TechnicalReport

on
BITCOINTRANSACTIONSANDTHEIRAPPLICATIONS

submittedto
ProfessorAnneGreenawalt
English312
MillersvilleUniversity
May5,2014

by
KylePollich

Thistechnicalreportwillattempttomakesenseoftherecentbuzzfromsourceslikeonlineand
traditionalmediaconcerningBitcoin.Itwilldescribetheconceptofacryptocurrencyandwhy
theymightbeworthacertainamountofmoneyinatraditionalcurrency,thenitwilldetailthe
processofacquiringandutilizingthatcryptocurrency(specificallyBitcoin).Thisreportis
intendedtomakethelaymanmorefamiliarwithBitcoinandothercryptocurrencies.

TechnicalReport
on
BITCOINTRANSACTIONSANDTHEIRAPPLICATIONS

I.Introduction

Bitcoinandothercryptocurrenciesrepresentanecessarychangeandshiftinthemindsetofthe
currentgeneration.Constantthreatsofoppressiveinternetlegislaturehaveplantedtheseedof
quietrebellioninthemindsoftalentedandintelligentpioneersinthefieldoftechnology.There
havebeen,inthepast,numerousalternativestothegenerallyacceptedorpopularmethodsof
informationacquisitionontheinternet.Forinstance,fromcopyrightinfringementandunfairfees
forsoftwareorinformation,theOpenSourceProjectwasborn.Bitcoinisthemodern
generationsanswertounstableandtritecurrencies,anditrepresentsatrendtowardtoward
open,free,butsecureinformationontheinternet.

Purpose
ThepurposeofthispaperistomakeitpossibleforthelaymantocarryoutaBitcointransaction
orinvestpersonalfundsintoBitcoin.Beingabletoholdmoneyinacompletelyanonymous,
securesettingthatisnotabankorcreditunionissomethingmoreandmorepeopleshould
desire,withalltheconcernofprivacyorlackthereofontheinternettoday.Therevelationsmade
byEdwardSnowden,forinstance,shouldworrypeople,andBitcoinisananswertoquellthose
worries.

II.WhatisBitcoin?
BeforedivingintotheworldofBitcoin,itisimperativetohaveanunderstandingofthehistoryand
backgroundofcryptocurrenciesingeneral.BitcoiniswhatsreferredtobytheUSgovernmentas
adecentralizedcurrency,meaningithasnocentralcontrollingentitylikeaUSbankorFederal
Reserve.Bitcoinwasconceivedin2008bySatoshiNakamotoasaprotocolforsecurecurrency
transfer,unitsofcurrencytradedusingthisprotocolbecamereferredtoasbitcoins.Bitcoinsare
createdthroughaprocesscalledmining,whereauserallowstheircomputersprocessing
power(specificallytheirGraphicsProcessingUnit)tobeutilizedintheverificationandrecording
ofBitcointransactionsaroundtheworld.Torewardusersfortheircontribution,theusersare
givenbitcoinsataratebasedontheircontributedprocessingpower.

Bitcoincanbeusedjustlikeacreditcard,cashordebitcardinestablishmentsthatacceptitas
avalidformofpayment.ThenumberofcompaniesandbusinessesthatacceptBitcoinasa
formofpaymentisincreasingeveryday,becausethetransactionfeesassociatedwithBitcoin
arelowerthanthoseassociatedwithcreditcards(usuallybetween2%and5%).However,there
hasbeenconcernovertheeasewithwhichillegalactivitiesmightbecarriedoutthroughtheuse
ofBitcoin.Forinstance,therewasanonlineblackmarketcalledtheSilkRoadthatwasshut
downbytheFBIin2013.TheSilkRoadwasamarketplacefordrugsandotherillegal
contrabandonwhichpeoplemanipulatedtheanonymousnatureofBitcointransactionstomake
illegalpurchases.TheUS,however,considersthiskindofoffenseveryserious,andisprepared
toregulateBitcoinifnecessary.

III.AcquiringBitcoin
TheprocessofacquiringBitcoinis,frankly,notveryinvolved.Thereafewsimplestepsand
conceptsthatneedtobeperformedandunderstoodalongtheway,butthereisnofactorof
intimidationwhenattemptingtoacquireBitcoinforthefirsttime.

BitcoinAddresses
ABitcoinaddressisthedigitallocationwherepaymentsofbitcoinswillgowhenyouaccept
them.Ifyoureexchanging,forinstance,USdollarsforbitcoins,youwouldprovidethisaddress
and,similartoanemail,yourbitcoinwouldbesenttothataddress.Unlikeanemailaddress,
however,itisusuallyagoodideatouseadifferent,newlygeneratedBitcoinaddressforevery
transactionyoumightmakewherebitcoinsareinvolved.Thefollowingisanaddressthat
MultiBit,aBitcoinwalletproviderusesfordonations:
ABitcoinaddressusuallytakestheformofaQRcode,whichinturndecryptsintoastringof27
34lettersornumbers("GettingStartedwithBitcoin).Theonlyconditionforthisstringisthatit
startwitha1ora3.AccessingthefundsassociatedwithaspecificBitcoinaddress.Thiskeyis
usuallyhandledbywhateverwalletprogramyoumightbeusingtostoreyourbitcoins("HowDoI
GetBitcoins?(ForBeginners)TheBitcoinBulletin).Thekeytellstheaddresstoonlyaccept
accesstoitsfundsbyacertainwallet,essentially.
BitcoinWallets
Technicallyspeaking,aBitcoinwalletissimplyacollectionoftheaforementionedkeysthatallow
onetoaccessthefundsattachedtobitcoinaddresses("BitBeat:IsItBitcoin,orBitcoin?The
OrthographyoftheCryptographyMoneyBeatWSJ").Yourwalletknowswhichbitcoin
addressesareassociatedwithyou.Itknowsthisbecauseyouprovidetheprivatekeyassociated
withaBitcoinaddressthefirsttimeyouaccessit,andthewalletremembersthis.Belowisa
pictureofmypersonalBitcoinwallet,whichIjustcreated.

Attheupperright,thereisthestaggeringlylargeexchangeratebetweenUSdollarsandBitcoin.
OneBitcoinisworth,atthetimeofthisreport,$499.79.ThepriceofBitcoinhasbeen,atits
peak,closeto$1300.00("DailyTechCrackingtheBitcoin:DiggingIntoa$131MUSDVirtual
Currency").However,forthepastmonthorso,thepricehassettledbetween$400.00and
$500.00fairlywithamilddegreeoffluctuation.

ExchangingCurrencyforBitcoin
Exchangingatypicalcurrency(likeUSDollars)forBitcoinisnotaverycomplexprocess.When
exchangingcurrenciesforothercurrencies,forexampleUSDollarsforEuros,thereisagiven
exchangeratebetweenthesecurrencies,andanypersoncangointoabanktoexchangeany
amountofonecurrencyfortheother.ThisisexactlytheprinciplebehindBitcoinExchanges.
TherearedozensofBitcoinExchangeshostedonline,suchasCoinbaseorCoincafe,thatexist
solelytoprovideamediumthroughwhichpeoplecanpurchaseBitcoin.Belowisanimageofmy
personalCoinbaseaccountafterIpurchasedapproximately$26.00dollarsofBitcoin.

Asyoucansee,26dollarsofBitcoinnetsjustabout5%ofasingleBitcoin.Now,afterIreceive
thosebitcoins,IwouldabletosendarequesttothebitcoinaddressofmyCoinbaseaccount
frommypreviouslyshownMultiBitwalletandstorethoseBitcoinmoresecurelyinmypersonal,
offlinewallet.

Security
Abigquestionsurroundingtheseanonymoustransactionsinvolvinganew,internetbased
currencyissecurity.Howsecurecanexchangingmoneydirectlyfromyourbankaccountinto
somenewfangledinternetmoneyreallybe?Theanswerisextremelysecure.Inordertoeven
considermakingthattransactionfor0.05BTCaboveIhadtoregistermyemailaddresswith
Coinbase,downloadanapponmyphonecalledAuthywhichturnsasmartphoneintoan
authenticationtokenforagivenservice(inthiscase,theCoinbaseloginprocess),and
generatesasevendigitkey(whichlastsonly30secondsbeforeyouhavetorequestanewone)
thatCoinbaserequiresforyoutomakeyourfirstpurchase.Youalsomustregisteravalidphone
number,andthereisa4daywaitingperiodforexchangingmoneyfromabankaccountinto
Bitcoin(thiscanbeavoidedbyusingacreditcardtopurchaseBitcoin,althoughtherewillbe
transactionfeesassociatedwiththis).So,itisquiteclearthattheseexchangestakethesecurity
ofpeoplespersonalmoneyextremelyseriously.

IV.Conclusion
Bitcoinisaveryreal,verypracticalanswertothequicklyincreasingthreattoanonymityand
freedomontheinternet.Bitcoinisawaytoavoidnotonlyapapertrailoftraceabletransaction
ontheinternet,butalsotopreserveahumanbeingsrighttoprivacyandfairtreatment.The
DollarandtheEuroareconstrained,controlledmeansofpayingforgoodsandservices,while
Bitcoinisacommunitydriven,quicklygrowingandfreshmethodofcompensatingpeople
designedspecificallywiththeinternetinmind.Ithasalwaysprovendifficulttoregulatewhere
moneygoesontheinternet,aswellaswheremoneyiscomingfromontheinternet.Nowisthe
timeforadigitalcurrencyrevolution,andBitcoinisatitsforefront.

WorksCited
"BitBeat:IsItBitcoin,orBitcoin?TheOrthographyoftheCryptographyMoneyBeatWSJ."
MoneyBeatRSS.Web.24Apr.2014.
<http://blogs.wsj.com/moneybeat/2014/03/14/bitbeatisitbitcoinorbitcointheorthograph
yofthecryptography/>.
"BitcoinGainingMarketbasedLegitimacyasXBTCoinDesk."CoinDeskRSS.Web.24Apr.
2014.<http://www.coindesk.com/bitcoingainingmarketbasedlegitimacyxbt/>.
"Coinbase."BitcoinWallet.Web.24Apr.2014.<http://coinbase.com/>.
"DailyTechCrackingtheBitcoin:DiggingIntoa$131MUSDVirtualCurrency."DailyTech
CrackingtheBitcoin:DiggingIntoa$131MUSDVirtualCurrency.Web.24Apr.2014.
<http://www.dailytech.com/Cracking+the+Bitcoin+Digging+Into+a+131M+USD+Virtual+Cu
rrency/article21878.htm>.
"TheFutureofBitcoin."TheNewYorker.Web.24Apr.2014.
<http://www.newyorker.com/online/blogs/elements/2013/04/thefutureofbitcoin.html>.
"GettingStartedwithBitcoin."GettingStarted.Web.24Apr.2014.
<https://bitcoin.org/en/gettingstarted>.
"HowDoIGetBitcoins?(ForBeginners)TheBitcoinBulletin."TheBitcoinBulletin.Web.24
Apr.2014.<http://www.bitcoinbulletin.com/2011/03/11/howdoigetbitcoins/>.