Bitcoin: Research other sources

Bitcoin is a digital asset and a payment system invented by Satoshi Nakamoto who published
the invention in 2008 and released it as open-source software in 2009. The system is peer-to-
peer; users can transact directly without an intermediary. Transactions are verified by
network nodes and recorded in a public distributed ledger called the block chain. The
ledger uses bitcoin as its unit of account. The system works without a central repository or
single administrator, which has led the U.S. Treasury to categorize bitcoin as a
decentralized virtual currency. Bitcoin is often called the first cryptocurrency, although prior
systems existed. Bitcoin is more correctly described as the first decentralized digital
currency. It is the largest of its kind in terms of total market value.

Bitcoins are created as a reward for payment processing work in which users offer their
computing power to verify and record payments into a public ledger. This activity is called
mining and miners are rewarded with transaction fees and newly created bitcoins. Besides
being obtained by mining, bitcoins can be exchanged for other currencies, products, and
services. Users can send and receive bitcoins for an optional transaction fee.

Bitcoin as a form of payment for products and services has grown, and merchants have an
incentive to accept it because fees are lower than the 23% typically imposed by credit
card processors. Unlike credit cards, any fees are paid by the purchaser, not the vendor.
The European Banking Authority and other sources have warned that bitcoin users are not
protected by refund rights or chargebacks. Despite a big increase in the number of merchants
accepting bitcoin, the cryptocurrency does not have much momentum in retail transactions.

Necessary Qualities of Money:

An ideal money material should possess the following qualities:

1. General Acceptability:
It is the very essence of money. Unless a person knows that the money which he accepts in
exchange for his goods or services will be taken without any objection by others as well, he
will not accept it.
It will cease to be current. In order to possess general acceptability, a commodity should have
some intrinsic utility independent of its value for monetary purpose. Gold and silver are
generally acceptable to all without any hesitation because they are used for ornamental and
other purposes and can be easily sold as bullion, besides being used for monetary purposes.

2. Portability:
A commodity fit to be used as money must be such that it can be easily and economically
transported from one place to the other. In other words, it must possess high value in small
bulk. Precious metals possess this quality. In the case of oxen and grain, a small value
occupies a large bulk and weight; hence, they are unsuited as money commodity.

3. Indestructibility or Durability:
As money is passed from hand to hand and is kept in reserve, it must not easily deteriorate,
either in itself or as a result of wear and tear. It must not evaporate like alcohol, nor purely
like animal substance, nor decay like wood, nor rust like iron.

Destructible articles, such as eggs, dried cod fish, cattle or oil has certainly been used as
currency; but what is treated as money one day must not soon afterwards be eaten up. Gold
coins are very lasting; they take about 8,000 years to wear out completely. Silver coins are
not equally lasting but wear out fairly slowly. As such gold and silver are considered to be
excellent money commodities.

4. Homogeneity:
All portions or specimens of the substance used as money should be homogeneous, that is, of
the same quality, so that equal weights have exactly the same value. In order that a
commodity may be used as a measure of value, it is essential that its units are similar in all
respects. Gold and silver are of the same quality throughout; their various parts are similar in
chemical and physical composition and their consistency is the same throughout the mass.

5. Divisibility:
The money material should be capable of division; and the aggregate value of the mass after
division should be almost exactly the same as before. If we use diamond as money and by
chance it drops from our hand and breaks, we will suffer an enormous loss. This is not the
case with precious metals. Their portions can be melted and remelted together any number of
times without much loss.
6. Malleability:
The money material should be capable of being melted, beaten and given convenient shapes.
It should be neither too hard nor too soft. If the former, it cannot be easily coined; If the
latter, it would not last long. It should also possess the attribute of impressionability so that it
may easily receive the impressions.

7. Recognizable:

Good money is recognized either by sight or touch. The printing of notes is secret. The
imitation is not possible, because the process of coloring and the quality of paper are always
in the hands of central bank. The general public is familiar with the various kinds of notes.

8. Stability of Value:
Money should not be subject to fluctuations in value. Fluctuating standard of value is just like
a changing yard or kilogram. The value of a material, which is used to measure the value of
all the other materials, must be stable.

The ideal money commodity should, as such, possess utility, portability, durability,
homogeneity, divisibility, malleability, Recognizable and stability of value.

Problems with Traditional Forms of Money Like Paper Money and Metal Coin:

Paper money:

1. The paper money have no stability of value in it, value of each paper money changes with
time and with change in monetary conditions of countries.

2. When the Govt. faces financial trouble, then, Govt. print more currency notes. As a result,
the prices of the commodities go up and country faces inflation.

3. For international payment, we have to convert our currency into foreign currency.

4. Due to increase in money supply, the price and profit will increase. The rich people
accumulate wealth and become richer.

5. It is easier to print paper money than metallic money. Danger is always there from
the hidden enemies of the country to print unreal currency notes.
6. Paper money has no durability because it can easily be destroyed or spoiled easily that it
has no value at all.

Metal coin:

1. They are heavy so it's harder to carry a lot of them

2. They are bulkier than paper money.

3. Some countries have simply abandoned metal coins for such small denominations. The
copper and nickel in many small-value coins is more valuable than the coins themselves;
criminals are melting down the coins, refining and selling the metals in bulk.

4. On the other hand, coins last a lot longer than bills which is why most countries use them
for their smaller denominations that get a lot of use, because metal is far more resistant to
wear than paper. Over time coins cost less to produce than paper money and are much less
expensive to count and process. That's why nearly every major country except the US has
replaced its lower-denomination bills with coins over the last 15 or 20 years.

Problems arise when the central bank has the authority of issuing currency:

Central banks are not commercial banks. They do not seek profits. Nor do they face the same
financial constraints as private institutions. In practical terms, this means that most central
banks could lose enough money to drive their equity negative, and still continue to function
completely successfully. For most central banks, one would have to go far to construct a
scenario under which they might have to compromise their policy objectives in order to keep
paying their bills.

The problem is that not everyone appreciates that a central banks accounting equity can be
negative without any reason for alarm bells to ring. Markets may instead react badly in the
false belief that losses imply a loss of policy effectiveness. Politicians may also object, if they
leap to the conclusion that bad decisions have been made at the taxpayers expense, or that
the central bank now depends on the government for a rescue. Such harmful self-fulfilling
prophecies are in nobodys interest.
Process about how bitcoin works:

As a new user, you can get started with Bitcoin without understanding the technical details.
Once you have installed a Bitcoin wallet on your computer or mobile phone, it will generate
your first Bitcoin address and you can create more whenever you need one. You can disclose
your addresses to your friends so that they can pay you or vice versa. In fact, this is pretty
similar to how email works, except that Bitcoin addresses should only be used once.

Balances - block chain:

The block chain is a shared public ledger on which the entire Bitcoin network relies. All
confirmed transactions are included in the block chain. This way, Bitcoin wallets can
calculate their spendable balance and new transactions can be verified to be spending bitcoins
that are actually owned by the spender. The integrity and the chronological order of the block
chain are enforced with cryptography.

Transactions - private keys:

A transaction is a transfer of value between Bitcoin wallets that gets included in the block
chain. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to
sign transactions, providing a mathematical proof that they have come from the owner of the
wallet. The signature also prevents the transaction from being altered by anybody once it has
been issued. All transactions are broadcast between users and usually begin to be confirmed
by the network in the following 10 minutes, through a process called mining.

Processing - mining

Mining is a distributed consensus system that is used to confirm waiting transactions by

including them in the block chain. It enforces a chronological order in the block chain,
protects the neutrality of the network, and allows different computers to agree on the state of
the system. To be confirmed, transactions must be packed in a block that fits very strict
cryptographic rules that will be verified by the network. These rules prevent previous blocks
from being modified because doing so would invalidate all following blocks. Mining also
creates the equivalent of a competitive lottery that prevents any individual from easily adding
new blocks consecutively in the block chain. This way, no individuals can control what is
included in the block chain or replace parts of the block chain to roll back their own spends.

Advantages of Using Bitcoin :

The following are some of the major advantages of using Bitcoin versus other currency
systems:

1. No Third-Party Seizure:
Since there are multiple redundant copies of the transactions database, no one can seize
bitcoins. The most someone can do is force the user, by other means, to send the bitcoins to
someone else. This means that governments cant freeze someones wealth, and thus users of
Bitcoins will have complete freedom to do anything they want with their money.
2. No Taxes:
There is no way for a third party to intercept transactions of Bitcoins, and therefore there is
no viable way to implement a Bitcoin taxation system. The only way to pay a tax would be, if
someone voluntarily sends a percentage of the amount being sent as tax.

3. No Tracking:
Unless users publicize their wallet addresses publicly, no one can trace transactions back to
them. No one, other than the wallet owners, will know how many Bitcoins they have. Even if
the wallet address was publicized, a new wallet address can be easily generated. This greatly
increases privacy when compared to traditional currency systems, where third parties
potentially have access to personal financial data.

4. No Transaction Costs:
Sending and receiving Bitcoins requires users to keep the Bitcoin client running and
connected to other nodes. Essentially, by using bitcoins users will be contributing to the
network, and thus sharing the burden of authorizing transactions. Sharing this work greatly
reduces transaction costs, and thus makes transaction costs negligible.

5. No Risk of Charge-backs:

Once Bitcoins are sent, the transaction cannot be reversed. Since the ownership address of
Bitcoins will be changed to the new owner, once it is changed, it is impossible to revert.
Since only the new owner has the associated private key, only he/she can change ownership
of the coins. This ensures that there is no risk involved when receiving Bitcoins.

6. Bitcoins cannot be stolen:

Bitcoins ownership address can only be changed by the owner. No one can steal Bitcoins
unless they have physical access to a users computer, and they send the bitcoins to their
account. Unlike conventional currency systems, where only a few authentication details are
required to gain access to finances, this system requires physical access, which makes it much
harder.
7. Be Your Own Bank:

One of the main advantages that people talk about when it comes to Bitcoin is the fact that
this technology allows you to be your own bank. You can literally have a bank in your
pocket by way of a Smartphone.

How does Bitcoin avoid the problems faced by other forms of money?

1. Unless users publicize their wallet addresses publicly, no one can trace transactions
back to them. No one, other than the wallet owners, will know how many Bitcoins
they have. Even if the wallet address was publicized, a new wallet address can be
easily generated. This greatly increases privacy when compared to traditional
currency systems, where third parties potentially have access to personal financial
data.
2. Money transaction cost is higher it is about traditional currency but as there is no third
party involved in bitcoin so here the transaction fee is very low.
3. Through bitcoin currency can be transmitted at anytime and from any place, which is
not possible in case of other forms of currency.
4. In terms of big amount now people dont need to carry currencies rather they can use
bitcoin.
5. Holding or carrying money is more risky as theres high chance of being theft or
hijacked. Bitcoin also avoid this problem as it is not a physical currency rather digital
currency.
6. People can use it as a wallet and can store value in big amounts which is not possible
by other forms of currency.
References:

1. https://en.wikipedia.org/wiki/Bitcoin

2. http://www.economicsdiscussion.net/money/top-8-qualities-of-an-ideal-money-
material/609

3. https://bitcoin.org/bitcoin.pdf

4. http://cs.stanford.edu/people/eroberts/cs201/projects/2010-
11/DigitalCurrencies/advantages/index.html

5. http://www.hongkiat.com/blog/bitcoin-questions/

6. https://bitcoin.org/en/Accessed on: April 9, 2016

7. http://www.coindesk.com/information/what-is-bitcoin/Accessed on: April 9, 2016
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April 11, 2016
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11, 2016
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features-and-data-availability.pdfAccessed on: April 13, 2016
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going-next/Accessed on: April 13, 2016
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paper_9805.htmlAccessed on: April 13, 2016
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were-too-embarrassed-to-ask-about-bitcoin/Accessed on: April 13, 2016