) to protect his investment and entreprenuer Mike Caldwell has minted more than $2.5 billion in physical Bitcoins (shown below, right).
On April 4th, 2013, Dmitry Bestuzhev from computer security company Kaspersy Lab identified a virus spreading through Skype which turned an infected computer into a Bitcoin miner. Bestuzhev pointed out that when the infiltration is repeated over time, the malware would be able to harness the power of thousands of computers to unlock Bitcoins at a rapid rate. The offending link was receiving an average of 2,000 clicks per hour at the height of its spread, with victims targeted in at least seven countries. At the time Bestuzhev’s article was published, the link had been clicked more than 11,000 times. The story was shared on Wired the following day, with additional coverage from Slashgear, BBC and Net Security that week.
Ponzi Scheme Arrest
On July 23rd, 2013, the U.S. Securities and Exchange Commission (SEC) charged Texas resident Trendon T. Shavers with operating a Ponzi scheme to raise at least 700,000 Bitcoins, or equivalent to $4.5 million at the time, from investor and misappropriating nearly 150,000 BTC for his personal use. According to the SEC, Shavers (a.k.a pirateat40) launched the First Pirate Savings & Trust (later renamed the Bitcoin Savings & Trust) through the Bitcoin Talk forums in November 2011, enticing potential investors with up to a 7% interest rate on deposits of 2000 BTC or more.
On August 18th, 2012, Shavers closed down the service after a handful of Bitcoin Talk users suspected it of being a fraudulent scheme. When the closure was announced, Bitcoin prices dropped from $15 each to $10 (shown above). At the time of the closure, Shavers claimed to have 500,000 BTC, worth more than $5.6 million at the time. He initially promised to refund everyone’s deposits plus interest, leading Bitcoin Forum users to create a thread to monitor the progress of repayments. In the following weeks, after only one investor confirmed receiving any payment, members of Bitcoin Talk proceeded to dox Shavers and track his location to Texas.
As the case is one of the first criminal prosecutions relating to Bitcoin, news of the charges appeared on a number of news and tech blogs as well as finance sites including The Daily Dot, Wired, Tech Dirt, The New York Times Deal Book and CNN Money.
As of March 2013, a number of online businesses and non-profit organizations accept Bitcoins, most notably Wordpress,4chan,Wikileaks,Reddit and OkCupid. Additionally, the Internet Archive has offered their employees an option to receive a portion of their paychecks in Bitcoins. There are also a handful of Bitcoin casinos where players will bet anywhere from ฿66,000 to ฿1,787,470 per year, depending on the site.
Bitcoins are the only currency accepted on Silk Road, an online black market that can only be accessed via The Onion Router (TOR). Though the site launched in February 2011, the site did not receive mainstream attention until Gawker published an expose on it in June of that year. Silk Road allows people to buy a number of items including drugs, apparel, books, digital goods, drug paraphernalia, erotica and forgeries. In July 2012, it was estimated that more than 1.2 million dollars US in sales were being generated monthly by the site.
Carnegie Mellon – Cryptography: It’s Not Just For Electronic Mail Anymore
Bitcoin Forum – I just got hacked – any help is welcome! (25,000 BTC stolen)
Cornell University Library – Traveling the Silk Road: A measurement analysis of a large anonymous online marketplace
Yahoo! Finance – Bitcoin Prices Blast Through $100, Driving Speculators Wild
Bitcoin Talk – Classic ponzi, with a classic ponzi closing statement.
The Daily Dot – “Bernie Madoff of Bitcoin” charged in $4.5M Ponzi scheme
fn80 NY Times Deal Book – S.E.C. Says Texas Man Operated Bitcoin Ponzi Scheme