AN INTRODUCTION TO BITCOIN

Army Institute of Law, Mohali

In the partial fulfillment of BA LLB 5 Year Course

Submitted by:- Astha kumari

5th yr Section A

1435
Bitcoin :definition

Bitcoin (BTC) is a digital currency, which is used and distributed electronically. Bitcoin is a
decentralised peer-to-peer network. No single institution or person controls it. Bitcoins can’t be
printed and their amount is very limited – only 21 mln Bitcoins can ever be created.

Who created Bitcoin?

Bitcoin was first introduced as an open-source software by an anonymous programmer, or a

group of programmers, under the alias Satoshi Nakamoto in 2009. There has been a lot of
rumours about the real identity of BTC’s creator, however all of the people mentioned in those
rumours have publicly denied being Nakamoto.

Nakamoto himself once claimed to be a 37-year-old male living in Japan. However, because of
his perfect English and his software not being labeled in Japanese, there are reasonable
doubts about this. Around mid-2010, Nakamoto moved on to other things, leaving Bitcoin in the
hands of a few prominent members of the BTC community. Also Satoshi named Gavin
Andresen a lead developer.

It has been estimated that Nakamoto owns around one mln Bitcoins, which amounts to
approximately $3.6 bln as of September 2017.

Who controls Bitcoin?

According to Gavin Andresen, the very first thing he focused on after Nakamoto moved on from
the project was further decentralisation. Andersen wanted Bitcoin to continue its existence
autonomously, even if he would ‘get hit by a bus’.

For a lot of people, the main advantage of Bitcoin is its independence from world governments,
banks and corporations. Not one authority can interfere into BTC transactions, impose
transaction fees or take people’s money away. Moreover, the Bitcoin movement is extremely
transparent - every single transaction is being stored in a massive distributed public ledger called
the Blockchain.

Essentially, while Bitcoin is not being controlled as a network, it gives its users total control over
their finances.

How does Bitcoin work?

A user sees only amount of Bitcoins on his or her wallet and and transaction results.

Behind the scenes, the Bitcoin network is sharing a public ledger called the "block chain". This
ledger contains every transaction ever processed. Digital records of transactions are combined
into "blocks".
If someone try to change just one letter or number in a block of transactions, it will also affect all
of the following blocks. Due to it being a public ledger, the mistake or fraud attempt can be
easily spotted and corrected by anyone.

User's wallet can verify the validity of each transaction. The authenticity of each transaction is
protected by digital signatures corresponding to the sending addresses.

Because of the verification process and depending on the trading platform, it may take a few
minutes for a BTC transaction to be completed. The Bitcoin protocol is designed so that each
block takes about 10 minutes to mine.

Characteristics of Bitcoin

Decentralised

One of Satoshi Nakamoto’s main objectives when creating Bitcoin was the network’s
independence from any governing authorities. It is designed so that every person, business, as
well as every machine involved in mining and transaction verification, becomes part of a vast
network. Moreover, even if some part of the network goes down, the money will keep moving.

Anonymous

These days banks know virtually everything about their clients: credit history, addresses, phone
numbers, spending habits and so on. It is all very different with Bitcoin, as the wallet doesn’t
have to be linked to any personally identifying information. And while some people just simply
don’t want their finances to be governed and tracked by any kind of an authority, others might
argue that drug trade, terrorism and other illegal and dangerous activities will thrive in this
relative anonymity.

Transparent

The anonymity of Bitcoin is only relative, as every single BTC transaction that ever happened is
stored in the Blockchain. In theory, If your wallet address was publicly used, anyone can tell
how much money is in it by carefully studying the blockchain ledger. However, tracing a
particular Bitcoin address to a person is still nearly impossible.

Those who wish to stay anonymous with their transactions can take measures to stay under the
radar. There are certain types of wallets that prioritise opaqueness and security, but the simplest
measure would be to use multiple addresses and not transfer massive amounts of money to a
single wallet.
Fast

The Bitcoin network processes payments almost instantaneously, it normally takes just a few
minutes for someone on the other side of the world to receive the money, while normal bank
transfers can take several days.

Non-repudiable

Once you send your Bitcoins to someone, there is no way of getting them back, unless the
recipient would want to send them back to you. This ensures the reception of a payment,
meaning that whoever you’re trading with can’t scam you by claiming that they never got the
money.

What can I buy with Bitcoin?

Back in 2009, when Bitcoin was first introduced, it wasn’t very clear how and where you could
spend it. Now, you can buy virtually everything. For example, giant companies like Microsoft
and Dell accept payments in BTC for a variety of their products and digital content. You can fly
with airlines such as AirBaltic and Air Lithuania, buy theatre tickets through UK’s Theatre
Tickets Direct, get a few bottles of craft beer from Honest Brew, and so on.

Other options include paying for hotels and buying property, picking up bills in various bars and
restaurants, joining a dating site, buying a gift card, placing a bet in an online-casino and
donating for a good cause. There is also a flurry of diverse online marketplaces, trading in
everything from illegal substances to high-end luxury items.

Bitcoin is a relatively new and quite complex form of payment, so it is only natural that the
spending options are still limited, but every day more and more businesses - from small local
coffee shops to industry giants - are accepting payments in BTC.

Moreover, due to its constantly fluctuating exchange rate, Bitcoin became a prime opportunity
for investment. Despite still being an unstable and to some extent unrecognised currency, it
became seven times more valuable over the last year, almost reaching a rate of $5000 for one
BTC.

How to get Bitcoin?

The simplest way of getting Bitcoins is to buy them. Bitcoins are available from various
exchanges, but you can also buy them directly from other people via marketplaces. They can be
paid for with cash, credit and debit card transfers or even with other cryptocurrencies. But first,
you’ll need a Bitcoin wallet.

There is a variety of options, but the main ones can be reduced to an online wallet and a software
wallet on the hard drive of your computer. Neither option is completely safe, as a hard drive can
become corrupted, while an online wallet might be prone to a hacker attack. There are also
mobile wallets, which are very simplified due to an enormous storage capacity required to carry
the entire Blockchain; dedicated devices called hardware wallets and paper wallets with two QR-
codes that are not stored digitally anywhere, making them immune to standard cyber-attacks and
hardware failures.

And, of course, there’s mining. Just a few years ago, anyone with a powerful enough computer
could mine Bitcoins, but this is not the case anymore. The BTC’s ever-increasing popularity as
well as its exchange rate caused big companies to step into the game armed to the teeth with
mining-specific devices, hence why the difficulty and energy required to mine worthwhile
amounts of Bitcoins has skyrocketed. What’s more, the amount of Bitcoins still to be mined
decreases constantly and drastically.

PROS :
Freedom

BTC was designed with freedom in mind. Most importantly, freedom from governing authorities
controlling the transactions, imposing fees and being in charge of people’s money. When it
comes to buying things, cryptocurrency became just as legitimate as flat currency in recent years,
and considering the existence of numerous deep-web markets that only accept Bitcoins, you may
be able to buy some things easier with BTC than with any other currency.

High portability

One of the distinct characteristics of money is portability, meaning it should be easy to carry and
use. Since Bitcoin is completely digital, practically any sum of money can be carried on a flash
drive, or even stored online.

Cryptocurrencies give people freedom to send and receive money with just a scan of a QR-code
or a click of an online wallet. It takes little to no time, there are no outrageous fees and the
money goes from person to person without any unnecessary intermediates; all you need is
Internet access.

Choose your own commission

Another indisputable advantage of the Bitcoin network is a possibility of choosing the

transaction fee amount, or choosing not to pay it at all. The transaction fee is received by the
miner, after a new block is generated with a successful hash. Usually, the sender pays the full
fee, while deducting this fee from the recipient could be considered an incomplete payment.

Transaction fees are completely voluntary and they serve as an incentive for the miners to make
sure that the particular transaction will be included in the new block being generated. This
incentive also works as an income source for the miners, often bringing them more money than
the traditional mining would have, especially considering that the mining activity will stop
completely in the future, when the limit of Bitcoins will be reached.

Thus, the cryptocurrency market asks users to chose between the cost and the waiting time.
Higher transaction fee would mean quicker processing, while users without any time constraints
can save money.

No PCI

PCI stands for Payment Card Industry and it denotes the debit, credit, prepaid, e-purse, ATM and
POS cards and associated businesses. It consists of all the organisations that store, process and
transmit cardholder data, there are strict security regulations in place and most major card brands
are part of it.

While unified rules and regulations can be good for big companies, they might not be taking
every person’s needs into consideration. When using Bitcoin, there is no need to comply with
PCI standards, which can allow users to branch out into new markets, where credit cards are not
available or the fraud levels are unacceptably high.

As a result, users get lower commissions, an opportunity to expand their markets and lower their
administrative expenses.

Safety and Control

Bitcoin users are able to control their transactions; no one can withdraw money from your
account without you knowing and agreeing to it, like sometimes happens with other ways of
payment, and no one can steal your pay information from merchants.

BTC users can also protect their money with backup copies and encryption. Moreover, their
identities and personal information are always protected, as none of it needs to be disclosed to
make a payment.

Transparent and neutral

Every single transaction as well as every single bit of information about it is always available for
everyone in the Blockchain, which can be checked and used in real time. The BTC protocol is
encrypted, hence why no human being or an organisation can control or manipulate it. The
network is decentralised, so no one will ever fully control it. This is why Bitcoin is always going
to be neutral, transparent and predictable.

It can’t be counterfeited

One of the most popular ways of counterfeiting in the digital world is using the same money
twice, rendering both transactions fraudulent. It is called a ‘double spend’. To counter this,
Bitcoin, just like most other cryptocurrencies, uses Blockchain technology as well as the various
consensus mechanisms built into all BTC algorithms.

Cons

Legal questions

Bitcoin’s legal status varies drastically from country to country. In some countries the use and
trade of BTC is encouraged, while in others it is banned and outlawed.

There has been a lot of concerns regarding Bitcoin’s appeal to criminals, some news outlets have
even stated that its popularity rests entirely on the ability to spend it on illegal goods. Indeed,
when the infamous web black market Silk Road was shut down, Bitcoin instantly decreased in
value (wired.com).

Level of recognition

Bitcoin is recognised and is perfectly legal in a lot of countries, however some of the world’s
governments still don’t have any regulations regarding BTC, while others have outright banned
it.

The majority of businesses, no matter how big or small, are still completely oblivious to it. It is
nearly impossible to abandon all other currencies and start using BTC exclusively.

Lost keys

A key is a unique alphanumeric password necessary to access a Bitcoin wallet. Losing that key
essentially means losing your wallet. However, most current wallets have backup and restore
mechanisms, but obviously the user needs to set them up before being able to use them.

Volatility

The price of Bitcoins has had its ups and downs, going through various cycles of skyrocketing
and plummeting, referred to by some as bubbles and busts. Throughout its history BTC has been
conquering new heights, only to sustain a massive drop straight after. Its value is unpredictable,
it changes rapidly and drastically, which can cause significant financial damage to an imprudent
investor.
Continuous development

The future of Bitcoin is rather unclear. Currently, governments and banks are not able to control
BTC, it’s almost unregulated. However, the bigger and more popular it gets, the more world
governments will try to take it under control. A regulated and governed Bitcoin would be an
entirely different sort of currency.

Is Bitcoin a pyramid scheme?

A billionaire investor Howard Marks has recently stated that digital currencies are nothing but a
pyramid scheme. He elaborated saying that the current success of digital currencies is based on
nothing but willingness to ascribe value to something that actually has no value beyond what
people will pay for it (cointelegraph).

Those investing in a pyramid scheme get their returns from their own money or from subsequent
investors’ money, instead of from profit made by the individuals running the business. When it
comes to Bitcoin, however, the gains and its value come from limited supply of coins. As more
people acquire the coins, the supply gets rarer, thus making each coin more and more valuable.
Bitcoin simply has nothing in common with a standard pyramid scheme.

Is Bitcoin a bubble?

Robert Shiller, a Nobel Prize winning economist, proposed a checklist which helps determine if
something is a bubble. Said checklist includes sharp increases in the price of an asset, great
public excitement, media frenzy, stories of people getting rich and growing interest in the asset
among the general public. Bitcoin checks all of those boxes.

So, in a way, Bitcoin is a bubble and it has burst before. After the infamous closure of Mt.Gox, a
Chinese exchange that was handling more than 70% of all the Bitcoin transactions worldwide,
BTC’s prices were falling for about a year and a half. It took the prices exactly 3 years to
recover. Of course, it is hard to predict what will happen in the future and there is a possibility of
Bitcoin’s prices plummeting again. However, Bitcoin has recovered before and it is currently
stronger than it ever was.

Difference of Bitcoin from traditional currencies

Decentralisation

Every currency in the world, apart from cryptocurrencies, is governed by some kind of authority.
Every transaction goes through a bank, where people are charged enormous fees, and it normally
takes a long time for money to reach the recipient.

Bitcoin, on the other hand, is not controlled by anyone. It’s a decentralised network and it’s built
on the cooperation and communication of all the people taking part in it. Because of that, even if
some part of the network goes offline, transactions will still be coming through.
It can’t be counterfeited

Bitcoin was designed as a currency that can withstand counterfeiting attempts. The legitimacy of
BTC is ensured by the Blockchain technology, as well as by various different defence
mechanisms built into every algorithm.

Most other traditional currencies are extremely prone to counterfeiting and those who control
them seem to be doing close to nothing to fix it.

Durability

Bitcoins don’t exist in physical form, which means they cannot be damaged. Every single
Bitcoin is essentially eternal, unlike paper money or coins.

Once sent, cryptocurrencies can’t be recalled

If someone makes a mistake and sends money to the wrong wallet and wishes to get it back, they
can’t. Like many other Bitcoin features, this was done in order to prevent fraud. Unfortunately,
when it comes to traditional currencies, most transactions can be recalled, all it takes is one
phone call.

Fungibility

While there are some traditional currencies like the dollar and euro that are accepted in multiple
countries, most of the world’s currencies can only operate within the geographical borders of
their country of origin. In contrast to that, BTC is an online currency, meaning that its authorised
operating environment is worldwide.

How is Bitcoin taxed?

Bitcoin is yet to obtain a legal tender status in most jurisdictions, but some tax authorities have
acknowledged its significance and proposed specific regulations. Those regulations vary
significantly from country to country.

For example, the U.S. Internal Revenue Service treats Bitcoin and all other prominent digital
currencies as a property rather than a currency. Every taxpayer selling goods and services for
Bitcoins has to include the value of the received Bitcoins in their annual tax returns. Miners are
also subject to U.S. taxation, but only if the mining proves to be successful.

According to the European Court of Justice, Bitcoin is a currency, not a property. Although it is
exempt from VAT, Bitcoin can still be subject to other taxes. The UK tax authorities treat
Bitcoin as a foreign currency, with every BTC-related case considered on the basis of its own
individual facts and circumstances. As of July 2017, the sale of Bitcoins is exempt from
consumption tax in Japan, where it’s officially recognized as a payment method.
So, as Bitcoin is a relatively new currency, the regulations frameworks governing its taxation
significantly differ depending on a country. Moreover, in many jurisdictions there are no specific
laws or regulations regarding the cryptocurrency.

Cryptocurrency Exchanges

Exchange Currency Payment methods

Coinbase USD, EUR, GBP Credit card, bank transfer

Bittrex 190+ crypto pairs Cryptocurrency

LocalBitcoins(P2P) All currencies Cash, PayPal, bank transfer

CEX.IO USD, EUR, GBP, RUB Credit card, bank transfer, Ethereum

USD, EUR, CAD, GBP,

Kraken Bank transfer, Altcoins
JPY

CoinMama EUR, USD Credit card, Ethereum

Bank transfer, Ethereum, Dash, Monero,

Bitfinex USD
Zcash

Poloniex 75+ crypto pairs Cryptocurrency

Bitstamp USD, EUR Credit card, bank transfer

Bisq (P2P) 59+ crypto pairs Cryptocurrency, bank transfer

GDAX USD, GBP, EUR Bank transfer, Ethereum, Litecoin

ShapeShift 40+ crypto pairs Cryptocurrency

What is a Bitcoin whale

Whales are the world’s largest mammals, and Bitcoin Whales are the largest players on the
Bitcoin market. Those are typically not individuals, but institutions such as Hedge Funds and
Bitcoin Investment Funds. For instance, Pantera Capital, Bitcoins Reserve, Bitcoin Investment
Trust and others.

These institutions typically move around hundreds of thousands of Bitcoins. It’s a very covert
operation: those funds arrange a special agreement with an exchange to move such big amounts
through exchanges out of sight of regular traders.

According to a recent Bloomberg report, just 1,000 people own 40 percent of the market. In fact,
those people own so much; they can send the market into a frenzy by selling just a fraction of
their assets.

There are currently more than 25 mln people worldwide that own Bitcoins, according
to this study. Interestingly enough, it only takes around 0.153 BTC to be in the top 30 percent of
Bitcoin holders in terms of the amount owned. To be in the top one percent, you ‘only’ need to
have 15 BTC to your name.
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