Bitcoin - the Basics
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Bitcoin
Vesa Linja-aho — T-76.5753 Law in Network Society
http://www.flickr.com/photos/31119160@N06/8007585111/
About me
Vesa Linja-aho, M. Sc. in electrical and electronics engineering.
Professional background: 7 years at Aalto university (research and
teaching) 1 year in Computerworld Finland magazine
(editor) 3 years at Metropolia, senior lecturer Electronics and electric safety Accounting and economics Open educational resources Everything new
http://www.google.com/#q=vesa+linja-aho
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Bitcoin = open source cryptocurrency
Bitcoin = distributed accounting system No central authority -> does not depend
on trust to single or couple of institutions. Like cash, but for the internet 1 bitcoin = 50 euros (20th of Mar 2013). Created by pseudonym Satoshi Nakamoto Based on a peer-to-peer network of
computers running the bitcoin software. The transactions are verified by proof-of-
work system of computers running a mining software.
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Pros
No unpredictable inflation by ”printing more money” by political decision.
Transactions travel instantly Send money in seconds to anyone with
internet access – with zero transaction costs.
Highly anonymous, in certain conditions Every transaction is public, though!
If you memorize your private key, the only way to steal your bitcoins (even for the authorities) is to torture you (or spy or hack your computer).
Easy to use You can choose the tool (usability /
security)4
Cons
Bitcoin is rather new and its still in marginal use -> high volatility. BTC money supply: 500,000,000 € EUR money supply: 5,000,000,000,000 €
It’s currency for the internet – take down the internet, and you cannot use bitcoins. Perhaps not suitable for any country’s
official currency. Lose your private key -> lose your bitcoins.
No means to cancel the transaction!
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Someone’s pro is someone’s con!
Stupid arguments against bitcoin
People buy guns and drugs with it! But it proves it works! And people use plain cash for the same.
Early adopters benefit too much Is it really a problem?
Bitcoin has actually no value Same applies to euros and dollars. They only have value because people
believe they have value.
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Good or at least considerable arguments against bitcoin
The value is unstable. There might be a bubble! Bitcoin can be replaced with a similar
product. The government can shut it down.
Or at least try to, by making it illegal to use bitcoins.
The slowness of transaction verification (about 10 minutes per block).
The scalability: the current version can not handle the transactions if everyone in the world used bitcoins.
MtGox handles most of the trade -> raid it -> ? 8
Is there a bubble?
Media attention will inspire people to buy bitcoins
Media attention will inspire companies to accept bitcoins (and vice versa)
The price of bitcoins rise -> media attention
The circle is ready.
As long as the price rises together with the use of bitcoin, there is (probably) no bubble. I emphasize the word probably. The
circulation speed of bitcoin is low if compared to regular money. 9
How it works
Every ”account” consists of the public key (= bitcoin address) and the private key.
Anyone who knows your public key, can send you bitcoins.
To spend bitcoins, you have to know the private key. The transaction is broadcasted to the
bitcoin network. The miners confirm the transactions
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The addresses
An example of a bitcoin address: 14nRKoXJAUpKYYbzw6Yrqh9gW2p26zerpW 2160 (about 1048)possible addresses
The corresponding private key: 5HuEupX3DNFJ7UypjFtXDTm4BVuAwZtAgY
f94sMALPyakgafVnU 256 bits About 1077 possible private keys
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Confirmations
In the process called mining, all transactions are collected in a block. A new block is mined in about every 10 minutes.
For small payments or with payments with trusted peer, 0 confirmations is usually ok.
For large amounts, 6 confirmations is considered safe.
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Double spend elimination
Because bitcoin has no central authority, one of the main security problems is eliminating a double spend fraud (wherein the same money is spent twice).
The main innovation in bitcoin is the blockchain. Each full node (= computer running the bitcoin program) in the network has a copy of all mined blocks.
Disrupting the system would need enormous computing power.
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Anonymity
Understand how bitcoin works Every transaction from address to address
is public. How much and when = public, who owns
the address = not public (can be analyzed, though).
Create a new address for every transaction Use mixing services The larger the transactions, the easier it is
to carry out traffic analysis
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Who accepts bitcoins?
Namecheap Wordpress Many nonprofits accept bitcoin donations
Archive.org Bitpay (= simple interface for merchants) Bitspend.net (order anything with bitcoins)
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Legal stuff
In Finland, the Board of Accounting recognizes bitcoin: treated like stocks or if selling and buying bitcoins is the core
business of the company, they are put in the current assets.
Its completely legal to use bitcoins as money (as it is legal to use potatoes or gold as money)
Anti-terrorism and money laundering law: selling bitcoins for > 15 000 € -> ask for ID.
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Bitcoin and taxes
I asked the tax authorities about bitcoin: 'we have a group of experts working on it’.
Currently, VAT 24% is imposed on selling bitcoins.
Exchanging bitcoins for a customer is VAT 0% That is, the dealer buys the bitcoins for
the customer.
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Bitcoin and taxes?
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Worth reading
http://www.reddit.com/r/Bitcoin http://bitcoin.it/ https://
blockchain.info/tx/8b555a4399797c784033863dda38abef7b8adcaf6748e9519dcb175fb1d04ee0
http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/
https://twitter.com/carsonj/status/314382483468713984
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Tools for beginners (and everyone)
http://easywallet.org http://blockchain.info/ https://www.bitaddress.org/
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