user's Blog!

Update: rumors of bASIC’s demise have been, at least for now, grossly exaggerated.

Updates on the Bitcoin ASIC mining scene are coming faster and faster as the shipping dates for all three leading contenders approach. Only a few days ago, all major competitors were poised to release their products around January 19, and it looked as though the eight month long wait for the new mining technology would finally draw to a close. Now, however, it appears that most of us will have to wait a little longer.

The first troubling news came on Saturday when Dave, manager of the bASIC project’s parent company BTCFPGA, announced that the project was on the brink of collapse, and was processing refunds. BTCFPGA has been in trouble for over a week; on January 5, another BTCFPGA employee who goes by Tom, or “cablepair” on the company forums, announced on the BTCFPGA forums that shipping would be delayed considerably due to Chinese New Year celebrations in China. In 2013, the date for the Chinese New Year will be February 10, and factories typically close for a week on both sides of the holiday (or two weeks total), allowing for celebrations similar to Thanksgiving and Christmas, but more prolonged since Chinese factory workers often live far away from home and need days to get back. However, the consequences to businesses relying on China as part of their supply chain extend far beyond this. Raw materials suppliers often shut down weeks prior to the main celebration to anticipate the reduction in demand, and after the celebrations production also picks up very slowly. Many employees take extra vacation time right after the holidays for Chinese New Year – a sensible decision, as they live so far away from home and taking multiple shorter breaks would not allow them to see their families. At many factories, the situation is even worse: up to 50% of the workers do not return to their jobs at all. Thus, factories start off the new year understaffed, at a time when they need to be the busiest bringing production back on track.

On January 8, BTCFPGA customers received another message in which Tom announced the “final – never again changing date for bASIC shipment:” March 15-29. The next day, Dave announced that “there are new player(s) that have come to the fore pledging to support this project – this may come as a complete buyout or by taking a cash equity position – the details are being hammered out over the next day or two.” He also confirmed that under the new deal the March 15-29 shipping date would be on schedule. On January 12, however, Dave made a post stating that the deal was off. On January 15, however, Dave provided some good news: bASIC was still alive, and Tom was working hard on a deal that would ensure that the company keeps going. “Tom sounded very upbeat and motivated to see bASIC placed in the hands of a team that can carry it forward to complete his original vision.” Dave wrote.

On Monday, Butterfly Labs, facing accusations of what some consider to be evasive behavior, have come out and announced a specific deadline: the week of February 10. The date comes as a shock to some, particularly as as little as one week before today many people expected Butterfly Labs to deliver slightly ahead of Avalon’s preset deadline, January 19. However, Butterfly Labs’ Josh Zerlan has written a post extensively describing the reasons behind the delay, and precisely what the company still needs to do over the next few weeks. The main cause of the delay is a decision that the company made to switch the technology that it uses to connect its integrated circuits to the rest of the processor. Its first decision had been to use the “Quad-Flat No-leads package” (QFN) technology, but later tests showed that with QFN the chips were getting uncomfortably hot. “Our chips would have functioned as currently spec’d within our thermal tolerances, Zerlan writes, “but we would have very little thermal headroom to really crank things up. With an eye towards the future, we decided to bite the bullet and release a product that is ready for the long haul as opposed to releasing something now that would require exotic cooling to be pushed past 80 GH/s or so.” The perfectionist attitude runs deep within the company; even the ASIC team’s payment, Zerlan writes, is “effectively tied to the success of the chip” – not the release date. They are now instead using a “flip chip ball grid array” (FCBGA).

The outline of Butterfly’s plans in the weeks to come is as follows. This week, the company will travel to the packaging facility for a final preparation and walkthrough, and confirm travel plans to the fabrication facility. Next week, preparation for final assembly will take place and the team will make its way over to the fab. On the week starting Jan 27, final chips will roll off the production line and manufacturing will start for the units themselves. On the week starting Feb 3, the chips will be packaged and everything will be assembled. Finally, on the week of Feb 10, Zerlan writes, “we descend upon the Post Office, DHL, UPS and FedEx like a horde of angry locust.”

In the meantime, ASICMiner appears to have been delayed only slightly compared to its prognoses from weeks ago; in an update on January 10, ASICMiner announced that they had already placed the necessary mass production orders, and so they are expected to turn on their devices relatively soon. They are also helped by the fact that their business model is different from the others, relying on keeping their machines in-house and earning money through a combination of raising shares and pocketing the mining revenues themselves, so they do not need to bother with shipping and can get away with somewhat less sturdy hardware. Avalon‘s Yifu Guo, on the other hand, confirms that shipping is still on track for January 19.

If all goes according to plan from here, some customers will be turning on their ASICs as early as next week, and will have two weeks of unexpectedly high revenue as without competition Avalon and ASICMiner’s machines will be able to collect a large fraction of the fixed Bitcoin mining reward. Also in Avalon customers’ favor is the fact that mining difficulty will take a while to adjust. Their first batch will contain 300 machines, each of which are capable of 60 GH/s, sending the network hashrate from about 21 TH/s to nearly 40 TH/s. The next difficulty target is estimated to take place on block 217728, almost exactly at the time that many customers will be receiving their Avalon ASICs, so the first time mining difficulty significantly moves up to reflect the network’s newfound strength will only happen in early February. Butterfly Labs will, unfortunately, miss the golden opportunity, and buyers of bASICs will have to wait even longer is they choose to spend their refunds on a competitor’s product. Regardless, however, it is becoming clear that every day we are getting closer to the pinnacle of Bitcoin mining coming right to our desktops.

The Two Bitcoin Conferences of 2013

After the first two successful Bitcoin conferences that took place in Prague in 2011 and London in 2012, it has been announced that there will in fact be two Bitcoin conferences taking place in 2013. The first, entitled “The Future of Payments”, will take place in San Jose, California on May 17-19, and the second, named “unSYSTEM”, will happen in Vienna on 1-3 November. The two conferences will be in a similar format to those run in 2011 and 2012; they will both take up a weekend, feature a number of speakers making presentations on topics either related to Bitcoin or of interest to the Bitcoin community, as well as offer opportunities for speakers and attendees to interact; for the curious, schedules for the previous two conferences can be found here and here, and videos of individual presentations are also available from 2011 and 2012.

The 2012 conference, organized largely by Bitcoin activist Amir Taaki, saw a significant shift in the range of topics discussed from that in 2011, featuring many speakers who were outside of the Bitcoin community entirely; free software advocate Richard Stallman, the pro-free speech Icelandic Modern Media Initiative’s Brigitta Jonsdottir, the free culture activist Jaromil and the leader of the 3D gun printing project Defense Distributed, Cody Wilson, were all among the speakers. A considerable number of Bitcoin developers and Bitcoin business owners, as well as others in the payments industry, but political activism was nevertheless a dominant message.

This time, the two conferences have radically different themes. For the 2013 conference in San Jose, the Bitcoin Foundation is pushing back in the direction of a conference organized around Bitcoin specifically and the more pragmatic issues that Bitcoin is trying to solve; the four main topics listed on the website are Bitcoin technology, Bitcoin mining, Bitcoin business and regulatory issues. Unfortunately, no list of speakers is yet given; the Bitcoin Foundation is still in the process of finding people to speak.

The unSYSTEM conference in Vienna, on the other hand, is pushing even further in the direction of activism. Of the sixteen speakers now listed on the site, only three are notable purely because of their work around Bitcoin, and the majority have nothing to do with the currency. Among these are Mitch Altman, inventor of the “TV-B-Gone” universal remote, free culture activist Nina Paley, democratic education pioneer Luis Henrique Fagundes and the Russian activist group Voina (“War”). Richard Stallman, Brigitta Jonsdottir, Cody Wilson, Jaromil and Max Keiser, who were all present at the London Bitcoin conference in 2012, are back, as well as Amir Taaki, who is organizing the unSYSTEM conference as well. Amir Taaki is known for his work on Bitcoin development, but has also participated in more direct forms of political activism, including a recent high-profile event in which he and a number of other activists squatted an exclusive property in central London. Also from the Bitcoin community Joerg Platzer, owner of Room77, the first restaurant to accept Bitcoin in Berlin, and now the leader of a project to get a large number of restaurants in Berlin to accept Bitcoin, will be attending.

A particularly notable upcoming speaker is the Silk Road, a black market offering thousands of illegal drugs using Tor and Bitcoin for anonymity. The idea of an illegal organization speaking at an above-ground conference seems counter-intuitive, but it can be done. The Earth Liberation Front, an eco-terrorist group, has an above-ground “press office” which is simply a media organization that reports on the ELF’s activities. The Silk Road may similarly have a liaison, or perhaps they may choose to speak by videoconference; Taaki writes that Dread Pirate Roberts confirmed Silk Road’s attendance, but details have not yet been decided.

On the whole, the split into two conferences is arguably a positive one for Bitcoin. There are many in the Bitcoin community who are intent on pursuing the success that Bitcoin reached at the end of 2012 with WordPress accepting Bitcoin and Bitcoin Central working with a licensed payment services provider in France, and attempting to get Bitcoin noticed, and accepted, by even more prominent individuals and organizations in the world of finance and payments. To many of them, associating Bitcoin with political radicalism, particularly the sort promoted by Cody Wilson and especially the Silk Road, serves only to marginalize the currency. Others, however, are political activists first and Bitcoin users second, and want to see more of what we saw in London in 2012. Almost certainly no one will agree with the entirety of what is spoken at the conference; opinion on controversial issues like guns and economic regulation vary widely even within the sort of community that unSYSTEM is seeking to attract, and some issues may even see both sides presented outright. However, as a meeting of minds the conference will be an event from which all sides can benefit by participating.

Practical information on attending both conferences has been posted, for the San Jose conference here and the unSYSTEM conference here. Both conferences are expecting a larger number of attendees than either of the conferences that took place in 2011 and 2012, and meeting the faces behind the most popular projects and services in the Bitcoin community has always been a key attraction of these events. Everyone is encouraged to attend, and those who have something that they want to present should contact the Bitcoin foundation here or unSYSTEM at their email address. Hopefully, these two conferences will be the greatest Bitcoin conferences yet!

BitPay has announced that it has secured a funding round of $510,000 from outside investors. The investors include Barry Silbert, founder of SecondMarket, a trading platform used by institutional investors to exchange shares in companies that have not gone public; Jimmy Furland, also of SecondMarket; Shakil Khan, founder of the online music service Spotify; and the Bitcoin community’s own Roger Ver, responsible for Memory Dealers and the Bitcoin Store, as well as others in the technology sector. BitPay is Bitcoin’s leading payment processor, providing merchants with ready-made software tools that they can use to accept Bitcoin on their website or brick-and-mortar store, as well as an option that allows merchants to accept bitcoins without ever handling them themselves; instead, Bitpay automatically converts the bitcoins to the merchant’s local currency and deposits into the merchant’s bank account.

BitPay is far from the first company to secure outside investment. The Bitcoin exchange MtGox was outright sold to Tibanne Co in March 2011, and within a year two more major Bitcoin businesses secured funding. BitInstant, a company that offers services that help make it easier and faster to buy bitcoins whether through bank transfer or cash deposit, secured an undisclosed sum in exchange for 15% of their company from Roger Ver in late 2011. In early 2012, Bitcoinica, the now defunct margin trading service that allowed users to buy or short bitcoins at high leverage, acquired an amount estimated to be in the low hundreds of thousands of dollars from an investor named Tihan Seale. Also, since May 2011 a number of small companies, mostly mining ventures but also notably SatoshiDice, have raised capital from a large number of mostly anonymous investors over trading platforms like the Global Bitcoin Stock Exchange and MPEX.

More interesting, however, is funding raised from established technology investors. In April 2012, Silicon Valley venture capital firm Draper Associates and Seattle angel investor Geoff Entress invested $500,000 in Coinlab, a company whose main projects so far have been an attempt to establish Bitcoin mining on gaming computers as an alternate way to pay for video games, and the Give-a-Goat charity mining software. In September, Coinbase, a company that has raised over $600000 from well-known investors including the “seed accelerator” Y Combinator and Reddit co-founder Alexis Ohanian. Now, this elite group of businesses has been joined by the largest payment processor in the Bitcoin economy, with over 2100 merchants (up from 1300 as recently as November) and $3 million in transactions over the course of last year.

BitPay intends to use the money to move their headquarters to Atlanta and hire five new employees to work on developing new features for their platform. “Atlanta is a great hub for financial technology companies,” BitPay founder Tony Gallippi writes, “Over 90 of them. It’s a great place to recruit and retain top talent, plus tap into the banking and financial infrastructure there.” Nearly 250,000 workers in the Atlanta Metropolitan Area work in finance-related occupations, out of a total population of 5.3 million, and 40,000 of them are employed specifically in the payment processing industry. Atlanta is also ranked by various indices to be among the top 40 financial hubs in the world. Thus, this decision will allow BitPay to tap into the talent of developers who are already familiar with payment processing issues, as well as give them the potential for much greater visibility in the payment processing community. BitPay’s headquarters are currently headquartered in the much less impressive Orlando, Florida.

Gallippi writes that WordPress’s decision to accept Bitcoin in November was a major factor pushing investors to support his company. Since WordPress started accepting Bitcoin (incidentally, using BitPay’s platform to process payments), the company’s merchant base has grown from 1,300 to over 2,100, and is expected to continue to grow as Bitcoin and BitPay receive more news coverage in the mainstream media. BitPay also currently has little in the way of direct competition. Coinbase, a company wishing to themselves become the “Paypal of Bitcoin“, does offer a merchant solution, but the core focus of their product is sending money person-to-person and creating an easy-to-use wallet service, so a marketing effort to attract merchants to themselves is unlikely. WalletBit is a more direct competitor, but so far their marketing efforts have focused heavily on Canada and Europe, while BitPay supports a more US-centric clientele. The distinction between the two can be clearly seen from their pricing policies; if a merchant wants their Bitcoin earnings automatically converted into local currency, BitPay offers a rate of 2.69% in the US and 3.99% in Canada, Mexico and the EU, while WalletBit offers a consistent 2.75% rate everywhere, although with a minimum fee of about $15 per transfer, soon to be reduced to about $5 in Canada.

Of course, a significant number of merchants also build their own platform for accepting Bitcoin, an option which should not be discounted for large businesses or unique businesses that need to integrate Bitcoin in some way that extends beyond simply using it to accept payments, but in the market of average merchants looking to start accepting the currency, within the US BitPay enjoys a near-monopoly. In two years that may change, just like leading Bitcoin exchange MtGox has seen its market share slowly drop from over 90% at its peak in 2011 to about 67% now. For now, however, BitPay is comfortably well ahead of any competition, and still has a long way to go in attracting new merchants. 2012 saw the company go from almost nothing to over two thousand merchants. Ten thousand by the end of 2013 seems quite likely.

After over three months of delays from all major competitors, it seems as though the race to develop the first ASIC-based Bitcoin mining computer is finally drawing to a close. Less than three weeks ago, Avalon ASIC announced a hard shipping deadline for themselves of January 19, and placed a countdown on their website. On December 28, another competitor, ASICMiner, published pictures of fully completed mining chips, and on January 3, their PR representative published a post on the Bitcointalk forums: “The samples passed all functionality tests. The power consumption is also within the expected range. And as our overclocking tests had shown, they still have a lot of potentials compared to our original spec. This means that the biggest risk of our project is gone and our NRE is a fruitful spend. The first production batch of chips will be out of the packaging service tomorrow. Our deploying is on its way.”

Butterfly Labs, the company that originally started the current rush toward ASIC development with its announcement in June, is intent not to fall behind. Today, Butterfly Labs is unveiling a prototype (pictured) of its ASIC miner at the Consumer Electronics Show in Las Vegas, where it is sharing a booth with BitPay. The device has an Android Nexus 7 tablet incorporated.

Out of the four major competitors, ASICMiner has a business model that is different from the others: while Butterfly Labs, Avalon and BTCFPGA are all seeking to make money by selling their ASICs, ASICMiner intends to keep all of its ASICs in-house, instead gaining the initial capital needed to develop their product by selling shares. The shares were originally released in August on the (now-defunct) Global Bitcoin Stock Exchange, opening up 7.5% of the company’s future profits to investors at a valuation of 40,000 BTC for the entire company. The offering was a success, selling out within days. However, the setup proved to be problematic when the GLBSE unexpectedly shut down, with the result that the company had no way of knowing who its investors were. ASICMiner did finally receive the shareholder database from the GLBSE in December, and shares will once again start trading and paying dividends on a yet-unspecified alternate platform soon.

As of today, the four main contenders in the race are:

• Avalon ASICs, offering 60 GH/s for $1,299. These are scheduled to come out on Jan 19, and Avalon stated on Jan 9 that this continues to be the expected deadline. Updates on Avalon can be found here.
• Butterfly Labs, offering the 60 GH/s Single SC for $1,299. These are likely to come out arund the same time as Avalon, although certainly not by the 14th.
• BTCPFGA’s bASIC, offering the 72 GH/s bASIC NextGen Bitcoin Miner for $1,069. Unfortunately, BTCFPGA has been suffering serious delays, and its projected shipping data now appears to be the second half of March.
• ASICMiner, not offering any physical product, but expected to contribute at least 2.8 terahashes, and likely more, to the 23-terahash Bitcoin network.

One positive outcome of this stiff competition is that it significantly reduces the chance of any attacks on the Bitcoin network during the transition to ASICs over the next few months. Three months ago, when Butterfly Labs’ Josh Zerlan was asked why he chose the business model of selling his products as opposed to simply mining with them himself, he replied: “Why don’t we mine with our own equipment? Because we believe the best way to secure bitcoin and help it to succeed is to get as much product out to as many people as widely as possible. That makes it exceptionally difficult, if not impossible, for any individual, corporation or hostile government to destabilize and wreck Bitcoin from within.” When he said this, however, almost everyone was fully expecting that Butterfly Labs would be the first to come out with ASIC hardware, and have a monopoly over it for possibly even over a month, and so the worry that Butterfly Labs would attempt to use its mining power to attack the network was prevalent. Now, however, there are a number of providers, all coming out with ASICs around the same time.

Thus, neither Butterfly Labs nor Avalon, BTCFPGA or ASICMiner will have a particularly long window of time within which to build up enough hashing power to attempt a 51% attack.
For those who are interested in seeing when ASICs start coming online in significant numbers, the best place to watch is the Bitcoin network charts at Bitcoin Watch. Once Butterfly, Avalon and BTFPGA customers and ASICMiner turn their entire first batch of computers on, the network hashrate is expected to skyrocket. ASIC mining computers are ten times more efficient than the semi-specialized FPGA machines that came before them, and even more efficient than GPUs. By the time the dust settles, we may be looking at hash rates well in excess of 100 terahashes per second – making what is already the most powerful distributed computing network ever to have existed even faster.

Joining the ranks of Coinbase, MtGox and Blockchain, Bitcoin developers Stefan Thomas and Jeremias Kangas have released a lightweight Bitcoin payment processor of his own, with a twist: you do not have to trust it to use it. The way that all other payment processors to date have kept track of individual orders is by creating a unique address for each payment, and forwarding any payments that they receive to the merchant. This does prevent the main issue with not bothering with payment processors and instead just having a single address – namely, that if you receive a payment you have no way to tell who sent it, but it also presents a trust problem: the merchant must trust the processor to hand back the bitcoins. Although over the normal course of business the incentives are aligned for the processor to do just that, as otherwise the merchant would immediately abandon the processor and the processor would lose that merchant’s revenue forever, in reality merchants’ revenues are often not a smooth daily trickle. For example, when Butterfly Labs opened up their ASIC mining computers to pre-orders this June, they received $250,000 in a single day. One can easily see how a merchant might be uncomfortable with trusting a third party with such a large windfall.

One solution is for the merchant to provide a few hundred addresses controlled by himself for the payment processor to use, but that requires the merchant to constantly have to replenish the processor’s database with new addresses. One could give more addresses at a time, and release an automatic script for generating addresses and including them in one’s wallet, but the problem remains that either the merchant must at some point replenish the processor’s address database, a concept foreign to any other payment system used today, or the initial database would have to be impractically large. In order for such a setup to work nicely, the merchant would have to somehow give an infinite number of addresses to the payment processor at the same time – in a finite amount of data. AcceptBit, in effect, does exactly that.

Explaining how AcceptBit does such a thing requires a basic knowledge of the mathematical properties of Bitcoin’s elliptic curve cryptgraphy. A private key in Bitcoin, used to sign transactions, is a number roughly between 0 and 2²⁵⁶. A public key is a point, with coordinates (x,y) both in approximately the same range. Elliptic curve mathematics has an operation of “adding” two points to generate a third point, such that this addition satisfies the standard mathematical properties of commutativity and associativity (ie. a+b = b+a and a+(b+c) = (a+b)+c). Thus, you can “multiply” a point by a number by repeatedly adding it to itself (or more efficiently with the double-and-add algorithm), and this multiplication is also associative. The elliptic curve standard also defines a specific point (G_x,G_y) as the “base point”, the values of which can be looked up in Bitcoin source code or the SEC2 specification. A public key in Bitcoin, from which Bitcoin addresses are derived, is simply the base point multiplied by the private key. It turns out that there is no known way of determining the private key corresponding to a given public key in less than about 2¹²⁸ operations (at current levels of computing power, longer than the lifetime of the universe), and this is part of the basis of Bitcoin’s security. There exist operations of “signing” a message and “verifying” a signature for a given message such that signing requires a private key and verifying requires the corresponding public key. Public keys are, as their name implies, public, and so the entire Bitcoin network can verify that the owner of a given address actually signed transactions that appear to be spending from that address by verifying the signatures with the address’s corresponding public key.

AcceptBit takes advantage of the “multiplication” operation that elliptic curve mathematics allows. It asks you to take a root private key, which you keep to yourself, and multiply it by the base point to generate a root public key, which you submit to AcceptBit. AcceptBit can generate new addresses by multiplying the root public key by a given number, for which you can generate the private key, and therefore spend from, by multiplying your root private key by the same number. AcceptBit can keep multiplying the key by different numbers to generate new addresses, so the number of addresses that they have is basically infinite. However, AcceptBit can only watch the addresses that it generates; it cannot spend from them – solving the payment processor trust problem.

This is not a new idea; the concept has already been implemented in the popular Bitcoin client Electrum and is formalized in the BIP 0032 specification. However, AcceptBit is the first service that makes use of it to do something that would not be possible without it. For now, the only wallet that includes built-in support for the specification is Electrum, and so an Electrum wallet is currently required to use AcceptBit.

AcceptBit has a simple form where you fill in your business’s name and your root public key from Electrum (obtained with electrum get master_public_key), and you can start generating invoices immediately. The form for generating an invoice is simple; just fill in a currency amount, a currency (with dozens to choose from) and click “Create”. You then get a payment page containing an address to pay to and a QR code to scan, and which shows the status of the transaction: unpaid, paid or confirmed. The main page also shows a list of all invoices that have been generated, allowing you to see which of them have been paid.

However, there are a few features which are still lacking from the service. One major weakness is a lack of automatic updating for the payment pages. Currently, in order to see whether an invoice has been paid or not you need to refresh the payment page. The service would become much more usable if it included a script which checks for payment every couple of seconds and updates the page automatically. Another flaw is its lack of an API. The only way to generate invoices is to fill in the form on your main merchant page; there is no convenient way to generate invoices automatically. Of course, one can hack one’s way around the restriction by filling in the form automatically; the command line script for this is ” wget --header 'Cookie: csrftoken=0' http://acceptbit.com/m/3psKTF6icX2GU9Beo1PPgb --post-data 'csrfmiddlewaretoken=0&currency_amount=0.1&currency=USD' “, substituting in your own merchant page and desired amount. However, this is far from convenient, and there is no way to keep track of invoices that is convenient for an automated script either. Thus, using AcceptBit to accept payments on one’s website is currently difficult.

If AcceptBit implements these missing features, it can become a competitive means of accepting payments even for those who are willing to trust an established third party merchant provider. It and Blockchain are the only two providers that do not require any kind of account to use, and right now Blockchain mirrors its weaknesses; although its merchant system has an exemplary interface for automated scripts, its operators have not seen a need to develop any merchant interface for human beings. Blockchain also has another weakness: less privacy. Because its merchant system requires you to specify a specific address to send bitcoins to, unless you specify a list of a hundred addresses to randomly choose from all of your customers’ payments will be collected in one place. AcceptBit, on the other hand, has the ability to generate new addresses that belong to you with every invoice, solving this problem. Although AcceptBit’s model of providing addresses that are already directly under the merchant’s control does mean that it will never be able to match BitPay and WalletBit’s offerings to convert earnings directly into fiat currency deposited in the merchant’s bank account, for those merchants who simply want an easy-to-use, hassle-free solution with minimal setup required AcceptBit definitely has the potential to become the best choice.

2012 has been an exciting year for Bitcoin. We have seen BitPay grow from near-irrelevance to processing transactions for over 2000 merchants around the world, Coinabul expand its gold-selling business from nothing in October 2011 to over 120,000 BTC of gold sold this year, entirely new Bitcoin-accepting businesses like Coindl and the Bitcoin Store open their doors, and hundreds more innovative services, of which there are unfortunately far too many to mention. Of course, life in the Bitcoin world has been far from perfect. We saw the margin trading service Bitcoinica come crashing down after a series of hacks, all in the tens of thousands of BTC in size, a Ponzi scheme grow to a size of $5 million at its peak before collapsing in August, and Bitcoin exchange Bitfloor lose $250,000 to another thief in September. However, after these events, the Bitcoin community has begun to take security much more seriously and, among other security upgrades, policies of keeping at least 85% of customers’ assets in offline cold storage have become an industry standard for Bitcoin exchanges. Scams too have become much more difficult to pull off. Also, in the last two months alone, Bitcoin has gained a large amount of public legitimacy, as popular services like WordPress and 4Chan began accepting it, and Bitcoin Central partnered with a licensed payment services provider in France to integrate its exchange accounts directly into the traditional banking system. And, last but not least, the Bitcoin price itself increased from $4.72 on Jan 1 to $13.51 on Dec 31, a 186% increase.

Now that 2012 is behind us, it’s time to start looking forward to what the Bitcoin community will bring in 2013. There are a considerable number of projects scheduled for release this year. A few of the projects, like ASIC mining computers, have simply been delayed from last year, some are services that accept Bitcoin, several provide ways to use Bitcoin more securely, and still others are new projects entirely. Here is a short list of what 2013 has in store.

• ASICs – Butterfly Labs first opened preordering for its upcoming line of application-specific integrated circuit-based mining hardware in June, originally planning to release them in fall 2012. The mining chips use hardware optimized to perform the sole task of carrying out the SHA256 calculations that make up the bulk of Bitcoin mining, and will thus be able to crank out ten times as much hash power per dollar of hardware and per dollar of electricity compared to FPGA or GPU-based solutions. However, a series of delays has pushed the shipping of these devices to the first quarter of this year. Other companies are rapidly catching up; Avalon ASIC has boldly put down a countdown on their website until the time that they ship, which they have scheduled for January 19, and DeepBit’s own ASICs are still scheduled for March. Once these devices are released, the Bitcoin network’s hashpower is projected to increase by a factor of ten, making the network extremely robust against attacks from traditional, general-purpose supercomputing networks.
• Bitcoin Wireless – This BitInstant project intends to provide a way of buying credits for prepaid cellphone and data plans from over 300 carriers around the world at competitive prices. The project was announced months ago and has been followed by near-silence since then, but it is still under development and will likely come out soon.
• The Bitcoin Debit Card – Although BitInstant’s plan for a Bitcoin-backed debit card originally announced in August has been delayed by months after its original scheduled release date in October, the project is still in the works. And if BitInstant’s card takes too long, the Bitcoin Central exchange in France, armed with many of the powers of a bank through their recent partnership with the licensed payment services provider Aqoba, is planning to release one of their own as well.
• Ripple – This project is another bank-free payment network that operates on principles somewhat different from Bitcoin. Ripple seeks to exploit the concept of six degrees of separation: that any two people in the world are connected through a chain of relationships that is, on average, only six links long. When one person wants to pay a given amount of money to another, the system finds such a chain between the two people, and registers a debt owed by each person in the chain to the one after them. Thus, everyone gains a credit and a debt within the system, except for the sender and receiver, who are the only ones who see a net increase or reduction to their balance. Friends and colleagues can always settle debts between each other, and Ripple seeks to leverage these relationships to enable payments between any two people in the network without ever moving any actual money. The project has been around for years, but recently there have been telltale signs that something is brewing. It looks like the Bitcoin community will have to wait and see to find out what Ripple has in store.
• BitMessage – This project by Jonathan Warren aims to use many of Bitcoin’s ideas to create a secure, decentralized protocol for sending messages. Like Bitcoin, BitMessage uses a peer-to-peer network to propagate information, but unlike Bitcoin, messages only stay in the system to be downloaded by the receiver for two days, limiting the Bitcoin issue of “blockchain bloat”. Version 1.0 turned out to be a flop due to serious security issues, but version 2.0 will switch to a much more secure design based on Bitcoin-like elliptic curve cryptography, as well as being subject to a much more stringent security audit. If BitMessage succeeds, it may well provide a compelling, security and privacy-friendly alternative to the notoriously insecure email system that we use today.
• Slush’s USB Hardware Wallet – In November, Marek Palatinus, operator of the Slush mining pool, announced a project to develop a physical Bitcoin wallet device that would take the form of a USB key. Wallet security has been a significant problem for Bitcoin; at one point, a Bitcoin user lost $500,000 when an online attacker managed to gain access to his computer. Since then, Bitcoin clients have added wallet encryption to increase security, which would have prevented the $500,000 loss, but Palatinus intends to go further. With his USB wallet, no private information will ever leave the device; the device outputs transactions signed with its internal private key directly. This, combined with a physical button and display on the wallet that can be configured to be required to press to sign a transaction, ensures that computer intruders or viruses have no way of stealing or emptying the wallet without the user’s express permission. Physical theft will not be a problem either; the wallet will have an option to require a PIN to sign transactions, and the user himself is asked to write the device’s randomly generated root private key down during initialization. Upon losing the device, one can quickly use the key to move all of the stored bitcoins to a temporary location before buying a new one.
• Multisignature Transactions – This is a technology that has been available for nearly a year and in the works since 2011, but which has still seen no significant real-world application. While bitcoins sent to a normal Bitcoin address can only be spent by transactions signed by the one specific private key associated with that address, a multisignature address is associated with N private keys, of which M must be used to sign a transaction spending from that address. N and M can be set to whatever values are necessary. A simple use case is a 2-of-3 wallet for an escrow transaction. For example, suppose Alice wants to buy an expensive product from Bob, but the two do not trust each other. Alice can send the money to a 2-of-3 address with keys controlled by Alice, Bob and a third-party mediator, who is also potentially untrustworthy. Bob sees that the money is in the address and sends off the product. If all goes well and the product arrives, Alice and Bob sign a transaction to send the money locked in the 2-of-3 address to Bob. If the product does not arrive and Bob is unresponsive, Alice can ask the mediator to sign a transaction with her to give her the money back. If the product does arrive and Alice refuses to release the payment, Bob can do the same thing. Finally, if Alice and Bob lose trust in the mediator, they can sign a transaction to send the money to another 2-of-3 address with another mediator. No other mechanism in Bitcoin – indeed, no other payment system in history – has the potential to allow this kind of minimal-trust long distance arrangement to take place. The technology also has applications in secure wallets, as one can create 2-of-2 wallets with one key on your machine and the other under the control of a third party, ensuring that anyone wishing to steal your bitcoins must compromise both the provider and your own machine. If the adoption of deterministic wallets was the main breakthrough in Bitcoin cryptographic technology in 2012, multisignature transactions may well be the defining development of 2013.
• Bitcoin Conference – This year’s Bitcoin conference will take place in May in San Jose, California, and will be hosted by the Bitcoin Foundation. This will be the third Bitcoin conference to take place, following one in Prague in November 2011 and another in London in September 2012. The topics that will be covered include Bitcoin tech, Bitcoin mining, Bitcoin business and regulatory issues. Hopefully we will be able to see speakers from outside the Bitcoin community too, even if not as many as we had in 2012; the previous two conferences have turned out to be a great opportunity for fostering dialogue between the Bitcoin community and the internet civil liberties community as a whole.

Although the problem is now considerably smaller than it was one year ago, a significant amount of misinformation about Bitcoin continues to float around the internet. Part of the problem is that the concept of Bitcoin is so unlike anything seen before; decentralized currencies that have no offline presence were not exactly a common sight before Bitcoin came along. Bitcoin is also unusual in that it is a high-tech subject which has consequences reaching far outside the technology world, leading to under-educated journalists churning out sentences like “the Bitcoin program is under licensing by MIT, the globalist-controlled think-tank college”. In reality, the MIT license used by Bitcoin does nothing more than give anyone the right to freely use, modify and redistribute the software, and has as little to do with MIT itself as Arabic numerals do with Al Qaeda and the governments of Syria and Iran.

Another issue is the natural desire to write an interesting story; a story about the average suit-and-tie businessman using Bitcoin to quickly and cheaply move money across international borders is far less likely to generate pageviews than an “underground website where you can buy any drug imaginable“. Thus, a natural bias exists in favor of the latter over the former.

Major news claims about Bitcoin spread like memes, only serving to compound the problem. For example, after the Financial Post claimed on June 8 that “Europeans were moving their money out of their banks and dumping it into … Bitcoin”, a flood of other similar articles followed. On June 11, Business Insider ran an article based almost entirely on the Financial Post article claiming the same thing, and Betabeat and various blog sites followed. One of these sites in turn catapulted the story onto Slashdot, and ZDnet and Daily Finance ran their own articles on the subject soon after. In reality, however, the story of investors flocking from Euros to Bitcoin en masse turned out to have been grossly exaggerated – Amir Taaki reports that “the only thing that’s happened is that the euro has increased in price vs the dollar slightly.”

Even in the case of stories that are essentially true, the effect can still manifest itself; when Bitcoin Central announced that it was partnering with a registered banking partner in France, the erroneous claim that Bitcoin Central was itself becoming a licensed payment services provider rather than simply partnering with an existing one was so mercilessly copied throughout the internet that Bitcoin Central was forced to release a statement clarifying the facts.

The following are some clarifications on the major misconceptions that have surfaced regarding Bitcoin over the past one and a half years.

1. Bitcoin does not have a central organization or authority. This feature of Bitcoin is among the least understood among people who are new to the currency, and perhaps the hardest to wrap one’s head around. A recent article by Occupy Corporatism stumbled around this difficulty considerably, making claims like “Bitcoin has been given that status of a ‘payment service provider'” and “Bitcoin now has an International Bank ID number”. Although the Bitcoin community does include organizations with names like the Bitcoin Foundation and Bitcoin Central, none of these are anything close to central authorities for Bitcoin with inherent power over Bitcoin as a whole. Bitcoin Central is only one Bitcoin exchange among many – and not even the biggest one. The Bitcoin Foundation is simply an organization consisting of highly respected members in the Bitcoin community and developers of a particularly popular piece of Bitcoin client software. Anyone could potentially create their own exchange and their own foundation and displace either of these outright. Rather than thinking of Bitcoin as a product released by a traditional corporation, it is more appropriate to think of it as a self-sustaining digital commodity, similar to gold. It has a healthy satellite industry that provides products and services based around it, and it has its own business and advocacy organizations, but there is no central Gold Corporation. The databases that show Bitcoin addresses with a given bitcoin balance are all collectively managed by the network using a peer-to-peer network, similarly to the peer-to-peer networks used by file sharing services.
2. The Bitcoin price did NOT fall to $0.01 in June 2011. The backstory behind this myth is an event in June where an administrator account at MtGox, a Bitcoin exchange which had over 80% market share at the time, was hacked, and the attacker managed to manipulate MtGox’s database tables to create a balance of 2 million bitcoins within his account and immediately sold them, consuming all of the buy orders that had been placed on the site in the months before going from $17.50 all the way down to $0.01. However, what sank to $0.01 was not the actual Bitcoin price, but rather a MtGox representation of the price. A price is, by definition, a value in exchange for which something is being bought and sold at a given time. In this case, however, MtGox later rolled back all of the trades that had happened during the event, so no lasting purchase or sale was actually made at anything less than $10. MtGox’s price charts show no transactions happening on the day. Aside from the attacker, no human being was, at any point, willing to sell bitcoins at anything close to $0.01 – the orders that were processed were all made weeks and months before the event, and at exchanges other than MtGox, the price generally remained at a healthy $13-$18. And, most importantly of all, the 2 million BTC that were sold were not even real bitcoins – they were simply fraudulent entries in MtGox’s database. Although it is understandable how some can interpret the event as the price dropping to $0.01, pointing to this incident as a sign of Bitcoin’s price instability is highly disingenuous – the root cause was a security mishap at a third party service, not a sudden loss of confidence in the currency. Incidentally, if the MtGox hack does count as the Bitcoin price dropping to $0.01, then another, less known, MtGox glitch deserves to count as the Bitcoin price reaching $1 billion.
3. Bitcoin itself has never been significantly counterfeited or hacked. A number of articles over the past one and a half years have come out with headlines triumphantly proclaiming “Bitcoin hacked”, or something similar in the introductory paragraph, and recently an article on the Washington Post claimed that in the future we would be smuggling “counterfeit digital currencies.” Unfortunately, Bitcoin’s security reputation has been negatively affected as a result. In reality, however, stories about Bitcoin being hacked are simply instances of the central authority misconception manifesting itself once again. The Bitcoin protocol itself and the various services that have been built up by the Bitcoin economy are two completely different things; saying that the former was hacked when the real victim was one of the latter is like saying the US dollar was hacked when criminals manage to steal $10 million by breaking into point of sale terminals. Incidentally, the US dollar itself has been “hacked”; a large part of North Korea’s revenue comes from counterfeiting hundred dollar bills; the Bitcoin protocol, on the other hand, has not had any significant security breaches. There have been a few minor incidents involving special methods of accepting Bitcoin that are known to be unsafe, but the scope of these attacks is well understood and very limited, and the average user and business is not vulnerable at all. Because all clients enforce the 21 million bitcoin supply limit, “counterfeiting” new bitcoins into existence is impossible outright. On the whole, the cryptographic and game-theoretical foundations behind the Bitcoin system have proven to be rock solid, and the fact that no one has yet claimed the $140 million reward for breaking these foundations is a testament to this. To the average user, there are only two ways to lose one’s bitcoins to malicious activity: entrust the bitcoins a third party service that turns out to itself be insecure or fraudulent, or have your own computer get hacked by a computer virus – both of which are problems in the traditional financial system as well, costing the US economy $50 billion per year.
4. Bitcoin is NOT (yet) seeing massive growth in usage to evade trade sanctions in Iran. Much like the Bitcoin Euro story, this is another meme that has spread around the internet all too quickly for its own good. After Business Week came out with its article on November 29, Reason, Infowars, various financial blogs and much later CNN all picked up on the story, often simply copying paragraphs while offering little or no original research of their own. In reality, the Iran story does have some grain of truth, as there have been signs of increasing activity from Iran in the past few months, but on the grand scale, Bitcoin is far from making significant inroads – on Google Trends, Bitcoin is not even on the charts for Iran. What happened here was a common journalistic fallacy: the media took a single story of an Iranian earning bitcoins by selling music on CoinDL and wrongly extrapolated to a story about Iranians switching to Bitcoin en masse. There is nothing wrong with writing an article expressing the potential for Bitcoin to be used to bypass trade sanctions on a larger scale, but one must be careful not to assert that such a thing is already happening.
5. Bitcoin IS being used to sell illegal drugs on sites like Silk Road. However, illegal goods other than drugs – including assassinations, child pornography and even guns, are NOT gaining significant traction. The black market website Silk Road made considerable news a few months ago when a paper by Nicolas Cristin was released, claiming that the site had a monthly trade volume of over $2 million. Focusing on the black market aspect of Bitcoin is a popular habit of journalists, as shown by US senator Charles Schumer in June 2011 when he accused Bitcoin of being “an online form of money laundering used to disguise the source of money” when buying and selling drugs. Even now, articles are using Schumer’s words as part of a two-sentence introduction to what Bitcoin is. Other articles, however, go even further; one blog piece claims that “the fact that you can buy drugs, guns, and assassinations with Bitcoins is indisputable,” and another video portrays bitcoins as the go-to currency for purchasing prostitution, guns, stolen art and more. These claims, however, are exaggerated. The video claims that “at one point the Silk Road drew the line at selling products harmful to others like firearms, stolen credit card numbers and more, but as the site grew things turned for the worse,” but this statement is factually wrong – in fact, as time went on, things turned for the better. Stolen credit card numbers, child pornography and assassinations were never allowed on Silk Road, and even the much more lax Black Market Reloaded has slowly begun clamping down on immoral activity – assassinations and child pornography can no longer be found on the site. After growing controversy among the site’s users, Silk Road’s mastermind Dread Pirate Roberts banned firearms from Silk Road in January 2012, moving firearms sales to a dedicated site. However, the site failed to gain traction, and Roberts closed the Armory down only six months later due to inactivity. Guns were not allowed back on Silk Road. The assassination threat is similarly overblown. If one casually scrolls through black market sites on the Tor network, there are indeed a number of sellers offering assassinations at a price anywhere from $5,000 to $20,000 USD, typically asking for Bitcoin as the payment method. However, a more detailed analysis shows a different picture. These sellers’ accounts invariably have no reputation or feedback of any kind, and they never offer to use an escrow service. This can only point to one conclusion: they are all scams. It costs nothing to put such an advertisement online, and scammers can simply wait until a customer contacts them, and then extract as much upfront payment as they possibly can. Some of these scams may even be vigilantes and police, deliberately undermining any semblance of trust in markets for such services in an attempt to protect potential victims.

It is easy to understand why so many writers have made these kinds of mistakes. It is easy to fall victim to the desire to come up with an interesting story that will generate pageviews, especially when there is often so little incentive to dig through to the more boring truth. To combat these myths, therefore, we must all be vigilant. Whether a given story is unfairly biased against Bitcoin, or even unfairly biased in its favor, it is important to work together to make sure that the truth always comes out – in the first case, not to needlessly scare potential Bitcoin adopters away, and in the second case, not to disappoint. Hopefully, as public understanding of what Bitcoin is continues to develop, we will be seeing far fewer outdated or inaccurate claims in 2013, and with luck, Bitcoin will be free to rise or fall – but hopefully rise – on its own merits.

Disclosure: the author of this article has had a small role in copywriting for UpTweet. This article was written independently of this fact.

After months of development, the upstart social media site UpTweet has recently announced that it is officially going live. On the surface, UpTweet is a general-purpose online social news and discussion site similar to Reddit, where users can submit and read posts sorted by the specific category that they are interested in. The list of categories is diverse, including news, sports, technology, health and even a “marketplace” category for buying and selling goods. However, the core concept behind UpTweet, and hence its name, is that the site is completely integrated with Twitter. A Twitter account is required to make posts and comments, and all posts and comments that a user makes are immediately published under the user’s account on Twitter as well. When a user posts a reply to a comment on UpTweet, he is also tweeting a reply to the tweet corresponding to the comment that he is replying to; every single conversation on UpTweet takes place on Twitter at the same time. The basic intent behind UpTweet’s design is that UpTweet attempts to bridge the gap between Twitter, with its 140-character headlines, and the deep conversation that is now only seen through forums and lengthy blog posts. Those who only want a summary of what is going on can read the Twitter feed, while those who want to go in deeper can click a link and see the full conversation on UpTweet instead.

UpTweet also extends what is currently possible with social media in another big way: integration with Bitcoin. Every time one of your posts gets retweeted on Twitter or “uptweeted” on UpTweet itself, a functionality similar to upvotes on Reddit but which also triggers an automatic retweet, a small payment gets added to your on-site wallet account. The amount is currently 0.0001 BTC per uptweet, but may go up or down depending on UpTweet’s advertising revenue.

Integrating Bitcoin with social media has been tried before, and at first it did have little success. In 2011, Witcoin offered users the ability to support posts that they like by tipping them with the currency, but the idea never caught on, and the site has since shut down. The Bitcoin-based paid question-and-answer board Rugatu has existed for many months, but its user base has so far remained fairly small. Twitter itself has been linked with BTC previously with FeedZeBirds, but that project, despite some degree of initial prominence, has now also died down. More recently, however, fortunes have turned in favor of such a merger. Bitcointip, a bot on Reddit that allows anyone to tip any other user in BTC, launched about a month ago, and is now actively operating with a total of about $25 tipped every day. UpTweet, with its per-retweet reward system, serves as a complement to Bitcointip – while with Bitcointip, one gets rich by getting lucky with a large tip from a particular individual, on UpTweet, the path to Bitcoin prosperity is pleasing the masses.

UpTweet’s growth strategy is rather different from most other Bitcoin-related services. The vast majority of Bitcoin businesses that we see today are specifically centered around Bitcoin, offering services that are usually available elsewhere but for Bitcoin. UpTweet, however, is treating Bitcoin integration largely as a sideshow, and is pursuing its own path in marketing itself. Topics on UpTweet include mainstream subjects such as entertainment and music, and UpTweet has already run an ad in Times Square. Once users start using UpTweet for its Twitter integration, the hope is that they will be attracted to Bitcoin as well. Founder Brian Santos writes, “We are getting people into Bitcoin without them even knowing it. That’s the way it’s supposed to be really – Bitcoin-centric sites are a thing of the past. For Bitcoin to succeed, it needs to go ‘mainstream'”.

UpTweet founder Brian Santos has also agreed to share his thoughts on UpTweet and the future of Bitcoin and social media as a whole in an interview:

1. To start off, could you introduce yourself to our readers? What is your background, and are there any other projects that you are involved in in the Bitcoin community?

My name is Brian Santos. I’m a digital artist, software developer, project manager, and marketing analyst based out of the sunshine state of Florida. I have been working with computers since I was 10 years old, before I even had my first desktop computer, I was coding websites on my WebTV Philips MAT-972 via 28KBPS dialup (“Blazing Fast Speeds”). I was always interested in building social networks through different communities like GeoCities and tools like IRC. I was also heavily into clans (Starcraft) and even ran one of the largest clans in Battle.net (Clan iM). I have always been enthralled with technology, owning dozens of computer rigs (many that I built myself), and learning a series of different programming languages and frameworks. I discovered Bitcoin in early 2011 and became fascinated by the entire idea of “free money”. After becoming heavily involved in UpTweet and correlating the Bitcoin technology with the Twitter API I now truly appreciate the true genius behind the divisibility and expandability of Bitcoin. I also learned that Bitcoins are far from “free”. I think BTC are a no-brainer, being the most transparent monetary system man has ever known. In addition to UpTweet I also own the Bitcoin Tees and memorabilia site http://bitcoinpride.com, and I am working on several top secret Bitcoin projects.

2. How did you first come up with the idea behind UpTweet?

About 3 years ago I was introduced to Twitter. The news report I first read talked about a revolutionary new system that was exploding into the scene at incredible speed. At first I didn’t quite grasp the usefulness of the service that limited everything you said to 140 characters. It wasn’t until I got more acquainted that I started to understand why the network was setup in such a fashion. Twitter (at the time) was positioning itself to take over as an alternative to paid text messaging services. Twitter allows users to tweet each other via direct SMS (and landline service in some regions), and to keep in line with universal standards, Twitter limits each post to 140 characters. From a marketing perspective I fell in love with Twitter almost instantly. The fact that it allows for direct access to a users fan base and does not limit how big or fast they can grow, makes it the ideal platform for a popularity based blogging system. As I learned more I began to work with Twitters infrastructure, and I started to notice some of the shortfalls that Twitter was suffering from. I wanted to create a system that removed all of the limitations that Twitter presented its users with, while at the same time keeping a truly integrated Twitter experience that enhances the service.

3. What audience is UpTweet aimed at? What would be an example of an “ideal user” of your service?

UpTweet is aimed for everyone and anyone. It has all of the most relevant categories to suit any user from entertainment to current news from all all over the world. We want to make sure that we provide a dynamic experience for all of our users. This means that a tweeter will only get fed topics that they want to hear about. We want to make sure that our categories are targeted and easy to identify. An ideal UpTweet user would be a blogger or reporter who lives in an interesting region and has many stories to talk about, yet lacks the resources or connections to get their work out to the mass public. UpTweet solves the resource issue by intimately integrating every UpTweet/Retweet on the site with the incorruptible, uncensored, and global digital currency Bitcoin. UpTweet also solves the reachability issue in 2 ways. We syndicate all of our users content throughout our vast network of over 80,000 Twitter followers and growing. On top of syndicating every piece of content, the post is added automatically to UpTweets popularity ladder which increases visibility and enhances user engagement. We want to provide an all-in-one service, and we hope to use the reachability of Twitter to fuel our process.

4. How are you marketing UpTweet? What groups of people are you targeting right now?

Since we just launched our site, we are now beginning to execute on our core marketing strategies. As said in the last paragraph, we are trying to target everyone and anyone. We want to have a dynamic community that defines itself with every post. We are going to market our site using a variety of different marketing techniques and paid choices. We first plan on getting our core group of site users established, and hope that this group is composed of mostly Bitcoiners. We want to have a core of devoted and intelligent individuals that watch over the general traffic on the site, and help maintain the level of quality and prestige that we’re looking for at UpTweet, all while earning a sizable amount Bitcoins.

5. Your service is also integrated with Bitcoin – it pays out a rate that is currently 0.0001 BTC every time one of your posts gets up-tweeted. What is your marketing strategy for introducing Bitcoin to new UpTweet users who may not have heard of Bitcoin before?

A lot of users who sign on to the site do not know what Bitcoin is. This is a good thing, as it gives them a truly organic experience with the currency, and introduces them to BTC in small baby steps, instead of forcing them to dive in to the sea of information relating to Bitcoin. Our strategy is to educate our user base, using the existing community as a support mechanism for the broader audience on the site.

6. How do you intend to protect yourselves from fraudulent accounts? There are undoubtedly armies of tens of thousands of Twitter bots on the internet, and it’s a problem that FeedZeBirds has had to deal with too; what kinds of measures to you have to prevent them from draining out all your funds?

Currently there are no Bitcoins on the server. All the user accounts are put into a “pending balance”. Every single payout is manually verified by our staff. Once someones posts are verified, Bitcoins are then deposited into the user’s online (onsite) wallet. From there they can withdraw to any wallet or service of their choice. If someone tries to manipulate our system, they will not get paid. Users who post a lot will be “auto-verified” and Bitcoins will be deposited automatically as the Retweets come in.

7. Do you see Twitter as becoming a more important social media platform in the future? Why or why not?

I obviously think that Twitter is the future. I believe that by the time they have their IPO, Twitter will be the #1 social network in the world (overtaking Facebook). The reachability and instantaneousness of Twitter is a force that is going to be very hard to stop. Tools like UpTweet will only continue seal the deal further, as they will fill holes that Twitter simply has not bothered to look at. Twitter is focused on improving their infrastructure and overall platform, and instead they are leaving all the feature enhancements to firms like ours. I believe this is a winning strategy, and it will only continue to make Twitter (the core platform) that much more relevant, by having sister companies that heavily rely on their business model.

8. What do you think about the idea of combining of social media and micropayments in particular? What kind of unique potential do you think this combination has?

I believe that rewards based social media is the next logical step in this fascinating evolution of human interaction. It’s interesting when you think about it. The first step in modern communication is verbal, the second is almost always monetary. For example when you invite someone for dinner the first thing on your mind is the conversations you will be having, and the second is how you will be paying for the conversations to take place. As people become more and more tech savvy they will surely want to be compensated for their time, and they should! We believe we are way ahead of our time, but it’s a challenge that we are eager to take on.

9. What other trends in social networking do you think are going to become dominant over the next few years? How do you see UpTweet fitting into this future?

I believe that the Arab Spring is just the beginning of this social “awakening” that we are witnessing world wide. I believe that every single dictator in power today will not be there in 10 years’ time. People are rising and taking back their freedoms that were once stolen from them. They are using tools like Twitter & Bitcoin to make these ideas successful realities. The world is sick and tired of war, famine, and overall corruption. Not only are we seeing social media being used to topple entire dictatorships I.E. Muammar Gaddafi, but also we are seeing it as a way to keep existing governments in check. We are witnessing this in Egypt with Mohamed Morsi and his attempt to implement a radical decree which would have essentially made him dictator. There was immediate public backlash fueled entirely by social media. Morsi is now withdrawing any “interest” for such decree, and I believe it has something to do with the whole world now watching his every move. Bitcoin will only intensify this as it knows no ruler other than the beautiful code which brings about it’s existence. It will be used a weapon by the people to directly fight corruption with nothing but truth and riotous determination for a chance at a better life.

10. Any last words for our readers?

Think outside the box. I KNOW this sounds typical, but serious Bitcoiners should pay attention… Right now I see many people in the community making Bitcoin centric websites that cater to Bitcoiners, and yet do not seek expand on the protocol in any meaningful way beyond your typical “pay me here” scenario. We need to break away from the stigma that seems to “outcast” any business that doesn’t have “Bitcoin” in its name. This is wrong, and it’s the kind of backwards thinking that will keep the community and the currency from ever growing beyond its targeted and specific niche. If you are a struggling developer, an entrepreneur, or a general Bitcoin power user, it should be your sole duty to diversify your portfolio with Bitcoin related projects that expand on the existing user base by offering innovative ideas that captivate the user and make them want to learn MORE instead of LESS. Information overload is a huge problem in our community, and it should be our top priority to minimize this into the cleanest way possible. If you make Bitcoins “just another currency”, we will fade into the realm of irrelevance. If we make Bitcoins something FUN that people want to use regardless of the politics, then we WILL win…. This is what we should be aiming for: an apolitical coin that facilitates real solutios that wow the masses.

 

A few hours ago, a poster on the Bitcointalk forum announced that he was able to successfully reverse an unconfirmed transaction against the popular Bitcoin gambling site SatoshiDice. The attacker’s strategy was simple. First, he sent a 0.25 BTC bet against SatoshiDice with no transaction fees, which he lost. Immediately after receiving the notification of his loss from SatoshiDice, he sent another 0.25 BTC transaction to himself – this time with a transaction fee, encouraging miners to confirm the second over the first. However, this strategy as is turned out to be unsuccessful, and so the attacker was forced to introduce another tactic: make the transaction “spammy”. The standard Bitcoin client has a number of rules about accepting transactions that take up a large amount of disk space as one of its measures to prevent people from sabotaging Bitcoin by filling the blockchain with hundreds of gigabytes of transactions, and a general principle is that transactions which deviate from the model of having only a small number of standard inputs and outputs are much less likely to get accepted quickly, or in some limited cases even propagated, without fees. So the attacker deliberately made his second attempt a 0.20 BTC transaction which split up the funds into twenty inputs of 0.01 BTC each, and then attempted to overwrite the transaction with a 0.20 BTC transaction to himself with a generous 0.004 BTC fee. This time, the attempt worked. The mining pool BTC Guild confirmed the second transaction over the first, and the attacker’s original loss disappeared forever.

It is very important to note that this does not undermine the security of Bitcoin as a whole, outside of a very limited number of applications. There are two forms of “confirmation” in the Bitcoin system. The first, which takes about two to five seconds to complete, is simple network propagation; a valid transaction will find its way through the Bitcoin network and make its way to the node controlled by the merchant. The second, which takes about ten minutes, is a block confirmation; here, the miners that maintain the Bitcoin network place the transaction in a block and perform a proof of work computation on the block, which takes a massive amount of computing power to forge. Most Bitcoin-accepting businesses wait for one block confirmation before releasing the product, and this attack does nothing against transactions that have a block confirmation. In the case of vendors selling physical goods and online services, a fraudulent customer’s product can easily be cancelled even hours after the original notification of payment is made. In the case of consumable digital goods like gift codes and wireless refills, this is not the case, but even there the process of sending the code to the customer typically takes up to 30 minutes, so providers either already check for one confirmation or could easily be patched to do so without adding much inconvenience. For usability purposes, the current paradigm of instant confirmations can even still, from the customer’s point of view, appear to remain in place; the instant confirmation still performs its function of reassuring the customer that the transaction has successfully reached the merchant just fine. Waiting an extra ten minutes is a process that can simply happen behind the scenes.

Surprisingly, digital download stores that offer instant downloads for instant confirmations are also protected; Coindl does not need to change its business model. It is indeed possible to force a refund from such a business using this technique, but they are still protected from incurring any significant monetary loss from the act by economics. Digital goods like books, movies and songs have essentially zero marginal cost, meaning that, for example, Apple has to pay less than a penny in extra electricity and bandwidth costs when you download an album from them for $11.99. Using this technique to coax a digital download site into giving you a free song or book is thus essentially equivalent to downloading it through a torrent network; even if half the people in the world start doing it, the honest customers and artists can still continue to carry out their business in peace.

As for solutions, the simplest, and guaranteed to be sufficient, patch is to simply wait for one confirmation before doing anything irreversible. Of course, there are some business models for which this is simply not acceptable; the whole attraction of SatoshiDice was instantly getting one’s money back if one wins. SatoshiDice themselves have already solved the problem; they now require all incoming bets to include transaction fees. Even if sites do not want to introduce such a complication, however, there are still other options. About eight months ago, a now-defunct company called RingCoin released a product named ZipConf, with the intent of supporting merchants accepting instant confirmations by making it more difficult for transactions that have not had a block confirmation to be reversed. Zipconf’s software stack attempts to prevent such attacks in two ways. First of all, it broadcasts the first transaction to as much of the network as possible as soon as its gets it, so that nodes will ignore any transaction that follows it seeing that it conflicts with an existing transaction. Second, Zipconf was willing to compromise slightly on being instant, waiting a few extra seconds after receiving a transaction to listen for fraud attempts before finally accepting it. By then, the transaction will have spread to much of the network and, the theory went, it would be nearly impossible for a second transaction to gain a foothold.

Such an approach can be implemented by businesses like SatoshiDice, although it can be combined with other techniques. For example, SatoshiDice might consider immediately re-sending the output of any transaction that they receive to themselves with a fee, encouraging miners to quickly confirm both the new transaction and its parent over any conflicting transactions. Another layer of defense would be refusing and immediately returning overly large or non-standard transactions. A third strategy would be cooperating with the miners and the Bitcoin developers themselves, getting them to include a patch that does not accept conflicting transactions over older ones even if the new transaction is much smaller and has a higher fee. Individual “selfish” miners may take the fee, but the majority of mining is controlled by mining pools, which are large enough that the public good of the utility of the Bitcoin network itself outweighs any personal cost to them of not accepting such transactions. Thus, on the whole, although this is one of the larger speed bumps the Bitcoin protocol has had to deal with, especially as it is a zero-day vulnerability, it is still only a speed bump. The community will simply need to make an earnest effort to make sure that all businesses and miners are patched to address the issue, and even instant confirmations will still likely continue to exist.

 

The Journal of Peer Production, an academic publication dedicated to exploring, investigating and promoting what they consider to be the emergence of a new, peer-to-peer, economic model in society, has announced a call for papers for a special issue of their journal on the topic of “value and currency in peer production.” The Journal of Peer Production has covered a wide range of topics in the area of peer-to-peer economy, ranging from file sharing in Sweden to the emergence of governance in the open source FreeBSD project and even do-it-yourself biology, and is now looking for answers to one particular question: what role will digital money have in a peer-to-peer society?

The Journal of Peer Production is not yet well-known in the Bitcoin community, but a distinct but ideologically similar group has had some exposure: the P2P foundation. The foundation made some headlines nine months ago when they started paying salaries in Bitcoin to show support for the currency, and one of the P2P Foundation’s founders, Michel Bauwens, appeared on the Keiser Report in May to talk about what the currency means to him. The P2P Foundation’s purpose is somewhat more general than the Journal of Peer Production; as P2P Foundation collaborator Nicolas Mendoza describes it, “the P2P Foundation documents, studies and promotes P2P practices around the world, plus it is continually building a knowledge commons of P2P practices that is available for everyone at the P2P Foundation wiki.” One of its most prominent recent works is the 2012 report “Synthetic Overview of the Collaborative Economy“, written largely by Bauwens, Mendoza and Franco Iacomella.

The Journal of Peer Production, on the other hand, focuses itself on releasing in-depth peer-reviewed articles about specific topics. It publishes its issues in July every year, and has so far released three. The first (or rather, “Issue 00”), released in July 2011 and entitled Mass Peer Activism, discussed filesharing in Sweden, Wikipedia and a branch of social science known as Actor-Network Theory (ANT). Issue 01, released in July 2012 and entitled “Productive Negation”, discussed free software and also dealt heavily with topics of scarcity and abundance and the features of a peer-to-peer economic model. Issue 02, also released in July 2012 and entitled “Bio-Hardware Hacking”, focused on hackerspaces and the democratization of biotechology. Issue 03, “Free Software Epistemics”, will come out in July 2013.

Radical politics and economics has always been one of the Bitcoin community’s interests, and so many people would benefit from taking a closer look at these two organizations’ work. The general category of the P2P ideology’s politics can be described as libertarian – a word which appears rather frequently in both organizations’ writings, but a form of libertarianism different from the one envisioned by writers like Jon Matonis. The P2P foundation has a section offering a criticism of Bitcoin which all-out attacks an aspect of the currency that many others consider to be its core features: its sharply limited supply. Despite his general stance in favor of Bitcoin, Bauwens nevertheless wrote that “it is a ‘scarcity’ based currency, subject to hoarding and wealth accumulation (only 21m bitcoins will be created, insuring a constant growth in value), that does not really change what is ‘wrong’ with the current currency system”, and further down in the page Sebastiano Scrófina criticized the currency’s deflationism. Bauwens later wrote another article criticizing the deflationist ideology as a whole. Deviating further from the traditional ways in which economic ideologies are categorized, an article in the Journal of Peer Production outright calls peer-to-peer society “a new communist horizon”. However, the communism is mentioned there is far from the authoritarian state communism of the 20th century; rather, peer production is described as “a ‘third mode of production’, irreducible to State or market imperatives” – Wikipedia and open source software being the perfect examples.

To those members of the Bitcoin community who are interested in the larger societal questions that technologies like Bitcoin can solve, the Journal of Peer Production and the P2P foundation are highly recommended places to stop by if only simply to expand one’s ideological horizons. Those who have something to say about local and alternative currencies, financing public goods in a peer-to-peer world, trust and anonymity or any of the other topics listed in the announcement are encouraged to make their submission proposal (maximum 500 words) to the foundation by January 28, 2013.

 

This Friday, Bitcoin Central, a Bitcoin exchange based in France, announced what has already been hailed as a major step forward for Bitcoin: they are now licensed to perform many of the same functions as a bank. Soon, a Bitcoin Central account will have all of the core features of a standard bank account in Europe. Each account will have its own international bank account number (IBAN) with which anyone will be able to send money to that account via bank wire. On the withdrawal side, Bitcoin Central will soon issue debit cards similar to those now in the works by BitInstant that would automatically convert the holder’s BTC balance to euros on the fly. And, finally, the euro balance of a Bitcoin Central account will be federally insured up to $100,000 by the French “Garantie des depôts” (roughly equivalent to FDIC insurance in the United States). Furthermore, these features will not just be available to residents of France; anyone in the world will be able to open a verified account if they are willing to provide proper identification.

If all goes according to plan, Bitcoin Central’s announcement will mean a lot for Bitcoin integration in the years to come. Acquiring bitcoins in the first place has always been the most difficult part of participating in the Bitcoin economy, and now, anyone with an account at Bitcoin Central will be able to, for example, have their salary paid into that account and automatically converted to Bitcoin. Bitcoin enthusiasts will be able to get pretty close to abandoning the traditional banking system entirely, storing their funds in BTC and using a Bitcoin-denominated debit card to pay for their purchases when they interact with businesses that do not use Bitcoin. As more people start accepting and spending Bitcoin, this opens up a path for the currency to gradually enter the mainstream world; if some businesses realize that some of their employees are converting their salaries to Bitcoin and some of their customers are paying them with Bitcoin debit cards, they may wish to cut out the middleman entirely and allow both sides to pay and receive bitcoins directly.

Another important aspect to highlight is what this means for Bitcoin’s legitimacy. There have been a considerable number of legal concerns around Bitcoin in the past few months. In September, the now-defunct Global Bitcoin Stock Exchange’s James McCarthy, in an interview explaining why he shut his platform down, claimed that the regulatory standing of Bitcoin exchanges is much more treacherous than many assume, and that “all existing bitcoin exchanges that are not doing AML on all accounts (even bitcoin only accounts) are at risk” of being shut down. In October, the European Central Bank released a report entitled “Virtual Currency Schemes” which, although in many ways positive to Bitcoin, ended with the ominous words “Further action from other authorities can reasonably be expected in the near future.” Legal concerns have been cited by many as a major factor hindering Bitcoin adoption, and the fact that the banking system is now willing to deal with Bitcoin in this way will do much to alleviate other organizations’ fears.

There has also unfortunately been a considerable amount of miscommunication both within the Bitcoin community and outside about this deal (in which I admit to participating myself), and Bitcoin Central has deemed it fit to release a public message clarifying the facts. The misconception started with the headline of the forum thread making the announcement, “Bitcoin-Central, first exchange licensed to operate as a bank. This is HUGE” This was widely misinterpreted to mean that Bitcoin Central will have the power to act as a bank themselves, but Bitcoin Central’s David François (also known in the Bitcoin community as Davout) clarified: We said “licensed to operate as a bank” which we mean as ‘open accounts to third-parties and hold fiat currency on their behalf in compliance with the regulatory framework’. The headline has since been corrected to instead say “operate with a bank.”

In fact, Bitcoin Central (or rather its parent company Paymium) has a deal with Aqoba, an institution which is already licensed to operate as a “payment services provider”, a status which David François describes as “exactly what a bank does, minus the issuing of credit”, and Bitcoin Central will be able to perform the same actions as a payment services provider by doing everything through Aqoba. Aqoba itself is partnered with Crédit Mutuel Arkea, an actual bank (or, more precisely, a banking and insurance cooperative), which is where the euro portion of Bitcoin Central account balances will be held. Thus, it is only the euro balances that are federally insured; BTC balances are protected only by good old-fashioned “cold-storage and extreme security paranoia.”

Some are worried about the potential legal issues surrounding what Bitcoin Central is doing. A number of Bitcoin exchanges, including, Intersango in the UK, Bitcoin Mercado in Brazil, and even MtGox in France iself have had their banking partners abandon them, and some are worried that, despite the Paymium team’s careful legal research particularly around the MtGox case, the same will happen to Bitcoin Central as well. Mike Hearn raises the concern that Bitcoin Central may be forced to close its doors to US residents in the future due to US foreign tax regulations. Others have raised the opposite argument: that, like Tor, Bitcoin is a vital tool in maintaining one’s privacy against the state, and regulation will only be harmful to Bitcoin achieving what they consider to be its primary purpose.

To those who are concerned about Bitcoin Central’s legal situation, François’s response so far can be summarized in one comment: “I hear you and that makes sense, I guess we’ll find out.” To those who see Bitcoin as a way of fighting against the traditional banking system and government regulation, François has one simple reply: “If you don’t see value here too bad, just don’t use us. We’re an option, not an obligation. We won’t force anyone.” All in all, Bitcoin Central’s new offering will only expand the range of choices that Bitcoin users have available to them.

 

FOR IMMEDIATE RELEASE
6 December 2012

ORLANDO – Bitcoin Magazine, the premier print and digital publication focusing on the new Bitcoin technology, has been purchased by a group of individuals well-known in the Bitcoin community, who are all dedicated to Bitcoin and its success.

Coin Publishing LLC is the new entity based in Florida that will be taking over the full operations of Bitcoin Magazine effective immediately, purchasing the assets and contracts from Bittalk Media Ltd for an undisclosed sum of cash plus bitcoins.

Coin Publishing LLC is collectively owned by individuals owning or working at BitPay, Butterfly Labs, Google, Casascius, 20 Mission, and Virtual Processing Solutions.

Mihai Alisie has signed a 12-month contract to work as Editor in Chief, and Vitalik Buterin has also signed a 12-month contract to work as Lead Writer and Webmaster.  The entire creative team that has been producing outstanding work under Mihai on the first 5 issues will continue to contribute to the magazine.  In addition, many new writers will contribute to the publication and the team will continue to expand in 2013.

A new website will soon be launched as the new interactive portal for Bitcoin Magazine going forward.  The team will also be working to release a digital download version of the previous issues as soon as possible.  Issue 5 is now on sale at the current website http://bitcoinmagazine.com/subscribe along with discounted bundles of all back issues.

Bitcoin Magazine has also moved to a new support ticketing system.  Customer support can be reached at [email protected] which will automatically generate a support ticket.

The distribution contract with Barnes & Noble will continue uninterrupted.  The distributor is also located in Florida, which will be easier and more cost-effective to work with.  Coin Publishing will also look to expand distribution into Europe and Asia/Australia in early 2013.

Bitcoin Magazine is reducing its advertising rates by $100 for all inside page ads.  We would like to see more businesses showcased in Bitcoin Magazine.  If you would like to inquire about advertising, email [email protected].  Full page ads are now $495 and half-page ads are $295.

———————————–
Contact Info

Jan Jahosky
Press Relations
Bitcoin Magazine
[email protected]
407-331-4699

 

BitFloor and Bitcoinica Refunds Showing Signs of Progress

The Bitcoin exchange platforms BitFloor and Bitcoinica, the two largest institutional victims of digital theft in Bitcoin history, have finally shown their first signs of genuine progress toward repaying their clients. On October 31, a court filing made by Tihan Seale in August to place Bitcoinica into a formal state of receivership for liquidation finally came before a judge, and Anthony John McCullagh and Stephen Mark Lawrence were appointed as liquidators. Three weeks later, the liquidators sent emails to select members of the Bitcoin community and made a post on the Bitcointalk forums asking for creditors to provide them with their address and contact details. As for BitFloor, on Monday, the exchange announced that it will be refunding 1.7% of its users’ lost funds, and further refunds will be made as BitFloor’s business continues to grow.

Aside from Pirate, Bitcoinica and BitFloor were arguably the two greatest mishaps that took place in the Bitcoin world in 2012. The former was a margin trading platform created by Zhou Tong in September which rapidly grew to a transaction volume larger than any exchange other than MtGox itself, but which rapidly fell into disrepute following a series of hacks in the spring. The first incident in March saw over $220,000 worth of BTC whisked away by an unknown thief who had broken into Bitcoinica’s servers. However, Bitcoinica’s investors supplied the funds to keep the company solvent, and it continued operating for another two months, until another $90,000 hack transpired and the company’s database of its users’ balances was deleted in the process, forcing it to finally shut down. Then followed a slow and laborious claims process in which Bitcoinica staff tried to piece together the remaining evidence to see which claims were legitimate and which were fraudulent or exaggerated. The process proceeded at a glacial pace, as it was hindered further by bitter internal conflicts between its various partners. A small portion of claims were paid out over a month, until the process stalled entirely, and to add further insult to injury, the claims fund itself was hacked due to a bad choice of password and the Bitcoinica staff not setting up any kind of two-factor authentication, losing another $320,000.

Fortunately, the debacle of BitFloor, although tragic, was not nearly as devastating. In early September, a thief managed to locate an unencrypted backup of the service’s wallet on the server, which had been accidentally left there while founder Roman Shtylman had been making a manual upgrade of the server’s software, and made off with $250,000. However, Shtylman managed to keep BitFloor running by freezing the Bitcoin balances of depositors at the time, with the intent to put BitFloor back on its feet and eventually earn a large enough profit to pay the depositors back.

The two events took a serious toll on the Bitcoin community’s confidence, and by September, many people had written off their debts at these exchanges, particularly those at Bitcoinica, as gone for good. Now, the fact that Bitcoinica is in the hands of legally appointed liquidators provides a first sign of hope that, eventually, depositors will get a large portion of their deposits back. Because of the third theft in July, the compensation will be far from 100%, although the loss from the theft will be slightly offset by Bitcoinica’s anonymous users, who will not be able to get anything back if they are unwilling to hand over their legal name and address to the liquidators; 60-70% is currently the prevailing estimate. Bitcoinica creditors, and those who are not Bitcoinica creditors even more, are cautioned to be truthful in what they submit. As one prominent creditor states, “If you don’t have a valid claim with Bitcoinica already then please realize that sending a false claim to a court appointed liquidator is probably not a very bright idea.” BitFloor may still go out of business from competition before it pays much more of its depositors back, but for now, it appears to be back on a stable trajectory.

There is also another silver lining to this new chapter in Bitcoinica’s tale. One so far overlooked statement in the liquidators’ post reads: “We would also appreciate feedback from investors on whether they would prefer to receive a distribution in the form of Bitcoins (where possible) or whether they would prefer a straightforward cash distribution.” This is the first time that a formal legal process has treated bitcoins as legitimate form of digital property, and has even been willing to handle bitcoins itself. Although this is a court-appointed company, and not a judge, the fact that Bitcoin depositors are being treated as legitimate creditors may still go a long way in alleviating the fears of those who may now be concerned about working with Bitcoin businesses due to legal uncertainty.

The Bitcoin community has already learned from and largely moved on from the aftermath of these two unfortunate events. Bitfloor’s theft prompted many Bitcoin financial service providers to switch to a stronger model of security, offering superior options for two and three-factor authentication and storing the vast majority of client funds in offline cold storage so that no security vulnerability can lead to an online thief pilfering them. The community has also become much less focused on financial services as a whole, focusing instead on strengthening the underlying economy. If Bitcoinica’s liquidation and BitFloor’s recovery continue, however, what has so far been a most unfortunate chapter of the Bitcoin community’s life may instead turn out to be a stepping stone to something much brighter.

 

Update: WalletBit has posted their official press release on Reddit and Bitcointalk. Also, the flat rate portion of their bank deposit fees has now been dropped.

WalletBit, the merchant platform that has begun rapidly growing in prominence and pushing itself as a mainstream alternative to BitPay this fall, has announced a new feature for merchants who are located in Europe: payment by bank deposit. Participating merchants can now accept Bitcoin without ever handling them themselves, instead having their earnings immediately converted to local currency and deposited regularly into their bank accounts.

Of course, WalletBit’s offering is hardly new; BitPay has been providing an equivalent service almost since its inception in May 2011, and the feature has proven to be an extremely popular one. However, WalletBit does promise a number of advantages over BitPay. First of all, WalletBit is intent on winning over merchants with its lower fees. For those merchants who wish to receive their earnings in bitcoins, BitPay has maintained a consistent transaction fee of 0.99% since it was first established, but WalletBit has recently reduced its fees to a slightly lower 0.89%. For merchants in the US, WalletBit’s 2.75% is slightly higher than BitPay’s 2.69%, but while BitPay’s commissions for European merchants increase to 3.99%, WalletBit’s rates remain the same.

Another advantage is internationality. Bitpay’s European bank deposits are only available to bank accounts in Germany, France, Spain, Italy, Finland and the Netherlands, but once this offer from WalletBit goes live its merchants will be able to receive Euros into bank accounts located anywhere in the Single Euro Payments Area (a superset of the European Union) as well as Danish krones in Denmark. WalletBit is also keen on advertising its security, featuring ACID and PCI-DSS compliance as well as AES-256 encryption for internal data on the server side, and the option of three-factor authentication using Google Authenticator and WalletBit’s own SecureCard, a printable grid of characters from which users are asked to provide a random three cells as part of the authentication process, to help clients protect their own accounts.

More developments from WalletBit are soon to come. Support for Canada is high on their list of priorities, although WalletBit is moving carefully in its efforts at Canadian integration in an effort to ensure legality and secure the best possible rates. WalletBit has also recently been putting a large amount of work into the usability of their payment systems, with particular emphasis on their smartphone and tablet applications. WalletBit Mobile, formerly ResponsePay, provides an easy-to-use wallet for the average user, and WalletBit will also soon launch a fully fledged point-of-sale solution that will allow stores and restaurants to record customers’ orders and accept payments all within a single tablet application.

WalletBit’s push for adding features since September has so far proven enormously successful for the company. Before Adam Harding joined the team as Director of Marketing in September, WalletBit saw very little use by Bitcoin merchants, to the point that few people realize that the business has been around since July 2011. Now, WalletBit’s transaction volume is more than double what it was this summer, and founder Kris Henriksen is confident that it will continue to grow as the new features that the company is developing fall into place. Canada remains a largely untapped market, with relatively few stores accepting Bitcoin despite the fact that interest in Bitcoin is not that much lower in Canada compared to the US. Brick-and-mortar stores and restaurants are another direction that WalletBit is intent on expanding into. Currently, although they have 167 merchants in total, only one of them is of the brick-and-mortar variety: a small kiosk in Kris’s home town in Denmark. “But once this bank transfer is up and running,” Kris writes, “I will have many brick-and-mortar stores to speak about.”

 

BitMessage: A Model For A New Web 2.0?

Over the past twenty years, the democratization of cryptographic technology has brought us the potential for an unprecedented level of privacy, giving the common man the ability to browse documents, have conversations, and now, with Bitcoin, send money to people around the world without even the most powerful corporations and government agencies being able to get in the way, but actual adoption of these technologies has been slow. It was once thought that PGP, the encryption tool created by Phil Zimmermann in 1991, was undoubtedly going to become standard in all email communications within years, but it is now 2012, and most email communication is still done in the clear, with providers like Gmail having the ability to read everything that their users write.

Some argue that the reason why encryption has not been implemented into email protocols is profit, as Google would have no way to earn advertising revenue from their service if they could not scan users’ emails for keywords, and others cite general apathy, quoting Mark Zuckerberg’s famous comment that privacy is no longer a “social norm”, but there is also a more fundamental issue at play: network effects. If you were to create an encrypted email right now with PGP and send it to a friend, they would have a difficult time figuring out what to do with it. For the encryption to be worth anything, your friend would need to have a decryption key under his control, whether that’s a public key or a symmetric key that the two of you had agreed upon earlier, and convincing other people who are not as technologically inclined to use such keys can be a challenge. There are isolated communities in which encryption is used, whether out of ideology or out of necessity – Bitcoin itself has a considerable number of pseudonymous businessmen and developers who rely on PGP to maintain their online identities. However, by and large, this is not the case. If encrypted email was popular enough in the world at large, the average person would have an incentive to set up a public key, but the fact that it is currently a niche technology means that they will not, perpetuating a catch-22 situation which requires a large portion of society to somehow coordinate to escape.

Enter Bitcoin. Although we tend to think of Bitcoin as a system designed specifically to send financial transactions, recent developments have shown that much more can be done with its cryptographic primitives. As early as 2011, people were using the lower digits of Bitcoin transactions as a way of encoding messages in the blockchain; one of the Bitcoinica thieves famously used the mechanism to distribute the message “expect mass leak soon“. Beyond the fact that this message will remain in the blockchain forever, an advantage of this technique is that the message is also authenticated; since sending a message in this way requires you to control the address that the transactions are sent from. If it is already known that you control a given address, then clearly you must have sent the transactions as well.

However, this ad-hoc messaging system is clumsy and inefficient, and the concept of Bitcoin messaging has seen two iterations since then. The first is Blockchain.info’s concept of blockchain notes. The implementation is simple. The sender sends a non-standard transaction with two outputs. One of the outputs sends a very small amount of money to the receiver, while the other does not go to anyone at all. Instead, in the output field of the transaction is the message itself. If interpreted as a script, the message is impossible to fulfill, so that output will simply sit there in the blockchain, never to be spent. However, this approach met with strong opposition from Bitcoin developers for polluting the blockchain. Gavin Andresen wrote :”Yes, please don’t create lots of unspendable scriptPubKeys. There are more prunable ways of embedding messages into transactions. And there are even better ways of associating messages with transactions, so only people involved with the transaction can read the message (if that’s desired). In other words, lets figure out how to do this the right way.” The blockchain note system was soon converted into a proprietary feature of blockchain.info’s wallet.

The other advancement was message signatures. In version 0.6, the Satoshi client added a feature which allows the client to use the same algorithm used in Bitcoin to sign transactions to sign any other message as well. Using the exact same cryptographic techniques that allow miners to verify that the owner of an address authorized a transaction sending money from that address, anyone can verify (using a tool also present in the Satoshi client since version 0.7) that a message signed with a given address was signed by the address’ owner. Electrum and brainwallet.org also support this standard for both signing and verification. This mechanism solves the authentication problem, and it does not pollute the blockchain, but it has a problem of its own: there is no built-in transmission mechanism. Thus, just like PGP, the only way to send a signed message is to create a format (called ASCII armoring in PGP) that combines the message and the signature into a block, and then paste the block all together as a message. Essentially, this creates a PGP clone based on Bitcoin’s elliptic curve cryptography, with all of its advantages and disadvantages.

BitMessage, however, solves both of these issues. Rather than going through Bitcoin’s peer-to-peer network, BitMessage creates a peer-to-peer network of its own with properties specifically designed for sending messages. As the whitepaper describes it, “objects are broadcast throughout a Bitmessage stream. We propose that nodes store all objects for two days and then delete them. Nodes joining the network request a list of objects from their peer and download the objects that they do not have. Thus they will receive all messages bound for them that were broadcast during the last two days.” “Objects” are the basic unit of the network’s operation, and are replicated throughout the network. To limit the creation of objects and avoid spam, making an object requires solving a proof-of-work computation, which takes about four minutes on an average computer – in short, a replica of Adam Back’s HashCash anti-spam scheme first proposed in 1997.

Sending a message is a four-step back-and-forth process. First, the sender creates an object asking for the receiver’s public key. Second, when the receiver receives this object, he creates a reply object sending the key back. Third, the sender creates an object containing the actual message encrypted with the receiver’s public key, and, finally, the receiver receives the object and sends an acknowledgement message. The main message can be much longer than the short text string that can fit inside a series of transactions or an output slot; the whitepaper explicitly mentions that the scheme “would allow an individual or organization to anonymously publish content.” If both the sender and receiver are online, the process can happen within seconds, but otherwise they merely need to be online within a two day timespan of each other four times (really three times, as the acknowledgement is not crucial to sending the message) for the transmission to take place. Once two users are aware of each other’s public keys, the first and second steps do not need to be repeated, making the process even easier. Identities on BitMessage are referred to by addresses like “BM-2nijaB5b1C6HESgdqFMoMzWqNchA9w84Xmv”, which are formed from public keys in a similar way to Bitcoin addresses.

However, although the fundamental ideas behind BitMessage are both innovative and sound, BitMessage as it is is not without its flaws. One blogger wrote a scathing review of BitMessage’s security, pointing out that it made a number of elementary mistakes in implementing its encryption algorithms. First, it uses RSA on the message directly rather than using it to generate a one-time key which is then used to encrypt the message, a basic modification which both drastically increases speed and prevents many attacks based on specifically constructing blocks to exploit the algorithm’s mathematical properties. Second, it independently encrypts each block rather than using an encryption mode like cipher block chaining which makes the contents of the encrypted blocks dependent on each other. This means that an attacker can rearrange the blocks of an encrypted message, which it will appear to the receiver as a valid message, as if the original sender intended for the message’s blocks to come in the attacker’s chosen order. Finally, the encryption algorithm does not include an authentication layer, making other kinds of attacks possible. However, BitMessage developer Jon Warren is aware of these flaws, and is working hard on creating another version of the protocol that fixes these issues.

Another one major flaw that BitMessage arguably has is that it is not compatible with Bitcoin itself. Unlike Bitcoin, which uses elliptic curve cryptography to secure transactions and now messages, BitMessage uses 2048-bit RSA. RSA is in many ways more difficult than ECC to work with. It requires much longer key lengths to achieve the same level of security (eg. 3072-bit RSA is about equivalent to Bitcoin’s 256 bit ECC), and because RSA keys must have a special property to be valid (namely, being a product of two large prime numbers) they take a comparatively long time to generate, and there is no standardized algorithm for generating keypairs deterministically from a seed. But the main advantage of a system compatible with Bitcoin is not even this. Rather, it’s the fact that if a similar system were to be designed that could interoperate with Bitcoin’s private and public keys, it would be able to take advantage of the infrastructure that exists around Bitcoin already. It would be able to use the private and public keys that are already sitting in hundreds of thousands of Bitcoin users’ wallets, and would also be able to skip the public key retrieval step, as public keys can easily be recovered from the blockchain.

Furthermore, it would be possible to merge the message transmission and payment features into one, creating a sort of unified payment and social network service in a decentralized way. If Alice wanted to send 10 BTC to Bob, she would not need to ask Bob to give her an address as she does now; rather, she would be able to simply send money to the address that she already uses to send Bob her private communications. The scheme can easily be augmented to preserve privacy. One interesting property of elliptic curve cryptography is the existence of an operation called point multiplication, which allows a public key to be multiplied by a value to create a new public key, from which Alice can generate another address, and then Bob can multiply his private key by the same constant to get a new private key that corresponds to the public key and address that Alice just created. This is the key insight behind a concept known as the deterministic wallet, already implemented in Electrum, and it can be applied to create one-time keys for messaging and payment as well.

Fortunately, the BitMessage protocol is designed to be upgradeable, and the next version of the protocol may end up both solving the security problems and introducing Bitcoin compatibility by simply switching BitMessage’s cryptography to the same elliptic curve system used by Bitcoin. If BitMessage continues to develop and grow, or even if another, similar technology takes its place, what it can offer is a decentralized, cryptographically secure platform that can form the basis for its users’ entire online lives. One can potentially extend the system to add on a web of trust, a systematic way of declaring friends and business relationships, personal webpages, and it already supports a Twitter-like mechanism of subscribing to individuals and receiving a feed from them. In ten years’ time, there is a chance that Bitcoin will prove to be much more than just a decentralized digital currency; it may be the start of an effort to redevelop much of the internet from scratch – and this time done right.

 

Recently, in the media surrounding Bitcoin, you may have heard about an event called the “block reward halving” that will soon be taking place in the Bitcoin network. Projected to take place on Wednesday at around 18:00 UTC, for the first time ever in Bitcoin history, the rate at which new bitcoins are generated will permanently be cut by a factor of two, and people all over the Bitcoin community are debating what the economic consequences are going to be. Opinions range from those who believe that Bitcoin will enter a period of extreme financial instability as it is caught off guard by the sudden shock in supply to those who believe that the markets will simply hum along as if nothing had happened at all. What this article will do is explain exactly what the block reward halving is, the economic issue that is at the core of the debate, and some of the more subtle effects that could arise from this in the medium to long term.

What Is The Block Reward?

In order to understand what’s going to happen on Wednesday, it’s important to first understand how money creation in Bitcoin works. The database that keeps track of which addresses have how many bitcoins is stored in the form of a “block chain”, which is extended by one block roughly once every ten minutes. Each block contains all of the transactions that have taken place during that time, and when a block is added to the chain, it signifies a consensus among the Bitcoin network that those transactions took place at that time. As time goes on and more blocks are added on top of that block, the consensus solidifies, and after four to six blocks, any attempt to fraudulently change the transaction history to your own benefit becomes impractical because of all the work that has already been done overtop. Blocks can be created by any node on the Bitcoin network, and to regulate the rate of block creation, the network imposes constraints on the form that a valid block can take, with the result that it requires a lot of trial-and-error work to find a block that is valid – so much work that the entire network only manages to find one roughly once every ten minutes. That is a constant; there is an adjustable parameter called the “difficulty” which the network collectively manages to make sure that the actual block creation rate never strays far from that value.

Because creating (or “mining”) blocks is so crucial to the security of the Bitcoin network and yet so hard, the Bitcoin protocol includes a mechanism to encourage people to mine: every time a block is added, the miner who found the block is given 50 BTC as a reward. There is also another mechanism to encourage mining called transaction fees, which will grow in importance in the far future, but for now, the block reward is by far the largest financial incentive to encourage people to participate in the block creation process. The block reward also has another function; it the only way that new bitcoins come into existence. Any bitcoin that you send or receive was at one point somebody’s block reward.

So What’s Happening to it, and why?

The rate at which new bitcoins are introduced into the system was never intended to stay at 50 BTC per 10 minutes forever. Rather, Bitcoin has a monetary policy that was coded into the system right from the start that reduces the rate over time, until the generation of new bitcoins finally stops entirely at a maximum of 21 million in 2140. There will still always be one block coming out every ten minutes, but the number of bitcoins handed out as a reward in each block will come down in sharp steps, cutting in half about once every four years (precisely, once every 210,000 blocks). The event that will happen on Wednesday is exactly this; after block 210,000 hits, every block thereafter will have a reward of only 25 BTC instead of the original 50 – at least until the next block reward halving in 2016.

The main reason why this was done is to keep inflation under control. One of the major faults of traditional, “fiat”, currencies controlled by central banks is that the banks can print as much of the currency as they want, and if they print too much, as happened in Weimar Germany in 1923 and Zimbabwe in 2007 (among many other unfortunate examples), the laws of supply and demand ensure that the value of the currency starts dropping quickly. Because the only use for money is to exchange it for something else later, a currency that is rapidly decreasing in value becomes even less valuable for that very reason, leading to a hyperinflationary spiral. In the later stages of such a calamity, hundred billion dollar bills littering the ground is not an uncommon sight.

Bitcoin, on the other hand, is intended to simulate a commodity, like gold. There is only a limited amount of gold in the world, and with every gram of gold that is mined, the gold that still remains becomes harder and harder to extract. As a result of this limited supply, gold has maintained its value as an international medium of exchange and store of value for over six thousand years, and the hope is that Bitcoin will do the same.

What Will The Economic Effects Be?

The question that most people are focusing on right now is what will happen to the Bitcoin price. Thought on the issue is currently split into two camps. Those in the first camp believe that the decrease in the block reward will cause a “supply shock” in the Bitcoin economy as the number of available bitcoins suddenly goes down, pushing the price up by as much as two times to compensate. This line of thought rests on two key hypotheses. The first is that the supply of bitcoins on the market is largely made up of miners trying to collect a profit, and current major holders play a smaller role. This hypothesis holds increasing weight as mining becomes more and more dominated by professional “mining companies” seeking to earn a profit, and was bolstered further in another way by a recent study by Dorit Ron and Adi Shamir which found that 78% of bitcoins currently in existence are not in active circulation.

The second hypothesis is actually the one attacked more frequently: that the supply shock has not yet been priced into the market. The fact that the block reward would decrease to 25 BTC after block 210,000 has been known since 2009, and what those in the second camp argue is that traders anticipating the change have already bought up bitcoins in the months leading up to the event with the intent to sell them after. If they are correct, then even if the supply of bitcoins coming into the market from miners will soon cut in half, the supply from traders will make up for it, and the price will remain roughly the same. As David Perry summarizes in his article on the subject, “this specific issue comes down to one difficult-to-answer question: what percent of the community is aware of the impending change?”

It’s important to note that the Bitcoin price may also, at the same time, move for other reasons. Right now, Bitcoin has climbed from $10.8 to $12.1 over two weeks, likely because WordPress started accepting Bitcoin, and historically price has been highly correlated with search volume as well. Bitcoin may simply continue its current short-term trend because another organization decides to accept it, or public interest in Bitcoin goes up in the short term, regardless of what happens because of the change in the block reward.

Okay, you mentioned more subtle effects. What else?

There is one reason to be concerned about the consequences of the event for the Bitcoin economy. In order for Bitcoin merchants to succeed, they need consumers who have bitcoins with which to pay them. The one group that is receiving a constant supply of bitcoins to spend is the miners, and so there is a possibility that miners are an important consumer base for the Bitcoin economy. An article by The Verge called them “Bitcoin’s working class“. With the block reward cutting down from 50 BTC per 10 minutes to 25 BTC, the amount of bitcoins that this crucial demographic has to spend will be cut in half, leading to a significant loss of volume to businesses which depend on them.

However, there is also another very profound change that will soon take place in the Bitcoin mining ecosystem: the introduction of the ASICs. ASICs, or “application specific integrated circuits”, are a kind of specialized computer chip that is designed to do only one task, but do that one task extremely well. They are used in a variety of applications including memory blocks, digital voice recorders, cars, and PDAs, but around the beginning of this year a, number of companies have started work on adapting the technology to Bitcoin as well. The result? Mining computers ten times more powerful per dollar spent on both electricity and hardware than anything else that has come before.

These two effects combined can only mean one thing for Bitcoin’s existing crop of miners: a sudden, drastic drop in revenues to anyone who does not upgrade. Currently, blockchain.info estimates that the average miner spends $0.3-$0.6 on electricity and bandwidth for every $1 that they earn from mining. In 2013, those miners who do not upgrade would be paying the same amount in costs but earn only a tenth as much once ASICs reach 50% market share. Outside of special circumstances, like landlords paying for electricity or mining doubling as a heating system, mining with anything but an ASIC will not yield a profit at all. Thus we are going to see not just a reduction in revenue for Bitcoin’s miners, but also a shift in who Bitcoin’s miners are. Those with large racks of GPUs in their spare rooms or mining software running on their gaming computers will fade away, and a new, considerably more amateur, wave of Bitcoin enthusiasts with ready-made ASICs from businesses like Butterfly Labs or Avalon will take their place. Of course, there will be many GPU miners who do upgrade, and just like the issue of how much of the upcoming supply shock is already “priced in,” just how much the mining community will change once ASICs come into play is a wild card.

Of course, the question of exactly how important the miners are is a wild card in itself. One of Bitcoin’s leading payment processors, BitPay, is reporting transaction volumes of $550,000 per month, or $18,000 per day – 2.5 times the current daily currency creation rate. However, there may be specific sectors of the economy that are more dependent on Bitcoin miners, and the potential exists that the new group of miners has drastically different preferences in terms of saving versus spending that may either augment or cancel out much of the supply shock.

Where can I celebrate?

There are lots of block reward halving parties happening around the world. You can find a short list here. If there isn’t one happening in your city, take the opportunity to find some fellow Bitcoin users in your city and create your own!

 

After the collapse of Bitcoinica six months ago, the business of margin trading, a service which at Bitcoinica’s peak attracted a trade volume almost as large as that of MtGox itself, disappeared from the Bitcoin ecosystem almost entirely. Since then, there have been a number of disparate efforts to bring margin trading back. Almost as soon as Bitcoinica fell, a company named RingCoin announced Kronos.io, a product which looked like it could be a superior upstart competitor that would not suffer from the security faults of its predecessor. However, kronos.io was never completed, and RingCoin is now defunct. Another alternative was icbit.se, a service which has been trading options between BTC and USD, gold and even crude oil for months, and is still active now, but has not had anything close to the level of success reached by Bitcoinica. Finally, there is the Bitcoin stock exchange MPEX, which also offers USD/BTC options for trade.Aside from these three, a number of other minor attempts have been made, some of which turned out to be fraudulent, and none of which successfully brought back what the Bitcoin ecosystem lost when Bitcoinica fell.

The idea behind margin trading is simple. If you have an account at a traditional Bitcoin exchange like BitStamp of MtGox, you have two balances: a BTC balance and a USD balance (or perhaps a CAD or EUR balance, or some other currency, depending on what country you are in). Apart from depositing and withdrawing, the only operation available to you is trading one currency for another, reducing the BTC balance by some value and increasing the USD balance by that value multiplied by the current price (or vice versa), also paying a small spread and commission. If you are participating in the exchange as a trader, your goal is to convert to BTC before the exchange rate goes up, and convert to USD before the exchange rate goes down, slowly increasing the net worth of your account over time. The benefit to society from such trading is that it stabilizes markets; a successful trader who earns a profit will, in doing so, prop up the valleys and dampen the peaks of the Bitcoin price, ensuring a more stable exchange value for all. Margin trading services add only one feature to this model: the ability to have one of your balances go negative. That is, if you have 10 BTC and 0 USD, and you are really sure that BTC will go up in the near future, you can buy more BTC on the market, and have a balance of, say, 15 BTC and -$55 USD. The attraction of doing such a thing is simple: if the value of a bitcoin shoots up by 10%, then the net worth of your account will grow by more than 10%. However, there is also a risk: if the value drops by 10%, the net worth of your account will drop by more than 10% as well. If you are really unlucky and the price drops by so much that the net worth of your account becomes negative, then your balances are “liquidated” and you lose everything. The ratio between the change in BTC price and the change in the net worth of your account is called the leverage, and there is typically a maximum leverage, which in the Bitcoin economy has historically been about 10:1.

This is the service that Bitcoinica was providing for eight months before its shutdown in May Now, it looks like another competitor is positioning itself to take this niche: Bitfinex. The service that BitFinex is providing offers a number of advantages over what Bitcoinica provided. First, the security that they claim to be offering is much higher. Unlike Bitcoinica, whose online-accessible “hot wallet” was hacked for $222,000 in March, Bitfinex plans to have no hot wallet at all, processing withdraws manually at the end of each day. The API keys that they use to deal with exchanges will be limited to trading, and will not have the ability to withdraw, averting a mistake which proved ruinous to Bitcoinica when $320,000 was stolen from their MtGox account in July. In terms of account security, Bitfinex once again beats Bitcoinica, offering two-factor authentication right from the start.

More interestingly, BitFinex will trade with a number of exchanges, offering spreads lower than those that can be found at any single one, and there is even the option to make a special “routed order” which will never be passed on to exchanges and instead attempt to eat up an opposing BitFinex order. As exchanges are bypassed, the fee for taking this option will only be 0.1%. Finally, just like Bitcoinica in the later months of its operation, an interest rate system is in place with which users can deposit money and earn an interest of currently 16.5% annually in exchange for providing liquidity.

However, there is also much to worry about. The BitFinex source code is based on the notoriously insecure Bitcoinica source code that was leaked in July, and one forum poster, Davout, found that one could use one of the same exploits against Bitfinex that worked against Bitcoinica when it was still operational: set the leverage to 10,000, put in a small amount of money, and wait for the price to move. If it moves even slightly down, the leverage effect ensures that the result will be immediate liquidation. If it moves up, however, the size of the account balance will jump up by ten thousand times the increase in the underlying BTC price, securing a profit margin far above 100%. Other issues, such as the use of floating point numbers (a form of binary scientific notation typically used to represent non-integer values in computers but known for their inexactness when trying to store decimal values) to store account balances, were also discovered. Even though Bitfinex’s creator Raphael Nicolle claims that “Bitfinex is now much more powerful and robust”, the discovery of such flaws so soon after Bitfinex’s beta release bodes ill for such an otherwise promising startup.

Secondly, the “no hot wallet” setup that is at the core of BitFinex’s design, although admirable, has a problem of its own: if, over the course of one day, it happens that users are consistently buying more BTC than selling, or vice versa, then in order for BitFinex to be able to honor all of its users’ positions it needs to step in and act as the counterparty to some of its users itself. This kind of setup is known as a bucket shop and is heavily frowned upon (and in many jurisdictions even illegal) because it creates perverse incentives – the shop can potentially make an order on the markets large enough to significantly bump the price up, liquidate all of its users who had opposite positions at high leverage, and keep all of their funds as profits. Even if Nicolle does not want to create a bucket shop, given a no hot wallet setup Bitfinex may have no choice but to periodically temporarily become one.

Also questionable is the founder, Raphael Nicolle, himself. Fortunately, this is not another attempt at an anonymously run financial service; Nicolle has provided a LinkedIn profile which confirms his involvement in BitFinex, and has plans to register the company when they settle on the best jurisdiction to locate their service. However, he was also involved in the Bitcoin investment scheme craze that had reached its peak in the Bitcoin community this summer, strongly supporting the (then only suspected) Bitcoin Ponzi scheme operator Pirateat40 in August, stating “now that Pirateat40 closed down his operatations thanks to all the fud that was going on and growing on the forum, I expect everyone that spreads this fud, accused and insulted Pirate and the people that supported him to apologize.” He even tried to open a 2%-per-week investment scheme of his own in September. Of course, all this does not nearly suggest that Nicolle was, and is now, attempting to defraud; 2% weekly interest rates, or 180% annual, are actually quite reasonable in a volatile startup economy where Bitcoin itself can easily rise and fall by much more than a factor of 2.8 within the same period. His endorsement of Pirateat40 too may simply have been a misguided expression of group solidarity and his ardent support of capitalism. However, for those who are concerned above all with the safety of their money reputational factors are an important consideration, and Nicolle may do well to find some trusted members of the Bitcoin community as partners if he wishes to quickly secure the community’s trust.

Perhaps BitFinex will indeed do what Bitcoinica, Kronos.io, and Icbit could not and provide a secure and lasting margin trading service for the masses. But perhaps this platform too will fail in the same way that Bitcoinica did. When Zhou Tong first released Bitcoinica to the public, he received what proved to be a prophetic reply on the Hacker News message boards: “systems that work with money are attacked hard and often, by intelligent skilled people. Spectacular failure is your destiny if you don’t work very hard to prevent it. Spectacular failure may be your destiny even if you do work very hard to prevent it. You should plan accordingly.” The quote applies just as strongly in this case. Nicolle is clearly trying hard to create a strong security setup for BitFinex so that it can avoid the security pitfalls that so ruinously struck Bitcoinica earlier this year. Given some of his security decisions, however, the question is: will he be able to?

 

Bitcoin has come far in this past year. Almost exactly one year ago, the Bitcoin price was almost at the bottom of the largest prolonged slump in Bitcoin history, having fallen from an all-time high of $31.91 in June to a bottom of $1.994 on November 17. Media attention on Bitcoin was almost universally negative, and Wired even ran an article entitled “The Rise And Fall of Bitcoin“, leading many to think that the currency was by then essentially dead. But, as we now know, Bitcoin was far from over. After bottoming out just under $2, the price quickly rebounded, hitting a high of $7.22 when the currency was featured on an episode of The Good Wife, an American legal drama with over 10 million viewers. The price once again somewhat dropped from there, and remained stable around $5 for over three months, until it finally began to climb once again at the end of May. In the summer, propelled by another spike in media attention combined with an artificial boom induced by fraudulent Bitcoin Ponzi schemes, the price rose to briefly touch $15.4 before the Ponzi schemes collapsed, the media attention somewhat receded, and the price oscillated wildly for a few days before stabilizing at a price level of $10-$13, where it has remained since.

The question that can be asked now is: where is Bitcoin now? Is the Bitcoin economy headed for another recession, not quite as severe as that of $2011 but which may still bring the price to $5-$8, is Bitcoin continuing to take off behind the scenes, or is the reality somewhere in between? There are many ways to answer this question. One way is to look at the projects that are currently being developed in the Bitcoin community. One can, for example, see that a number of competing businesses are releasing ASIC-based Bitcoin mining hardware, that BitInstant is coming out with a Bitcoin debit card, that WordPress has started accepting Bitcoin, and that in September Bitcoin received its first inklings of government approval (a process which may only become easier with the advent of the Bitcoin Foundation), and use that information to conclude that Bitcoin is doing great and will only continue to rise through 2013. Alternatively, one can take a dimmer view and claim that nothing truly groundbreaking is taking place, and so the price will go down. However, what this article will focus on is evaluating Bitcoin by the numbers, and looking at what is happening to the various trends that have historically been highly correllated with Bitcoin’s success.

Google Trends

Historically, the Google Trends search volume for Bitcoin has been very highly correlated with the Bitcoin price. Here is a chart that shows the relationship between the two:

Notice how precisely the trends volume followed along with the price all the way through the 2011 bubble and crash, the mini-bubble in January created by the Good Wife episode, and the period of stability that followed. Around May, however, the two started to diverge. Although the search volume did follow the price somewhat as the price rapidly increased to $13 over the summer, it did not pick up nearly as quickly. Since then, search volume has declined and essentially reverted to the same slowly increasing trendline that it has been on since November, but the price does not reflect this; if the correlation had remained, Bitcoin would be at $6, not at $11.

There are several ways to explain the disparity. First, one could argue that we are still in a mini-bubble, and the price will indeed return to $6-$8 in due time. If you look closely, this is exactly what happened on a much smaller scale in January; the trends volume dipped first, then the price. Second, one could argue that the disparity is there because the market has already adjusted to the halving of the block reward that is due in early December. The fact that the disparity is almost exactly 2x strongly supports this hypothesis. Third, one could argue that this is the “natural” price, and the lower prices earlier this year were the result of market manipulation. This is also possible; many suspected Pirate, the operator of the Bitcoin Savings and Trust Ponzi scheme that collapsed in August, of somehow keeping the price down so that his BTC-denominated debts would not spiral out of control too quickly. Also, the period from September to May saw an easy way of “shorting”, or virtually holding negative quantities of, BTC with Bitcoinica, which likely had a significant downward effect on prices. Now, although some options for shorting exist, they are not nearly as popular.

However, there is another question to ask: has interest in Bitcoin really dropped back to its former trendline over the past two months? Although the Google Trends volume for “bitcoin” says yes, some secondary indicators offer a different result. Here is the trends volume for “buy bitcoins” – the volume has continued to increase in a linear fashion all the way through this summer’s mini-bubble and, although it is showing signs of a temporary slowdown, has not decreased at all.

Also, it is not necessarily the case that there is any necessary relation between search volume and price at all. Consider the Tor-based online black market for illegal drugs, the Silk Road. Search volume for “silk road drugs” and “silk road bitcoin” barely increased at all in the period from January to July, and yet in reality we know that Silk Road’s volume has more than doubled over this period and is continuing to increase. In Silk Road’s case, the situation is of course somewhat unique, as once a user discovers Silk Road all of their interactions with the site are through Tor and they have no reason to look up anything more on the public internet, but the same effect may be taking place to a much lesser extent with Bitcoin as well; once a user knows what Bitcoin is, they have little reason to search for it.

Transaction Volume

Here are two charts showing the number of transactions that are taking place in the Bitcoin network.

The chart on top provides a much more hopeful sign than the Google Trends evidence; although the number of transactions has been declining for the past few months, it is still far above the level at which it had stabilized this spring. In fact, if you look at the chart all the way from 2011, transaction levels remain far above even those seen at the peak of the June 2011 bubble. However, although the chart on the bottom is still more positive than the Google Trends volume, it does show a decline to the earlier trendline. The difference between the two charts is simple: SatoshiDice. The second chart was added by blockchain.info in June after the popular gambling site began to take up over half of the transactions on the Bitcoin network, and what it does is remove all transactions from the 100 Bitcoin addresses which contribute the most to the sum, including all of the addresses used by SatoshiDice.

The question is, however, is removing SatoshiDice from the charts legitimate? Many would say yes. Unlike most other Bitcoin gambling games, SatoshiDice is played directly on the blockchain – in order to make a bet, you send a transaction to one of its addresses, and if you are lucky you immediately get more money back. Thus, it is argued, each transaction on SatoshiDice counts for much less economic activity than a transaction anywhere else. However, what this analysis misses is that even if its effect is exaggerated SatoshiDice is a very significant Bitcoin business, and has earned 10,000 BTC over the past six months, or about $16,000 per month – roughly a third of the $30,000-$60,000 monthly fees earned by MtGox. As for transaction count, SatoshiDice transactions represent only 40% of all transactions coming to the top 100 addresses that the second chart removes – the rest is made up of 1VayNert, an address owned by the DeepBit mining pool, and various unknown users. Thus, it is not at all clear that the ratio of transaction count to “economic activity” is really all that different between the popular addresses and everyone else.

Business Volume

This is by far the least rigorous of the numerical analyses due to the lack of data available, but as an indicator of the growth of Bitcoin as a whole it is arguably the most important one. A number of Bitcoin businesses are willing to share their sales volume, and these figures are much more positive. On Bitcoin Friday, a recent Bitcoin community-wide sale organized by Jon Holmquist, Bitcoin’s two largest payment processors, BitPay and WalletBit, reported a total of 196 transactions – not much, by large business standards, but more than any previous day in Bitcoin history for both companies. Volume on Coinabul, the gold and silver sellet, has been increasing every month. BitPay, a payment processor handling sales for a number of Bitcoin businesses, has seen its volume increase from $170,000 in May to $550,000 in September. Recently, BitMit told Bitcoin Magazine that they have “more than doubled [their] trading volume from 1840 BTC to 4260 BTC” in October. SatoshiDice is remaining constant; its sales volume for the past 30 days is 181,362 BTC, compared to an average of 176,835 BTC per month over their entire 184 days of operation. And, last but not least, there is Silk Road. The underground marketplace’s growth was reported on in August, when a report showed that it had more than doubled in the six months before that and, although hard figures are hard to come by, mastermind Dread Pirate Roberts stated on the Silk Road forums two weeks ago that “we are in uncharted territory in terms of the number of users accessing Silk Road.”

It is important to keep in mind that kind of survey of businesses does have an intrinsic optimistic bias; businesses that are seeing their volume slowly decreasing are typically far less prominent in the media, and so a survey would be much more likely to miss them. However, the fact that aggregators like BitPay are also showing signs of growth is a sign that the growth shown here is more than just churn. At this moment, there are other factors that are heavily in Bitcoin’s favor. Only a few days ago, the Bitcoin community was joined by WordPress, its largest merchant yet.

All in all, it is hard to tell what is happening with Bitcoin. Some indicators are showing that Bitcoin usage is remaining roughly stagnant, with a general trend of slow decline balanced out by sudden spikes of attention, while others imply that Bitcoin is stronger than ever. However, what is almost certain is that Bitcoin is not going to collapse any time soon. The price charts show that Bitcoin is currently simply in yet another period of stability similar to the one earlier this year, where search volume and the Bitcoin price remained very steady for over three months. This time, the Bitcoin price is not quite as steady as it was from February to May, but the fact is that the currency has maintained a price level of $10-$13 for over three months:

Although one can draw a near-term trend to suggest that the price is going down, a more long-term look shows that we are actually on a very slow and steady course upward, and the fact of Bitcoin’s WordPress acceptance suggests that Bitcoin is much more likely to keep its upward course than it is to go back down. All in all, Bitcoin may yet have a very bright future ahead.

 

Today, WordPress, an extremely popular blog hosting site and framework and the 22nd most accessed site in the world, has announced that they are going to be accepting Bitcoin as a method of payment. The press release reads: “at WordPress.com, our mission is making publishing democratic — accessible and easy for anyone, anywhere. And while anyone can start a free blog here, not everyone can access upgrades (like going ad-free or enabling custom design) because of limits on traditional payment networks.” The main reason why WordPress has decided to start accepting Bitcoin is that a core part of WordPress’s mission has always been promoting freedom of information, and Paypal and credit card companies’ restrictive policies prevented users from buying WordPress’s services in exactly those countries where they were needed most. “PayPal alone blocks access from over 60 countries,” the release continues, “and many credit card companies have similar restrictions. Some are blocked for political reasons, some because of higher fraud rates, and some for other financial reasons. Whatever the reason, we don’t think an individual blogger from Kenya, Haiti, Cuba, or Iraq should have diminished access to the blogosphere because of payment issues they can’t control. Our goal is to enable people, not block them.”

Another argument which WordPress did not mention is anonymity. Many bloggers that operate in restrictive regimes do so using pseudonyms for their own protection, and traditional payment methods like credit cards and PayPal are unusable for those bloggers because they expose the payer’s physical identity. Bitcoin, on the other hand, offers its users a large degree of anonymity, giving bloggers, dissidents or simply people trying to live their lives in authoritarian regimes a much greater chance at evading persecution.

Aside from going ad-free and custom design, the paid services that WordPress offers include the ability to use WordPress on your own domain name, buy extra storage, customer service offers like a guided transfer of a blog from wordpress.com to self-hosting and even a wide variety of premium themes. However, it is important to note that not everything will be purchaseable for BTC immediately; domains and individually purchased themes (ie. bundles are fine) will not be accepting Bitcoin payments for a while. Nevertheless, WordPress promises to make Bitcoin available as a payment medium for all products “within two or three months.”

As a content-publishing platform, WordPress is already a very attractive choice for Bitcoin users. There are many e-commerce plugins for WordPress, and one of them offers support for BitPay. As a result of WordPress’s ease of use, Bitcoin Magazine itself uses WordPress as its content publishing back-end. For those who are not yet Bitcoin users, WordPress provides yet another reason to become one. WordPress is a rapidly growing platform, with over 100,000 new blogs created daily, and is showing no signs of slowing. And, more recently, WordPress is being used for more than just blogs. Thanks to its extendable plugin-based infrastructure, WordPress is being used for company websites, news sites, social networks and even in e-commerce applications. Being the 22nd most popular site in the world, WordPress is by far the largest website that had started accepting Bitcoin to date (although by financial size it is arguably beaten by Wuala‘s parent company LaCie), and its acceptance will hopefully provide confidence to many other large businesses that may be contemplating accepting Bitcoin but so far have not been willing to be the ones to make the first move. Now that WordPress has given the green light, potential adopters like Reddit, and perhaps many others that we have not even heard were considering accepting Bitcoin, may be soon to follow.

 

While the rest of the Bitcoin community was celebrating Bitcoin Friday by taking advantage of the large discounts made available by their favorite Bitcoin shops, Joerg Platzer of Room 77, a restaurant that has become the epicenter of the Bitcoin community in Berlin, used the date to announce Bitcoin Kiez, a project to get a large number of businesses to accept BTC in Berlin’s Graefekiez district.

Now, Bitcoin Kiez has announced its first three participants:

• Primo Maggio – as Rooom77’s Joerg Platzer describes it, “original Italian food at its best.” This restaurant features a wide variety of homemade sandwiches, antipasti, pasta and desserts, as well as a unique selection of drinks. It places a large emphasis on high-quality ingredients, writing on its website: “everyone who wants to share in our philosophy on good food are cordially invited to come to Primo Maggio on a journey of discovery. In our kitchen and our bar we allow only products which we stand behind. Our customers should only receive what we would take for ourselves, not only when we want to satisfy our hunger, but also our taste buds”.
• Fabelhaft Bar – features some of the best cocktails in Berlin. As one review describes it, “entering the one-room space is like stepping into a gothic castle crossed with an underground bordello, with requisite fin-de-siècle lamps and old candles softly glowing above funky mismatched chairs, each casting soft shadows against the mostly barren and crumbling stone walls. Mondays through Thursdays, unkempt barflies mix with artsy expats and laid-back locals to exchange jokes and talk politics over cold brews or fresh cocktails, including the popular Moscow Mule made with cucumber, vodka, ginger ale, and hand-ground ginger.”
• Vinyl Living Room Longplayer – a small and cozy used record store that is popular as a hangout spot for DJs even outside of Berlin. The shop features a large selection of hip-hop, funk, soul and jazz records and also some reggae, rock and punk, and many of the records that can be found there are difficult to find anywhere else. Although there is no food to buy here, it’s located on the Graefestraße almost right across the street from Room 77 itself.

This is only the beginning, and Room 77 owner Joerg Platzer is confident that there is more to come. Platzer wrote in a thread in the German Bitcointalk forum on the subject: “In the next few weeks the experiences of the participants in this public beta phase will be taken into account to further adapt and optimize the Bitcoin infrastructure. During this time more retail stores and restaurants will announce their acceptance of Bitcoin to the point that in December you will be able to go shopping for Christmas gifts and eat in many cafes and restaurants and pay for everything in Bitcoin. We are calling it ‘an alternative local currency with global reach.’”

If Platzer’s efforts succeed and a stable local Bitcoin community forms inside Berlin, it would be a major step forward for Bitcoin, as it would mark the first large-scale Bitcoin acceptance trial to take place in the physical world. Furthermore, in the eyes of the residents of the Graefekiez, Bitcoin would no longer simply be an abstract topic they may or may not have once heard of; rather, it would be very real, as they would see signs of stores accepting it and customers using it to pay for products and services every day. It would also be a great opportunity to see Bitcoin used in the real world by a non-technical audience, and would provide something very concrete to show to Bitcoin naysayers that the currency is now far more than just a speculative investment. And, most importantly of all, it would be a model for other cities to follow in Berlin’s footsteps.

 

Marek Palatinus, commonly known under his forum handle Slush as the operator of mining.bitcoin.cz, the oldest mining pool in the Bitcoin community, has just announced that he, in collaboration with Pavol Rusnák (stick), is starting up a new project: a Bitcoin hardware wallet that works by connecting to a computer via USB. The primary motivation behind the project is security. There have been cases where Bitcoin users lost thousands of dollars – in one extreme example, half a million – because the computers on which they were storing their bitcoins were infiltrated by viruses. One could argue that these thefts were the fault of a few particularly negligent individuals, but the evidence suggests otherwise. For nearly a decade, botnets of computers taken over by viruses have existed that are millions of machines strong, and even in Finland, which a study by the Norwegian security company Norman found was the least computer virus-ridden country in the entire world, over 24 percent of PCs were infected. Security is not getting any better either; in 2006, security expert Bruce Schneier was quoted as saying “I don’t think, on the whole, we are winning the security war; I think we are losing it.”

When the most private information that there is on a computer consists of funny cat pictures, the issue is of little concern. When the computers in question are storing codes that can be irrevocably redeemed for the equivalent of hundreds of thousands of dollars, however, security becomes a much greater concern. So far, the Bitcoin community’s recommendations for dealing with wallets of such value have been sensible: put a small amount of money on a traditional client to be able to spend it at will, and store the bulk of the funds in an offline wallet either printed out on paper or on a separate machine so that the private keys never touch the internet. However, there is a major problem with this setup for the average user: it is not easy to set up or maintain. Most people do not have the technical knowledge or the inclination to figure out how to carry out an offline transaction, thus anyone attempting to push Bitcoin as a way of storing a significant quantity of savings is often fighting an uphill battle.

This is where the as of yet unnamed USB Bitcoin wallet comes into play. The wallet is a hardware device roughly the size of an iPod Shuffle (3×3 cm) which includes a chip that can generate new addresses from a seed and can use any of them to sign a transaction. To send a transaction, the user must connect the device to a computer (in future versions, possibly also a smartphone) via USB, enter the address and amount on the computer, and ask the Bitcoin client on the computer to send off the unsigned transaction to the device. To protect against viruses, the user must then confirm the transaction by pressing a button on the device, and the signed transaction will then be sent back to the client to be published. The private keys never leave the wallet in the process.

The protocol also has several other features which make it convenient to use. First of all, the process of generating addresses on the chip is based on the hierarchical deterministic wallet proposal drafted by Peter Wuille in February 2012. All private keys are generated from a single root private key which can be written down during the initialization phase, so even if the device is lost, the funds can still be recovered. Elliptic curve mathematics also allows the algorithm to have another interesting property: there is a root public key corresponding to the root private key, which the device freely divulges upon request, such that from the public key one can generate all the addresses that the device can, but without being able to spend from the addresses. A Bitcoin client can easily generate all of the addresses that the device can spend from, and can present to the user a view of how many bitcoins he has in which addresses just as easily as if the client actually owned the addresses in question.

The protocol also includes an optional mechanism to make transactions require a PIN, and the device itself is designed to be tamper-proof so that even if it is stolen, it will be extremely difficult for the thief to recover any private keys or coax the device into signing transactions. Aside from manually brute-force searching through all possible PINs, the only way to crack the device, Slush writes, is to “brush the chip with the precision of nanometers and read the bits using an electron microscope.” In short, long enough for the user to realize that the device is gone and use the root private key to move the funds to a temporary location.

Finally, the device also supports another kind of security through multisignature transactions. Multisignature transactions allow you to create an address such that bitcoins sent to that address require multiple private keys to sign, which can be kept at separate locations or even by separate individuals. Complex schemes like signatures from 2 out of a given 3 private keys being required are also possible. Thus, if you are not willing to entrust the security of your funds to one device entirely, there is always the option of using it as only part of your wallet security arsenal.

The main drawback of the device is portability. Although it is only 3×3 cm in size, it also requires a cable to actually connect to a computer or phone, making it impractical to carry around in one’s wallet. The possibility of including USB and micro USB connectors was discussed, but rejected because having either moving parts or a connector sticking out would make the device much more subject to wear and tear. To Slush, however, the device’s sub-optimal portability is not much of a concern; he writes, “the major purpose is not to make payments mobile. The major purpose is to make them safe.”

Also, the device cannot, by itself, be used on an arbitrary computer without setup. Although there is no need to have a specific operating system or install any drivers because the device will use the same interface to communicate with the computer as standard USB keyboards and mice, the protocol does require a Bitcoin client to be already present in order to function. Specifically, at least in the near future, this means Multibit or Electrum; these are the only two clients whose developers have agreed to cooperate in implementing their part of the protocol. The Satoshi client and Armory may join in the future, but unfortunately, online clients like Blockchain will not, as HTML5 offers no way to directly interact with devices on a low level. Fortunately, Multibit and Electrum do not require installation, so they can be stored on a USB key kept along with the device, and then loaded directly from USB when needed. In the future, there is the possibility that the device will itself contain a client in some way, but that is not in Slush’s immediate plans.

For now, the intent is on simplicity, not features. Slush has already contacted a security company which will do a full review of the code, with thorough tests covering every line – something which, outside of large research institutions and corporations, is only possible with a very small codebase. Every added feature introduces complexity, and therefore a possible attack vector into the device, something which Slush is intent on minimizing. So far, the device is still in its early infancy; nothing close to a full product is available, and there is still the potential for significant changes to the design before the product is released. Currently, the device is set to be released simultaneously as two products: a custom hardware solution for common users, and a shield for the Raspberry Pi for the more technically inclined. The technically inclined also receive another bonus: the code for the device will be completely open source. If the project succeeds, it represents a significant step forward for Bitcoin security. Decoupling Bitcoin security from computer security is a necessary step if Bitcoin intends to be truly secure for the average user, and, along with multisignature transactions, physical wallet devices like this project will be a vital step in getting us there.

 

[divider]
Disclaimer: Bitcoin Magazine has previously run advertisements for Butterfly Labs. This article was written independently of this fact. -Ed.
[divider]
Aiming for longevity and efficiency of their products, Butterfly Labs (BFL) has confirmed their new SC chips will be using a 65nm process, the same transistor size as was used for Intel’s wildly successful Core 2 Duo and Core 2 Quad processors. As BFL’s main competitors, Avalon and bASIC, are reportedly built on 110nm and 90nm processes respectively, BFL should be able to hold the position of market leader in mining efficiency for some time to come.

BFL’s soon-to-be-released SC product lineup includes the Jalapeno ($149 for 4.5GH/s), the Little Single SC ($649 for 30GH/s), the Single SC ($1,299 for 60GH/s), and the Mini Rig SC ($29,999 for 1,500GH/s). All of these products will utilize BFL’s full custom ASIC 65nm chips, expected to run at 1 watt per GH.

Josh Zerlan, a BFL representative, expects to have chips in hand by the end of November and begin initial shipments shortly after. The number of units to be shipped in the first batch has not yet been determined. Josh also released new photos of the heat sinks for our viewing pleasure.

 

Roger Ver, known in the Bitcoin community for operating Memory Dealers and for a number of efforts marketing Bitcoin including a billboard and a radio ad, has announced that he is starting a new Bitcoin business: an all-purpose electronics store. The Bitcoin Store is already online, with thousands of products available for sale ranging from three dollar USB keys to thirty thousand dollar servers and everything in between. Of course, Bitcoin electronics stores are nothing new; Bitcoin Blaster has been selling electronics for bitcoins for months now, and Bitcoin stores with even larger offerings, such as the now-defunct Bitcoin World Market, have been popping in and out of existence for over a year. However, the Bitcoin Store has one feature that gives it staying power that no other such business has ever had in the Bitcoin world: it is cheaper than the competition.

Roger Ver’s announcement provides some examples: a 60-inch TV which can be found on Amazon for $1,397.99, NewEgg for $1,437.99 but on the Bitcoin Store costs only $1,367.48, a laptop whose Amazon price of $2,266.66 and NewEgg price of $2,317.00 is beaten considerably by the Bitcoin Store’s price of $1985.51, and a laser printer which costs $202.01 on Amazon, $204.99 on NewEgg but $175.66 on the Bitcoin Store. As for how the Bitcoin Store manages to do this, the answer is simple; Roger Ver writes “we have partnered with the worlds largest wholesale technology distributor, and avoid traditional merchant fees because we accept Bitcoin only.” Such relationships are difficult to come by; Roger Ver was only able to achieve this because he already operates Memory Dealers, a store which has an annual sales volume of over $10 million USD (although, Ver laments, almost none of it in Bitcoin). “It remains to be seen,” Ver adds, “if Bitcoinstore.com will be able to have enough volume to keep all the distributors happy and willing to give good prices.”

Shipping is currently set at a fixed $4.99 USD for orders within the United States (although the fee is waived for orders above $100), and a variable fee based on destination and weight internationally. Even at this rate, domestic shipping is usually cheaper than that available at Amazon and NewEgg, where shipping on low-cost products is often even higher; a sample selection of adapters on NewEgg shows shipping costs ranging from $6.99 to $9.99. There are places in the Bitcoin economy where shipping is even cheaper. Some goods on Bitmit offer even expedited international shipping for as little as $2. However, no other bitcoin business offers nearly as expansive an array of goods as the Bitcoin Store does. If volume picks up, even the $4.99 shipping fee may disappear. “Ideally, everything will have free shipping inside the USA,” Ver writes, “but it will take a little more work. If I can guarantee $300K in sales a month, then I can do it for sure.” Even without that much volume, there is a possibility, although far from a certainty, that shipping costs will soon come down to $1.99 regardless.

For now, the Bitcoin Store is still in a beta stage, with a $1,000 minimum on purchases. The user interface is still being finalized, and international shipping costs are currently very high; some report costs as high as $90. However, if everything goes according to plan all of these issues will soon be resolved. The minimum is only there to keep usage down while the site is still being finalized, and Jon Holmquist expects that it will be removed within the next few days. The Bitcoin Store team also reassures potential customers that the current international shipping costs should be disregarded, and much cheaper options will be introduced once the rest of the site is complete.

Because of its low prices, if the Bitcoin Store is successful, it represents another chance for a large increase in Bitcoin adoption in the near-to-medium term future. The Bitcoin Store’s prices are in fact low enough for it to even be worth it to pay the 5% fee to buy bitcoins from BitInstant to shop there rather than using a credit card, so the potential audience of the site extends far beyond those who already have bitcoins to spend. Like all Bitcoin businesses, the main challenge that the Bitcoin Store will have to face is marketing. Roger Ver and Jon Holmquist are already marketing the site on all channels within the Bitcoin community as well as social media channels, but a much stronger and concerted marketing effort will be required for the store to achieve the sales volume that it needs. If it does, this may be one of the best things to happen to Bitcoin yet.

 

Arbitrage serves an important function in the Bitcoin economy. Thanks to the individuals and automated bots that actively look for price differences between the various Bitcoin exchanges and buy from one and sell to another if the price disparity ever becomes high enough for the transaction to be worth it, people who are buying or selling BTC for their own use can rest assured that they are paying roughly the same price no matter which exchange they go to. Arbitrage also promotes competition among exchanges; if the only people trading on exchanges were those who were actually seeking to convert their money from one currency to the other, there would not be enough volume on the smaller exchange to sustain them, and it would be very difficult for new entrants to gather up enough momentum to survive.

In an effort to make life easier for traders participating in Bitcoin arbitrage, developer Eun-Joo Hansch Seoung and her husband have developed a Bitcoin client designed specifically for the task. The idea is simple; rather than having to navigate between browser tabs and spend time copying and pasting codes and addresses across multiple websites and interfaces, almost all of the process can be done within one client which handles all of the operations automatically. The software was originally developed in late 2011 to early 2012 for the now defunct Bitcoin exchange TradeHill, but by the time the software was finished the exchange had already shut down. Hansch writes, “I really was very disappointed since I had been working for months to create a software, which was of no use any more! But I decided not to give up! I figured out the API of MtGox and reused large parts of my GUI. And now BTC-Trader is capable of using the MtGox API.” In fact, BTC Trader supports much more than MtGox; it also includes support for the BitInstant API, a BitcoinCharts overview and the ability to see market prices for all exchange for a specific currency – a view which is surprisingly missing from BitcoinCharts. If you are working in multiple currencies, BTC Trader offers a view which is missing from MtGox: the ability to see all of your balances in all of your different currencies at the same time.

As an example of what can be done, Hansch offers a video tutorial showing how the software can be used to sell 2 BTC for USD on MtGox, send those USD to BTC-E via BitInstant, and sell them back for 2.0037 BTC on BTC-E all in the space of 50 seconds.

The basic steps are simple; as Hansch writes:

1. Sell Bitcoins on MtGox site to get USD funds.
2. Use the USD funds on MtGox for creation of a MtGox coupon code.
3. Creation of a Bitinstant quote with a mouse click.
4. Execution of a Bitinstant transfer to BTC-e Bitcoin exchange.
5. Checking the Bitinstant API response for retrieval of funds.
6. Purchasing Bitcoins on BTC-e exchange.

With BTC-Trader you can perform step 2 to step 6 in about one minute.

The program still has shortcomings; particularly, support for exchanges other than MtGox is not fully integrated into the program, so the last step of the process of arbitrage between MtGox and BTC-E, for example, does require going directly to the BTC-E website. According to Hansch, developing support for additional exchanges will take a considerable amount of time. “The development of a BTC-e version may not take another year,” Hansch writes, “but there is still a lot of work to do.” Given the rate at which new ways of exchanging Bitcoin are appearing, BTC Trader may never be finished. However, Hansch believes that the product is ready to see the light, and is eagerly looking forward to hearing from its first new users.

Eun-Joo’s husband, Andreas, has also agreed to answer our questions about his role in the development of BTC Trader in an interview:

How did you first hear about Bitcoin? What got you interested in helping to develop a trading application for it?

I heard about Bitcoin in September 2011. On the 24th of September 2011 I registered at MtGox. At first I only traded a few Bitcoins using about 200 Euro from my bank account. But after a few months I created enough profit to be independent. I promised to my wife, that I will not use more than 200 Euros. But my profit exceeded 200 Euros and I told her: Look, this money I created from nothing. I gave all the money back to our bank account, so this Bitcoin money is truly mine and I can do whatever I want to with it. I reinvested my Bitcoins and did a lot of trading. One day I had been lucky and earned about 30 BTC due to an error of a website. I tried to contact the support but didn’t get a reply, so I kept the Bitcoins. At that time this event nearly doubled my funds. Since then I developed my BTC-Trader and did a lot of trading.

Many are suspicious of a claim that in the modern age of nearly instant high-frequency trading human-controlled arbitrage can stand a chance against bots. Do you think human trading using your program can still be viable?

Although many people are using trading bots you can still make some profit, because a human being will always be better in his analytical abilities than a trading bot, which may be faster. I see often trading bots just making a little cheaper offer, if you go down with the price. Sometimes you can chase them down to a lower price just by making very small sell offers. However if this trading bot is more intelligent, it knows that this offers better in price are just too small. So you can also figure out the behavior of a trading bot and try to trick it. For example you use a 1 BTC ask to get the bots price down. But the rest of your BTC you will sell for a higher price. The bots Bitcoins will sell faster if you managed it to get him sell his Bitcoins cheaper. But in many cases you can just trust on the market. Just sell your BTC for a high price and get some profit. This small bots will sell all their Bitcoins and the price will still go up. There is just a little patience needed.

Have you managed to use the software to make any trading profits yourself?

My main strategy is the transfer of funds via Bitinstant from MtGox to BTC-e. At this Bitcoin price the difference should exceed about 0.25 USD. If so you can sell Bitcoins on MtGox, transfer the USD funds to BTC-e and buy some more Bitcoins back. With 100 BTC you can gain about 1-2 BTC per day in doing so. The most important thing is to be quick enough. While transfering the funds you are taking a risk. Selling BTC on MtGox and transferring the USD funds to BTC-e via Bitinstant takes some time. During this time other users can buy this cheap ask on BTC-e and you end up with USD and a too high price for buying back BTC. Now you have to decide if the BTC price will go up further or not. Sometimes you will do the wrong decisions. But you should keep cool then and try to keep the losses as small as possible. The shorter the time you will have to take this risk, the better. With BTC-Trader I am quicker than the user, who will try to do this process manually. This is an advantage.

What is your main concern with getting BTC trader finally out there for anyone to try?

It is not easy to convince users, that they should use BTC-Trader. I guess most Bitcoin users are very good at computers. Many use Linux as operating system. They only trust open source software or software they created on their own. A proprietary software for trading on MtGox faces the difficulty, that nobody will trust such kind of software. Sometimes I think it might be impossible to get money for a software users wouldn’t try even if it was for free. Today I was kind of excited about the first download of BTC-Trader. But I don’t know if this user will try it. However I will know if he will request a license.

 

For those who have bought or earned their first supply of bitcoins, no matter how large or how small, the first question that often goes through people’s minds is: what can I do with them? The Bitcoin community focuses heavily on the various ways that users can mine, buy, sell, or invest their bitcoins, and it is easy to forget that one of the key purposes of any kind of currency is, ultimately, to be able to spend it. However, Bitcoin does have a substantial underlying economy with a growing number of merchants participating; BitPay alone has over four thousand merchants using their payment processing system, and many more use competing services or manage their own sales platforms. A long, but even still only partial, list can be found on the Trade section of the Bitcoin wiki, featuring businesses offering all kinds of products. Particularly interesting are the low-end offerings; one of the advantages of Bitcoin is that it makes it much easier than almost any other consumer e-commerce system to manage very small amounts of money, and so the Bitcoin community has a number of offerings that take less than a few dollars, or even cents, to get started. No matter how Bitcoin-wealthy or poor you happen to be, the following list will provide an overview of some of the things that you can do with your hard-earned digital cash.

$0.01 – $2.5

• Bitcointip – the Bitcointip Reddit bot allows you to support your favorite contributors on Reddit by tipping them bitcoin. Once you create a Bitcointip account and send your bitcoins to the deposit address, all you need to do is reply to any post with something like “+bitcointip 0.05 BTC”, and the funds will immediately be transferred to the recipient’s account, from which they can then withdraw the bitcoins at any time. If the recipient does not yet have an account, an account will be created for him.
• Rugatu – Rugatu is a Bitcoin-based paid question-and-answer board. If you have a question that you want answered and are willing to pay ten cents to a few dollars for an answer, simply submit it to Rugatu and deposit your bounty. Once someone provides an answer which you find satisfactory, you will be able to release the bounty to that user.
• SatoshiDice – if none of the other options in this category satisfy you, you can always gamble for a chance at increasing your supply of bitcoins to a level where you can buy something more respectable. SatoshiDice offers a wide range of probability distributions, returns an average of 98.1% of what players send in, and requires no account to set up – just send bitcoins to one of its addresses, and perhaps you will receive an even larger sum back. See also: Satoshi Circle, Satoshi Roulette.
• Coindl – the iTunes of the Bitcoin world, Coindl specializes in digital goods. On Coindl, you will be able to find a small but unique collection of songs for 0.001-0.089 BTC each, as well as books, games, art and software. If you do not have that much, some items are even available on a pay-what-you-want basis.

$2.5 – $15

• Bitmit – the Bitcoin-based auction site has products listed for as little as two dollars, and is very easy to use. At the low price range, you will be able to buy electronics like USB keys and headphones, books and, in the digital goods, section, even one-month premium subscriptions to various online services.
• Ogrr – if you spend a lot of time playing online games, Ogrr is a trading forum that allows you to buy and sell your in-game virtual goods for bitcoin. Ogrr has subforums for a large number of games, including Diablo, World of Warcraft and Runescape.
• Bitcoin swag – if you want to show off your Bitcoin pride, there are many places that offer you the gear to do just that. BitcoinPride sells T-shirts, BTCTrinkets sells various pins and keychains and CryptoAnarchy offers a large variety of shirts, keychains, magnets and more for sale.
• Bitcoin Magazine – what better thing is there to spend your bitcoins on than a copy of the Bitcoin Magazine? Each copy of the print edition is sold for $8.88, free shipping included, although if you are looking for past issues you can often find them bundled for even cheaper.
• Reddit Gold – Reddit’s premium offering offers some extra features on top of the usual Reddit experience, and access for a month can be bought for $3.99
• VPN services – for less than $10 worth of bitcoins, you will be able to buy a month or two of access to services like ExpressVPN, Mullvad, SecurityKiss, BolehVPN and privateinternetaccess.com, which allow you to route your internet traffic through them to bypass country-wide internet blocking (both Chinese-style censorship and even in some cases country restrictions on services like Hulu and Pandora) and protect your privacy. In fact, Bitcoin is the perfect currency to buy privacy-protecting VPN services; the privacy that it offers, especially when combined with mixing services like that integrated into Blockchain.info’s wallet, ensures that when you are purchasing your anonymity you are anonymous to the provider as well. A more complete list of VPN options can be found here.
• VPS and domain registration – if you are looking to start your business, one of the first things that you will need is a website, and that usually entails having a domain and a server to serve your website from. Fortunately, Namecheap, VPS6, BitVPS and many more exist to help you get just that – all payable with BTC.
• OkCupid – it’s a common meme that computer nerds can never find love, but if you’re in that situation you are now one step closer to breaking the trend. OkCupid, a popular online dating site, is now accepting Bitcoin for its $10 per month premium service “A-list”, which offers a number of additional features including no advertising, filtering and better search options.

$15 – $100

• File sharing – Bitcoin now lets you buy premium access to two of the world’s biggest names in online file sharing: Usenet and Mega. Usenet is the world’s oldest widely known internet discussion and file sharing service, with subdivisions called “newsgroups” for hundreds of different topics of discussion and files that are difficult to find anywhere else, and to Usenet can now be bought at bitusenet.com. Mega is a more traditional centralized file upload/download service created by Kim Dotcom, albeit with client-side encryption, and although Mega does have a limited tier of free service it also has multiple levels of premium access, which the officially endorsed bitvoucher.co sells for BTC.
• Local businesses – a number of cities, particularly in the US and Europe, have at least one local restaurant that accepts Bitcoin. Going to such places offers benefits beyond just the food – it can also be a great way to meet other people who are part of the Bitcoin community.
• Clothing – CryptoAnarchy, Bitmit, BitcoinPride and others all offer Bitcoin-branded clothing in the 1-2 BTC range, if you wish to take your enthusiasm for Bitcoin to a new, and much more visible, level.
• Employment – ultimately, you do not even need a third party service to make your bitcoins worthwhile. Bitcoin is a free market composed of people around the world, and if you have a job that needs to be done, whether it’s art, translation or programming, just post it on any Bitcoin forum and you will quickly get people eager to work for your bitcoins so that they can spend them in turn.
• Domain name hosting – if you want to set up an online presence for your business or even just have a personal website that you fully control, there are plenty of providers who will sell you a domain name for bitcoin. Some providers, like BitDomain.biz, are even willing to work with you if you wish to remain anonymous – something which is impossible for those providers that only accept credit cards.
• Anything – many large merchants do not officially accept Bitcoin, but the Bitcoin community has come up with a collection of services that allow you to spend bitcoins with them nonetheless. The most popular is Bitspend, which has a form into which you can enter your shipping information and the product URL, which Bitspend’s staff then use to pay for the order with their credit card. There are also more specialized proxies available: BTCBuy offers Amazon, ThinkGeek, Sears, NewEgg, drugstore.com and Barnes and Noble cards from $10 to $350 in value, GamerKeys, which sells many popular PC games for bitcoins and Steambits, a proxy for the gaming service Steam.
• Home accessories – there are many stores listed on the Trade section of the Bitcoin wiki which offer various electronics, tableware and home appliances, and a large selection of goods can be found on Bitmit as well.

$100 – $1000

• Electronics – the Bitcoin Store, Bitmit, Bitcoinblaster.com and many other sites offer both low-end and high-end, new and used computers, tablets and phones for sale at similar prices to what can be found elsewhere. The Bitcoin Store’s prices are in fact usually even cheaper than leading traditional retailers like Amazon and Newegg, often to the point that it can even be more efficient for those who who have never used Bitcoin before to buy bitcoins through an exchange just to immediately spend them at the Bitcoin Store rather than buying the equivalent goods elsewhere with a credit card.
• Precious Metals – if you want to convert your bitcoins to precious metals, Amagi Metals or Coinabul is the place to go. Recognized even outside of the Bitcoin community for their reliability and ease of use, these two stores are the easiest way to buy gold and silver coins for BTC. Note that if you want to convert your gold or silver into bitcoins to spend on any of the other options in this chart, Coinabul can do that too. Aside from the bullion sellers, there is All Things Luxury, which offers a large collection of gold and silver jewellery.
• Travel – if you’re travelling to any city around the world, you can avoid currency exchange difficulties by carrying over your money in the form of bitcoin instead. Several cities have bed-and-breakfasts and taxis that accept Bitcoin, and even for your everyday use, you can always make a deal on Localbitcoins to exchange your bitcoin for local currency when you get there. For those who prefer a more structured tour, Bitcoin-friendly travel companies and private tour guides also exist.
• Rental – real estate companies such as Finextra in Germany and Fat Property in Houston are now allowing you to pay for rent in BTC, and artists, developers and entrepreneurs in San Fransisco may be interested in 20 Mission, a living community designed for startups.

$1000 and above

• Cars – the innovative car manufacturer WIKISPEED is accepting Bitcoin as payment, and private offers of cars for BTC are increasingly popping up.
• Houses – at least one person is now selling his house for BTC in Alberta.

This page is, and will always be, a work in progress, and we would gladly welcome your ideas on what we can add. Your suggestion may appear in an upcoming issue of Bitcoin Magazine.

Thanks to everyone in the comments so far for your ideas!

 

Disclaimer: Bitcoin Magazine has previously run advertisements for Butterfly Labs. This article was written independently of this fact. -Ed.

In an upcoming article in our next issue of Bitcoin Magazine, Butterfly Labs, arguably the market leader of manufacturing and selling Bitcoin mining equipment, has released a sneak preview of their current state of development for their ASIC-based Bitforce SC line of computers, scheduled to be released in late November or December. As a sneak peek, we have two images for you.

The company has responded to recent criticism with some images. The photo above shows one of the boards in the Minirig SC, the $29,899 version of Butterfly Labs’ product that Butterfly Labs claims will be able to produce 1.5 terahashes per second while consuming only 1500 watts of power. This board, also shared by the Bitforce Single SC, is 92x92mm in size, and holds the entire processing power of a Bitforce Single SC. The Single SC as a whole will have a base area of 98x98mm fully assembled, and will be 74mm high. Each of the eight black squares on the board is a chip capable of computing 7.5 GH/s. Its theoretical maximum output is even higher, but the decision was made to limit the computing power of each chip to provide quieter operation. The Bitforce SC Mini Rig, the $29,899 traditional desktop computer-sized version of the Single, will use the same boards, but most likely with a higher clock rate. The Bitforce SC Jalapeno will use a modified board with only one chip, whose operating capacity is further reduced to meet the limited power availability through the USB bus.

Butterfly Labs promises to release more information in the coming weeks, and with the November/December ship date rapidly approaching, eager customers and those watching from the sidelines do not have very much longer to wait.

 

TorrentLeech.org, a torrent tracking service with a massive 500k userbase, is now accepting and even encouraging Bitcoins as donations and in exchange for VIP accounts.

TorrentLeech believes that “Bitcoin payments safeguard your privacy and protect your anonymity,” and are “strong believers of the Bitcoin.” For these reasons, they are offering 1-3 months of extra VIP subscription for each donation via Bitcoin, depending on the amount donated.

TorrentLeech has even gone so far as to create their own wiki page¹ to aid users in acquiring and using Bitcoins.

With the encouragement for users to use Bitcoin, and a userbase half the size of the estimated one million people using Bitcoin, this new donation policy could very well result in a large number of new Bitcoin users over the coming months.

[divider]

Do you think TorrentLeech’s announcement will have an effect on the number of active Bitcoin users?  Leave a comment and tell us why, or send an email to [email protected].

Sources:

1) http://wiki.torrentleech.org/doku.php/bitcoin

Disclaimer: Bitcoin Magazine has previously run advertisements for Coinabul. This article was written independently of this fact. -Ed.

Coinabul, Bitcoin’s largest gold and silver selling service, has announced that is holding a sale to mark an important milestone in its history: one successful year of operation. Jay Shore and Jon Holmquist, both self described “metal-bugs”, had started the business to help the Bitcoin community convert their bitcoins into precious metals in October 2011, and after a month of hard work, the business began to quickly take off. On December 3, the site saw a volume of over 1,000 BTC, and since then, has been seeing consistently higher volumes every month. The site passed 6,000 BTC in April, and, as of its first anniversary, Jon Holmquist has announced that the site has transacted a total of over 120,000 BTC.

Surprisingly, the main driving force behind Coinabul’s success is not its Bitcoin acceptance – rather, it’s the service’s ease of use. Coinabul’s web page proudly claims that Coinabul is known industry wide – not the Bitcoin community, Jon Holmquist clarifies, but the precious metals industry as a whole – for its speed and reliability. The task of claiming such a trophy turned out to be rather easy for a Bitcoin business for two reasons. First, as Holmquist writes, “conventional gold dealers are terrible at building websites.” Gold buyers are traditionally thought of as being an older and more conservative demographic, but the Bitcoin community is one of the few places where an interest in precious metals and internet technology intersect. Second, Bitcoin’s claims of being easier to work with for merchants than traditional systems are hardly exaggerated; Holmquist adds: “Not even a week ago I was trying to use APMEX’s shopping cart and I couldn’t even finish the transaction due to what I think were expired SSL certificates.”

Coinabul has expanded considerably since its last semi-anniversary event six months ago. Aside from its massive increase in trade volume, the business has continued to add features to the website and make it easier to use. The most notable new feature that Coinabul has added since then is an API which allows computer programs to purchase gold and silver automatically. Two possible use cases for this feature come to mind. First, one can use it to make limit orders and stop losses of gold or silver, converting a given supply of bitcoins into precious metals when the price hits a certain value. Second, one can connect the API to a merchant platform, so that a business can convert its revenues into gold and silver immediately and automatically. Shipping is now available worldwide, with sales tax exemptions in Canada and the EU. The process has become fairly efficient; gold and silver typically makes its way to the customer in under a week, and although shipments are sometimes hindered by customs officials suspicious about BTC-denominated invoices rapid delivery is the norm. Shipping costs are typically about 2% of the products’ value, including insurance, and so far, there has only been one serious incident relating to shipping, which the shipping insurance happily covered.

In some areas, Coinabul has encountered roadblocks. Almost since the site’s inception, its founders have been toying with the idea of allowing users to buy virtual gold and silver holdings that would remain stored under Coinabul’s control. However, although the idea has not been abandoned, progress has been slow. “It’s a very hard legal challenge,” Homlquist explains, “We’ve had some progress, but nothing to announce yet.” Coinabul’s difficulties are understandable; introducing gold storage as an add-on may seem like a simple matter of combining one product with another, but it also means that the business would be acting as a financial service, and not just a merchant as they are currently.

Shipping is another area Coinabul is still struggling to improve. Although Coinabul’s shipping has become considerably faster over the past six months and continues to do so, Shore and Homlquist had been planning to achieve a turnaround time of 24 hours worldwide for months – a figure which has, so far, proven elusive. Costs too have been a problem, as shipping costs have risen from under 2% to about 2.4% in the past few months. “We’re a small company,” Homlquist explains, “so we can’t negotiate like the big guys can.” However, the pair is confident that these and other problems can be resolved. Coinabul has already added some new employees, and will continue incrementally improving its infrastructure as it gains the scale and ability to do so.

Six months ago, Coinabul was also eager to start working with MintChip, the Royal Canadian Mint’s foray into digital money. “This should ease the barrier-to-entry for our less tech savvy potential clients, as well as appeal to the gold-bugs being turned on, for the first time, to digitized payments via the Canadian Mint,” Holmquist had claimed. Now, Homlquist reports, for the time being the MintChip project has been shelved. “We don’t see MintChip as expanding in the future,” Holmquist explains, although he adds “but on the off-chance that it does, we’ll accept it as payment.”

Coinabul’s anniversary sale offers $12 per ounce off gold purchases and $1.5 per ounce off silver – roughly 0.67% and 4.5% off the average cost of each one, respectively. After the sale, Coinabul’s founders are also organizing another event: Bitcoin Merchant Friday. Celebrating the second anniversary of the day the Bitcoin project was first registered on SourceForge, a number of prominent Bitcoin merchants, including Coinabul itself, will be holding sales on Friday, November 9. As for Coinabul’s business, their main target in the next twelve months is the USD market; although Coinabul has been growing quickly, Holmquist believes that the business will be able to do much more once it gains a significant foothold selling gold for US dollars as well. But, even if Coinabul becomes a mainstream trader of gold for USD, they do not intend to abandon their roots. “We built Coinabul around Bitcoin, Homlquist writes, “and I feel like Bitcoin has been growing around us too. Bitcoin has given us a solid foundation, solid roots, so now we’re actively exploring ways to enter the bigger market by transacting in USD. Hopefully we’ll be able to offer enough of a discount for clients using Bitcoin that USD customers will adopt!” As for Coinabul’s past, Holmquist is happy about the progress that his and Jay Shore’s business has made. “First month sucked,” he writes, “Second month was okay. Rest of it was a joy! We’ve had our fair share of issues, but we’ve sorted through them. The community has really supported us and we hope they continue to do so!”

 

Last week, the Global Bitcoin Stock Exchange, for a long time the leading investment platform in the Bitcoin economy, suddenly and unexpectedly shut down. There has been much speculation about what has happened, as GLBSE founder James McCarthy (Nefario) maintained relative silence on the Bitcoin forums, and fears multiplied that government law enforcement agencies were behind the shutdown. Just like in the Bitcoinica case, there is also a substantial sum of Bitcoin deposits stored with the site, and so thousands of Bitcoin users around the world have a significant financial stake in the matter. In this interview, McCarthy will discuss the reasons behind the GLBSE’s shutdown, the historical background to the disagreement with his former business partner and currently most vocal opponent Theymos, and his perspective on the legality of Bitcoin services as a whole.

Vitalik: So, to start off, the main question that we’re all wondering about is: what happened? Why was the glbse shut down?

James: Well, after getting involved with Pirate, I lost nearly all the bitcoin that GLBSE users had left with us.

Vitalik: What do you mean “getting involved with Pirate”?

James: I kid, I kid. So basically, when I started GLBSE bitcoin was still considered very experimental. It wasn’t too long after that Pizza had been bought for 10K BTC. And for a long time GLBSE itself was very much a toy. We didn’t reach any sort of success until Feb/March this year. I’ve heard people asking why didn’t we involve a lawyer when the whole thing started, but the truth of the fact is that this was just a fun cool project, and it only became an issue when we became succesful. Also, at that time Intersango had just gotten a letter from the FSA stating that they didn’t consider bitcoin as currency.

Fast forward to just after the Bitcoin2012 conference in London, which was an awesome event with some amazing people. I had just moved to London and the decision was made to make GLBSE a legitimate company. We were succesful enough that it was certainly worth our while getting a solicitor. After spending some time I’d found what I consider to be a pretty good one. This being London, we’ve got some of the best securities solicitors in the world, so another part of that was my location – I couldn’t really find anyone while I was based in China, or even Manchester. So I spoke to the solicitor and explained everything to him, bitcoin, GLBSE, and the community. The solicitor went and spoke to some other people, got a second opinion, and went to the FSA. Keep in mind that this was after BitcoinGlobal had already had a shareholder meeting and the step to become a legit company had been discussed and approved.

Fast forward to last week, and the FSA and others finally get back to us. And things have changed. They were now unsure as to what they would consider bitcoin. Regarding the GLBSE, they believed that what was being done is very much a regulated activity. But this isn’t the largest problem.

Vitalik: You said on IRC that is was anti-money laundering (AML) first, then tax, then the regulations, right?

James: Yes. Money laundering and the finance of terrorism became the largest concern. Due to the properties of bitcoin, it’s very attractive for criminals, money laundering etc. Also due to the properties of bitcoin, it’s especially difficult to detect any relationship between accounts. So, for example, if you put requirements for AML on transactions over a certain size, you have no way to know if smaller transactions are linked. So for AML purposes bitcoin is exceptionally risky.

Long story short, the GLBSE was shut down because:

a) It was performing a regulated activity
b) I, being the operator, would be liable for the lack of AML provisions. Essentially I would go to jail if GLBSE continued to operate

Vitalik: The exchanges seem to be dealing fine with the AML stuff though, is your situation different?

James: Yes and no. All existing bitcoin exchanges that are not doing AML on all accounts (even bitcoin only ones) are at risk. In the event that bitcoin is considered a currency (which is highly likely), all existing regulations would then be retro-actively applied depending on jurisdiction. Also, for bitcoin exchanges who are dealing with bank deposits the depositors are somewhat known – as in, they have to transfer in from and out to a bank account, and those are linked to a persons identity.

Vitalik: Would you have to AML all accounts or just those above a certain threshold? Because I don’t know any exchange that doesn’t let you be anonymous for small values.

James: The GLBSE was bitcoin only. With bitcoin, it needs to be AML for all accounts. And that’s a risk the exchanges are taking. It’s not possible to tell if one bitcoin only account is connected or not to any other. A person could split one bitcoin transaction across several accounts, keeping the amount under the AML required level. In fact, this is what some users were discussing on bitcointalk , specifically to avoid the requirement for AML. That’s a big risk for exchanges to take and it grows as the popularity of bitcoin grows.

This is not just my opinion, this is what the solicitor has told me, and since it’s my neck on the line regarding the GLBSE and all it’s activities I’m much more inclined to listen to the solicitor – otherwise, why bother getting one?

Vitalik: What about the tax issues?

James: Very simply, the tax man will want their cut of bitcoin activity. Right now people might be able to get away with just by saying that their business is that they sold bitcoins, but once the amounts become worth while tax agencies everywhere will start asking how people managed to aquire those coins in the first place, and this is partly where the money laundering side of things comes in as well. Unless you’re are doing business with bitcoin anonymously you will have to follow all the existing rules and regulations of the jurisdiction you are based in

Vitalik: you said that you might try to make a legal exchange in the future. What would have to be done for that?

James: The initial plan was to make GLBSE itself a legal entity that met all the regulatory requirements, with the hope being that it would be something we could ease into. But it became very clear that this was not going to be possible. Plan B was to shut down GLBSE and start a new company, which from the begining followed all the rules.

Vitalik: And that turned out to be impractical too?

James: Not at all. Really I don’t have a conclusive answer on that, yet. Things in the non-bitcoin economy take a hell of a lot longer to get done than in Bitcoin land; people were complaining about why GLBSE wasn’t able to give them their bitcoin back right away (and started freaking out on the forums, in a large part thanks to theymos), really things don’t move that quickly offline.

Vitalik: Anyway, what are the difficulties with getting users their money back?

James: And I wasn’t going to do anything without the legals giving the me go ahead to do so. Users also need to keep in mind that it’s only been a little over a week since GLBSE shut down. I’m currently wading through the 800+ closed accounts for returning bitcoin and assets. A lot of that has to be done manually. Also, you can’t just withdraw your assets since they’re something that existed solely on GLBSE.

Vitalik: But isn’t transferring assets just a matter of telling the issuer who has how many?

James: Not exactly. When signing up users never agreed to have their contact details given to the issuer, and most of the issuers need a bitcoin address for them to payout to. Once the form went up, the whole process for closing your account is very very smooth and simple.

Vitalik: OK, you have a form up now, asking for email and BTC address. So, if you’re fine with giving your contact details to the issuers, the issuers can contact you by email from there. What happens if you don’t want that?

James: Then you’re choosing not to continue your relationship with your issuer. I’m sure your shares will still exist, but your issuer won’t know who you are, so you won’t be able to collect them.

Vitalik: so what is the plan for BTC deposits, if you’re not just sending them immediately?

James: As you may be aware, there are internal disputes in Bitcoin Global. I was hoping to get them sorted quickly. Since I don’t hold all users funds, but I do hold most of them. I’m not sure exactly how much Theymos holds, but it’s not what he publicly stated In July/September I had sent Theymos 3K BTC to be able to top up the hot wallet when I was on the road (I was going to be traveling for a few days). Last I remember he had about 1500BTC. Those were users’ deposits.

Vitalik: but if you have most of the money, would it be possible to do something like returning half pro rata immediately, and then returning the rest when you can?

James: I could probably do that. As I said earlier though, I need to go through the 800+ accounts first. Obviously not all of them, do them in batches. The first batch will be getting their coins either later today or early tomorrow.

Vitalik: Anyway, what is the internal situation of the company at the moment? I can see theymos is not really on your side anymore.

James: He hasn’t been on my side for some time. About 2 months ago, I had made a number of technical changes to GLBSE to bump up the speed. This ended up introducing a vulnerability, which was on the site for all of three days before I had found it and fixed it. It was a parallel programming issue. So the result was one user had discovered this vulnerability and had taken advantage of it. The user had gotten away with about 2500BTC. This was a big hit to GLBSE’s profits, but we had enough to handle this. After investigation I’d learned the user had a bitcointalk account, naturally with Theymos being the admin (and a BitcoinGlobal shareholder, as well as treasurer) I went to Theymos, provided him with the proof both in the block chain and from our records, to get the guy’s personal details. He flat out refused, under no circumstances would he release that information. At that point I thought that this was it and we’d have to just take the loss.

Vitalik: Did he say why he was refusing?

James: Said he couldn’t trust any information or records from GLBSE, or something along that line.

So he was a shareholder of glbse but didn’t trust the rest of the company? Sounds like that wasn’t the first disagreement.

Not just a shareholder, the treasurer. It was the first disagreement over anything GLBSE related. I’d given up my position as a moderator on bitcointalk about a year earler over him allowing someone to be hounded off the forum over their sexuality, it wasn’t acrimonious though. So really this incident was the first.

Moving on from that, I’d gotten the thief’s information through other means about a month later (from the theft) and got him to return all of the funds about 2 weeks ago. No easy task getting the information or getting him to return the coins.

Vitalik: Congratulations, I think that deserves a story in itself

James: Meh. The fact that Theymos was not willing to help with the theft wasn’t brought up in the next shareholder meeting. I was going to, but on the news that GLBSE was going to go legit he said that he would resign and sell out. He didn’t like the idea, but thats fine. Not a problem with people disagreeing. So he wanted to sell his (very small) share in GLBSE. After that information I thought the point about the theft was moot.

Vitalik: Well, I could understand that – he would need to stop being pseudonymous if btc global became an actual company, right?

James: Yes, which was fine. This is why they were going to sell their stake in the business, and I was ok with that. But then, he wasn’t happy with my choice to remove Goat from GLBSE. And then with the closing of GLBSE, a shareholder meeting happened on the Friday after it was closed. Theymos put forward a motion to remove me as CEO, but it did not even get 30%. It was him along with two others. We’re very unhappy with this course of events.

So right after he lost the vote (remember, Theymos never invested anything in GLBSE) he made that post on the forum, and he’s been on a quest to do as much damage to me and any GLBSE operations ever since. The others who were with Theymos are the ones who have been posting on the forums.

I’d explained since the begining of the meeting that if GLBSE continued I would end up in jail. He didn’t care. He was perfectly happy for that to happen

Vitalik: You did say at the conference in London that you were willing to relocate to another country if necessary.

James: Yes, but we’ve not exhausted the options in the UK at all.

Vitalik: So you would prefer a tightly regulated, possibly full AML on every issuer and buyer, UK exchange over the status quo someplace in Asia?

James: I would prefer to have an exchange/service where real businesses can raise capital for starting or growing without the fear of being arrested.

Vitalik: Is it true that the glbse bylaws disallow shutting down the glbse?

James: No. The purpose of the bylaws is to maintain and run GLBSE. If GLBSE is to close, then the bylaws have no purpose. Nothing states that GLBSE can’t be shutdown.

The purpose of this document is to codify the governing bylaws of BitcoinGlobal, whose initial stated purpose is the development and maintenance of the Global Bitcoin Stock Exchange trading platform, but whose operations may extend to other areas with approval of the Members.

This is what he is using as his main argument. He interprets this as a ban on the shutdown of GLBSE, when it really states that the purpose of BitcoinGlobal is to run and maintain GLBSE. No GLBSE means there is no purpose in BitcoinGlobal. It’s on those grounds he had me labelled as a scammer on the bitcointalk forums. He’s also put my life in danger by whipping up members of the forum. I’ve gotten several phone calls usually at 3-4am in the morning with death threats, one of which knew my address. I’ve only been living in this address a little over a week.

Vitalik: So, is there anything else that has happened this past week?

James: In terms of the scandals not so much. I’ve not been talking to anyone else much if anything at all, Bitcoin Global shareholders included. With the exception of the solicitor – since theymos and other shareholders have decided to selectively release information to the forums from the meetings and emails, I need to make sure all angles are covered. As far as the Bitcoin/legal situation, having a trading platform/secondary market where users can re-sell shares or assets they own is pretty much illegal unless you set up a registered stock exchange which would take tens of millions to do. However…

Vitalik: A crowd investing service like Prosper?

James: That is where we’re looking, crowd funding and the regulations around that area. Can there be a second market for that kind of thing? Sure, but that is something thats not going to be exactly legit.

In the long term, and speaking more about Bitcoin rather than the GLBSE specifically, if the largest proportion of the bitcoin economy is made up of black market goods and services, it’s going to eventually result in govenments around the world shutting down all the exchanges. This equates to economic sanctions on the “nation” of Bitcoin. So technically you can’t stop people using Bitcoin and trading with it, you can choke off the entry points into the economy. Without exchanges Bitcoin for the average person becomes pretty useless. We’re nowhere near the point when bitcoin can be self sustaining exchange free. The more legitimate businesses that use Bitcoin, not only will the overall Bitcoin economy grow in general, but the more difficult it will become for governments to cramp down on the exchanges as it will have a legitimate use.

So, I guess that’s it. Any more questions?

Vitalik: No, I think that’s all. Thanks for your time!

 

Last Thursday, the Global Bitcoin Stock Exchange, the first and by far the largest securities exchange in the Bitcoin economy, unexpectedly shut down. The principal cause of the shutdown appears to be legal problems. As Nefario wrote in IRC chat^[1], “my problem actually is: 1) AML, 2) tax, 3) regulations, in that order.” The shutdown has already had an impact on the Bitcoin price, dropping it from about $12.9 to a low of $10.65 before a partial recovery^[2], and will have a significant impact on the Bitcoin economy over the next few weeks as the businesses listed on the exchange adjust to the loss of their main platform for attracting and interacting with investors.

The GLBSE was first launched by its founder James McCarthy, more commonly known by his forum handle Nefario, in May 2011. The site had a rocky start; the first IPO that was made through the exchange was Ubitex, a service which intended to help Bitcoin buyers and sellers avoid the banking system and trade bitcoins directly, meeting face to face and using cash. The IPO gathered over 1100 BTC (worth an average of about $10000 at the time, although the price was very volatile), but the service never had any success, and in August, its founder disappeared entirely. This IPO was likely not a deliberate scam. Its founder, Nathaniel Theis, was a minor, and the most likely explanation was that he simply got discouraged by the business’s initial failure and decided to cut himself off from his commitments.

The GLBSE did attract some legitimate business. Mining companies, businesses which use investors’ funds to buy Bitcoin mining equipment and pay out the bulk of the mining rewards that they generate as a dividend, were popular right from the GLBSE’s launch, and turned out to be largely legitimate throughout the exchange’s entire history.

However, there were further debacles. By fall 2011, the Lambert funds^[3], a set of investment funds operated by Peter Lambert which attempted to earn their profits through arbitrage and investment within the Bitcoin economy, were the largest assets trading on the exchange. From September to November, the value of the funds rose steadily, and although there was little on the GLBSE beyond these funds and the mining companies, the GLBSE’s userbase was slowly growing. In December, however, Peter Lambert mysteriously stopped communicating with his investors^[3]. On January 18, Lambert came back, and delivered the news that many were already suspecting was the truth:

For personal reasons, I have decided to get out of the bitcoin business. I have put up orders to buy back the outstanding shares of the LIF assets. Unfortunately, my trading strategy seems to have been flawed, we lost a bunch of money. I have been selling off the GLBSE assets held by the fund, but it appears many of the buy offers were not real, and I was only able to recover a small amount for the assets held. Many of the GLBSE assets turned out to be scams.^[4]

Despite this, the GLBSE kept growing. Three days after Lambert’s fateful declaration, Nefario announced that the GLBSE would be releasing a new version of its interface – GLBSE 2.0. The new interface would be a major step toward pushing the GLBSE into the mainstream, and included a number of improvements in usability. First, the original GLBSE’s authentication system, based on users storing private key files on their computers, was removed, and replaced with a traditional username/password authentication system. Nefario describes the motivations behind the original setup, and its replacement, thus:

The mistake made was that we (at GLBSE) thought the issue was to provide an anonymous asset(stock) market/exchange, so thats what our time effort and money went into. What we should have been doing was building a market for people to raise capital for their business or idea in bitcoin, and make it as easy as possible for people to do that while trying to keep investors safe.^[5]

Along the same veins, the GLBSE introduced a voluntary identity verification system, by which sellers could submit one or more pieces of identifying information, including address, phone number, email, Facebook account and a photograph of a widely recognized type of ID, to link them to a real-world identity. Users would see this information and be able to make judgments regarding their investments with this information in mind. Many legitimate businesses did submit such information, and trust in them improved, but many others continued operating anonymously.

The summer of 2011 saw a new type of security appear on the GLBSE: the Pirate Pass Through (PPT). Pirate was the name typically used to refer to a forum poster who went by the names Trendon Shavers and his forum handle pirateat40. He managed Bitcoin Savings and Trust (BST), an investment scheme that offered interest rates of up to 7% per week. The scheme expanded quickly, and evidence suggests that, as it was approaching its peak, its deposits were growing at over 100,000 BTC per month.

Many were concerned that BST was actually a Ponzi scheme, a fraudulent investment opportunity that has no underlying business to generate profits, but instead creates the illusion of one by paying out profits to earlier investors from the pockets of later investors. However, many more found the interest rates attractive enough to be worth the risk, and there was high demand for ways to make it easier to invest in the scheme. The Pirate Pass Through was the result of this demand; a security listed on the GLBSE investing in shares of BST and paying back the returns, minus an operator’s fee, as a dividend.

Some PPTs were honest about what they were doing, but many other investment funds were Pirate pass throughs by stealth. Offering investment funds of their own with returns from 2-4% and vague descriptions about investing in “arbitrage” and “the Bitcoin economy”, the operators of these schemes were actually investing either some or all of their investors’ funds with Pirate, either naively hoping that Pirate would not default or confident in their ability to quietly disappear in the resulting chaos if he did. By August 2012, official and unofficial PPTs were by far the largest sector on the exchange.

Like all Ponzi schemes, however, sooner or later Pirate was doomed to fail. And, on August 17, it did. Three days before the final collapse, the scheme attempted to increase its lifetime by reducing interest rates from 7% to 5%, but the attempt backfired as investors attempted to withdraw their deposits en masse. Pirate shut down^[6] Bitcoin Savings and Trust with a message on the Bitcointalk forums on August 17, and promised at first that deposits would all be returned. However, on August 28, even this promise fell away as Pirate announced that he was in default^[7]; since then, Pirate has ceased communication entirely, and efforts are still underway to find Pirate’s physical identity and location so that he can be prosecuted.

But Nefario was determined that the GLBSE would carry on. On September 16, he gave a speech on the exchange at the London Bitcoin conference, arguing that even without the Pirate pass throughs the GLBSE remained a significant part of the Bitcoin economy and was here to stay. In an attempt to show the GLBSE’s legitimacy, he underlined its crucial importance for the Bitcoin mining industry, estimating that at least ten percent of the Bitcoin network’s hash power is made up of computers bought with money raised through GLBSE IPOs. As for legal threats, Nefario was also confident. “If they say in the UK ‘You can’t run this thing anymore’,” he claimed, “that’s OK. We’ll just move somewhere else. We’re not using a bank account for this and the funds are sitting on a USB key so it’s easy to exploit differences in jurisdictions. We might want to move somewhere like Singapore or Hong Kong, for example.”

Since then, Nefario has hired a lawyer to help make the GLBSE a legitimate business, and as soon as the lawyer began offering advice Nefario almost immediately started to play a different tune. The GLBSE quickly shut down, and communication with the Bitcoin community has been limited since then. Internal shareholder relations have fallen apart; Theymos, a pseudonymous shareholder and treasurer at Bitcoin Global, believes that Nefario has been approached by legal authorities and the current events are really Nefario desperately doing everything he can to avoid prosecution. Nefario’s behavior is particularly problematic because, officially, he does not even fully control the exchange; the GLBSE’s parent company, Bitcoin Global, is itself a multi-shareholder enterprise, and a number of shareholders have expressed their disapproval of his actions. However, Nefario has stated on advice of his solicitor that he will ignore any attempts to remove him, and even that turned out not to be necessary; Theymos attempted^[8] to pass a motion to remove Nefario from his position as CEO, but he was unable to gather the required 51% support. According to Nefario, keeping control of the company is his only choice; Nefario writes, “keep in mind that GLBSE is linked to me and my identity, I’ve used my credit cards to pay for the domains, servers and other items. If I passed control of it to anyone else(especially an anonymous person), and it continued to operate, knowingly breaking laws and attracting attention then I would be found liable.” And, judging by Theymos’s inability to get 51% support, the majority of the GLBSE shareholders agree.

For those who are hoping that the GLBSE will recover, the odds are unlikely. Nefario himself has stated that the GLBSE is never coming back, and although he has hinted at the possibility of the GLBSE’s parent company, Bitcoin Global, creating a regulated and legal exchange to replace it, it is doubtful that enough Bitcoin businesses would be willing to go along with the issuer requirements that such a status would entail for the effort be worth it. Currently, many more are concerned with a far more pressing question: what will happen to the GLBSE deposits? Theymos has added fuel to these worries, claiming that users will be required to submit identification documents to get their money back. Nefario, while not explicitly denying this, has simply stated that “all deposits will be returned to GLBSE users.” Regardless of what happens, fortunately this time the issue is not as crucial as it was in the Bitcoinica crisis; the amount at stake has been claimed by Bitcoin Global shareholder Theymos to only be about 8000 BTC, as the rest of the value that GLBSE users have stored in the exchange exists in the form of shares. A share is nothing more than a formalization of a relationship between investor and issuer, so the GLBSE, being nothing more than the database holder, has no way to make off with this part of users’ funds. Furthermore, the GLBSE’s website now claims that the company is “currently working on a simple, safe, and easy to use method that will allow you to continue your relationship with your asset holders”; given that there is no evidence that the GLBSE’s databases have been confiscated or destroyed there is no reason to believe that this will take an excessively long time. Once the GLBSE’s issuers receive the data needed to continue their relationships with their asset holders, however, they will still need a platform on which to manage it.

What platforms may take the GLBSE’s place is a question that will soon be answered in an upcoming article…

1. https://bitcointalk.org/index.php?topic=115669.msg1251856#msg1251856
2. http://bitcoincharts.com/charts/mtgoxUSD#rg60zigDailyzczsg2012-09-08zeg2012-10-08ztgSzm1g10zm2g25zv
3. https://bitcointalk.org/index.php?topic=35775.0;wap2
4. https://bitcointalk.org/index.php?topic=35775.20
5. https://bitcointalk.org/index.php?topic=60489.msg707619#msg707619
6. http://pastebin.com/VZgm7Dvy
7. https://bitcointalk.org/index.php?topic=82573
8. https://bitcointalk.org/index.php?topic=115669.msg1250328#msg1250328

[UPDATE: Nefario has contacted us and provided an explanation for the GLBSE’s inactivity, and corrected some misconceptions regarding the internal affairs of Bitcoin Global]

 

This morning, users of the Bitcoin exchange Intersango were greeted with an email from support stating that Intersango would soon be shutting down all USD-denominated trade on the exchange:

Intersango’s USD market will stop trading 2012-10-14 at approximately midnight UTC.

At this time we ask that persons with USD funds either place a withdrawal request or purchase bitcoins.

To facilitate persons wishing to purchase bitcoins Intersango has placed 625 BTC up for sale at 12.1 USD.

Unfortunately the USD market is simply too small to justify it’s ongoing operation.

The justification makes sense; while Intersango’s GBP and EUR exchanges traded 15,000 and 28,000 BTC in the past month, respectively, its USD trade has only seen a volume of 4,800 BTC, or $58,000, over the same period^[1]. With its fee of 0.65%, this amounts to a monthly revenue of $400. Intersango is still seventh in the USD market, and there are many exchanges in both the USD and other currencies that are willing to continue operating at much lower volume (including Intersango itself with a Polish division handling 2,000 BTC per month), but in the case of the USD the team behind Intersango evidently does not consider maintaining operations at such volumes to be worth it.

All four Intersango exchanges, with the exception of its minor PLN division, have been in trouble for months. The EUR volume, making up the bulk of Intersango trade, peaked at about 15,000 BTC per week in July before beginning a steady decline to a third of this value now. The GBP volume never even peaked; it had been roughly steady for eight months starting from last December, but precipitously declined from an average of 15,000 BTC per week to 3,000 BTC per week in the past one and a half months. And the USD volume has simply been on a slow and steady decline from 4,000 BTC per week to 1,000 BTC per week since June.

Intersango has suffered a number of setbacks in that time. One major blow was to its reputation, as the team behind Intersango was also a key player in the prolonged Bitcoinica debacle that took place three to six months ago. Another issue was banking problems; Intersango’s UK bank, Metro Bank, halted the exchange’s ability to send and receive payments in July, leading to weeks of delays^[2]. Finally, the exchange’s problems may have been largely simply a result of dropping BTC exchange activity in general. Since the closing of Bitcoin Savings and Trust on August 17, the volume of Bitcoin exchange activity on most exchanges, including the dominant player MtGox, has reduced significantly^[3] from the levels that the exchanges saw in the summer.

A successful Bitcoin conference in London in September did improve the Intersango team’s reputation, and banking problems of Bitcoin exchanges do tend to eventually be fixed, so Intersango does have a chance to turn itself around. However, the question is, will it? Is Intersango’s move to abandon the USD part of a strategic consolidation and retreat, or does it mean that the exchange is sinking into the depths of obscurity? Or will its trading volume simply stabilize at a level that is perhaps not as glamorous as that of MtGox, but is nevertheless profitable to run? At this point, only time will tell.

Sources

1. http://bitcoincharts.com/markets/
2. https://bitcointalk.org/index.php?topic=63877.320
3. http://bitcoincharts.com/charts/mtgoxUSD#rg360zigWeeklyztgSzm1g10zm2g25zv

 

About three months ago, Butterfly Labs was the first to announce a specialized Bitcoin mining device based on a technology with the potential to massively increase the computing power of the Bitcoin network per unit power and cost: the ASIC. ASIC, or application specific integrated circuit, is a technology taking specialization to a whole new level. Although FPGAs, or “field-programmable gate arrays”, are already used for Bitcoin mining, ASICs offer even greater improvements because they come specialized for one specific task right out of the factory. The process to create ASICs is hardly new, as they have been used for applications like digital voice recording for many years, but it has taken time to adapt the process to Bitcoin mining.

The statistics of Butterfly’s ASIC-based Bitforce SC lineup are impressive; dollar for dollar, the SCs are about thirty times as powerful as anything currently available, and, given the state of the Bitcoin network at the time of the announcement, each one would pay for itself in eight days. More recent specifications from Butterfly show that the power consumption is as low as the price; the middle-of-the-line $1299 SC Single would provide 60 gigahashes per second (up from 40 as per the original announcement) for only 60 watts, less than the company’s current FPGA offering.

The customer service offerings are as impressive as the product itself. Butterfly Labs now intends to offer a lifetime warranty on all of its ASIC products. As CEO and lead engineer Nasser Ghoseiri put it, “We’re making an infrastructure. Hardware is only part of it – our mission is to support the value of their investment by responding to market changes with things like the buy-back program, and making sure that their investment is safe.” Will the units actually last a lifetime? Butterfly’s Josh Zerlan says yes. The Bitforce SC ASICs are “not like the FPGA units at all… they are going to be far simpler and much more robust.”

Of course, many are incredulous, and ever since the original announcement, there have been concerns that the SCs would not actually be created and the whole thing was a scam – a worry that was heightened when it became public that one of the company’s employees had a criminal history. Some were also worried that if Butterfly’s offering was legitimate, it would be unhealthy for one company to have so much influence in a market, the whole point of which was to be decentralized.

Now, however, several other companies have joined the fray. The first is BTFPGA’s bASIC, which offered 27 GH/s for $1069 (a figure which has since been increased to 54 GH/s). The bASIC is intended to be the ASIC “successor” to BTCFPGA’s existing FPGA-based ModMiner Quad. Just like Butterfly Labs, BTCFPGA is offering a trade-in program^[1] by which existing ModMiner Quad orders that have been placed but not shipped can be replaced with orders for a bASIC, and any ModMiner Quads that are already in use can be traded in for a rebate. Also just like the ModMiner, the bASIC is intended to be completely open source.

Another option available to Bitcoin miners is the Avalon ASIC. Avalon’s ASIC, a project created under the umbrella of the upstart Bitcoin business incubator BitSyn.com, offers 60 GH/s for $1299. However, its power consumption is more worrying. An initial announcement suggested that the machine would consume 600 W, although a later post on the BitSyn.com forums stated that 600 W was a conservative estimate, and the actual power consumption would likely be 120-160 W. Given that Butterfly themselves took almost three months to come up with a power consumption estimate, and bASIC does not have any figures at all, the lack of precise specifications at this point is understandable; the ASICs are still under development, and shipping for the first 300 units will take place in January and February 2013.

Finally, DeepBit has released a line of ASICs of their own. DeepBit is well known for having been, at one point, the largest Bitcoin mining pool. DeepBit even exceeded 50% of the network’s total hash power for a few brief moments in 2011, although the mining pool has shrunk considerably in recent months, and is now not even close to first place^[2]. DeepBit has been making preparations for this ASIC offering since January, and is seeking to reclaim some of its former glory with the ASIC-based Reclaimer line. However, the results are not particularly impressive; the largest and most efficient of the line offers 80 GH/s for $2800. DeepBit may readjust its specifications in the future as Butterfly and bASIC have done, but at this point, its offering appears to be the least attractive of the four. Deepbit operator Tycho expects the Reclaimers to become available in March.

The sudden diaspora of competition on the Bitcoin mining market provides several positive signs. First, the existence of offerings from established players like Deepbit, and the similarity of the statistics across all of the companies, suggests that the ASIC offerings are indeed legitimate, and will provide the hashing power and efficiency at least near what they are offering. Second, it alleviates fears of market centralization. Finally, the development of ASICs in general is a very positive sign for the security of the Bitcoin network as a whole.

Bitcoin’s hashing power is likely to go up by at least a factor of 10 to about 200 terahashes per second, or 3 exaflops – likely the first use of the prefix “exa” (meaning 10¹⁸) ever to be employed in the computing world. Even billion-dollar government supercomputers are hard-pressed to match just one percent of that. From here, Essentially, this implies that the condition for overpowering the security of the Bitcoin network is changing. Formerly, all that one needed to do to overpower the rest of the network and gain the ability to pull off double spending frauds was to gain more hashing power than the rest of the Bitcoin network combined for a short amount of time. Now, of course, the same still holds, but doing so requires buying up large quantities of ASICs – in short, throwing in more capital investment than the rest of the Bitcoin network combined at least over the past few months. Right now, even with the ASIC revolution increasing the power of the Bitcoin network by a factor of ten, that is still only a few million dollars – although even now any attack will take months to prepare. From here, however, further improvements to mining technology will only come with iterative applications of Moore’s law, and so the capital barrier to pulling off a double spend will only go up as times goes on. If the Bitcoin network was precarious and vulnerable to any significant company, government or that may have wanted to bring it down before, it is now well on the path to lasting stability.

Sources

1. https://bitcointalk.org/index.php?topic=79637.msg1157524#msg1157524
2. http://blockchain.info/pools
3. https://bitcointalk.org/index.php?topic=79637.msg1157643#msg1157643

 

About a month ago, New Hampshire State Representative Mark Warden pushed forward the legitimacy of Bitcoin in two very significant ways. First, he was the first major political candidate to accept Bitcoin for political donations. This was a significant milestone, both because the regulations around political donations make utilizing Bitcoin a much greater challenge than for any other kind of charity, and because it means that Bitcoin has support “within the government.” Eric Olson, a Libertarian candidate in North Dakota, had been accepting Bitcoin for months before^[1], but the Libertarian party, like most other third parties in the United States, is much too small to attract significant media attention. Secondly, when New Hampshire’s Deputy Secretary of State approved the arrangement, the event marked the first official ruling of any kind in favor of Bitcoin’s legality.

But in the three weeks since, signs are showing that Mark Warden was not simply the first to reach a milestone; he may well have been the first to break a dam. Less than a month after Warden’s move and weeks after the New Hampshire Secretary of State’s approval, Jeremy Hansen, a professor of computer science and independent candidate, has just announced^[2] that he also intends to accept Bitcoin donations. Hansen does not have a political platform of his own – he strongly supports direct democracy, and intends to simply serve as a conduit for direct democracy if he gets elected. Barring constitutional objections, on each bill he would simply vote the way the people want him to. Although, like Olson, Hansen is not a mainstream candidate, unlike Olson he has also managed to get formal legal approval from both the Vermont Attorney General and the Vermont Secretary of State.

But Josh Jones, creator of Bitcoin Builder and developer of the custom system which Hansen uses to accept donations, intends for Bitcoin to go even further. He believes that “Bitcoin is perfect for campaign contributions because of its ability to do micro-transactions at low-to-no cost”, and to that end, has offered Hansen’s system to any candidate wishing to accept Bitcoin. “The system up now at http://www.bitcoinbuilder.com/donate/,” he writes, “allows political campaigns to create donation forms in one click that comply with the legal requirements Jeremy and I have identified.” And indeed it does. Going to the link, visitors are immediately presented with a form that allows them to create a donation campaign, whether for political purposes or otherwise, set or modify some basic settings like what personal information to require (the default is name, email, phone and address), click “Start Donation Campaign,” and have a link to a form which anyone can use to donate right away. If other candidates are interested, they now have the tools to start accepting Bitcoin far more quickly – Jones’s form is far easier to set up than even BitPay. The work of determining what kind of donation system works best has already been done by Warden and Jones, and getting approval for each additional state will only be easier with the weight of two established precedents in Bitcoin’s favor.

Sources

1. https://bitcointalk.org/index.php?topic=51631.20
2. http://vermontelection.org/2012/09/24/bitcoin/

 

Attention on Bitcoin has increased considerably in 2012 based on a number of sources. Although the Google Trends volume, a rough indicator of the number of eyeballs looking for something on the internet, is not nearly as high as it was at its all-time high in June 2011, indicators of the slower-paced and more durable sort of attention that ultimately leads to success for any new product of technology have arguably only become stronger. In 2011, indicators that there was any high-level institutional acceptance of the technology were scant, and any kind of connection between an established government or business and Bitcoin, even an independent time project of a Google employee, became the focus of attention for weeks.

There are good reasons to be concerned about this kind of institutional attention; even if it has little effect on Bitcoin directly, there is reason to believe that many businesses are holding out on accepting Bitcoin because they are waiting for official acceptance. BitPay’s Tony Gallippi writes about the experiences of Bitcoin users in Finland: “As a result of the secretary of the Central Bank of Finland publicizing that bitcoin is legal to use in Finland, many businesses have seized the opportunity to accept bitcoin. Some of the rather unique merchants in Finland include a dentist office, a veggie burger restaurant chain, and a funeral service.” There are likely many potential Bitcoin-using businesses in the US and elsewhere that are holding out for just such a ruling; in the case of Google, Sergey Brin all but admitted that that was the case. Since 2011, however, there have been many telltale signs that there are a number of individuals and teams in the upper echelons of government and business around the world that have begun to pay attention to what the mainstream media still, arguably correctly, describe as a fledgling currency, and this article will list some of the more important indicators.

• Bitcoins are a Unit of Value in Germany – Germany’s financial supervisory authority, Bafin, has published a report (translation of relevant text here) delineating their status under German law. The document has the following to state on the subject: “tokens of value meant to be used as a method of payment which are issued by barter-clubs, private exchange-rings or other payment systems in exchange for real economic goods or services or like for example Bitcoins, which are issued in computer networks without any service in return, are therefore exempt from the definition of e-money, even though they fulfill the same economic function as e-money and have the actual potential of privately issued currencies.” The legal concept of e-money in Germany applies only to instruments that ultimately derive from legal tender currencies, and so Bitcoin is effectively classified as a commodity. Incidentally, this is similar to the way more recent government decisions have treated Bitcoin donations – as an “in kind” donation of material but not monetary form, similar to donating food or supplies. Note that classification as a commodity does not exempt Bitcoin transactions from taxation; in most jurisdictions, barter income is taxable too.
• Being A Bitcoin Exchange Is Not Illegal in France – Although it makes no claims about the legitimacy of Bitcoin itself, this little-known ruling is arguably the first true “Bitcoin ruling” ever to take place. In the summer of 2011, Crédit Industriel et Commercial, the bank which MtGox was using for their activities in France, closed MtGox’s account, arguing “Bitcoin is an electronic money, Macaraja [the entity representing MtGox in France] is not a bank, therefore it’s illegal for Macaraja to be handling this”. MtGox challenged the decision, and took CIC to court claiming its right to a bank account under French law. In response to the CIC’s position, MtGox argued that “bitcoins are not an electronic currency but rather an immaterial good, like software”, and the court decided (French) that it was not competent to determine the issue of Bitcoin’s validity. Nevertheless, this did establish one important legal precedent: without any judgment on what Bitcoin was, MtGox was safe to continue operating by default.
• FBI Internal Report on Bitcoin – in early May, a report from the FBI titled “Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Deterring Illegal Activity” was leaked. The fortunate news for Bitcoin shown in the report was that the FBI was less fearful of Bitcoin than some had suspected. The report read “The FBI assesses with medium confidence that, in the near term, cyber criminals will treat Bitcoin as another payment option alongside more traditional and established virtual currencies which they have little reason to abandon. The FBI assesses with low confidence, based on current user and vendor acceptance, that malicious actors will exploit Bitcoin to launder money.”
• HSBC says Virtual Currencies Will Go Mainstream In 3-5 Years – HSBC’s global head of e-channels strategy and innovation, Andrew Davis, stated that he believes that virtual currencies are going to enter the mainstream soon. “We have a planning assumption that virtual currencies will become mainstream in three to five years,” Davis said. “One of the reasons why we need to reach a view two to four years out is to influence our decisions around enterprise architecture, because it doesn’t change very often. How people place value on things won’t just be with hard currency in the future and we’re already seeing micro-currencies emerge around the world.” Although Bitcoin itself was only mentioned by secondary sources, no virtual currency other than Bitcoin is anywhere close to “becoming a normal way of buying goods and services,” around the world, making it highly likely that the HSBC has Bitcoin in mind.
• The Financial Supervisory Authority of Norway Mentions Bitcoin – This report paints Bitcoin in a less charitable light than some of the others. A translation of the pertinent text reads: “Bitcoins can for instance be compared to ‘Monopoly money’ where each single actor buys virtual money called Bitcoin to do commercial transactions in a gated environment of trade. Liquidity in fiat money must always be available if the trade actors wish to exchange from bitcoins to, for instance, US dollars or Euros. At the moment, this system is outside governmental control, and the risk is unknown. The system is virtual and the American government has signalized that they want to remove this system before naive and gullible users become too involved. For such a system to work, it needs a ‘rich’ sponsor.”
• Brazil Whacks Bitcoin Investment Group – In August, the president of the Comissāo de Valores Mobiliários, Brazil’s equivalent of the Securities and Exchange Commission, ordered the administrator of the “Grupo de Investimento Bitcoin” to suspend what the CVM considered to be an illegal investment fund. What the GIB was offering was similar to many other investment opportunities popular at the time: shares which anyone can buy which pay an interest of 12% every 30 days. After the shutdown, operator Leandro Cézar restarted the operation by reclassifying the investments as loans – a subtle distinction, but one which does give depositors more power to go after him if he fails to pay interest – and by not guaranteeing a fixed interest rate. Although the CVM’s ruling makes no difference to Bitcoin itself, it may set a precedent for the legal status of the wide array of Bitcoin-based financial instruments available for purchase on the Bitcointalk forums and the Global Bitcoin Stock Exchange.
• Ron Paul’s Domestic Monetary Policy Subcommittee Hearing – US Congressman and, for a few months, potential Republican presidential candidate, Ron Paul had a subcommittee meet on August 2 to explore the concept of parallel currencies. About 48 minutes into the conference, congressman David Schweikert began talking about the concept of alternate currencies in a variety of contexts. “What happens tomorrow if a handful of our trading partners move to a basket of currencies? Does that actually create a new method of exchange?” Schweikert asked, and other topics such as contracts which require payment physically using US dollars but peg the value to gold were brought to the table. At one point (49:10), another congressman off-screen mentioned Bitcoin by name. Although Bitcoin itself was mentioned only briefly, the hearing provides clear evidence that the idea that the monetary landscape is changing is one that is understood by many beyond the internet fringe, and is something which at least some government officials have already accepted as a reality.
• Mitt Romney Blackmailed for Bitcoins – on September 5, an anonymous individual posted a message on Pastebin claiming to be in possession of all of Mitt and Ann Romney’s tax records for several of the most recent tax years, demanding $1 million in ransom, to be delivered in bitcoins. The letter stated that an encrypted form of the documents had been sent to all major media outlets, and the Secret Service confirmed that a letter as well as a flash drive containing encrypted files had been received at and subsequently confiscated from both Republican and Democratic party offices. Hustler’s Larry Flynt offered to pay the entire million, but by the end less than $50 had been contributed, and no information was released. Since then, the SEC has started investigating the blackmail, but as far as is public knowledge no leads on the perpetrator have yet been found.
• Finnish Central Bank Agrees Bitcoin is Legal – Bitcoin has made considerable progress in Finland in the past few months, with a veggie burger restaurant chain, a dentist office, a funeral service, soon a movie theater, and many others accepting Bitcoin in Finland. When a reporter for YLE 2, a Finnish TV channel, asked a representative of Finland’s central bank what the legal status of Bitcoin was. The representative replied (3:40), “There are no guarantees that bitcoins can be exchanged back into official money. Such guarantees don’t exist in unregulated virtual currencies such as Bitcoin.” When the reporter asked “But isn’t it illegal?”, the representative replied “Not at all, people can invest in and use any money they prefer. Finland is a free country, after all.”
• AUSTRAC Typologies and Case Studies Report 2012 – Australia’s anti-money laundering association, AUSTRAC, published a report in August describing possible mechanisms for money laundering, and a section of this report focused on digital currencies and virtual worlds. The section argued that “Criminal groups and individuals may increasingly use digital currencies, as opposed to
  online trading of real currency, due to the anonymity some digital currencies provide,” and “these digital currencies present challenges for government agencies in following the money trail.” The report then focused specifically on digital currency exchanges, arguing that the ability to exchange between digital currency and traditional currency offers a convenient way for criminals to break the trail of their illegally obtained funds. The perspective is not a new one, and confirms the general consensus that if there will be an attempt to increase regulation on Bitcoin it will be through the exchanges.
• France’s 2011 Tracfin Report – France’s TRACFIN, or “Traitement du renseignement et action contre les curcuits financier clandestins” (“Treatment of Information and Action Against Clandestine Financial Circuits”, essentially an anti-money laundering association) published a report describing various schemes of money laundering using virtual currencies and corporations located in various financial havens around the world. Among other cases, the report described “the illegal exercise of the profession of banker with a virtual currency with no legal value”. Although the focus of the report was money laundering, the use case which the page described for Bitcoin was in fact a perfectly legitimate one: using bitcoins “to avoid fees associated with currency exchange and monetary transfer” between the Euro zone and entities outside the Euro zone using US dollars.
• New Hampshire Deputy Secretary of State Okays Bitcoin – Many people within the Bitcoin community have heard that Mark Warden, an incumbent and candidate for State Representative in New Hampshire, is accepting Bitcoin for donations. At first, there was considerably legal uncertainty about the offer, and most people now agree that the first iteration of Warden’s attempt at accepting bitcoins, putting up a donation address for anyone to send bitcoins to just like Wikileaks does, was in fact illegal, due to the anonymity of the procedure. Mark Warden himself soon agreed, returning all of the funds that had been sent to the addresses from which they came. Then, however, Warden created a new donation page, presenting a more conventional BitPay merchant form, which asks for personal information like name and physical address before providing a donation address. What many people do not know is that when Warden asked the New Hampshire Deputy State Secretary if what he was doing was acceptable, the Secretary said yes. As long as donations are accompanied by the donor’s name and address and contributions are only acceptable from US citizens and permanent residents, there are no problems accepting Bitcoin for political donations at least in New Hampshire. Although no government confirmation of this has been published, Warden confirms that this happened, and links to this announcement on a Bitcoin forum through a post on his Twitter account. Since then Jeremy Hansen, an independent candidate in Vermont, has started accepting Bitcoin donations as well, and Josh Jones, the creator of Hansen’s donation system, has made it open for any politicians, or other charities, to use it as well.
• Lockheed Martin Wants Someone Experienced in Unconventional Money Transfer, like Bitcoin – A job posting by Lockheed Martin, an American global aerospace and security company with strong ties to the US military, asking for a “Counter Threat-Finance Analyst” was discovered on LinkedIn very recently. The job description read “Analysts should also have financial investigatory/forensic accounting experience in non-traditional arenas including drug money laundering, Sharia-compliant banking, terrorist finance, informal and formal money transfer mechanisms (hawala), trade based value transfers, and parallel reconstruction. Knowledge of emerging alternative and mobile payment methods is also desired (Bitcoin, Secondlife, etc).” The general theme is similar to that of the monetary policy subcommittee hearing; the interest is not so much in Bitcoin specifically, but in emerging methods of money transfer as a whole.
• SEC Investigates Bitcoin Savings and Trust – About a month after the Bitcoin Savings and Trust Ponzi scheme shut down, Philip Moustakis, an investigator from the United States’ Securities and Exchange Commission sent out email messages to some prominent individuals who were connected to BTCST’s operator pirateat40 asking for information for anyone who invested in BTCST and has information on the scheme to contact him by email or phone. However, the scope of Moustakis’s involvement was limited. One person who talked to Moustakis by phone wrote: “Here is the deal. This is NOT a criminal investigation. This is a civil action. Philip is essentially on a fact finding mission. At the end of this fact finding he has to present the FACTS to the Commissioners and they decided if there is enough evidence to make a case against Trendon Shavers. If there is not enough evidence, Trendon Shavors [possibly the real-world identity of pirateat40] remains on the Beach in Mexico spending what remains of your Bitcoins.” So far, the SEC has not followed through on any civil action against pirateat40, and there is a chance that there will never be enough information to find him to make the case.
• BitInstant Introduces Bain Capital to Bitcoin – Charlie Shrem and Erik Voorhees represented BitInstant (and by extension Bitcoin itself) at the Money 2020 conference in Las Vegas from October 22-24, which focused on emerging and innovative financial services. BitInstant managed to get a booth directly next to that of PayPal, and Charlie Shrem reports that the president of Bain Capital, a firm now famous for its connection to US presidential candidate Mitt Romney, had breakfast with him and Voorhees, and responded very positively to Bitcoin when the two introduced the currency and the Blockchain mobile Bitcoin client to him.
• European Central Bank Report – On October 29, the European Central Bank released a report entitled Virtual Currency Schemes. The report is by far the most detailed government examination of Bitcoin to date, as nearly a quarter of it deals specifically with Bitcoin. It contains a detailed technical description of how Bitcoin works, an examination of Bitcoin’s economic background including the now famous acknowledgement that “the theoretical roots of Bitcoin can be found in the Austrian school of economics”, and a description of the risks that Bitcoin poses to central banks. The report concludes that while volume is low it is not a threat to price stability, and although it could make it more difficult for law enforcement authorities to locate criminals due to its anonymity properties “practically identical problems can also occur when using cash;” however, Bitcoin may pose risks to its users due to its lack of legal status and could have a “negative impact on the reputation of central banks”. All in all, a review by BitInstant’s Erik Voorhees called the report “generally, very good.” However, others are less optimistic. The section on Bitcoin ended by recalling that in June 2011 two US senators had expressed their concerns about Bitcoin and its ability to allow people to more anonymously purchase and sell illegal drugs, and claimed that “further action from other authorities can reasonably be expected in the near future” – a phrase that some have interpreted as a foreboding hint of what is to come.
• Italian Gnosis Report – On October 29, Gnosis, a magazine published by the Agenzia Informazioni e Sicurezza Interna (Italy’s domestic intelligence agency), released an article entitled “Bitcoin: Currency of Cyberspace”, describing Bitcoin in as much detail as the European Central Bank’s report. The report touches on Satoshi Nakamoto and the possible meanings of his name, Bitcoin’s technical characteristics and the currency’s economic model, once again giving credit to Bitcoin’s Austrian-economic roots with the statement that “decentralization of Bitcoin is an added value for the money, due to the fact that it is not affected by any possible economic and financial instability that can be traced to the behavior of central banks (which happens almost systematically for other currencies which are legal tender).” The report even discusses Bitcoin Magazine itself, claiming that “the magazine is a tool able to transmit a message to the masses clearly and precisely: there is a payment system which is secure, confidential, and not subject to the uncontrolled costs of banking and financial intermediation. It is also a way to spread the culture of electronic money, which is essential to sensitize the masses to its use.” However, although the report did portray Bitcoin in a threatening manner in several places, it was largely neutral to positive to Bitcoin in tone, ending with the words “As Abraham Lincoln once said, the best thing about the future is that it comes one day at a time. Confident we wait…”

Although the reports are, for now, still few and far between, the New Hampshire decision and the statement by the Finnish Central Bank undoubtedly represent significant milestones for Bitcoin acceptance. Currently, there are two ongoing court cases relating to the Bitcoinica situation which may lead to further legal decisions when they are resolved, although it remains to be seen just how much the cases will actually involve the issue of the validity of Bitcoin itself. Nevertheless, over the past two months, the amount of government attention on Bitcoin around the world has grown considerably. The ship of the government and corporate establishment may be slow to steer, but a growing number of signs suggest that at least parts of it are finally coming around.

Image by cometstarmoon of Flickr.

  
 

Mihai Alisie (left) conducting an interview with Roman Shtylman (right), the founder of Bitfloor, to be published in an upcoming article.

[divider]

Bitfloor, a New York based Bitcoin exchange, is now back up and running after a thief stole $250,000 worth of Bitcoins^[1] from a backup on one of its servers. Roman Shtylman, the founder and operator of Bitfloor, wrote a blog post^[2] promising that he is still working to return users Bitcoin funds, but that it was important to get the exchange back up and running quickly so as to not erode confidence in the continuation of the exchange any further.

Currently, any Bitcoin balances held prior to the hack are on “hold” status within the exchange. They cannot be traded or withdrawn.

The plan to return users funds currently rests on the profitability of the exchange – as profits are generated, Shtylman plans to distribute some or all of them towards releasing the Bitcoin balances currently on hold. Each user will have the same percentage of their balances released any time a dispersal is made.

Shtylman also mentioned he was pursuing potential options with investors to pay back users sooner rather than later, though no specific timeline was given in either case.

The security of Bitfloor has reportedly been heavily solidified. No longer will any customer funds be risked in a hot wallet on the server – 100% of customer funds will be placed in cold storage. Bitfloor will still operate a hot wallet, but it will only risk its own funds, not any customer funds. The REST API has been bulletproofed with a secondary passphrase to prevent unauthorized withdrawals from customer accounts. Bitfloor’s servers now reside in a PCI-compliant data center, with disk encryption making the drives useless to anyone attempting a theft while physically at the location. And, perhaps most importantly, all backups are now encrypted.

Roman ends his blog post with the following message to his customers:

\”“I am committed to keeping Bitfloor alive, strong, and growing for the bitcoin ecosystem. I would like to say thank you to all of the support I have received pressing for the return of Bitfloor and the service it provided. Bitfloor will continue to excel in both service and quality as it goes forward.”\”

Do you have Bitcoin balances on hold at Bitfloor? Do you expect Roman to keep his word and pay them back? Post in the comments below, or send your side of the story to [email protected].

Sources

1. http://bitcoinmagazine.com/bitfloor-hacked-250000-missing/
2. https://plus.google.com/109620439233076225324/posts/bLJRDHApjSP

 

Following the success of the first Bitcoin conference in 2011 in Prague, another conference organized by the Bitcoin Consultancy has just finished in London. This conference was much larger than the previous, with hundreds of attendees present, and individuals prominent in a wide variety of fields shows up to speak. A wide range of topics was discussed, ranging from Bitcoin itself to open source projects like mesh networking and 3D printing and even underlying social and political themes.

Particularly unprecedented was the level of interest coming in from outside the Bitcoin community itself. Although the last conference in Prague did bring in Pirate Party founder Rick Falkvinge, Russia Today journalist Max Keiser and electronic payments expert David Birch, the amount of interest coming from outside this year was much greater. Almost as many speakers at the conference came from the Linux community as from Bitcoin, and there were many speakers who were heavily involved in both. Other open source projects were also represented, and the conference even featured the founding father of the free software movement itself, Richard Stallman. This level of outside involvement, combined with the highly interactive nature of the conference, created an opportunity for the world of Bitcoin to integrate into the larger free software, cryptography and free culture community as a whole, and paves the way for greater cooperation between all of the various movements that are seeking to use technology to empower the individual in the digital age.

Among the speakers were:

• Richard Stallman – creator of the GNU project, a key precursor to modern GNU Linux operating systems, and world-renowned free software advocate
• Dennis Roio (Jaromil) – long-time activist within the free software movement, and significant contributor to the development of multimedia applications for the Linux platform
• Amir Taaki – the main organizer of the conference
• Birgitta Jonsdottir – a member of the Icelandic parliament largely responsible for bringing the country to the top of the Press Freedom Index in the world.
• Tony Gallippi – CEO of BitPay, the Bitcoin merchant platform which handles payment processing for over 1000 Bitcoin-accepting merchants
• Mike Hearn – the primary developer of BitcoinJ, a Java implementation of Bitcoin, who is also involved in researching the idea of cryptographic contracts
• Caleb James Delisle – developer of the cjdns mesh networking system
• Cody Wilson – founder of Defense Distributed, a group that is attempting to design functional 3D printable firearms for self-defense
• Mihai Alisie – editor-in-chief of Bitcoin Magazine itself

A more complete list can be found [here](http://www.bitcoin2012.com/speakers). The Bitcoin Magazine team has taken a large number of pictures and exclusive interviews, and some of these will become available in an upcoming issue of the magazine.

 

After months of stagnation, the virtual goods trading forum Ogrr has just announced a move that will dramatically increase the size of its userbase: a merger with MMOExchange.net. Ogrr, with 3611 users currently, will be merging in 14643 users of MMOExchange, creating a new combined community over 18000 users strong.

The transition is designed to be smooth. MMOExchange itself will soon be shutting down, but all MMOExchange accounts will be transferred over to Ogrr in their entirety. After the switchover happens, which is scheduled to take place on the 22nd or the 23rd of September, MMOExchange users will be able to log in to Ogrr using the same username and password. The first time they log in, they will be taken to a setup wizard that verifies their MMOExchange account. If an Ogrr account exists with the same user name, MMOExchange users will be required to change theirs, but otherwise everything about the account will stay the same; verification levels, donation tags and even threads and posts will all be transferred over. Users who have been ignored or banned should not count on a fresh start either; undesirable statuses and labels will be carried over as well.

MMOExchange users will also gain access to the key feature that makes Ogrr what it is: Bitcoin integration. Ogrr originally launched last December when Jesse Powell, then using the trading forum d2jsp, was scammed for 20,000 units of d2jsp’s centrally managed internal currency, “forum gold”. When he reported the incident to d2jsp’s moderators, he was forced to pay another 20,000 forum gold to the scammer as a penalty for making an unsubstantiated claim. Powell decided that he had had enough of d2jsp, and resolved to make his own trading forum instead, this time using Bitcoin as the default currency. Although users are free to finalize payments using whatever mechanism they want, a Bitcoin wallet is integrated into the site, and the site also offers an escrow mechanism to protect buyers by ensuring that sellers cannot run away with the money before the buyer signals that the transaction has successfully been completed.

MMOExchange is largely oriented toward gamers playing the MMO RuneScape; the forum currently shows over 300,000 posts on the RuneScape board, compared to a mere 1148, 4085 and 16069 for Diablo, World of Warcraft and Other, respectively. Ogrr, on the other hand, sees its greatest volume with Diablo. However, Ogrr’s user base is much more diverse, and over a dozen games have their own subforum. Even if the new forum will predominantly be focused around RuneScape, the two communities are bound to be a great complement to each other. Many of the game-specific groups on each community, currently too small to be self-sustaining, will gain new life as their much larger counterparts are merged into them.

Altogether, the combined forum is significant not just in the video game trading community, but also to Bitcoin itself. A side-by-side comparison of various metrics of the Bitcointalk forums and MMOExchange (two links) shows that MMOExchange is over half as large as the forum that has remained by far the largest in the Bitcoin community up to this date. By the total number of posts, MMOExchange is just under half of Bitcointalk’s size, with 578,665 posts to Bitcointalk’s 1,137,508. By the average number of users online, MMOExchange’s 213 per day is nearly two thirds Bitcointalk’s 348. By the number of posts per day, however, MMOExchange’s 1023 is almost as large as Bitcointalk’s 1154. What the numbers show is that once MMOExchange merges with Ogrr, the forum that will arise as a result will be large enough that it may prove a serious competitor to Bitcointalk itself; Bitcointalk users who are unhappy with the quality of the forum’s community will finally have another option.

It should also not be understated just how significant a step forward this is for Bitcoin adoption as well. Virtual goods trading is arguably a perfect market for Bitcoin; with digital goods, traditional methods of payment offer no protection from chargebacks. Also, in most online games, prices are highly variable, as negotiations must often be done for each individual item and even with commodities, new patches and updates can change the value of a good by an order of magnitude – exactly the kind of market that is best at dealing with the volatility introduced by Bitcoin itself. With the acquisition of MMOExchange, Ogrr has a significant opportunity to secure for Bitcoin a strong niche and open the doors to widespread Bitcoin adoption in the area of massively multiplayer online gaming as a whole.

 

The WalletBit website and service came under DDOS attack on September 15, 2012, completely disabling the services as of around 9:00 PM GMT. The attackers sent the following note to Kris Henriksen, the services’ founder, creator and CEO:

Hello,

Your service is currently under our control, and will remain so until you’ve fulfilled our request.

All you need to do is settle 1000 BTC to the following receiver: 1PBvDW74Qm7pSFMfi5h4AgyDLGcb86LtTg

Should you ignore this message, then keep in mind that we’ll have no problems keeping your service.

You have exactly 24 hours to initiate the money and get back to us, and if you fail to do so, then we’ll keep your service offline for an additional week.

Good luck!

Kris refuses to give in to the demands, sending the following response back to the attackers:

Hi Yuri,

I can see that you have the possibility of bringing down my network provider and keep it down.

The thing is, I don’t have 1000 BTC and neither do WalletBit in liquidity. So I am unsure how we are going to come to an agreement or solution.

I know this way of getting bitcoins most be very efficient, but maybe there is another way?

Awaiting your response.

Regards
Kris

It remains to be seen whether the attackers will follow up on their threat to continue crippling the service for a full week, or if they will divert their resources to another target. The ransom has subsequently been lowered to 150 BTC after the attackers received Kris’ response, but Kris still refuses to give in to the attacker’s demands.

The attack appears to be a SYN flood style distributed denial of service, and large enough to defeat WalletBit’s existing redundancy.

WalletBit is a Bitcoin payment processor, allowing merchants to easily accept Bitcoins for payment and collecting the relevant customer information.

ResponsePay is the mobile solution for utilizing WalletBit and BitInstant, and includes features that allowing users to send Bitcoins via email, SMS, or Bitcoin address, scan QR codes, and create location-based coupons.

At this time, BitPay also appears to be under a similar attack, but have not been available for comment.

Would you give in to the ransom, or wait out the attack? Leave your comment below, or send it to [email protected].

 

BitPay first opened its doors in the summer of 2011, seeking to help solve what founder Tony Gallippi believes to be one of the greatest problems preventing consumers and merchants from using Bitcoin: usability. The company’s main offering is a payment processing service, which merchants can sign up for to provide customers wishing to pay them in bitcoin with a convenient interface to do so similar, but usually much simpler, than that provided by traditional merchant services like PayPal. For a small additional fee, BitPay also provides the option for merchants to have any bitcoins that they receive instantly deposited into their bank account, allowing them to bypass Bitcoin price fluctuations entirely.

BitPay has grown rapidly since its inception, and has added a number of new offerings in the past 12 months. Though independently of BitPay itself, in December 2011 Gallippi announced LoveBitcoins, a Bitcoin adoption campaign that set for itself the audacious goal of bringing to Bitcoin 1 million new users. In January, BitPay released a plastic card which one can carry to allow anyone to pay them simply by scanning the card with a smartphone Bitcoin wallet, while BitPay’s back-end automatically converts the bitcoins and immediately deposits money into the owner’s bank account. The core merchant system has also added a shopping cart, smartphone-based checkout mechanisms, and customized solutions for use cases like event tickets and taxis and limousines.

But BitPay truly started to pick up this spring. Transaction volume more than quadrupled each month from March to May, and BitPay finally broke out into the Bitcoin mainstream in June, when Butterfly Labs announced that they would be releasing a new line of Bitcoin mining computers based on a technology known as ASIC which will be dozens of times faster than anything available at the time. Butterfly chose BitPay as their payment processor, and BitPay received considerable media attention after their payment processing service handled a total of over $250,000 worth of transactions in a single day after pre-orders for Butterfly’s new machines opened up for sale. Over six months, BitPay has grown from almost nothing to being the leading platform for Bitcoin e-commerce, used by everything from retail stores to political donations and even Bitcoin Magazine itself. Now, BitPay is celebrating another important milestone: one thousand merchants.

1. Three to four months ago, you gave some figures that showed extremely rapid growth for BitPay – $10,000 transaction volume in March, $40,000 in April, $170,000 in May and a record of $250,000 in one single day in June when Butterfly Labs released their ASIC machines. How much has the volume of your business grown since then?

Our business continues to increase. After the big single-day record, our business is running above $550,000 in monthly transactions. Probably what is more exciting is the much larger number and diversity of our merchants. Since we launched our new website at the end of August, the number of merchants we have accepted has exploded by 30% in three weeks.

2. What kinds of businesses and what specific industries make up the bulk of your client base? Are there any categories that either struck you or would strike the Bitcoin community as being particularly surprising?

The majority of our merchants are eCommerce businesses. Whether they are shipping merchandise or just delivering a digital product or service, the businesses who accept payments online see the most value in accepting bitcoin in its early stage. The category where we get many merchants is in IT services, which would cover webhosting, domain registration, and internet access.

3. Are there any industries which are not yet well represented in Bitcoin business but you feel are ripe for adoption? What is BitPay doing to target them?

The one that seems ripe to widely adopt bitcoin is VPN services. We have a couple dozen merchants that offer VPN services, which is a service designed for internet privacy. Using bitcoin as a private payment method would make perfect sense, both for the business and for the customer.

4. In your speech at the Bitcoin conference in Prague last November, you identified three factors that were preventing merchants from adopting Bitcoin: first, the catch-22 issue that no customers were asking for it, second, the problem that it’s too hard to buy bitcoins, and, third, that the price is too volatile. In the ten months since then, how much do you feel that Bitcoin has progressed in each of these areas?

Progress is being made in all three areas. We are starting to talk with larger and larger companies about accepting bitcoin. Bitcoins are becoming easier to purchase, but the price volatility for the buyer still remains. This is where wallets and exchanges can better work together, to let users load their wallet with their local currency, and keep their balance and purchasing power in their local currency. Then, only buy the bitcoins at the moment they are needed to send a transaction. On the receiving side, we already insulate our merchants from the volatility by guaranteeing the exchange rate, and we automatically convert the incoming bitcoins to their local currency.

5. What else could the Bitcoin community be doing to address these concerns?

There are some brilliant people in the Bitcoin community, and if the problem is big enough, someone will take the initiative to solve it. This is the beauty of bitcoin. You don’t need to ask your boss, if you see a need to solve a problem, you can just build it yourself.

6. Aside from your work with BitPay, you have done considerable work in the effort of promoting Bitcoin to merchants and ordinary people around the world. What, in your experience, is the single most compelling argument to convince the average merchant to care about Bitcoin?

Merchants start to see the value that bitcoin brings once they understand one basic concept – credit cards were never designed for the internet. Credit cards were designed in the 1960s, and meant to be presented and used in person. Accepting credit cards over the internet is a risky business. When thieves get hold of stolen credit cards today, they don’t go shopping at their local electronics store, because there are security cameras everywhere. They go shopping online. The amount of payment fraud is staggering, and costs businesses as much as $100 Billion per year in chargebacks and disputes (source)

7. Aside from your basic payment processing system, BitPay has experimented with adding features targeted to very specific use cases and businesses. You have a Bitcoin deposit card that allows anyone with a smartphone wallet to pay into your ordinary bank account, you have a product offering scannable tickets for events like movies, plays and concerts, and you have a page dedicated to taxis and limousines. Has this side of marketing approach been successful, or has a more generic strategy of focusing on one core product proven to be the better way forward?

It has been successful in certain cases, and we would be interested in doing more branding like this. Bitcoin is a whole new concept and difficult for many business owners to grasp. The idea is to try and connect with a certain type of business, and make a simple bitcoin payment system just for their needs, without too many confusing options that they don’t need.

8. What are BitPay’s next steps for the near future? Are there any specific areas in which you are planning to expand, or any new services which you plan to introduce?

We are continuing to innovate on the core platform and add new features. Our plans for growth are mainly through our Integrator network. This would give programmers around the world the opportunity to help merchants in their local area get setup to accept bitcoins with BitPay, rather than try to build a do-it-yourself solution. We believe that tech support is best handled as close to the merchant as possible, so we would share a percentage of the fees we earn from these accounts with the local integrator. The Bittiraha.fi group in Finland is a great model for other teams around the world to emulate.

9. Anything else you would like to add?

Bitcoin Magazine is a quality product, and it really helps us sell bitcoin when we meet with businesses in person. Keep up the great work!

 

An anonymous poster published a message^[1] claiming to be in possession of all of Mitt and Ann Romney’s tax records for several of the most recent tax years, demanding $1 million in ransom, to be delivered in bitcoins. The letter stated that an encrypted form of the documents had been sent to all major media outlets. The Secret Service confirmed^[2] that a letter as well as a flash drive containing encrypted files had been received at and subsequently confiscated from both Republican and Democratic party offices.

The perpetrator threatened that if a specified bitcoin address does not have a net value of at least $1 million at some point between now and September 28, the encryption key to the documents will be released, opening the records up for all to see. If the money is received, “the keys to unlock the data will be purged and what ever is inside the documents will remain a secret forever.”

The blackmail message has another twist: as the message itself describes the rules, “And the same time, the other interested parties will be allowed to compete with you. For those that DO want the documents released will have an different address to send to. If $1,000,000 USD is sent to this account below first; then the encryption keys will be made available to the world right away. So this is an equal opportunity for the documents to remain locked away forever or to be exposed before the September 28 deadline. Who-ever is the winner does not matter to us.”

So far, the two addresses combined have received a combined value of over 1 BTC, some of it undoubtedly from enthusiastic individuals who are eager to see what Mitt Romney’s tax accountants have been up to. However, it is important to note that there is no proof that the information has been leaked at all. The files could easily be random data and the extortionist could simply be a clever fraud sitting there, waiting for eager activists to donate money to a pool that they think is going toward the goal of financial transparency. A statement by PricewaterhouseCoopers, a firm mentioned in the letter, stating^[3] that there was no evidence that any unauthorized access was made, lends further credence to this possibility. However, the possibility that such a fraud will lead to any significant donations is exceedingly small. No Bitcoin charity to date has managed to raise anything more than about $40,000. Given that there is not even a money-back policy in case the funds do not reach their goal, the ultraminiscule probability that the donations would reach $1 million becomes a self-fulfilling prophecy.

Even if this particular case of Bitcoin extortion turns out to be a hoax, it is important to keep in mind that the next one may not be. Transferring money has always been the hardest part of any extortion operation. An easy-to-use and nearly untraceable method to do so may increase the ease of such a means of making profit considerably. Extortion will not always come in the form of something as trivial as blackmail either; a sniper asking a billionaire for a fee of $1,000 per day if he wants all of his family to be able to venture outside of a secure bunker and live is entirely possible. Assassination markets have been around as a science-fiction concept for decades, but the sheer ease with which money can now be transferred is bringing such ideas far closer to reality than was ever imagined possible.

Perhaps the only option that society may have is to simply accept this new reality, but choose to see the good as well as the bad. Thanks to Bitcoin, sites like Wikileaks can now receive anonymous donations even if the entire traditional payments bureaucracy has turned against them, helping to promote government and corporate transparency at a level that was never before thought possible.

Although the tools of communication and financial privacy are granting the small thieves an unprecedented ability to carry out their business with impunity, the large thieves that have so far been able to hide in the bureaucratic shadows of governments and large corporations are finding themselves more and more thrown into the limelight. This is the world we are moving towards: one that is perhaps more anarchic, and in some respects more dangerous, but one that is at the same time more just.

Sources

1. http://pastebin.com/1j1yzQ9S
2. http://nashvillecitypaper.com
3. http://www.cnbc.com/id/48916562

 

Bitfloor, the fourth largest exchange dealing in US dollars, has just announced^[1] that it has been hacked, and the service has taken a loss of 24,000 BTC, worth about $250,000 at the time of the theft. As Roman Shtylman, the founder of Bitfloor, describes it, “last night, a few of our servers were compromised. As a result, the attacker gained accesses to an unencrypted backup of the wallet keys (the actual keys live in an encrypted area). Using these keys they were able to transfer the coins. This attack took the vast majority of the coins BitFloor was holding on hand.” As a result, BitFloor has paused all exchange operations and, depending on the effect that this will have on BitFloor’s finances, BitFloor may take one of two options. They may either take the loss and continue running in an attempt to eventually earn the money back or, in the worst case, shut down entirely and begin an account partial refund process out of the available funds.

The unencrypted backup that allowed the thief to carry out the attack was made when Shtylman made a manual upgrade earlier and put the data into an unencrypted partition on his disk; Shtylman has so far declined to comment further on the details of the attack, saying that “my current focus is on the future and not the past.” As Bitcoin security experts point out, Bitfloor made not one but two errors that were both necessary to lead to such a severe loss; the first, leaving data stored unencrypted, was an honest and perhaps unavoidable mistake, but it would not have had nearly as much of an effect if there had not also been the second error of leaving so much money in an online-accessible “hot wallet”. Since the Bitcoinica Linode theft, in which an unknown attacker made off with $222,000 worth of bitcoins from Bitcoinica’s hot wallet in March, it has been generally understood that any Bitcoin-holding service should keep the vast majority of its funds in “cold storage”, a term referring to a setup where the private keys never touch any computer that is accessible from the internet.

ThomasV, the lead developer behind the Electrum client, lists some security recommendations for Bitcion exchanges here; his seven key points are:

1. Don’t store more bitcoins outside of cold storage than you can afford to lose and remain solvent. This ensures that your business will be able to financially survive a hack.
2. Deposits should be sent to cold storage addresses directly.
3. Transfer from cold storage to hot storage should be manual only.
4. An attacker should not be able to disguise a theft as a series of withdrawals from customers.
5. If a withdrawal request exceeds the amount available on the hot wallet, the customer should have to wait. Receiving coins 24 hours later is better than not receiving one’s coins at all.
6. Clone your database to a place where an attacker cannot irreversibly modify or delete it from the server.
7. Send digitally signed account statements to customers regularly, using a key that is not on the public server.

Taking greater care to protect one’s server from being hacked in the first place is of course the best defense. However, any single layer of defense will invariably make mistakes, and sound Bitcoin service security requires a strong and detailed strategy for mitigating losses based on a defense in depth. Not following proper security procedures may mean seeing your prospering Bitcoin business meet a sudden and untimely end. Given the amount of information and experience available on such matters, not taking the most trivial standard precautions may even open one up to liability due to gross negligence. No matter how big, small, young or established your Bitcoin business may be, it is better to be prepared earlier rather than later.

Sources

1. https://bitcointalk.org/index.php?topic=105818.0&action=printpage

 

Recently, BitInstant CEO Charlie Shrem announced that his company would be releasing a new product: a Bitcoin prepaid debit card. The product is scheduled to come out in six to eight weeks, and would cost $10, although Shrem announced that the first thousand cards would be given out for free; for those who are interested the signup form is already available. The concept of a Bitcoin card is nothing new; they have existed in some form for months. However, with all of the previous options the costs have so far been prohibitive; beyond the initial cost of the card itself, deposits could cost anywhere from 4% to as high as 10%. BitInstant’s card, on the other hand, once loaded will cost a mere 1-1.49% to deposit, exchange fees included. What makes this possible is that unlike any of its competitors, BitInstant is working through a Mastercard banking partner directly, with no intermediaries.

Almost immediately after the announcement, however, there arose some confusion in the Bitcoin community as Mastercard came forward to deny¹ that such a card was in the making. Before being able to issue a card with a MasterCard logo on it, both the issuer and its banking partners need to go through a rigorous screening process, a MasterCard spokesperson explained, and “at the moment, BitInstant has submitted no documents to MasterCard, and is not even present on their system.” However, Shrem quickly clarified the situation², explaining why MasterCard made such a claim: BitInstant was not working with MasterCard directly, as the card would be made through an international banking partner, and the submission to MasterCard would not take place until the preparations with the banking partner were complete.

Aside from its cost, BitInstant’s card will have two other advantages over its competition. The first is its internationality – BitInstant’s card will be usable anywhere in the world – except perhaps, as Shrem points out, “North Korea I think.” The card itself is denominated in USD for banking purposes, although BitInstant will be able to make the card’s value rise and fall with the Bitcoin price to simulate a constant Bitcoin balance if the customer desires it. However, currency conversion fees are low; some currencies will be able to get away with no extra fees at all, while others may have an additional fee of 1% added on – considerably less than that charged by many other credit cards, whose intermediaries tack on much higher fees³ on top of the 1% charged by Visa and Mastercard. The second advantage is its convenience. The card can be reloaded simply by sending money to an address, and comes with a QR code that allows smartphone Bitcoin wallets to send funds to that address directly on the card itself.

The one disadvantage that the card has is that it is not anonymous – BitInstant intends to comply fully with the strict anti-money laundering (AML) and know-your-customer (KYC) standards that providers of prepaid debit cards are required to follow. Those who wish for greater anonymity may instead turn to an alternative card released by Bitcurex which has a higher initial cost of $30 and a deposit limit of $3500, but does not require any identification to order.

With the low fees that it has, BitInstant’s debit card represent another step in a growing niche use for Bitcoin: that of a behind-the-scenes intermediate currency for transferring the money that most of us already use every day. International money transfer of the sort typically carried out by intermediaries like Western Union and Moneybookers is one example; some people have been finding it faster, safer and cheaper to send bitcoins⁴ from one country to another by converting in and out of Bitcoin through local exchanges on both sides than by dealing with the bureaucratic fees and delays of sending it internationally via traditional means. Now, BitInstant is expanding this niche into another market: the prepaid debit card industry. Prepaid debit cards are a growing market⁵, and Americans loaded a total of $37 billion onto prepaid cards in 2011 alone. So far the prepaid card industry has been burdened with high fees, and reloading them has always been a cumbersome process. Now, thanks to BitInstant, this may all change. Unlike so many other Bitcoin-based services that attempt to replicate businesses that already exist in the world at large, BitInstant’s prepaid debit card is actually superior to much of its competition, and may even be a competitive option to someone who does not yet have any personal or ideological interest in Bitcoin whatsoever.

It should be clarified that to such a consumer the card’s advantage is not fees. Beyond the 1.49% charged by BitInstant, such a consumer would need to pay exchange fees as well as exchange spreads – the difference between the price of the cheapest bitcoins that are available to be bought on the exchange (the “ask” price) and the higher price at which someone else has established that they are willing to buy them (the “bid” price). In total, someone who uses BitInstant’s card in this way may have to pay a total of 3.5-4% for the round trip, higher than even the sum of the various monthly, reload and conversion fees that card providers tend to tack on⁶

But low fees are not what prepaid debit card users are looking for. Even the cheapest prepaid debit cards have higher fees than traditional debit and credit cards, so for debit card users there are other factors that dominate. One article on bankrate.com describes the case for prepaid debit cards with four arguments. First, debit cards help curb spending, as it is impossible to have a negative balance. Traditional debit cards have the same effect, but are often unusable for online purchases, making the prepaid variety, which mimic credit cards, more attractive. Second, prepaid cards allow you to keep your money safe when travelling. If your card is stolen, your losses are limited to the value of the card. Third, teaching kids about money – prepaid cards can easily be used to give your children a controlled allowance. Incidentally, that is a purpose for which Bitcoin itself shines too, the main difference between the two being that Bitcoin offers the child more privacy. Fourth, prepaid cards offer more privacy, as merchants do not receive all of the customer’s personal information when a transaction is made, and some cards can be bought without anyone being able to link you to the card at all.

It is the second use case in which BitInstant’s card truly shines. Existing prepaid debit cards often have currency conversion fees as high as 2.5%⁶, making them expensive to use while travelling, but BitInstant’s card charges a mere 0-1% for the service, making it a perfect fit. If privacy is your primary concern, Bitcurex’s debit card may be your best bet, although BitInstant’s card fares decently in this regard as well; even though BitInstant itself will have access to your personal information, the merchants who you transact with will not.

Of course, for those who are already avid Bitcoin users, BitInstant’s card offers even greater advantages. It essentially turns your Bitcoin balance into a fully fledged bank account, allowing you to live almost entirely “off the grid” of the traditional banking system. The card offers a convenient way of “cashing out” of Bitcoin at any time, complementing the services that BitInstant offers to facilitate people instantly “buying in” and allowing those who wish to live a more halfway house lifestyle a seamless experience in converting from one to the other. Employers interested in paying their employees in bitcoin will now suddenly find their lives much easier; while before Bitcoin could only be used to buy a limited range of products which employees may or may not need, potentially requiring them to undo the employer’s hard work in buying bitcoins with their own hard work of converting them back to cash, now the currency can literally be used to buy almost anything. And the benefits will extend far beyond the prepaid debit consumers and employers who may be interested in such an offer; the growing use of services like BitInstant’s card may be what provides the final push to bring Bitcoin to critical mass as a free-standing economy of its own.

Sources

1. http://www.techweekeurope.co.uk/news/no-bitcoin-debit-card-90058
2. http://blog.bitinstant.com/blog/2012/8/22/public-statement-regarding-the-bitinstant-paycard.html
3. http://www.bankrate.com/brm/news/cc/20050624a1.asp
4. https://bitcointalk.org/index.php?action=printpage;topic=74952.0
5. http://www.bankrate.com/finance/savings/pros-and-cons-of-prepaid-debit-cards-1.aspx
6. http://www.canadapost.ca/cpo/mc/personal/productsservices/visagiftcard.jsf#prepaid

 

Laying rest to one and a half weeks of suspense, yesterday pirateat40, the pseudonymous operator of the Bitcoin Savings and Trust investment scheme, has officially announced that he is in default¹. BST was a high-yield investment scheme that opened in November 2011² and offered its customers interest rates of up to 7% per week, claiming to be able to offer such returns by “selling BTC to a group of local people” – ie. arbitrage. Since then, the scheme has grown rapidly, and Pirate claims³ (and independent estimates agree) that over 500,000 BTC, or $7 million USD at the time, were deposited in BST at its peak.

For months, the main question that has been asked about the scheme is: is it a legitimate investment? Proponents argue that it is, and justify Pirate’s pseudonymity and secrecy as being necessary to both protect him and prevent others from replicating and diluting the effctiveness of his business model, while detractors believe that Pirate’s unwillingness to further elaborate on the sources of his income is a sign that these underlying sources do not exist at all; in short, that BST is a Ponzi scheme. A third possibility is that BST is itself a pass-through for another Ponzi scheme, such as Sergey Mavrodi’s MMM-2011, although that possibility has become a remote one since MMM defaulted in June and BST continued operating for two months afterwards.

The first shock to BST came on August 14, when Pirate lowered the maximum interest rate on his accounts from 7% to 5%⁴. Whether the scheme was legitimate or not, it was clear to everyone that an effective interest rate of 3313% was unsustainable and Pirate would have to reduce interest rates at some point. And, at some point this summer, the time finally came. At first, Pirate tried to continue his prior rate of growth and keep attracting new investors by attempting to increase investors’ confidence in himself; he announced on July 2⁵ that he, under a newly disclosed supposed real name of “Trendon Shavers”, would be attending Defcon in person on July 27-29, and invited investors and curious Bitcoin users in general to meet him in public – “look at a pirate, eye to eye if you dare”, the forum thread read. There have been no confirmed reports that anyone actually saw Pirate at Defcon, but the announcement alone restored confidence at least for a short time. However, even then, BST was simply growing too large and too quickly to last, and on August 14, Pirate was forced to contain his growing debts by shifting down his gears. However, Pirate’s measure utterly failed in its intent; as Pirate himself describes⁶, “In a perfect world this would allow me to hold more coins in reserve outside the system, but instead it only exponentially increased the amount of withdrawals overnight causing mass panic from many of my lenders.” And thus, on August 17, Pirate was forced to finally shut down.

Since then, following the tradition started by the July 11 Bitcoinica thief donating 100 BTC to a claims fund⁷, Pirate has paid back 106.92 BTC⁸ to one of his depositors, and has only been claiming to make progress toward repaying any others. At first, Pirate promised that all BST depositors would be paid back including interest up to the last hour – a promise which many pointed out would be very difficult to fulfill even for a legitimate business, as he would be accruing over $50,000 USD of new debt every day, but many believed that he would be able to manage the feat. On August 28, however, Pirate announced that he would not be able to pay back his depositors after all, and that he was officially in default¹. He has nevertheless made vague promises that depositors would be partially paid back, requiring operators of so-called “Pirate pass-through” bonds on the Global Bitcoin Stock Exchange to report a list of their customers⁹ to Pirate by Friday if they want to be refunded.

The consequences of this are far-reaching. Almost immediately after Pirate announced BST’s closure, the Bitcoin price ended its three-month long rally after briefly spiking up to a one-year high of $15.4 and began a precipitous decline, losing slightly over half its value over three days⁹ before recovering to what appears to be a stable level at $10-$11. It is unclear if a Pirate default is good or bad for the Bitcoin price; on the one hand, it reduces confidence in Bitcoin as a whole, while on the other hand, it means that many wealthy depositors suddenly have far fewer bitcoins than they thought they would have, and would thus need to buy more (or sell less) to compensate. Many bets have also been made ^10,11 over whether Pirate would pay back; these bets have not yet closed, as the deadline for Pirate to pay in full is still over one week away. In the long term, it remains to be seen how this incident changes both the public attitude on the outside to both Bitcoin itself and the financial freedom that it offers and how the Bitcoin community will perceive any new lucrative Bitcoin investment, legitimate or not, that presents itself in the future. For now, many are relieved that this chapter in the Bitcoin community’s life is finally drawing to a close.

A more detailed version of this article will appear in an upcoming issue of Bitcoin Magazine in print.

Sources

1. https://bitcointalk.org/index.php?topic=82573;action=printpage
2. http://pastebin.com/yH0jr6KY (The original post on bitcointalk.org has since been edited)
3. https://bitcointalk.org/index.php?topic=101339&action=printpage
4. https://bitcointalk.org/index.php?topic=91141.100&action=printpage
5. https://bitcointalk.org/index.php?topic=91252.0&action=printpage
6. http://pastebin.com/VZgm7Dvy
7. https://bitcointalk.org/index.php?topic=93100.msg1029638#msg1029638
8. https://bitcointalk.org/index.php?topic=101942.0&action=printpage
9. http://bitcoincharts.com/charts/mtgoxUSD#rg60zczsg2012-07-01zeg2012-08-30ztgSzm1g10zm2g25zv
10. http://betsofbitco.in/item?id=433
11. https://docs.google.com/spreadsheet/ccc?key=0Ajtx05YrHtIydFVHcGxLOExTbnhqajJLZmlSZUNtM3c#gid=0

 

Some sources report that Icbit may be engaging in hidden market manipulation against their customers’ interests, although there is insufficient evidence to confirm or deny this conclusion. Always tread carefully when trading on the Bitcoin markets.

Ever since Bitcoinica shut down following the hack on May 11, the Bitcoin economy has lacked a way of betting for or against the Bitcoin price at leverage. While it is always possible to buy bitcoins and sell them, what Bitcoinica allowed users to do was to use a small quantity of bitcoins as collateral to hold a much larger quantity of virtual bitcoins or USD, balanced out with a negative balance in the other currency, allowing anyone to realize much higher losses and gains off of a limited amount of capital than can be achieved through simple trading, and also allowing traders to change their positions in any direction instantly without having to wait days for deposits at Bitcoin exchanges to process.

Furthermore, because margin trading allows users to hold a negative quantity of bitcoins, Bitcoinica allowed users to profit when the price dropped – a possibility which many believe had a valuable dampening effect on potential Bitcoin bubbles by providing an economic outlet for traders to express their caution. Almost immediately after Bitcoinica shut down, the three-month period of extreme price stability that had prevailed since mid-February ended, and the Bitcoin price began slowly rising. Some are concerned that without the economic tools that Bitcoinica offered, there was nothing to prevent the current rally from turning into another bubble and crash like that seen last June. Also, margin trading tools have another valuable use: they allow merchants to cancel out the exposure to Bitcoin price movements that they naturally get from holding currency for operational purposes, and with no such service available managing risk for Bitcoin merchants becomes considerably more difficult.

However, for the past several months, a new competitor has been slowly growing to fill the niche: icbit.se. Icbit was first launched in November 2011 with little fanfare, as the original margin trading service, Bitcoinica, was in full swing at the time. Throughout winter and spring 2012, the site continued to slowly and progressively add features, and it was not until July that the number of users started to pick up. Since then, growth is once again at a relative standstill, and the site is processing a relatively steady 2000 BTC per day on its exchange and 1500 BTC per day in the “futures” section, the part that allows Bitcoinica-like margin trading.

The site differs from Bitcoinica in two key ways. First of all, while Bitcoinica dealt directly in bitcoins and USD, allowing users to hold positive and negative quantities of each one, icbit.se accomplishes the same functionality using contracts called “futures”. Technically speaking, a futures contract is an agreement between two parties that one will sell a quantity of an underlying asset to the other at a given price at some pre-determined point in the future. For example, one might have a futures contract between A and B stating that A will sell one bitcoin to B for $13 on January 1, 2013. If the price of a bitcoin is $18 by then, A will be forced to buy the bitcoin on the open market and sell it at the reduced price, taking a loss of $5 that B will receive as a profit. For assets with low storage costs (a classification which Bitcoin fits perfectly), the price of futures closely follows the price of the actual asset, as when the two veer too far apart, it opens an opportunity for anyone to make a profit from arbitrage by buying one and selling the other at the same time.

Icbit allows users to do all of this using a very simple interface. The buying and selling is abstracted away and the future is defined as a “difference contract”: if the price of a bitcoin is above $13 on the expiration date, A simply pays B the difference directly, and vice versa if the price drops below. Buying a future constitutes making a bet that the price will go up, and selling a future constitutes making a bet that the price will go down. Just like at a Bitcoin exchange, to buy a future on Icbit, one can either place an offer himself, which will remain on the orderbook until someone accepts it, or one can match someone else’s offer already on the books. When the order is filled, he and the other party are locked into the contract, and the process is complete. Selling a future follows the exact same process.

It is possible to buy futures with a higher total value than the amount of BTC that you have deposited or sell futures without buying them first – the only limit is a requirement to have enough BTC deposited to be able to pay for a 10% change in the price – similar to Bitcoinica’s limit of 10x leverage. If the price rises or falls enough that your account’s net worth falls below zero, Icbit attempts to liquidate your position by making automatic transactions on the market, and if there are no asks or bids available the algorithm moves to a last resort of closing your futures early, forcing your counterparties to accept a limited, albeit generous, profit.

There is currently only one futures contract sold, “BTCUSD-12.12”, which expires in December, but most users do not wait that long. If one holds a positive number of futures, he can liquidate his position by selling them, reducing his next exposure to zero and unlocking his margin balance, allowing him to immediately withdraw. If he holds a negative number of futures, he can buy futures to cover the difference to the same effect. Icbit automatically rearranges the counterparties behind the scenes so that when you liquidate and withdraw, the rest of the users can continue trading without disruption.

The futures model can be applied to much more than trading bitcoins, and Icbit already has plans to that effect. Eventually, BTC-denominated futures contracts will be able to be made with not just BTC as an underlying asset, but also major indices and commodities like the S&P 500 and the Brent crude oil price. Theoretically, any stock, commodity, index or even arbitrary variable like the temperature can be used as a basis for futures contracts, so if the site continues to grow, it has plenty of room to expand.

There is also one other key difference between Icbit and Bitcoinica: on Icbit, all transactions are made between the users themselves. While Bitcoinica had users trade with the service, employing an algorithm to buy and sell on MtGox to cover its users positions, Icbit allows the trades to happen by themselves, and only takes a flat fee of 0.005 BTC per 1 BTC in each contract as revenue. This model ensures that Icbit will be able to operate with less financial risk, a problem that Bitcoinica struggled with as its profits went from $100,000 per month to near zero in March due to a problem with the algorithm. The model will likely also ensure higher security, as the service can run without leaving as much money in a potentially vulnerable “hot wallet”. The problem with this setup is that liquidity is not guaranteed, a problem which Icbit is currently forced to alleviate by operating an algorithmic trader on its own service as a “market-maker”, but that is an issue that will resolve itself as more traders start using the site.

Legality is another concern. Icbit is currently not registered anywhere as a financial services provider, and its operators would prefer keeping away from the eyes of the law entirely. The site’s front page features the cryptic phrase “ICBIT is not a place for money laundering, so we are not going to enforce any AML measures like ID verification requirement”, a claim which its operator clarified on a Bitcoin forum with the statement “Indeed it makes me quite worried if a bitcoin exchange becomes a central war place for money laundering practices. Officials should catch offenders at other places before they reach exchanges. Like, when they actually steal money, not when they try to launder.” There is reason to believe that the site will be able to maintain this position for some time. Icbit is still relatively small, and the service itself never handles any financial instruments other than bitcoins and AurumXChange voucher codes, making any attempt to shut the site down through the banking system unlikely. The GLBSE, which is much more prominent, has much higher volumes and has been around much longer than Icbit, still survives with its lax verification policies. However, it remains to be seen how this policy will survive its first major trial, whenever that may come.

Icbit is still relatively small, and the high spreads that appear on the futures exchange as a result are a hump that the site will have to get over if it intends to see greater adoption. If it does, then it will be well on the path to becoming a fully fledged replacement for Bitcoinica, hopefully with greater security due to its more safety-oriented design. And if it does not, others will soon take its place. Icbit already has many challengers, and although none of them has managed to overcome the rigorous security and trust requirements of running a margin trading service, it is only a matter of time before one comes along that does. Regardless of which service, or services, become dominant in the end, one thing is clear: having been introduced to it once with Bitcoinica, margin trading is a service of which the community is unwilling to let go.

 

As many have predicted was an inevitable future, the man known only as Pirateat40 on bitcointalk.org announced the closure of his investment service, the Bitcoin Savings & Trust, earlier today, citing complications in performing larger transactions as the primary reason.  The interest rate given to investors was a staggering 7% per week for large investments, a number that could not have been sustainable in the long run and could only be matched in non-Bitcoin economies with ponzi schemes and similar cons.

Although it remains unconfirmed as of yet whether Pirateat40’s proposed investment service was or was not in fact a ponzi, the truth will undoubtedly be more clear next week: he has promised to pay back all of his users within a week, and begin those paybacks starting on Monday.  We will find out very quickly whether he has the ability to repay all customers, or if those words were the last we’ll ever hear from him.

After briefly touching $15/BTC prior to the news of the shutdown, the market had a stark reaction when the announcement was made, as it is fairly well known that deposits with pirate exceeded at least several hundred thousand BTC, if not more, and could be used to greatly affect the Bitcoin price. Within an hour, the price per bitcoin had dropped to almost $10 before stabilizing around $12.50.  Two trains of thought dominate recent market discussions: either Pirateat40 will be able to repay all of his investors, flooding the market with BTC that had been previously locked up and driving the price down as some of the investors cash out, or Pirateat40 was running a ponzi and will simply run with the currently-held funds, leaving no potential for cashout in the immediate future, and potentially more buying, as investors seek to replace the lost BTC.  Even the latter scenario does legitimize a price drop; if such a large con was to be revealed, it could shake confidence in Bitcoin considerably, and that uncertainty could lead to further price drops.

Many investors in the program shared the belief that it was a ponzi scheme, but openly admit to investing in it (or pass-throughs made for smaller investors) anyhow.  If reinvested, the return on investment at 7% interest rate would mean a doubling of one’s account balance about every 10 weeks.  And, given that the service has been running since early November 2011, a user could have conceivably seen an increase in their account balance of 700%.  These extravagant returns attract investors who believe they will be able to pull out of a scheme before it collapses, even though they might know it is a scheme to begin with.

Keep a watchful eye on bitcointalk.org come Monday – it should be very telling as to whether investors will be seeing a bitdime of their money back or not.

Do you expect Pirateat40 to pay back his customers?  Tell us in the comments below, or send an email to [email protected].

 

Several weeks ago, there was a large one-day spike in Bitcoin’s price volatility, as a series of sudden sell-offs sent the MtGox price oscillating within a range of $7.3 to $9.5, an event which pirateat40, operator of the Bitcoin Savings & Trust high-yield investment scheme, eagerly took credit for at the time. Now, it appears that there has been a less dramatic, but much more sudden, spike in volatility on MtGox, jerking the price between $12.64 to $13.84 over the course of twenty minutes. Volume spiked from an average of 14 BTC per minute to a high of over 1000 BTC per minute, and the top price of $13.84 that the volatility brought provided the Bitcoin price charts with a new high, the likes of which it has not seen since July 31 last year.

In the world of traditional finance, trading bot malfunctions are nothing new. Two weeks ago, a malfunction in a trading algorithm operated by Knight Capital cost the company $440 million, losing the company nearly four years of revenue and sending the stock price crashing down by 75%. In the world of Bitcoin, it may be impossible to tell who was responsible for this shock, or how much money they lost; it is also impossible to tell how many lucky traders managed to earn back some of the bot’s losses for themselves by arbitraging its temporary insanity.

It’s worth pointing out that both the allegedly Pirate-related spike and this one took place the day after a sudden upward spike in the Bitcoin price, potentially suggesting that the same bot, with the same weakness, was responsible for both of them. But regardless of who was responsible, in both cases, the markets have proven themselves to be self-correcting, and ordinary users were mostly left untouched. The price left the volatility spike at the same value of $13.50 at which it came, and when Bitcoin holders in the US began to wake up two hours later, the the markets had already resumed their regular motions and no lasting changes had taken place.

[divider]
Some image elements used under CC BY 2.0, by pasukaru76

 

If you have been following Bitcoin closely the past couple of days, you may have heard about MtGox trading bitcoins at $1B a piece.

Though all evidence of the event has been erased from Mt.Gox and BitcoinCharts history, Mt.Gox briefly showed a high of $1B per Bitcoin on the 9th of August, 2012.  Market depth on the ask chart was also incredibly low, showing a fraction of what might be considered normal.

Some users speculated that Mt.Gox’s live data stream had somehow been hacked to display incorrect data.  Ultimately, it was confirmed by Natalie on the Mt.Gox support team to be the result of a technical glitch, not a hack or any other sort of malicious behavior.  Reportedly, Mt.Gox’s creator MagicalTux stated that a 0-amount trade “triggered an old bug in the trade engine we’ve been tracking for a while”.

Witnesses to the incident uploaded a variety of screenshots highlighting the vast discrepancy from normal trading operations (1, 2, 3, 4, 5).

The full statement posted by Mt.Gox’s support team is shown below.

[divider]

Hello Mt.Gox Users,
Trading was unavailable for a short period of time today.  There were invalid trades taking place as well as trade orders that could not be cancelled.  Therefore we had to halt the trading engine and consequently, most ask orders were cancelled.
However, we have resolved this issue and trading has now resumed. Invalid trades have been cancelled and trade orders can now be cancelled. Users who have had their ask orders cancelled are kindly requested to place their orders again.
We apologize for the inconvenience caused and we will make every effort to prevent this from happening again in the future.  Thank you for your continued support to Mt.Gox.
UPDATE:  After investigating, we found out that the issue is likely due to an old piece of code in the trade engine that checks for bid/ask cross (i.e. negative spread). This piece of code would check for bids and asks differences, but did not make sure that both were in the same currency.
To prevent this bug issue from recurring, we have placed some extra checks to halt trading automatically should a similar issue happen again. Thank you once again for your kind understanding in this matter.
UPDATE 2:  It appears that some new trade engine features that were rolled into production earlier today caused this bug to become possible. We have now found the exact cause and resolved this bug.
We now are 100% confident that today’s problem was due to a technical glitch and we would like to assure that it was not caused by any malicious attempts.

[divider]

Image Copyright 2006 (CC BY-SA 2.0) hashashin

 

One of the lesser known features of Bitcoin is that the private keys, which form the basis for a Bitcoin address, do not need to be generated randomly; instead, one can generate a Bitcoin address, fully compatible with Blockchain.info’s wallet and Armory, using nothing but standard easily available cryptographic tools and a password of your choice. If you ever lose access to your client or account, or if you are using a brain wallet and don’t ever store your wallet electronically or on paper at all, you can always fully recover the ability to use your address simply by repeating the procedure you used to create it with the same password.

The trick is a simple one: open this web page in a new tab in private browsing mode (Shift+Ctrl+N in Chrome and Shift+Ctrl+P in Firefox), turn off your internet connection for security reasons, input the password into the larger textbox at the top, hit “Calculate SHA-256 hash,” and copy it down somewhere. Close the tab, turn the internet back on, and follow your wallet’s instructions for importing your own private key. It just so happens that the output of the SHA256 hash function is in exactly the right format to be a private key under Bitcoin’s elliptic curve cryptography system. You don’t have to use online tools to find the SHA256 hash; on Linux, for example, the command echo -n 'password' | sha256sum | grep -o '[0-9a-f]*' does the same thing and is more secure.

However, while this is a convenient way of reliably generating addresses, it is important to be extremely careful when using it. Recently, a Bitcoin user attempted a dictionary attack against addresses generated in this way, generating addresses from millions of passwords found in a leaked password database from an unrelated source, and ended up randomly guessing the backdoor keys to addresses that, at their peak, contained a total of seven bitcoins. Of course, this sum is a small one, but as the number of Bitcoin users increases and alternative wallet generation strategies become more popular, it will only increase, and there will be more incentive for someone with access to greater computer power to attempt this feat once again. Given that Bitcoin mining companies are developing computers thousands of times faster and more efficient at the task of calculating SHA256 hashes than anything else available today, they will be able to get much further.

So, how can you protect yourself? The most basic option is to use a strong password, and not something like 12345678, to secure your private key. However, the stronger the password the harder it will be to both input and remember, so stronger passwords, while being a necessity, need to be complemented with other strategies. One option is to use a hash function deliberately designed to run slowly. One popular option is bcrypt, of which a single hash takes a few hundred milliseconds to calculate. The wait is an insignificant one when you’re trying to create or recover your address yourself, but becomes prohibitive to any attacker wishing to attempt hashes by the millions. The simplest implementation to use is python-bcrypt; after installing it, open a Python console, type import bcrypt followed by x = bcrypt.hashpw ('password',bcrypt.encode_salt('0000000000000000',12)) (you can replace the empty salt with a second password if you wish). You will then need to apply SHA256 to the result to get the correct format for private key insertion, but what matters is that you have a very slow function forming the bulk of the generation process. Another possibility is to apply SHA256 a hundred thousand times (the python for which is import hashlib, followed by x = 'password', then for i in range(100000): x = hashlib.sha256(x).hexdigest() and finally print(x)) or, for added security against specializing mining computers, apply SHA512 a hundred thousand times instead and then only take the first half of the output.

However, there is also another option. Consider how password authentication works for normal websites: logging in to one’s Google, Twitter or Bitcointalk account does not simply require typing in a password to authenticate yourself, you must type in a username as well. And for good reason, too – rather than being able to pull off a dictionary attack and make off with thousands of accounts in one fell swoop, attackers are forced to try every password in their dictionary for each and every username that they come across, and they may not even have the database of usernames to work with. The solution to the Bitcoin address cracking problem is thus to replicate the username/password model for your private key. Rather than hashing “password”, I might hash “vbuterin:password” instead. As long as you remember your username and don’t have a complex convention for stringing the two together, this doesn’t harm memorability at all, but does severely hamper an attacker’s ability to unlock your address for his own use.

Creating your own addresses deterministically from a password is a powerful feature, and has many unique and powerful uses. It allows you to use your Bitcoin wallet with the reassurance that, even if you lose everything you have, you will still be able to recover it. It allows you to use Bitcoin without relying on any software except at transaction time. Combined with other advanced elliptic curve mathematical techniques, it can also be used to generate complex hierarchical wallets with a root password. However, passwords have their risks, and when money is at stake, doubly so. For this reason, it is important to understand passwords’ limitations, and use them with a healthy dose of prudence.

 

Much has happened since the first Silk Road report that we released a month ago. In mid-July, a Silk Road user was arrested by Australian police for allegedly transporting unspecified narcotics into the country. The event attracted considerable attention within the Bitcoin community as it was the first “Silk Road-related” arrest ever to take place, and the Australian police eagerly took the opportunity to warn Australians that law enforcement is “well aware of this method of drug procurement” and that “persons who buy or sell through online marketplaces, on so-called ‘anonymous’ networks should understand that they are not guaranteed anonymity.” However, it is important to point out that neither the anonymity of Tor nor that of Bitcoin was compromised. Rather, all evidence points to the seller being caught through the international mail system. It is also well understood that island nations have an easier time controlling their borders, whether against illegal immigrants, drugs or guns, than most others, so on the whole the event is not particularly surprising.

Soon after, Dread Pirate Roberts, the mastermind behind Silk Road, announced that Silk Road’s illegal gun-selling sister site The Armory would be closing. To justify the decision, Roberts wrote in a post on the Silk Road forums (original accessible only through Tor) that it simply was not popular enough to justify the expense; in his own words. “The volume hasn’t even been enough to cover server costs and is actually waning at this point. I had high hopes for it, but if we are going to serve an anonymous weapons market, I think it will require more careful thought and planning.” Unlike its larger cousin Silk Road, the Armory was never well received by the Bitcoin community or the media; many to whom the thought of legalizing all drugs is not even controversial, particularly those in Europe, find the prospect of psychopaths being able to anonymously buy guns much more worrying. The one major article covering it in the news came only weeks before the announcement, in the form of a piece on Gizmodo titled “The Secret Online Weapons Store That’ll Sell Anyone Anything“. The article did misrepresent the Armory to some extent, the largest offense being a claim that its cryptic garbled sixteen-character URL was part of a deliberate strategy of obfuscation (in reality, the Tor protocol offers no way, except perhaps extreme repeated trial and error, to choose one’s URL, as the generation process is a pseudorandom process somewhat similar to that used to generate Bitcoin addresses), but it did provide the Armory a last chance at acquiring a foothold in the illegal arms market. However, even that failed to reignite attention; at the time of this writing, the number of products available is less than sixty, and the Armory will soon be gone entirely. Weapons will not become allowed on Silk Road as a substitute.

The Australian arrest may shed some light on why Silk Road, the anonymous illegal drug store, has been able to succeed and the Armory, the anonymous illegal gun store, has not. The major bottleneck of both is the postal system, and drugs are much easier to sneak through than guns are. The former usually comes in the form of small tablets or a powder which can be reliably placed in vacuum sealed bags, while the latter, even if disassembled into its constituent parts, is made up of large pieces, any of which can trip a metal detector. The requirement for the customer to assemble the weapon also hampers usability, and the requirement for the seller to disassemble and spend more time packaging it drives up costs, which are another major reason why many potential customers opted to continue purchasing their weapons through offline channels instead.

Finally, a few days ago, Nicolas Cristin, a researcher at Carnegie Mellon University, released a detailed analysis of Silk Road in which he discovered considerable evidence that pointed to a, to some, exciting, and to others, frightening conclusion: that, unlike its arms-dealing sister site, the Silk Road is booming. According to Cristin’s paper, at the end of November 2011, Silk Road had 220 active sellers, increasing to 290 on March 1, but the number then started to quickly climb, leading to the site having over 550 active sellers at the end of July. In the previous Silk Road report it was mentioned that the majority of sellers were from the US, with a sizeable minority in the UK, a fact which Cristin’s paper corroborates: the most popular shipping origin, the USA, is the home of 43.86% of all sellers, followed by “undeclared” with 16.28% and the UK with 10.14%. Customer satisfaction on Silk Road is mostly positive, with a 97.8% positive feedback rate, although less than that on white market sites like Ebay, which boasts a positive feedback rate of 99%. But the most surprising figure of all is Silk Road’s sales volume. The volume was about 8,000 BTC daily in March, increasing to a peak of 15,000 BTC per day in May and then slowly falling to 10,500 BTC a day in July. But, as the paper points out, the fall was merely a nominal one, caused entirely by the rise in the Bitcoin price over the same period. In USD, the total sales volume in each of the past two months, June and July, exceeds $2 million. And, as Cristin points out, that does not even include the hidden listings.

For comparison, BitPay processed $170,000 in May and hit a record of $250,000 in one day with Butterfly’s ASIC launch. BitInstant transferred $1.1 million in April, and MtGox had a trading volume of $18 million these last 30 days, although the latter figure is hardly comparable to the others because the vast majority of Bitcoin exchange trading volume is a result of arbitrage and speculation. Silk Road’s revenue compares even better: while BitPay’s commission of 0.99% brought in $1,700 and BitInstant’s 0-5%, at most $60,000, Silk Road’s average commission of 7.4% nets the site over $180,000 USD per month, exceeding even the $45,000 to $108,000 earned by MtGox.

Given Silk Road’s low-profile stance in the Bitcoin community, these figures come as a shock. Far from being an easily ignorable sideshow, Silk Road is, in fact, a mainstay of the Bitcoin economy. Furthermore, Silk Road is not merely a particularly popular toy. Dividing Silk Road’s monthly volume of $2 million by its 550 active sellers gives an average revenue of $4500 per month, strongly suggesting that there are dozens of individuals earning a living largely or exclusively using the website. On the one hand, Bitcoin advocates can rejoice; there is now definitive proof that Bitcoin has found a stable and serious niche, one that is not merely a byproduct of novelty or community patriotism, and there are individuals beyond infrastructure providers like BitInstant and MtGox who are employed in the Bitcoin economy full time. But at the same time, as the law is beginning to turn its eyes toward Bitcoin with Brazil’s securities commission targeting a Bitcoin investment group and two legal actions being brought forward around the events of the Bitcoinica crisis, one cannot help but worry about the effect that this will have on Bitcoin’s public image in the months and years to come.

 

The owner and operator of Silk Road, aliased as Dread Pirate Roberts, announced on August 2nd, 2012 that “The Armory”, an extension of Silk Road focused on allowing users to anonymously buy and sell munitions, will be closing.  Roberts cited a low and continuously declining number of transactions – enough that the 10% take of Silk Road wasn’t even enough to keep the servers paid – as reason for discontinuing this particular arm of the Silk Road marketplace. Some users explain user dis-interest with high prices on The Armory, and too much competition from local dealers, who can still retain customer privacy while conducting legal transactions.

The Armory is not yet closed – a countdown has been initiated, to end at 8:10 PM GMT on August 15th. Roberts warns users to finish up their current business and withdraw any lingering funds before the countdown is reached.

Many Bitcoin users have expressed joy over the closure, either for personal anti-gun reasons, or for the removal of a potential derogatory connotation of Bitcoins with the illegal sale of firearms.

Despite this closure, there may be hope in the future for those interested in anonymously pawning and procuring guns online.  Roberts states, “if we are going to serve an anonymous weapons market, I think it will require more careful thought an[d] planning,” indicating the possibility of a future restoration of the service after some additional forethought on the design.

What do you think about the closure of The Armory?  Post your comment below, or send an email to [email protected].

 

As of 18:36:30 GMT on August 2nd, Bitcoin broke the $10 price barrier on MtGox for the first time in 2012.  Bitcoin closed at $9.35 at the end of the day on July 31st, and, as of 1:54 GMT August 3rd, is currently trading at $10.65, indicating a rise of almost 14% in just two days.  The trading price hit a new 2012 high of $11.00 around 22:00 GMT.

Some are suspicious of the recent run-up in price over the last two months, and do not believe it will last.  The price at the start of 2012 was only $4.72, and, with the current trade price of $10.65, shows a whopping gain of 126% over eight months.  Most of that gain was only seen over the most recent two months – June and July – of 2012, amid concerns that this is yet another bubble-based rally, with the potential for a mirroring of the boom and bust of the summer of 2011.

Others are more optimistic, giving reasonable explanations for the rally, such as the potential that  investors with high net-worth are beginning to invest significant funds into bitcoins, or conducting market trend analysis to legitimize the price increase.  The lack of increased activity shown on Google Trends also helps bring security to the idea that the current rally is sustainable, and not a bubble.  An increase in Google Trends activity tends to indicate hype, and a rally without hype might indicate a rally with legs to stand on, instead of a rally built on a group of get-rich-quick speculators.

While it is certainly impossible to predict the future price of bitcoins, the steady 3-month rally with every week ending at a higher price than the last does seem to bode well for those who believe the rally is sustainable and will continue.

[UPDATE]: As of 8:00 PM GMT on August 3rd, Bitcoin is trading at $11.08, continuing the rally with a rise in price of 18.5% in less than 3 days.

Are you making bank on the current rally?  Post a comment below, or send your story to [email protected].

 

As was previously reported, Bitcoinica was shut down on May 11th, 2012 as a result of a hacker stealing 18,547 BTC (then worth about $92,500) from the service’s hot wallet.  Two months later, while the service was in the midst of rebuilding user data to issue refunds, a malicious entity was able to gain access to Bitcoinica’s MtGox account and withdraw 40,000 BTC (then worth about $310,000) and $40,000 USD.

After Zhou Tong, the creator of the service, sold Bitcoinica to Wendon Group, the Bitcoin Consultancy was hired to be responsible for maintaining the service. Once the service was shut down, they were also responsible for refunding the service’s users.  Recently, the three members of the Bitcoin Consultancy have allegedly ceased all communications, and have stopped refunding users entirely.  Due to this deafening silence from the Bitcoin Consultancy, Tihan Seale has stepped up, and begun the process of liquidation via receivership in New Zealand.  Seale has claimed responsibility to Wendon Group for monitoring past investments, which evidently can include cleanup of failed investments.

Evidence made public by a variety of Bitcoin users seemed to indicate that Zhou Tong himself was responsible for at least the most recent hack. Within hours of this information coming to light, Zhou Tong claimed to identify the third hacker instead as Chen Jianhai, a previous business associate of his.  After Zhou Tong supposedly confronted Jianhai with evidence of his theft, Jianhai agreed to return at least some of the Bitcoinica funds.  Zhou states that he can recover, at most, about $330,000 worth of combined USD and Bitcoins from Jianhai, leaving the users short $42,000.

User deposits at Bitcoinica at the time of shut down have been estimated at just over $1M USD of total valuation.  With $442,500 of those funds stolen, but 15,000 BTC  (currently worth about $140,000) recently returned by Zhou Tong on behalf of Chen Jianhai, 38% of the funds paid out so far, and the $92,500 hack apparently being too much for Bitcoinica to pay out of its own pocket, it seems reasonable to estimate that Bitcoinica only holds around $390,000 to $490,000 in remaining assets with which the receiver of a liquidation might be able to pay back to users of the service.  Assuming this estimate holds true, it would mean that users of the service could expect, at the maximum, to receive around 75%-80% of their account balances at the time Bitcoinica was shut down. If Zhou Tong is able to recover the additional $190,000 from Chen, it would mean that users of the service could expect, at the maximum, to receive over 95% of their account balances at the time Bitcoinica was shut down.  Legal fees or other currently-unknown creditor claims could further erode this eventual payout percentage.

Have you been affected by the Bitcoinica debacle? Post your comments below, or send your story to [email protected].

 

A moderator of the chat at BTC-e known as “Dev” indicates that a malicious entity was able to deposit fake Liberty Reserve funds, and use them to purchase Bitcoins. The moderator went on to state that “they [were] able to withdraw [a] small amount of BTC on our bitcoin server”. The exact amount is still unknown. The European Bitcoin exchange intends to perform a rollback on the fraudlent deposits and resulting trade transactions at around 7:10 AM GMT 7/31/12.

Quick tabulations based on volume reported by Bitcoin Charts indicate around 63,500 Bitcoins have been fraudulently purchased at prices of up to $99/coin. With MtGox prices still hovering around $9.30/coin, such a differentiation in price has already caused panic on the exchange, with many users hovering on the website’s chat, trying to ensure that their funds are safe.

As of 7:34 AM GMT, a rollback of the fraudulent transactions has not yet been performed. More updates to come.

[UPDATE 7/31/12 4:12 PM GMT]

BTC-e officially confirms that their Liberty Reserve API key was compromised, leading to the falsification of funds on the exchange.  Approximately 4,500 bitcoins were actually withdrawn and stolen by the attacker.  The exchange will cover the stolen funds, remain open, and, according to BTC-e, all transactions performed after 12:00 AM GMT were reverted.

While BTC-e is still working on finalizing legitimate user account balances, they expect new trading and depositing should be available within 1-2 days.

[UPDATE 8/2/12 6:05 AM GMT]

BTC-e has opened back up for trading as of 15:10 GMT on 7/31/12.

Were you affected by the attack? Post your comments below, or send your story to [email protected].

 

On July 26, AurumXChange, MtGox and BitInstant posted a thread on the Bitcointalk forums with new evidence relating to the theft that had taken place on July 13, in which an unknown individual gained access to Bitcoinica’s MtGox account and was able to withdraw the maximum 40,000 BTC and $40,000 USD. According to AurumXChange, the hacker proceeded to transfer the $40,000 USD through their service into Liberty Reserve. However, soon after the incident, AurumXChange found a request by Zhou Tong to exchange $40,000 USD on Liberty Reserve for an equivalent (minus fees) deposit into his bank account in Singapore. Zhou Tong had never dealt with AurumXChange before as an exchange customer. Furthermore, the email address used by the hacker, [email protected], was the same as the one used to open a MtGox account, which is beyond doubt linked to Zhou Tong and Bitcoinica.

This evidence looks rather damning to Zhou Tong’s case, but he has put forward an alternate story: that he was framed. As he describes it, the email account was an insecure one with a heavily reused password that he only used to make accounts with websites to which he had no interest in giving up his private information, and the $40,000 USD exchange was an unrelated transaction that he was making for a friend. Furthermore, he has even found a suspect, the Chinese multimillionaire Chen Jianhai, that he claims has admitted to the crime when Zhou pointed out to him that it was a matter of an international scale with many highly intelligent netizens around the world investigating. Jianhai is a former business associate of Zhou’s, and used Zhou’s identity because he felt that “it would be impossible to discover the hacker” and “it would be much easier to deny if the suspect account is an insider because you (Zhou Tong) can always distract people from investigating”.

Regardless of who is guilty and who is being framed, however, there is another matter at stake: what happened to due process? Any concept of separation of powers appears to be thrown overboard and the investigator, prosecutor, judge, jury and executioner are one and the same. Zhou Tong himself did not know that he was a suspect before the public posting was made, and the situation has quickly devolved into what is essentially a public self-proclaimed judicial process where Zhou is forced to scramble to present his own side of the case in a race which he cannot win. As some have pointed out, people have killed for less than $200,000, and it is important to treat matters involving such large sums of money with the same level of prudence as they are afforded in the rest of the world.

What this ultimately boils down to is that the Bitcoin community needs to have a serious conversation about the way that it handles the judicial process. So far, everyone involved has been very unwilling to make any overtures to established police authorities, presumably wishing instead to establish an alternate extralegal “lex mercatoria” to handle Bitcoin-related cases in an ad-hoc fashion. There are, of course, legitimate reasons to do so. One of the major ideological reasons why people participate in Bitcoin is the desire to avoid the stifling bureaucracy of existing governmental justice systems, and so far, Bitcoin has never been tested against them. If the US, Chinese, Australian or Singaporean courts are forced to make their first landmark “Bitcoin ruling”, there is no telling what that ruling will be. They may decide that bitcoins are simply worthless virtual tokens, and stealing them is simply part of the game. Alternatively, they may decide that Bitcoin exchanges are a form of illegal money laundering, leading to the majority of such exchanges being forced to shut down and relegating Bitcoin to the realm of small islands of circular commerce and illegal weapons and drugs.

On the other hand, there are reasons to believe that legal attention would actually be good for Bitcoin. Many businesses are holding back from accepting it due to legal uncertainty, and having a solid judicial confirmation that bitcoins do have value and are a valid and legally protected means of conducting exchange would arguably be a great boon to Bitcoin’s perceived legitimacy. Some have claimed that “there are no Bitcoin police” as an argument against Bitcoin, and a legal prosecution for a Bitcoin theft would greatly help alleviate these fears.

However, if the Bitcoin community does reach a general consensus that, even if for only a short time, an informally self-regulated Bitcoin is the way to go, then everyone in the Bitcoin community who is in a position to be an administrator of justice should take their job far more seriously than they do now. Many thousands of bitcoins have been lost in the community’s slow process of re-learning the progress that the outside world has made in the field of security, and it would be a great tragedy if even greater losses are suffered because we are being equally slow in re-learning the need for sound justice. On the other hand, if we handle the Bitcoinica case fairly and professionally, whether independently or in a spirit of mutual cooperation with the relevant legal authorities when the time comes, and reach an equitable resolution based on principles of justice and restoration, and not vigilantism and vengeance, it would be a great opportunity to prove that the lex mercatoria can work after all.

Correction: The July 13 Bitcoinica Investigation and Sound Justice

In a comment in the above titled article posted on July 18th it was misstated that both MtGox and AurumXChange have broken their own privacy agreements regarding information they released on the forums suggesting Bitcoinica’s founder Zhou Tong is connected to funds stolen in a hack of their exchange accounts. In the absense of a court ruling on the matter, a statement of such by the article’s author cannot yet be made in the manner it originally was worded, which may have been erroneously perceived as a statement of fact instead of the opinions of the author as is the case. Innocence for all parties will be assumed until a court of law decides otherwise based on factual evidence, including any connection between the theft and Zhou Tong. Bitcoin Magazine apologizes for the miswording on this matter and do not purport ourselves as a judge or jury on any legal matters that affect the community regardless of how passioniate our authors may be.

 

Last November, Mitchell Bourne, with the aid of the Bitcoin Consultancy, organized a highly successful Bitcoin conference in Prague, featuring speakers from both inside the Bitcoin community, like We Use Coins creator and BitcoinJS developer Stefan Thomas and Bitcoin Consultancy member Amir Taaki, and outside of it, like Pirate Party founder Rick Falkvinge and digital money theorist David Birch. This year, the Bitcoin Consultancy intends to hold a conference again on 15-16 September, this time in London. The last conference was held in Prague because the venue was less expensive and it was not clear how many people would attend, but with the Prague conference behind them this time, the team is more certain that the conference will succeed, and are expecting over 300 attendees.

Hosting the conference in London will have a number of advantages. London is the home of the Bitcoin Consultancy, as well as many of the speakers that are invited to the conference, and even for those who do not live in the United Kingdom, London is much easier to reach than Prague is, with several international airports around the city allowing for direct flights from many cities around the world.

The list of speakers is already a long one, and includes a number of individuals from within the Bitcoin community. This year’s selection is heavy on the technical side, featuring Mike Hearn, developer of the Java-based Bitcoin platform BitcoinJ, once again the BitcoinJS developer Stefan Thomas, Patrick Strateman, Bitcoin Consultancy member and the chief technology officer of Intersango and Jim Burton, lead developer of the Bitcoin client Multibit. On the less technical side will be Max Keiser, in charge of his finance-oriented show on Russia Today, the Keiser Report, and Matthew N Wright, who is involved in a number of Bitcoin-related projects, including Bitcoin Magazine itself.

However, what is more impressive are the non-Bitcoin speakers. Looking at the list of speakers, the conference can just as easily be described as a Linux conference as a Bitcoin one. On the list are many developers who are focused on Linux and Bitcoin at the same time, although typically with more attention toward Linux, as Linux offers more opportunities for developers to express themselves than Bitcoin, where the technical side is already largely settled. Among these are Dennis Rolo, also known as Jaromil, both an advocate of underground economies and a developer of Linux multimedia systems, Nils Schneider (tcatm), known to the Bitcoin community for Bitcoin Watch and Bitcoin Charts but also the creator of the iPod Linux project, Jeff Garzik, a prominent Linux kernel developer who also spends time on Bitcoin development, and, most important of all, Richard Stallman, the free software advocate who created the GNU operating system that forms the basis for most of the Linux distributions that we use today.

There will also be several speakers outside of both the Bitcoin and Linux communities. Once again on the technical side, there will be Andrew Miller, co-founder of a computer vision consulting firm and contributor to OpenKinect and the decentralized file storage system Tahoe-LAFS. On the non-technical side, David Birch, who spoke at the 2011 Prague conference, will once again be attending, and from the civil liberties community there will be a new guest: Birgitta Jónsdóttir, the Icelandic parliament member responsible for creating the Icelandic Modern Media Initiative, which introduced anti-censorship, freedom of information and whistleblower protection laws that have placed Iceland at the top of the Press Freedom Index in the world.

To the Bitcoin Community, what this conference signifies most of all is the growing integration of Bitcoin into the larger technology and civil liberties community. Even one year ago, Bitcoin was largely on its own, and the rest of the technology community was largely watching the currency from the sidelines. The only prominent individual who made a serious attempt to conceive of Bitcoin as being part of a larger philosophy of individual empowerment was arguably Rick Falkvinge. After surviving a bubble and crash and continuing to attract more attention, however, a growing number of people are realizing that Bitcoin is only one tool in a much larger arsenal, and this year’s list of speakers reflects that reality. Hopefully, this conference will prove to be of major benefit to both the Bitcoin Consultancy, desperate to recover its public image after the Bitcoinica fiasco, the Bitcoin community, as the event has the potential to bring Bitcoin considerable media attention, and the free software and civil liberties community as a whole.

 

The Middle East and North Africa remain one of the more difficult parts of the world in which to acquire bitcoins. Although largely justified by the region’s low GDP, the concentration of Bitcoin clients in the region is low, and options for exchanging the local forms of digital money for bitcoins were hard to find – until now. Bitcoin Nordic recently introduced CashU as a payment option. Bitcoin Nordic is a Bitcoin exchange based in Denmark launched on April 2 with its main feature being instant delivery of bitcoins for payments by credit card. This activity was soon suspended by Visa and MasterCard, but the company remained, and continues to offer bitcoins for bank transfers (and vice versa) and anonymous cash in the mail, expanding their range of payment offers with this new addition.

CashU is a popular online and mobile payment method in North Africa and the Middle East, as the region’s large and young population currently has very limited access to credit cards. It works as a prepaid system, allowing users to top up their CashU accounts through CashU prepaid cards sold in the Middle East and Africa, Ukash vouchers which can be found around the world including the UK, mainland Europe, South Africa, South America, Canada and Australia, and a number of other methods. Users can then spend their CashU account balance at a number of online sites. Bitcoin Nordic claims that by introducing CashU as a payment option, they will have made Bitcoin accessible to over 300 million people who did not have a convenient way to buy it previously.

Bitcoin Nordic’s prices are steep; they charge a 15% commission on top of the 24-hour average MtGox price, higher than the 10% that they charge for cash and check payments, and much higher than the 0-7% fees typical for cash deposits and wire transfers in the United States. However, relative to other fees in the CashU market, Bitcoin Nordic’s rates are hardly exceptional. Although credit card payments and some other methods like Fawry and BEE are processed with a fee of 5-7%, UKash vouchers take 9% plus foreign exchange rates. Comparing these rates to Google’s baseline rates, we see that this constitutes an additional commission of roughly 5% – in total a 14% fee, almost exactly as much as what Bitcoin Nordic charges for converting CashU to Bitcoin.

Nevertheless, even with net fees of 20-30%, Bitcoin Nordic has potential to carve out a viable niche for itself for one simple reason: it has no competition. Although CashU is the established payment method of the region and is already used by much of the population, the range of sites that accepts it is fairly small. Though many major products like World of Warcraft and iTunes gift cards can be bought with CashU, the majority of the products and services that we are used to in Europe and North America do not support it. Bitcoin, on the other hand, does – both by itself and as a gateway to other stores through services like SpendBitcoins, which offers gift codes for stores like Amazon, the Apple store and Thinkgeek for bitcoins and even features a Buy Anything service that allows you to use Bitcoin as a proxy for any purchase online.

In the past few months, Bitcoin has seen a massive increase in its reach all across the world. Chinese adoption spiked rapidly in May, BitInstant added 700,000 locations to buy bitcoins in the USA, Russia and Brazil, and, although with no evidence of success so far, efforts to bring Bitcoin into Africa are underway as well. With this move by Bitcoin Nordic, the Middle East and North Africa will now be able to participate in Bitcoin’s worldwide growth in adoption, and millions of people will gain access to products and services that they had no way of getting to before, both inside the Bitcoin community and outside of it.

 

Bitcoinica has fallen far in these past four months. The margin trading service that was once hailed as a revolutionary margin trading service and a shining beacon of success in the Bitcoin economy has become a locus of scandals and thefts, as skilled online intruders continue to peck at the now defunct service’s diminishing million-dollar supply of customers’ funds and its operators continue to struggle to pay users even a 50% share of what they are owed.

Bitcoinica’s downfall started on March 1. Linode, a web hosting provider then used by Bitcoinica, Slush and the Bitcoin Faucet, was hacked by an unknown intruder, who proceeded to empty all Bitcoin wallets that were running on the service, taking 5 BTC from the Bitcoin Faucet, 3,000 BTC from Slush and 43,000 BTC, then worth about $220,000 USD, from Bitcoinica. The loss was a large one, but the site nevertheless kept running and was able to guarantee its users’ deposits.

Then, however, came a second attack. On May 11, an intruder managed to break into Bitcoinica through a compromised email account, and proceeded to lift 18500 BTC from Bitcoinica’s hot wallet. This time, the site could not keep operating, and it shut down and opened up a claims process through which users could petition for a refund on their deposits. However, the intruder also managed to delete Bitcoinica’s account registry, leaving the team in charge of the claims process no way to verify user account balances was to look through a collection of various trading records, causing the claims proceedings to slow down to a crawl.

Now, Bitcoinica has been struck yet again. On July 13, another thief withdrew the maximum possible from the MtGox account that was holding the remaining portion of Bitcoinica users’ funds, clearing out 40,000 BTC and 40,000 USD, or a net total of $350,000 USD at the time of the breach. The attack was possible because the LastPass account that was storing the passwords needed to access the MtGox account was set to the same password as the MtGox API key used by the Bitcoinica server to access funds when Bitcoinica was still running. While the original thief had the opportunity to steal these funds at any point after the breach on May 11, the opportunity became accessible to anyone a few days before this latest theft, when the Bitcoinica server’s source code was publicly released to the internet. The API key was stored in the source code, and another thief discovered that the key was also the LastPass password, and that no form of additional second-factor authentication was required to use the Last Pass account, and proceeded to log on to MtGox and withdraw the funds.

Regardless of his level of responsibility for earlier breaches that had to do with the security of Bitcoinica itself, this time Zhou Tong is clearly innocent. He writes in a thread on Hacker News on the subject: “I didn’t set the password. I didn’t have the power to change the password. I shouldn’t have access to the account. The root cause is LastPass account being stolen.” And the other parties agree; both Bitcoin Consultancy and Tihan Seale, Bitcoinica’s secretive investor, much prefer to blame each other, the core issue being who is responsible for setting the two passwords to the same value. As Bitcoin Consultancy’s Amir Taaki writes, “The breach today occurred because the password for LastPass was in fact a duplicate password which had been compromised during the hack. Unbeknownst to us, Tihan was using the mtgox api key as the password for a website called LastPass.” Tihan, on the other hand, showed himself for only the third time so far on the Bitcointalk forums and wrote :”I claim no expertise to judge the security of the master password but it was very long. Its status as a master password and its use in all respects were fully understood by the Consultancy upon acceptance. If the Consultancy deemed this password to be unfit for ongoing use, they certainly had the opportunity and the duty to change it.” This miscommunication appears to be the core of the problem, regardless of whether the greater problem was Tihan not clearly speaking or Bitcoin Consultancy not clearly listening.

As for what this means for the users, the result is that claimants will be forced to take a 30% cut on their deposits. Because of the difficulty of figuring out some users’ exact balances, the claims fund had settled on a strategy of paying claims in two stages – 50% as soon as the claim is processed, and the remainder of the claims fund proportionately to all depositors once all claims are processed. About 40% of claims have been processed so far, and, as far as can be determined for certain, so far no one has received more than 50%, so the general strategy for determining and paying claims is expected to hold even if the second round of payments will be in the form of 20% of claimants’ funds rather than the entire remaining 50%. However, the implementation of the strategy will be a problem – Amir Taaki reported in his post on the subject that “The payments process was looking good, but now Patrick [the sole individual responsible for handling claims up to now] has walked away and I’m unsure what happens next.” Meanwhile, Zhou Tong has come up with his own solution: he created his own claims processing service, voluntarily contributing 5,000 BTC out of his own profits from running and selling Bitcoinica to spread among all claims that he deemed valid. Over 80,000 BTC worth of claims were filed, and claimants received a 6.239% share of their losses. Zhou Tong emphasizes that his process was independent from Bitcoinica, and that both his claimants and those who missed the opportunity should seek their 70% payment from the official claims process as well.

Many victims of the crisis have already written off the situation as hopeless and are content to simply wait and see if they ever do get any of their money back, but others are not so willing to back down. The possibility that there will be a lawsuit against Bitcoinica is very real, and what will happen to the claims process in that case is unknown – Bitcoinica Consultancy’s Patrick Strateman, at least, believes that “if anybody decides to file a criminal complaint you will effectively guarantee that it will be months or even years before anybody sees their funds.” Whatever direction Bitcoinica Consultancy chooses to take the claims proceedings from here, one can only hope that depositors will be able to collect the remaining portion of the funds from Bitcoinica’s supply faster than the thieves will.

On Tuesday, Bitcoin finally exceeded the $7.22 high that the price reached in January, briefly touching $7.25 in the (North American) afternoon before temporarily sliding back down to $7.10-$7.20 for the rest of the day.

The January high was set in anticipation of an episode of the TV show The Good Wife) airing an episode featuring Bitcoin, bringing the price from a medium-paced recovery after its November low of $1.994 suddenly up to $6.5-$7 for about two weeks. When the episode aired, immediately came a large spike in online attention on Bitcoin as some portion of the show’s 12 million viewers wondered what the online cryptocurrency that they had been suddenly introduced to was. However, the aftermath was a disappointment. Susan Toepfer, in her extensive summary and review of the episode, called it “a fairly low energy episode, requiring far too much attention to tedious detail”, and the markets shared the sentiment. One day after the episode aired, the Bitcoin price precipitously fell from $6.8 all the way down to $4.64 before making a temporary, partial recovery, although the drop was exaggerated by instability in the margin trading service Bitcoinica. It can be argued that the airing was nevertheless a significant turning point in Bitcoin’s public image for the long term, but in the short term it is clear the the Bitcoin traders’ impression of the airing’s effect was wildly exaggerated.

The current rise is different from both this increase and the June bubble that brought us the all-time high of $31.91 per bitcoin in a very significant way. While the previous two bubbles were both accompanied by sudden increases in search volume, both of which are clearly visible on Google Trends, the current rise is accompanied by no such thing. That is not to say the rise is causeless; the news on Chinese adoption, the reports of BitInstant and BitPay seeing rapid growth in transaction volume, the emergence of ASIC mining computers and even the release of Bitcoin Magazine itself did come together to cause a marked shift in mood toward the end of May, even as Bitcoinica had just announced its permanent shutdown as a result of an 18,750 BTC hack. However, the key difference is that while the causes of the previous two bubbles were external, being dependent either directly or indirectly on a sudden influx of attention, the factors behind this increase are internal, indicating a change in sentiment, and possibly a recovery from a level that had been somehow unnaturally suppressed for months before. The fact that the rise came soon after Bitcoinica went down lends some support to the latter theory, as shorting, or effectively owning a negative quantity of bitcoins is no longer possible.

There is indeed much to hope for from Bitcoin in the coming months, but the fact that the search volume on Bitcoin is not increasing is a potential source of worry. Although Bitcoin is getting stronger, and its individual projects are progressing and getting more and established with each passing month, at least this indicator of the size of the community as a whole has remained the same since January. While the argument can be made that there is a substitution effect of people moving away from the casual curiosity form of attention to a deeper and more involved level of involvement with the currency and its increasingly disparate communities, and even that search volume represents the flow of incoming users more than it does the activity of existing ones, the fact that the one major indicator of the size of Bitcoin’s community that is better than any other at being guided by reality rather than sentiment gives reason to be cautious. But unlike the previous two bubbles, it has so far taken one and a half months for the price to climb only 40%, so it may be that caution is a lesson that the community has already learned.

 

For better or for worse, Silk Road has been a fixture in the Bitcoin economy ever since the currency first caught the attention of the mainstream media in early 2011. The service is an online black marketplace for goods such as drugs, pirated digital goods, books on topics such as computer hacking and drug manufacture, counterfeits and forgeries, complete with an Ebay (or Bitmit)-style user interface, an escrow system and a Bitcoin wallet that mixes all incoming and outgoing coins so as to obscure their origin. It operates completely anonymously, existing to the outside world only as a so-called “hidden service” on the Tor network, run by a user who is known to others only as “Dread Pirate Roberts”. It maintains the secrecy of its operators and location by combining two technologies: Tor, the largely US military-funded internet anonymizing service intended to help dissidents in authoritarian regimes evade the prying eyes of their governments, and Bitcoin. The former makes it extremely difficult to trace buyers and sellers’ communications, and the latter, combined with Silk Road’s proprietary mixing system, their financial trail.

Silk Road attracts people for many reasons. Some are simply interested in having a safe and easy place to buy and sell illegal items, of which drugs are by far the largest category. Others cite costs as a factor. One writer, Gwern, claimed in his review of Silk Road that he was able to find Adderall on sale for a “price per pill far superior to that I was quoted by one of my college-age friends (less than 1/3 the price) and also better than the Adderall price quote in the New Yorker, $15 for 20mg”. For others, Silk Road is an ideological mission far more than it is about the goods. Dread Pirate Roberts frequently promotes libertarian political principles on his own forum, and there is a common consensus that fining and imprisoning people for putting substances into their own bodies is morally wrong. The crypto-anarchist movement, which seeks to remove the potential for individuals and institutions to exert power over others by moving key social institutions onto mathematically secured, and often anonymous, internet-based protocols, also finds the service attractive. As governments continue attempting to push restrictive internet legislation such as SOPA and ACTA into law, the allure of using Tor to make such government machinations simply irrelevant will only continue to increase. Finally, there are some legal products available for sale on Silk Road, and even for those who are not interested in using Silk Road to circumvent the law the service provides an active community in which entrepreneurs can nurture their online business and potentially develop a second income from the comfort of their own homes.

Silk Road first truly broke into the public view on June 1, 2011, when an article on gawker.com made a detailed review of the service, and membership quickly jumped by an order of magnitude to over ten thousand. A few days later, the US government caught on, and senators Charles Schumer and Joe Manchin called for the website to be shut down immediately, proclaiming that “Never before has a website so brazenly peddled illegal drugs online” and “by cracking down on the website immediately, we can help stop these drugs from flooding our streets.” Since this brief spark, however, Silk Road has faded somewhat into the background. On June 9, the Bitcoin price bubble finally popped, and attention quickly turned to first this, then to further negative attention on Bitcoin’s economic properties, and finally a security crisis involving a series of unrelated events in late June, continuing in August as bitomat.pl was hacked and the first online Bitcoin wallet, MyBitcoin, disappeared with 51% of its users’ deposits.

Silk Road suffered as the price fell from $31 to $2 between June and November, making it difficult for sellers to make money, but the service retained a loyal following and its users were eventually rewarded with the price rebounding and stabilizing in early 2012. The number of accounts is currently at about 22000, and the largest number of people online at any given time is 126 – a stable community, but much smaller than those who see Silk Road as being the single shadowy force keeping up the Bitcoin economy behind the scenes imagine. About three quarters of its users are from the United States, although British and European users are a sizeable minority. One reason for this is the relative ease of buying bitcoins in the US, as well as the higher interest in drugs there, but the divide is also because Silk Road does little to cater to its non-US customers. For example, Silk Road users have the option of seeing prices in BTC or USD, but not any other currency. This is particularly of concern for non-US sellers, because they, unlike sellers who are based in the US, do not have the choice of setting a price for their goods that is fixed in their local currency. Language is another concern; foreign language support is nonexistent, and even dedicated subforums for second-tier languages are lacking.

So far, there have been no reports of anyone being arrested as a result of Silk Road activity, and there are good reasons to believe that while the DEA may find Silk Road worth keeping an eye on, they are not actively attempting to identify buyers or sellers. As one Silk Road user, vlad1m1r, who confines himself to the strictly legal activity of selling bitcoins in exchange for cash in the mail in the UK, writes, “I find it implausible that they are monitoring it on a daily basis as it’s simply not an effective use of resources due to the anonymous nature of the Tor network and the use of GPG encrypted messages to exchange personal information. Users occasionally speculate that this vendor or that may be LE (Law Enforcement) but I doubt very much that a Police officer would sell drugs in order to make arrests as this would be textbook entrapment.” The last claim, that a police officer selling drugs constitutes entrapment, is a legally complicated one; USLegal defines entrapment as being “when [a person] is induced or persuaded by law enforcement officers or their agents to commit a crime that he had no previous intent to commit”; someone actively searching drug listings on Silk Road would likely not fall under the definition. Nevertheless, the argument that it’s not worth it to spend the resources going after Silk Road is a valid one, and law enforcement officials who are more interested in mitigating the social consequences of drug sellers and gangs on the streets than in pursuing a prohibitionist agenda as an end in itself may well decide to leave Silk Road alone simply because buying drugs on the internet is much safer than the alternative.

The relationship between Silk Road’s users and its management tends to be a positive one. As vlad1m1r describes it, “we do get the occasional malcontent who complains that their thread was arbitrarily deleted or that the creator of Silk Road himself DPR hasn’t deigned to address their particular concern, but people are generally polite when asking for new products or help with using the site, and the admins largely reciprocate.” One of the factors contributing to Silk Road’s cohesive community is the high level of trust. Scams are a serious problem on the darknets because of the anonymity of the participants and the fact that going to the police for help necessarily implies confessing to a crime, and Silk Road is one of the few places that attempts to counteract this with a reputation system and a built-in escrow service.

However, there are problems. One major controversy among the service’s users is that of morality. There have been instances of people putting up images which constitute child pornography in some jurisdictions but are acceptable in others, and the Silk Road administration tends to stick to its own moral philosophy in such cases, not taking down consensual images which are slightly underage but strictly prohibiting products of genuine abuse. There have also been requests for credit card skimming devices, which are not allowed under Silk Road law, but which some people believe are no more immoral than counterfeits and drugs. Weapons were another concern, and Dread Pirate Roberts eventually resolved that particular concern with the middle-of-the-road option of banning them from Silk Road itself but allowing them on a specifically designed sister site called The Armory. Services such as theft and contract killing are banned from Silk Road and The Armory entirely, although some Silk Road users point buyers interested in such goods to a competing site with no moral restrictions at all, Black Market Reloaded.

The other issue, although not a controversy, revolves around the escrow system. The default way of making transactions in Silk Road is for the buyer to send his funds not to the seller directly, but to the escrow system, which notifies the seller that it received and is holding the funds. When the buyer receives his product, he notifies the escrow system that the transaction was successful, and the seller gets his money. Some sellers, however, ask their buyers to bypass this mechanism and send directly to them for convenience, a practice which is heavily frowned upon by the Silk Road administration and community, but is nevertheless sometimes done. On April 20, many sellers on Silk Road celebrated the service’s first birthday by hosting special sales of their products at reduced prices, and one established vendor, Tony76, used the opportunity to sell a large number of orders and ran off with the money. There is some speculation as to just how much Tony76 was able to steal, but it is known that he transferred at least $30,000 worth of bitcoins off the site. Since then, the use of escrow has gained in popularity once again, and the possibility of making escrow mandatory, while not currently implemented, is always under discussion.

Outside opinion on Silk Road is split. Some believe that the Bitcoin economy would be better off without such services tarnishing its reputation, as it would be better able to market itself as a currency with legitimate uses, while others openly embrace the underground economy either seeing its liberation as an end in itself or respecting its potential to act as a bootstrapping mechanism for Bitcoin. In terms of its size, Silk Road is currently Bitcoin’s largest e-commerce platform, having about twice as many products as its largest legal competitor, bitmit.net, but it is far from being Bitcoin’s economic powerhouse, a title to which businesses like Butterfly Labs and BitInstant hold a much greater claim. Both supporters of Silk Road’s particular brand of crypto-anarchic freedom and people concerned with Bitcoin’s public image can rest assured that Silk Road is nowhere near taking over the Bitcoin economy, but neither is it going away.

 

As a recent article by Business Insider describes it, “China is a kleptocracy of a scale never seen before in human history.” The exploitation suffered by hundreds of Chinese families today is not just the exploitation of a heavy-handed government clamping down on union activities, evicting millions from their homes to make way for economic projects, turning a blind eye to outright financial fraud, or any kind of active collusion carried out by foreign businesses; rather, the Chinese are living under a system which has been macroeconomically rigged against them.

In traditional Chinese families, the main old age security mechanism for thousands of years has been having children. Because of a culture that leads to children staying with their parents and taking care of them until they die, having a large family was necessary simply because having no family could lead to starvation when everyone your own age has passed away and there is no one left to care for you. When the one-child policy was enacted in 1978, however, this means of taking care of one’s old age became illegal, and low-income families turned to the only other option available to them: savings banks. Even with the level of poverty that is prevalent in China, families are managing to cut back on their consumption to save as much as 50% of their income every month.

Laying aside the one child policy’s effect of pushing savings rates up so high, in an ordinary economy this would simply be the market working as intended. Individuals value their future as much as they do the present, so they save money, and that money is invested into long-term oriented business projects on a societal level.  This fuels the economic growth and produces the goods and services that will take care of them in their old age.

In China, things are different. Because capital controls prevent most people from investing in foreign assets, the range of places that low and middle income families can save their money is very limited. One option, bank accounts, has rates that are regulated and thus limited to 1%, a highly negative rate when factoring in national inflation, which is currently hovering around 3%. Slightly better are life insurance policies, but the returns on these too are negative when compared with national inflation. The remaining option is property, but the direction in which property values will go in the medium term is uncertain, and the barriers to entry, as well as this risk in property investment, mean that for many savers, banks are actually the more attractive alternative.

As for where this savings account money is invested, the chief borrowers are the “state owned enterprises” (SOE), which are not known for their productivity as engines of long term economic growth. As a report by the US-China Economic and Security Review Commission describes, “The irony of this situation is that the private sector in China has been more productive than the state-owned sector and has been growing more rapidly. For example, private enterprises are more than twice as productive as wholly owned SOEs. Indeed, productivity increases with each form of ownership that moves progressively away from direct state-ownership”. Instead, SOEs tend to spend their capital on extravagances such as this palace-like Harbin Pharmaceuticals plant. Nevertheless, the corruption in the Chinese government-industrial complex ensures that these SOEs continue to get favored rates when borrowing money from the banks.

The obvious question is, how can Bitcoin help? While the currency is not a panacea in improving investment access and liquidity – for Prosper-like peer lending, for example, it currently has no place whatsoever – this may be an application where Bitcoin may indeed help people protect their wealth. An argument has been made that electronic money and a modern banking system are key tools in alleviating poverty since they allow savings to be kept safe from crime, encouraging people to actually store enough money away for investment or insurance purposes rather than spend it as soon as they can. In China, this is clearly not working. Although banks can protect your wealth from the common crook on the street, they offer no protection against the kleptocrats on the top, who control the banking system itself.

It would, of course, be foolish to suggest that people with no children and no welfare system should place the majority of their life savings into a currency which may rise or fall by a factor of a hundred over the next few years. However, Bitcoin offers much more than just the currency itself. First of all, it offers a route for people to store their money in other currencies through exchanges. Second, there have been funds on the GLBSE in the past which allowed people to indirectly own stocks on real-world exchanges, and if demand arises, these may appear again in the future. Such funds can even be based on businesses within China itself, as the private sector is already willing to rely on “private financing mechanisms beyond the scope of permissible financial activity” and more efficient mechanisms of bringing private financing to the businesses that need it most can only be an improvement. Bitcoin is simply one link, even if a critical one, in the chain of personal and economic liberation and democratization that the internet is rapidly beginning to provide. Third, even the highly speculative investment that is Bitcoin itself can be a good thing to have if one puts only a small portion of his savings into it. If Bitcoin falls by a factor of 100, 1% of your life savings would dwindle down to 0.01%, but if it rises by a factor of 100 that 1% could turn into a doubling.

The utility of investing through Bitcoin is not limited to China. In other poor countries as well, the lack of a good investment vehicle is a problem for many, as cash can easily be stolen and property destroyed. Bitcoin, on the other hand, features savings mechanisms such as brain wallets, and Bitcoin services can be accessed with a username and password that can also be memorized and accessed from anywhere where there is a laptop and an internet connection. Infrastructure to facilitate much of this, such as text-based mobile phone interfaces, is lacking, but there have been attempts to promote Bitcoin in Africa, and if demand picks up, the infrastructure will be soon to come.

In China, Bitcoinica tried to introduce Bitcoin through Alipay deposits in February, but Alipay’s policy of not allowing currency exchange transactions forced this to end. More recently, however, there have been some successes. MemoryDealers’ Roger Ver successfully introduced some Chinese businessmen to Bitcoin in May to help get the currency used for gambling in Macau, and later that month, the BTCChina exchange saw a one-day volume so high as to temporarily propel it to second place among all Bitcoin exchanges in the world.

In circumstances like these, Bitcoin should be seen not so much as a technology of economic efficiency, but rather one of democratization. The present, heavily state-controlled banking system is clearly not working for the people, and there is an opportunity for disintermediation to bring costs down for businesses, while at the same time ensuring that working class individuals are not quietly robbed of their savings. Furthermore, if Bitcoin gets any traction as a means of opening up access to capital, the result would be an emerging economy equipped right from the start to use it as a currency.

 

Butterfly Labs had just unveiled their latest addition to their line of specialized Bitcoin mining computers: the Bitforce SC Single. Butterfly Labs already provides some of the most powerful and economical Bitcoin mining hardware available – its currently most popular SHA256 Single product provides a mining hashpower of 832 megahashes per second ($3 per day under current network and market conditions) for a mere $599, or $719 per GHps, a higher ratio than any other FPGA on the Bitcoin wiki’s mining hardware comparison list. Its electrical efficiency is not unmatched, but nevertheless impressive, managing 10 megahashes per joule (the ZTEX USB-FPGA module beats is with 22), but the difference is not a great one; at 10 cents per kilowatt hour electricity costs consume about 6.5% of SHA256 Single’s revenue. The SC Single, however, will put even these figures to shame; when it comes out in October it will provide a staggering 40 gigahashes per second for $1299 ($32 per GHps), paying for itself in eight days if the rest of the network were to remain constant.

The technology that Butterfly Labs is using to attain such a high hashrate is known as application-specific integrated circuits, or ASIC. In simplest terms, ASIC is simply the next step along the progression toward more and more specialized hardware for Bitcoin mining. The first miners ran on ordinary computers and relied on the computer’s central processing units, or CPUs, general-purpose hardware which runs all of the software applications that we use every day. Then came graphics processing unit, or GPU, miners, still using ordinary computers, although now only a subset of them, but relying on specialized hardware chips designed to make very similar computations millions of times very quickly by doing them in parallel – a function originally intended for applications such as playing movies and making the vector computations needed to run modern 3D games, but just as usable for the repeated hashing proof of work process employed in the Bitcoin mining protocol. Next came field-programmable gate arrays, or FPGAs, which are essentially arrays of basic components called logic blocks the interconnections between which can be programmed by the user to efficiently perform a specific function. The next step, application-specific integrated circuits, are the highest level of specialization: chips that are manufactured specifically to serve one function and one function only. Within ASICs, there are further gradations of specialization: an intermediate stage called structured ASICs, which benefit from standardized manufacturing like FPGAs but are “programmed” by the manufacturer using masks, and full custom ASICs, which use a layout built specifically for the task down to each individual transistor. The reason why Butterfly is able to so vastly outstep its present competition is that Bitcoin mining is currently at the FPGA stage, but Butterfly managed to skip structured ASIC entirely and create a solution that is built using the full custom approach.

Of course, Butterfly Labs’ current monopoly on this new type of hardware will not last long, and in time more and more miners will begin to use ASIC technology to increase their mining output. The result will be a massive increase in the Bitcoin network’s hash power, as a single unit of Butterfly’s SC Mini Rig, the most powerful computer that will appear in the SC line, will be able to match the current hashpower of 8% of the Bitcoin network, exceeding all but the largest three mining pools, for a mere $30000, as well as a continuation of the present shift in the breakdown of Bitcoin mining costs away from electricity and toward capital expenditure.

The SC Single’s release also represents a milestone for Bitpay. The leading Bitcoin payment processor had been experiencing rapid growth since March, increasing its monthly volume from $11,000 in March to $40,000 in April and $170,000 in May, quadrupling every month, and the release has brought Bitpay yet another record: over $250,000 processed in a single day. Orders came in from 17 different countries, including Belgium, Russia, Finland, Poland and the Philippines.

Bitpay CEO Anthony Gallippi is certain that the fundamentals behind his business will ensure its continued growth. In a press release announcing the new daily record he states: “Our payment service is unique in the marketplace. Using BitPay, an internet merchant can accept a payment from any country on the planet, instantly, with zero risk of fraud. No other payment processor can do this. American Express cannot do this, PayPal cannot do this, Mastercard cannot do this. BitPay can.” Bitpay has the disadvantage over plain Bitcoin transactions that it takes a 0.99% fee for every transaction, but it distinguishes itself with its ease of use as well as the possibility of automatic conversion and deposits into the merchant’s bank account, including insurance against sudden fluctuations in the Bitcoin price. Gallippi is currently advertising his service to credit card and Paypal using merchants and consumers maligned by chargeback fraud and identity theft, stating in a venture capital pitch last month that identity theft claims over 10 million victims per year. Although Bitpay is far ahead of its competition in market share for now, that may later change; MtGox has recently come up with a checkout system of their own which is “completely free” and very easy to use; all it takes is creating a standard MtGox account, pasting the HTML code for the checkout button onto your webpage, and editing your server-side code to handle the POST request that the button sends whenever a payment is successfully made. It remains to be seen how much market share MtGox will be able to capture with this alternative.

 

 

Update: since the writing of this article, TorWallet’s developers have ceased communication and the service is not processing withdrawal requests, and so the site is with overwhelming probability a scam. Let this be another reminder to all Bitcoin users: anonymously operated financial services are in almost all cases not to be trusted.

The latest online Bitcoin wallet to come out, TORwallet, is, in simplest terms, a combination of Instawallet and a Bitcoin mixing service (or “tumbler” or “laundry”, as the concept is sometimes called). Just like with Instawallet, the service works by generating a random URL for each new wallet, and showing a Bitcoin address you can deposit to to add funds to the wallet onscreen. Once you deposit money, all you need to do to withdraw it at any point in the future is to revisit the same URL, enter the destination address and click “Send Bitcoins”. The other defining feature of the wallet, the mixer, mixes your bitcoins into a large pool and then sends you bitcoins back, but ones which are not linked to your original coins in the blockchain. Essentially, for an adversary who has not compromised TORwallet, the task of linking your new “laundered” bitcoins to the old ones becomes nearly impossible.

While the idea seems convenient at first glance, the effectiveness of this implementation can be called into question. First of all, the representation of TORwallet as an “anonymous mixing bitcoin wallet” is somewhat misleading. One would expect such a wallet to carry out its mixing functionality automatically and behind the scenes, so that user could be comfortable in the knowledge that the “mixing wallet” is doing the mixing for him, but in TORwallet this is not the case. For mixing to take place at all, the user must activate the feature manually by clicking the “mix coins” button and paying the greater of 3% of the amount mixed or 0.5 bitcoins as a fee, making the “mixing” and “wallet” functionalities essentially completely separate. This particular way of implementing the mixing functionality is highly problematic not only because of usability, but also because it limits functionality; what if a user periodically deposits new coins that need to be exchanged for “clean” coins and does not wish to pay a 3% tax on his entire pool of savings every time he does so?

The wallet’s security model, a copy of that used by InstaWallet, is also problematic. The strategy of using the URL as the password is highly problematic, since it means that anyone who gets access to your browser can simply look through your history, open up your wallet and drain it within seconds. Accessing the wallet only through a private browsing mode (which the Tor browser bundle does by default) solves this problem, but also creates the problem of having to find a place to store the URL. To prevent attackers from easily finding it with a simple file directory scan, it would have to be stored encrypted, and at that point what you have is simply a more cumbersome version of a proper username/password authentication framework like that used by secure wallets like Blockchain. This is not to say that Instawallet is worthless; the wallet’s extreme usability makes it an ideal candidate for users who are just getting started with Bitcoin or don’t have time to set up an account at a more advanced alternative. However, Instawallet themselves recommend that you “please do not store more than some spare change here,” and since TORwallet’s fee structure implies that they expect people to be storing more than 16.7 BTC ($100) with them, they would do well to listen to Instawallet’s own advice.

Both of TORwallet’s key functions have superior alternatives as separate entities – Bitcoin Fog as a mixing service, as it takes a smaller fee (randomized 1-3%) and a smaller minimum (1.00 BTC withdraw with no fixed fee component), and Blockchain is a stronger wallet. Furthermore, there is even a service which can be described as a mixing wallet done right: Silk Road. The Tor-based black market auction site employs a secure mixing service intended to be safe enough even for users engaged in illegal activities for all bitcoins passing through the system, and includes the send, receive and storage functionality needed to make a basic wallet work.

The last problem is that of trust. As we know from the examples of MyBitcoin and Bitscalper, anonymous services whose only function is storing money cannot be trusted simply because the profit that they would earn from running away with everyone’s coins at any point is sufficiently high compared to the profit that they expect to earn in the future by acting honestly that it often is expedient for them to disappear. Deposit accounts can still be trusted; if the provider provides enough information about who they are and where they can be found, the threat of law enforcement will shift the calculus toward honesty, and even some anonymous services can be trustworthy. In the case of Silk Road, for example, users only need to store change in the service for a few days, and the owners have an effective source of fees, the future expectation of which is sufficient to continually entice them to conduct themselves honorably. TORwallet, however, is intended to be a long-term money storage provider, and has chosen to maintain their anonymity, placing them on par with Bitscalper in terms of the level of trust that they presently deserve.

The one feature that TORwallet does have over its alternatives is its direct accessibility through Tor as a hidden service, something which no other online Bitcoin wallet (except Silk Road and its ilk) has available. Aside from that advantage, however, the service has a long way to go in terms of implementing a reliable framework of security and trust. One suggestion would be to switch to a Blockchain wallet security model, where the wallet is stored encrypted and all calculations are done client side, and to seamlessly integrate the mixer into the wallet as a deposit mechanism – the wallet would show a deposit address where users can send their funds to, which automatically triggers a mixing service which sends randomly sourced bitcoins to the wallet that the user controls perhaps less a 1-2% fee. This would solve the trust problem and the security problem while making it much more of a true “mixing wallet” at the same time. Abandoning the Instawallet URL-as-password model for something more secure is another necessity. As it stands, however, there are much better alternatives for the functionality that it provides.

 

Cryptocat made the news recently when its lead developer, Nadim Kobeissi, was detained and interrogated one week ago at the US-Canadian border. The tactic of harassing individuals who are involved in suspicious cryptography-related activities is not a new one; Nefario, the China-based founder of the Global Bitcoin Stock Exchange, was detained for hours as interrogators questioned him about Bitcoin and ultimately denied him entrance to the US last August. This time, the Streisand effect kicked in; Cryptocat saw the highest level of interest since the project’s inception, and its inventor was forced to cautiously tweet: “It’s important that my interrogation doesn’t blow confidence in Cryptocat out of proportion. It’s still an experiment that needs work.”

But what is this software that has attracted so much attention these last few days? Essentially, it’s a browser-based, open source alternative to traditional instant messaging and chat programs like Skype. Messages are encrypted in the browser with Javascript, sent encrypted across the internet to the client, and then decrypted in the client, using public key encryption to ensure that Cryptocat itself has no way of knowing what is sent, although its developer is careful to point out that Cryptocat, and third party observers, know that something is sent, and, unless the client is also using Tor (Cryptocat offers a hidden service at xdtfje3c46d2dnjd.onion), who is sending and receiving. To join a chat with someone else, simply go to a URL like “https://crypto.cat/?c=bitcoin”, substituting bitcoin with whatever name you want to give the chat, and tell someone else to go to the same page.

Even beyond its encryption, Cryptocat is superior to its traditional alternatives, like Skype, in some respects. No accounts or setup are required, so you can immediately set up a chat with anyone around the world without asking them to download a program first. There is no need to invite individual users to a large group chat; simply putting the URL in a common location will suffice. The program also has a certain charm to it that strictly professional services like Skype lack; it uses the names of animals as default usernames and its interface features imagery reminiscent of  classic arcade games of the 1980s.

However, the program does have its drawbacks. It has a smallar array of features, offering no voice or video chat and limiting its file transfer service to only images and zip archives up to 600 KB. The fact that it’s a browser-based program is a disadvantage as well as an advantage; there is no way for the program to tell when someone’s online or offline as there is in Skype, limiting its utility as a program for chatting with friends or coworkers whenever they are online. It has a Chrome extension and an Android app, but neither of these have any kind of notification functionality that allows them to remain useful without being the dominant application on the screen.

Browser applications, even ones that securely encrypt everything on the client side, do have a weakness in terms of security. While a desktop app with equivalent functionality only needs to have its code evaluated once, web applications essentially re-download the entire code to the user’s browser each time the program is loaded, so backdoors can be introduced at any time. Fortunately, however, the chrome extension and Android application solve this problem, as both types of software are downloaded and kept locally on the client.

Another inconvenience is speed. A message takes a few seconds to make its way from one party to another, partially because of the encryption and partially because the software relies on both clients communicating through the centralized server rather than the semi-decentralized globally distributed network that Skype uses. Of course, this fault is excusable; an individual with Nadim Kobeissi’s limited resource does not have the capacity to make the types of physical networking optimizations that corporations like Microsoft and Google can set up. But this is nevertheless a hurdle that may drive users who do not need encryption away from Cryptocat, as typical users tend to evaluate services by a combination of their quality and how many of their friends and coworkers already use them, not their estimation of the creator’s merit under his particular circumstances.

Cryptocat is still a work in progress, so these issues may be resolved as time passes and the software continues to be developed, although the hurdle of speed is one that is difficult to solve without the resources of a large corporation. Its ease of use and lack of setup is a strong advantage; for applications like one-time interviews it is arguably the best chat application available already. On the whole, the program is off to a good start, and it has lots of potential to become even better.

 

Over the past ten years, as even the most perfunctory observation will be bound to conclude, the financial system has become more and more negligent in its responsibility to serve the underlying economy from both sides. Savers have seen the interest rates in their bank accounts fall to 1%, or real returns that are negative once inflation is taken into account, while borrowers are forced to deal with rates that often exceed 10%, and with credit cards, often 20%, leaving many in a cycle of perpetually increasing debt.

Economists often think of an interest rate as a price, where the good being sold is the ability to use the value embodied in a certain quantity of money for a given period of time. The present financial market, therefore, is one where the difference between the price that the intermediaries are paying for the good and the price at which they are selling it is a factor of ten. This is unprecedented; there is no other commodity market in existence where the intermediaries are able to maintain profit margins of 900% without competition.

As with many other industries over the past ten years, however, the internet is paving the road for a better way. Rather than going through a bank, sites like Zopa and Funding Circle in the UK and Prosper and Lending Club in the US connect borrowers and lenders directly, taking only a 1% fee for their service. Interest rates end up at a happy medium of about 6% for savers and 9% for investors. Zopa already boasts a total of $200 million worth of loans processed, and its American equivalents have processed $350 million and $650 million, respectively. There is no FDIC insurance, meaning that there is no institutional guarantee that lenders will get their money back, but the intermediaries perform credit checks on borrowers and split up lenders’ money among many loans, so that even with the occasional default, investors can be almost certain that they will net a profit.

To many Bitcoin users, this seems, at first glance, to be a natural market for Bitcoin to expand into. Decentralization and disintermediation are beloved buzzwords in the Bitcoin community, and if the currency can remove the need for banks as a place to store money, why can it not also eliminate the need for banks in their capacity as managers of capital? The reality, however, is that Bitcoin simply is not ready.

One argument that is often used in favor of Bitcoin is its lack of transaction fees. While this argument is a very compelling once for applications like online gambling, some forms of e-commerce and international money transfer, it simply does not apply in the case of lending. A 3% transaction fee both ways from a three year 8% APR loan is indeed a significant 23% cut of a lender’s profit, but what this argument does not take into account is the fact that for most users Bitcoin, as it stands, also has a transaction fee of 2-6% when cashing into and out of the fiat economy. If a hypothetical borrower spends large amounts of money on Bitcoin-friendly services already, then this effect can be bypassed by sending the borrower bitcoins, which he will spend on services, allowing him to use the fiat currency that the bitcoins replaced to fund the object of the loan, but outside of the Bitcoin community itself, such individuals are few and far between.

Another argument is Bitcoin’s ease of use. While it may take several minutes to fill in the necessary personal details to make a payment with a credit card or Paypal, Bitcoin, as its proponents argue, is instant. This argument does not deserve serious consideration in this case; while it is a compelling argument for buying a song for 0.199 BTC on Coindl, filling out a form is an insignificant inconvenience compared to the thousands of dollars that an investor usually commits to sites like Prosper.

Bitcoin’s potential for anonymity is another advantage heavily touted by Bitcoin enthusiasts, but once again, while anonymity is an advantage if one wishes to buy a private VPN service or goods that one’s family, community or government disapproves of, it is of little use when trying to establish that the recipient of your money is a trustworthy individual who has the ability, willingness and incentive to pay the money back.

A fourth problem is that Bitcoin’s existing lending community is specializing in a market far different from the kind of loans that peer lending sites intend to attract. In the Bitcoin community, the prevailing interest rate is 3-6% per week, and the projects that the loans are intended to fund, assuming that they are not outright Ponzi schemes, are all specific to Bitcoin itself. Furthermore, the market is focused on a small number of highly trusted borrowers, so the problems involving trust and borrower evaluation on the scale that mainstream peer lending sites have to deal with are nonexistent. Before they restructured their service in 2009, Prosper was barely surviving as investors in all but the highest rated loans found themselves losing more to defaults than they gained in returns. Prosper’s restructuring introduced more stringent measures in steps like identity verification and credit checks, the very sort of red tape that the Bitcoin community tries so hard to avoid.

Bitcoin has great potential to do a lot of good in many economic sectors around the world, but what the case of peer lending serves to remind us is that it is not the immediate solution to all of our financial problems. Not only is there no clear path for adoption, but there is no evidence that at this point in Bitcoin’s adoption, entering the peer lending market is even desirable. Inside the Bitcoin community, the Bitcoin lending market is a strong one, and there may be compelling arguments for using Bitcoin for investing and lending to specific markets in developing countries, but Bitcoin-based peer to peer loans on a national scale is a prospect in which Bitcoin may become the preferred currency only in the far future.

 

On June 8 exactly one year ago, the price of a bitcoin, having risen over the preceding two months from sub-dollar prices and public obscurity, briefly hit its all-time high of $31.91 before crashing down to $10.25 and beginning a slow and steady decline that would decrease its value by over 93% over the next four months. The sudden climb brought great hope to the Bitcoin community, with some expecting that its value would hit $1000 and it would enter mainstream usage by the end of the year, and the decline brought no less despair, as mainstream media turned against Bitcoin, pointing out first the existence of black market applications like Silk Road and later questioning its economic model. By late November Wired even wrote an article proclaiming the “Rise and Fall of Bitcoin“, setting the stage for many outside the Bitcoin community to see the currency as a failed experiment and even an example to point to when defending the need for centralized control.

However, Bitcoin overcame all of this, and just one month after proclaiming the currency’s fall Wired took back its words with an article proclaiming its comeback, and the price of the currency proceeded to rise once more before finally stabilizing at $5. While the decline following the bubble did have some negative effects on the public perception of Bitcoin, as the opinions of some turned so sharply against it as the price slowly collapsed, there is a strong case to make that the effects of the bubble have largely been positive. The Bitcoin community acquired most of its current members around this time, and judging by the fact that the community still exists it is evident that many of these new entrants are willing to endure hard times for the sake of a brighter long-term future. The opinions of some may quickly change with the tides, but there are some who see that Bitcoin has a long term fundamental value that will make it a useful good to hold no matter what price it may be worth on the market and have invested hundreds of thousands of dollars into both the currency itself and the businesses that support it.

Now, at a time when Bitcoin has been more stable for the past four months than even mainstream commodities like silver and the mood might just be turning toward another rally, many are looking back to what happened in the spring and summer of 2011 and are expecting another bubble of proportionate size. One the one hand, such skepticism to Bitcoin’s present stability is a very reasonable response, and it is vitally important that we as a community do not take for granted factors which may change at any time. However, there are several reasons why such an event is not likely to repeat itself at this time.

First, there have been no changes in fundamentals. The bubble of 2011 accompanied a fundamental shift in the prospects of Bitcoin economy: that of mainstream attention. Bitcoin was mentioned on Forbes and Time magazine, potentially putting it in the hands of Wall Street billionaires, and the number of people who were aware of Bitcoin in the tech community skyrocketed. Now, however, there has been no such shift. There has been more and more evidence of growing Bitcoin adoption behind the scenes, and Bitcoin businesses like Coinabul, BitPay and BitInstant have all been reporting massive rates of growth over the past six months and new products have been released, but news of this sort has been circulating for months. A change in fundamentals comparable to that seen in April and May last year would be the adoption of Bitcoin by a mainstream business, not hints of shadowy movements in China.

Second, the Bitcoin economy is more decentralized, and therefore more resilient to any sudden changes in expectations, both positive and negative. The Bitcoin economy of 2011 was heavily dependent on centralized providers in all sectors, relying heavily on Dwolla, MyBitcoin, Deepbit, adoption specifically in the United States and, most importantly of all, MtGox. A collapse of the latter could have easily brought the Bitcoin economy to its knees. Now, however, there is a much greater degree of resiliency on all sides. The most recent major news in the Bitcoin economy was the shutdown of Bitcoinica, its only margin trading provider and the second largest Bitcion trading site surpassed only by MtGox itself, but its collapse only reduced the Bitcoin price temporarily by less than 5%, a decline which was quickly corrected and even reversed. The only exception seems to be the Bitcoin lending market, dominated heavily by Pirate and the GLBSE, and a collapse of particularly the former will mean losses of hundreds of thousands of dollars, but even this will not have as much of an effect; the activities of Pirate are largely confined to the Lending and Securities subforums at Bitcointalk, and many casual Bitcoin users and almost all observers have never even heard of these activities. Because there are far more businesses that can now succeed and fail in the Bitcoin economy, the effect of each one is lessened.

Third, the possibility of shorting will provide a dampening effect on any bubbles. Right now, since Bitcoinica has shut down there are no margin trading platforms available, but Kronos.io will soon enter the stage and once again fill this niche. The problem during the 2011 bubble was that there was no way of taking a position against the rise of Bitcoin prices, so while many were skeptical that the bubble would last there was nothing they could do about it. What short selling (or “shorting”) does is allow people to effectively own a negative quantity of bitcoins, redirecting investors who would otherwise be purchasing bitcoins on the open market and pushing prices up further to buying a virtual bitcoin whose value the short-seller is accountable for. If enough people to this, shorting absorbs upward market swings and helps stabilize the market.

Finally, cultural memory matters. When the Bitcoin community encountered the bubble of 2011, it had not seen anything like it before. The only similar rises in prices that preceded it were the ones from $0.05 to $0.30 and then from $0.30 to $1.10, both of which were followed by either temporary stagnation or only relatively slow declines in price. Now, however, there is a much greater awareness of the dangers of both overexcitement and despair, and a general understanding that price stability is important is much more prevalent. History never repeats itself exactly the same way twice, and Bitcoin is no different.

If a mainstream business does suddenly decide that it would begin immediately using Bitcoin and promoting it to millions of customers, then these factors will indeed change. The economy would at least temporarily recentralize, cultural memory will once again become a void as the community loses all precedent, and no one will be willing to short when prices are going up so high that betting on the end of a bubble too early would simply result in forced liquidation as too much money is lost in the short term. If there is a fundamental shift that would force Bitcoin to grow by a factor of ten in a single year, then it is quite likely that the straight line growth of 25% per month would eventually turn itself into a faster climb followed by a slump. For now, however, greater stability is still the norm.

 

Centralization has always been an issue in the Bitcoin ecosystem. The original spirit of the currency, as envisioned by its early adopters and its founder Satoshi Nakamoto, features a distributed network of independent miners, a peer-to-peer community of users trading bitcoins for products and services with each other over the internet and an unprecedented stability and universality arising from the currency not being dependent on any one currency or government. By the middle of 2011, however, it became clear that this was not at all the case – what we got instead is an oligopoly of mining pools, a Bitcoin exchange market dominated by a seemingly immovable monopolist, and a hopelessly intertwined connection with the United States and its dollar. Many have been unhappy with such a state of affairs ever since it developed, although others argue that it is the optimal level of centralization decided on by the free market and the best exchanges and pools deserve their market shares for providing a superior quality of service. For the longest time, this state of affairs remained. Tradehill came and went, Deepbit remained as strong as ever, and MtGox’s market share was progressively increasing all throughout the latter half of 2011. More recently, however, the free market has begun to take another course.

Data from the past year shows that three types of decentralization have all been taking place in the Bitcoin economy since roughly the beginning of 2012: the decentralization of exchanges, the decentralization of currencies and the decentralization of pools.

We see a rapid decline in MtGox’s global market share, bringing the exchange down to a level unseen since 2010. The causes of this are twofold. First, MtGox’s popularity itself is decreasing. The main reason for this is that the main barriers to entry that had been cementing MtGox’s monopoly throughout 2011, deposit and withdrawal options and liquidity, have both been solved. Through BitInstant, MtGox, CryptoXChange, Virwox, Bitstamp and BTC-E are able to process essentially the same array of fiat deposit and withdrawal options. As for liquidity, while in 2011 one could often expect some exchanges to have prices that differ from each other by as much as 5% and ask-bid spreads that are even greater, now an increasingly more advanced arbitrage market is effectively removing both of these efficiencies. More recently, MtGox has been having some recent difficulties processing withdrawals, and this has also added to the shift in market share as users move to other exchanges where they feel that they can get their money faster and more safely. The ever-present fear that MtGox is secretly operating with a fractional reserve also tends to intensify during crises such as this one, driving users to move their funds elsewhere.

Second, the prime importance of the US dollar itself is decreasing. While MtGox’s popularity even among USD exchanges has decreased considerably over the past five months, an equally important cause of its decline is the fact that in non-USD markets, which are growing in importance, MtGox has never been that strong in the first place – its market share there has never consistently been above 30%, and it too has decreased from about 25% to about 18% over the past eight months.

Finally, there is the decentralization in pools. The above charts show the slow progression of the mining pool network from July 2011 to now. One year ago, the Bitcoin network was so centralized that if the then two largest pools, Deepbit and Slush, were to coordinate they could potentially pull off a 51% attack, and over the past six months especially the market share of the top two has been consistently on the decline. It can be justifiably argued that the owners of the two pools never had that much power in the first place, as whenever Deepbit’s hash power threatened to exceed 50% miners tended to quickly switch to other pools, but whether the state of affairs of one year ago was merely slightly undesirable or a critical source of instability it cannot be denied that the fact that the market is moving toward a more decentralized structure is an improvement.

There are other signs of improvement. In 2012, alternative clients like Electrum, Armory and Blockchain have finally become credible alternatives to the Satoshi client, and the Bitcoin economy is even decentralizing by industry as the financial sector slowly begins to take a back seat. The failure of Bitcoinica, the then second largest business in the Bitcoin economy, followed by a mere 4% decrease in the Bitcoin price and soon after a rapid correction and even reversal, is ample proof of this. The period of the Bitcoin economy being held hostage by capricious individual bottleneck providers is finally at an end.

 

Un des arguments principaux en faveur de la monnaie fiat contrairement à la monnaie basée sur une ressource rare, soit l’or, l’argent ou les bitcoins, c’est qu’il y a du temps qui doit être perdu a miner quelque chose qui n’a pas de valeur intrinsèque. Ne serait ce pas plus efficace, les défenseurs de la monnaie fiat débattent, de ce mettre en accord d’utiliser quelque chose plus facile a produire, comme le papier, comme monnaie et d’avoir une agence centralisée qui prévient la fraude? Malgré que ces arguments ont leurs mérites contre l’or (spécialement du au dommage a l’environnement qui peut être causée via les mines), miner du Bitcoin est beaucoup plus que l’équivalent de miner pour de l’or ou fabriquer de l’argent : il sécure aussi le réseau contre les fraudes, fournit la fonctionallité des factures (une base de données décentralisée qui permet aux gens de voir les transactions qui ont eu lieu) et, du moins dans les stages primaires du Bitcoin, de joindre la communauté et de commencer a utiliser des Bitcoins.

Le point technique de la création des blocs auquel beaucoup objectent c’est que le mineur doit résoudre la valeur du bloque pour que le hache soit quelque chose qui commence par des zéros, un problème qui peut juste être résolu par essai et erreur et qui est vraiment difficile. Ça prend environ à tous les ordinateurs qui mine des bitcoins dix minutes pour trouver la solution. Plusieurs demandent pourquoi il est nécessaire d’inclure ce critère, au lieu de faire la création de bloc aussi simple que de signer toutes les transactions, créant un Bitcoin où tout les 21 millions de coins son creés du début avec peu d’effort informatique.

Il y a deux raisons pourquoi ce n’est pas fait. La première est question de la distribution de la monnaie – à qui les coins initiaux devraient être distribués? Tel que montré par l’exemple de Tenebrix, le monde n’est pas prêt a faire confiance a un système où que le créateur de la monnaie contrôle la piscine et qui le distribue lentement au peuple comme récompense pour ceux qui aident a faire augmenter la valeur de la monnaie, alors la seule option c’est de la distribuer au peuple. Mais qui est le peuple? Si les coins sont distribués par hasard aux l’adresses Bitcoin, alors nous allons avoir des mineurs qui calculent des trillions de haches générant des adresses. S’il y est distribué à l’IP par hasard, alors Bitcoin pousseraient le monde a prendre des botnets et aussi l’impacte du monde qui chasserait des adresses IP aurait aussi bien pousser le monde en Ipv6 après six mois. Le pouvoir des ordinateurs, au contraire, ne peut pas être être usurpé d’aucune manière ; si quelqu’un trouverait une manière de laquelle un ordinateur de 10-gigaflop peur prétendre d’être un ordinateur de 60-gigaflop (ce qui nous donnerait un ordinateur de 360, etc.), ça serait, dit doucement, un gros avantage au programmateurs partout dans le monde. Aucun mécanisme, autre que le pouvoir des ordinateurs, marche pour empêcher une personne de se fair passer pour de plusieurs (aka Sybil attacks), et imaginer combien de temps le budget des états-providence scandinaviens dureraient si une personne pouvait prétendre d’être milles. Et si une personne pouvait prétendre d’être 51% du réseau, les conséquences pourraient être pire.

L’escroquerie de multiple identité est un des plus grands défis de l’internet en général. Considérant que ce sont des résultats de ce menace externe que Bitcoin: l’enregistrement des noms de domaine est centralisée, la création de compte Gmail nécessite maintenant un numéro de téléphone, partout dans le monde on résout ce problème avec le captcha. La preuve de travail cryptographique, malgré qu’inefficiente, est présentement la seule méthode pour résoudre ce problème tout en gardant l’anonymat de l’internet et Bitcoin et son parent idéologique, Hashcash, un système antispam qui requière l’expéditeur du courriel pour résoudre le hache problème a l’envers, reconnaissent ça.

Maintenant, combien d’électricité est-ce que Bitcoin utilise? Selon les données de BitcoinWatch, le réseau total de hashrate est de 12 trillions de haches par seconde, et le hardware utilisé pour le minage est d’une efficacité d’environ 2 Mhache/J. Alors, le réseau utilise 6 millions de joules, où 1.7 kWh, per seconde. Avec un coût d’électricité de 0.10$/kWh, ça nous donne 14 400$ par jour. Ceci semble extrême : un réseau de 45 millions de dollars qui consume plus par année qui vaut au complet. Mais ces calculs ne voient pas les avantages à long terme. À la fin de 2012, la récompense aux mineurs va être divisé par un facteur de deux et ceci va continuer chaque quatre ans jusqu’à ce que la récompense soit complètement disparue et remplacée par le coût de transactions. Qu’est qui se passe après?

À long terme, la grosseur du réseau est en consistance avec 2 choses et 2 choses seulement : le prix d’un Bitcoin et la récompense pour la création d’un bloc (valeur fixé plus les frais de transactions). C’est parce que chaque mineur mine plus qu’il dépense, alors le réseau au complet doit coûter moins chère que la valeur complète en dollars américains qu’il gagne pour lui même. Ce qui est le plus intéressant dans cette équation est ce qu’il manque : une considération pour efficacité du hardware. Si le hardware devient dix fois moins cher et dix fois plus efficace, alors des nouveaux mineurs vont apparaître jusqu’à ce que le réseau soit dix fois plus grand, et le réseau entière va coûter le même prix qu’auparavant. Si les mineurs peuvent trouver une deuxième utilisation a leur électricité utilisée pour miner en utilisant la chaleur de leurs ordinateurs pour réchauffer leurs maisons durant l’hiver, ça serait un changement positif vu que ça décentraliserait le minage parce que se deviendra une tache faite par tous les gens qui en ont besoin et pas par des super-ordinateurs centralisés. Aussi, ça augmenterait le pouvoir du réseau a trouver des haches et augmenterait la sécurité, mais ultimement ça ne baisserait pas le coût du minage.

Vu qu’il n’y a ultimement aucune récompense fixée, comment gros est-ce que le réseau deviendrait ? En prenant un échantillon de 20 blocs aléatoires de maintenant, le total des récompenses par transactions est en moyenne 0.01 par bloc, ou 5000 fois moins que l’ancienne récompense fixée. Alors, si la récompense disparaîtrait maintenant, a long terme, une fois que la distorsion de l’investissement qui a été fait pour le hardware existant disparaît, l’électricité consommée par le réseau diminuerait a une somme minime de 2.60$ par jours (1.6 ghache/s). Maintenant, et si Bitcoin prendrait contrôle du système monétaire mondial ? Il y a présentement 8.3 trillions de dollars US dans le monde (physique et virtuelle), alors si Bitcoin serait pour prendre contrôle de tout ça, son prix (en dollars de 2012, parce que dans telle monde le dollar peur n’exister plus) serait de 8.3$ trillions divisé par 21 millions, ou 3.95$ millions de dollars américains par BTC. En prenant charge que la somme totale des frais de transaction reste la mémé (une hypothèse raisonnable parce que la valeur des frais et proportionelle au grandeur de l’économie Bitcoin et le prix d’un bitcoin est aussi proportionel, donc les deux effets s’annulent), le réseau coûterait au plus le prix des frais d’une transaction par jour (1.44 BTC par jour) – 2.08$ billion par année. Juste l’impression de la monnaie aux États-Unis coûte 7 millions par année présentement, sans mentionner les industries privées – Visa, Mastercard, Paypal, la plupart du système bancaire, etc. Même avec des frais de transaction 50 fois plus haute, Bitcoin en vaut la peine.

 
 

Si Bitcoin est pour réussir à faire un gros succès, il peut pas se limiter a la foule d’internautes, des libertariens et des avocats du droit à la vie privée qu’il cible présentement et il doit trouver une manière d’attirer le grand marché public. Ce marché semble difficile a attraper : il a échappé a plusieurs choses y compris Linux et l’Esperanto, vu qu’ils apprécient la commodité, mais cette commodité ne peut pas être atteinte sans le support du même public. Mais ce grand public n’est pas d’une entité homogène ; il y a plusieurs dimensions – riche et pauvre, urbaine, suburbaine et rurale, jeune et vieux et il y en a ceux qui sont potentiellement plus intéressés au Bitcoin que d’autres. Et c’est en les divisant et conquérant que les révolutions qui voient du grand succes l’atteignent – Facebook a commencé à Harvard pour les élèves et maintenant c’est pour le monde entier. Bitcoin peut bénéficier d’une telle stratégie et la cible logique de Bitcoin sont les jeunes gens, qui son moins établies et confortables dans leurs vie et prêts a essayer des nouvelle choses. Et qui sont les plus jeunes et les plus aventureux? Les adolescents.
Voici 5 raisons, pourquoi les adolescents sont une excellente adoption démographique pour Bitcoin :

1) Les ados veulent le pouvoir d’achat par internet. L’idée d’une allocation pour que les enfants aient leurs propres argents pour dépenser est profondément ancrée dans notre culture, mais il n’y a simplement pas d’équivalent pour l’internet. Dans plusieurs juridictions, vous devez avoir au moins 18ans pour obtenir sa propre carte de crédit, alors quand une personne en bas de 18 ans veut acheter quelque chose, la seule option est d’utiliser la carte de crédit des parents. Les parents puissent adopter une des deux stratégies : ils laissent leurs enfants utiliser la carte de crédit pour acheter ce qu’ils veulent, en espérant qu’ils ne dépensent pas trop, ou il puissent dire a leurs enfants qu’ils doivent demander pour chaque achat. Le premier est trop négligent et le deuxième est trop autoritaire et il y pas de manière facile de faire le juste-milieu dans le système des cartes de credit. Mais avec Bitcoin oui : les parents pourraient donner leurs allocations, les envoyer a leurs enfants chaque semaine ou mois, et il n’y aurait pas de possibilité qu’ils dépenseraient trop – un équivalent identique a l’argent pour le monde digital.

2) Les Bitcoins leur apprendraient la sagesse financière. Avec une carte de crédit, on dépense maintenant et on s’inquiète plus tard. Si on veut, on peut s’inquiéter beaucoup plus tard vu qu’on peut juste faire le paiement minimum chaque mois jusqu’à ce qu’on soit proche de la faillite et que les agences de recouvrement appellent chaque jour. Avec Bitcoin, c’est le contraire. L’argent doit être dans votre compte avant de le dépenser et même si dans un monde de Bitcoin il y avait des dettes, en avoir serait un choix et non une transition homogène d’une balance positive a une balance négative que c’est présentement. Il y a une limite a combien vous pouvez dépenser et quand vous dépenser n’importe quoi, la transaction apparait sur le client Bitcoin et reste la jusqu’à ce qu’uneautre, nouvelle, transaction apparaisse et la pousse en dehors de l’écran pour la remplacer. La douleur de dépenser est lal à chaque fois qu’on regarde à la balance restante. Avoir juste un montant dans un endroit important, a être regardé a chaque jour, a un fort pouvoir psychologique : sa vous fait constamment penser “il y me reste 47.2 BTC et je ne serai payé qu’en 14 jours, alors ça me donne environ 3.5 BTC par jour, donc est-ce que c’est vraiment une bonne idée d’acheter ce nouveau gadget a 15 BTC aujourd’hui quand je vais peut être en avoir besoin pour quelque chose d’autre plus tard?”. C’est prouvé que le monde dépense moins quand il paie cash et Bitcoin aurait un effet encore plus fort.

3) Bitcoin permet les mêmes bénéfices de l’argent comptant côté intimité. Le monde veut de l’intimité et beaucoup d’adolescents de nos jours serait horrifiés s’il apprenaient que leurs parents allaient tracer de tout leurs achats à partir de maintenant. Notre société voit une telle infraction a l’intimité d’irraisonnable, et ultimement ils ne sont pas très utiles: aussitôt que l’enfant arrive au collège il va immédiatement acheter tout ce que ces parents lui interdisaient quand il était plus jeune. Bitcoin, de l’autre cote, c’est le Weight Watchers pour notre richesse: c’est pas ce qu’on achète, mais bien combien on achète, et les adolescents peuvent faire leurs propres choix sur ce qui est le plus important pour eux et s’ajuster, au lieu d’angoisser pour satisfaire les idées de leurs parents de ce qui est la sagesse financière et ce qui est l’extravagance. La prudence est mise en œuvre par la réalité, pas l’autorité.

4) Bitcoin encourage les jeunes entrepreneurs. L’internet est de plus en plus le choix primaire des jeunes pour interagir socialement, mais c’est aussi une opportunité puissante pour eux de commencer a interagir avec les autres économiquement. Tout le monde a des talents, que sa soit la musique ou l’art ou l’écriture ou la programmation informatique, et Bitcoin permet a ces gens de facilement gagner de l’argent venant de leurs habiletés mêmes pendant qu’il sont encore des étudiants du secondaire. L’argent était le libérateur économique et l’excitant des jeunes entrepreneurs d’il y a 50ans, avec l’image iconique des jeunes qui vendent de la limonade et des jeunes a bicycle qui vont porter les journaux, et cette culture a donné comme résultat le meilleur air économique qu’on a jamais vu. Maintenant, l’équivalent de ça est l’internet, ou le ciel est la seule limite: si votre travail est assez bon, vous pouvez atteindre des centaines de milliers de personnes et gagner une plus grosse somme d’argent que le propriétaire du kiosque de limonade aurait pu rêver. Mais pour que les adolescents soient libérés économiquement, il faut qu’il y ait une monnaie d’échange libératrice, et Bitcoin est le candidat parfait: contrairement à la carte de crédit, être un créateur et gagner de l’argent est aussi simple qu’être un acheteur et dépenser.

5) Les adolescents sont le futur. Ils ne sont pas ralenti par la manière que nous menons nos vies présentement, avec nos cartes de crédit, emprunts et prêts, et peut-être quelques uns choisiront de vivre sans banque complètement, en utilisant Bitcoin dès le début. Même si pour beaucoup de personnes changer à Bitcoin est une étape douloureuse vu qu’il sont déjà confortables avec leurs cartes de crédit, les adolescents c’est d’appliquer pour une carte de crédit qui est une tache douloureuse et ils préféreraient commencer à gagner et dépenser des bitcoins. Finalement, ils ne sont pas corrompus pas le système psychologique des cartes de crédit, celui ou que l’argent rapide et temporaire est plus facilement atteignable en suppliant qu’en produisant et la psychologie qu’ils vont adopter va, 10-20 ans plus tard, être la psychologie dominante du mode. Si nous, la communauté de Bitcoin, tentons de fondamentalement changer comment le monde pense, les adolescents sont la meilleure place a commencer.

 
 

Le premier Mars, Le premier mars, l’hébergement qui fournissait les serveurs de Linode ont été piraté, résultant un vole de 3000 BTC d’une piscine minière opérée par Slush et plus sévèrement, 43000 BTC de Bitcoinica. Il y avait eu deux grands vols de Bitcoin auparavant, un de 25000 BTC en Juin 2011 en un de 17000 BTC de l’échange Bitcoin bitomat.pl en Août, ce qui a abouti a la sauvetage et acquisition de l’échange par MtGox. La sécurité est un problème majeure dans la communauté Bitcoin, et plusieurs s’inquietent que s’ils géreront une partie signifiante de leurs activités économiques avec les bitcoins son argent ne sera pas sûr. Beaucoup des partisans du système bancaire traditionel voit le vol en juin et maintenant ce vol comme des signes claires de l’infériorité de la manque de la réversibilité et traçabilité de Bitcoin, et on ne peut pas nier que les incidents tels que ce vol sécoussent la confiance même des partisans de Bitcoin dans le système, mais il est d’une importance cruciale que nous ne tombons pas dans l’hystérie et éxaggerons les conséquences et, plutôt, regardons la question avec beaucoup de sang froid. Il y a plusieurs raisons pourquoi ce vol est, en fait, moins indicatif à la faiblesse de Bitcoin qu’il peut sembler au premier coup d’oeil.

• La sécurité de Bitcoin s’est amélioré entre ce vole et celui qui est arrivé il y a six mois et ne cessera pas de s’améliore. Quand bitomat.pl a été piraté, les 17 000 bitcoins perdus représentaient tout l’argent des clients, tandis que pour MyBitcoin, leurs pertes étaient égales à 51% de leurs fonds totaux. La quantité perdue par Bitcoinica, malgré stupéfiante pour la moyenne du monde, était assez basse pour qu’ils réussient a rembourser toutes leurs clientèles et continuer a faire rouler la compagnie. Ils sont en train de faire une mise à jour sur leurs sécurités suivant cet incident et ils travaillent sur un serveur spécialisé, plus sécuritaire. Bientôt, les innovations comme les transactions des signatures multiples augmenteront la sécurité encore plus.
• La necessité de stocker les données qui valent $220,000 n’est pas quelque chose d’unique à Bitcoin. Compagnies telles que Sony et Stratfor on encore plus souffert quand leurs données propriétaires ont été ébruités par Anonymous, et il y aussi plusieurs petits cas qui ne font pas les nouvelles. Un rapport par l’institution Ponemon montre que le coût en moyenne des portables volées monte à 49 246$, incluant 39 297$ à cause des données perdues ou ébruitées. Nous portons au temps d’attention à la perte reliée a Bitcoin parce que la valeur est clairement quantifiée et parce que les entreprises Bitcoin restent extrêmement ouvertes est orientés vers la communauté – normalement, les banques annoncent par leurs voles au publique parce qu’ils ne veulent pas paraître vulnérables et prendre un coup à leurs réputations.
• Bitcoinica est une compagnie de service financier et ils doivent gérer ce genre de risque d’une manière que les autres compagnies ne doivent pas. Gardons en tête que de tel risque ne sont pas uniques a Bitcoin – MF Global a vu 1.2$ milliards, près de 100% de sa valeur nette (ce qui a menée à la perte de ce courtier), simplement disparaître sans laisser de trace. Bitcoinica, de l’autre coté, a réussi à rester solvable. Pour la compagnie moyenne de maniement Bitcoin, de tel risque sont beaucoup plus doux vu que tous leurs bitcoins peuvent être entreposés dans un stockage froid parce qu’ils ne doivent que laisse l’argent y entrer sans l’enlever.
• Le petit gars est sécure. Bitcoinica a pris le coup entier des 43 000BTC pour que la balance des individus ne soit pas touchée. L’ironie c’est que c’est exactement comme ça que ça marche dans la vraie vie. Quand ta carte de crédit ce fait voler et le voleur achete 10 000$ de biens avec elle, la banque prend le coup et te rembourse, comme Bitconica a fait. Ceci est un des points majeurs de Bitcoin: Bitcoin ne te force pas à être ta propre banque. Vous pouvez gardez vos bitcoins stockés avec une banques de Bitcoin si ça fait vous sentir plus sécure, et de plus en plus qu’il y a d’usagers qui acceptent les Bitcoins, plus de services comme cela vont apparaître. Il y a déjà plusieurs options avec autant des niveaux de commodité et de paranoïa qu’il a de types de smartphone. La liberté est supérieure a la non-liberté pas parce que les gens le préferent peu importe les conséquences, mais parce qu’il permet l’expression de la préférence en premiers lieux.

 

 
 

Un Bitcoin c’est une monnaie électronique pair à pair décentralisée. Essentiellement, c’est similaire a un compte bancaire, dans le sens que votre argent est gardé en chiffre dans une base de données et que le système transfert un nombre d’un compte a l’autre pour faire une transaction, a l’exception que le système est décentralisé donc la base de données est sauvegardée sur chaque ordinateur participant simultanément. Bitcoin est le premier a distribuer une tel monnaie, ce qui a pour résultat que son architecture n’a pas d’homme au milieu pour prendre des frais sur chaque transaction que vous faites et que ce n’est pas contrôlé par aucune organisation ou gouvernement.

Les courriels vous permettent d’envoyer des messages n’importe où dans le monde. Skype fait la même chose, mais avec les conversations téléphoniques. Maintenant il y a Bitcoin, vous permettant d’envoyer de l’argent n’importe où de n’importe où sans restrictions ou frontières nationales pour moins d’une cent par transaction.
Le système a été décrit dans le papier de Satoshi Nakamoto de 2008 qui a été envoyé à une liste de courriel de la cryptographie, et le projet original en open source a été fondé le 3 janvier 2009. Pour ses deux premières années, le nombre d’usagers a pris de l’expansion, jusqu’à fin 2010, suite a un article dans Slashdot où qu’il a eu un influx de nouveaux usagers et d’attention médiatique et d’une croissance rapide des prix vu que pour la première fois Bitcoin était exposé au monde entier. Depuis son inception, il y a maintenant plus d’un million d’usagers et les 8.5 millions unités existants présentement valent ensemble des dizaines de millions de dollars. La base de données décentralisée de Bitcoin sécure des transferts entre comptes (ou, dans la terminologie de Bitcoin, adresses) en utilisant un algorithme mathématique connu sous le nom de signatures digitales et prévieny le problème connu sous le nom de la double dépense – envoyer le même bitcoins a deux personnes différentes – en diffusant tous les transactions sur un réseau qui prend trace de quelles bitcoins ont été dépensés et quand pour synchroniser l’information sur toutes les machines participantes. Vu que toutes les transactions sont diffusés sur le réseau entier, il sont automatiquement publiques. Contrairement à la banque régulière, qui conserve l’intimité des consommateurs en gardant les transactions privées, pour Bitcoin, la transparence ce fait en gardant l’identité du propriétaire de l’addresse privé.

“Miner” pour des Bitcoins
Quand un ordinateur participant activement dans le réseau, appelé un mineur, prend charge d’une nouvelle transaction et qu’il est satisfait de son authenticité, il l’ajoute a la fin d’une liste maintenue collectivement avec les dates et l’heure de toutes les transactions connue appeler le “blockchain”, ce qui le confirme en même temps. N’importe qu’elle autre essaie d’envoyer le même coins encore une fois va être automatiquement rejetée vu que la chaîne met en évidence que ce coin a déjà été dépensé. Le processus pour ajouter un bloc a la blockchain a été désigné pour être vraiment difficile, nécessitant beaucoup de temps et de puissance de calcul pour accomplir, ce qui fait que c’est essentiellement impossible de créer un blockchain de contrebande sans avoir encore plus de puissance de calcul que le reste de la communauté du réseau Bitcoin combiné au complet. Chaque bloque a une valeur appelée hache, un chiffre mathématique généré des données d’un bloque en utilisant une fonction délibéré visée a être alambiqué pour que son résultat soit essentiellement aléatoire et qu’il soit impossible a prédire ce que le résultat va être avant de le calculer, et la difficulté de créer un bloque augmente dans le sens que pour chaque bloque sois valide, son hache doit être plus bas qu’une certaine “cible”. Les mineurs sont alors forcés de faire des changements insignifiants au bloque en essayant des valeurs différentes d’une variable factice appelée “nonce“ jusqu’à ce qu’un mineur soit chanceux et voit que la hache d’une de ses versions du bloque tombe plus basse que la cible, et là le bloque se fait ajouter et le processus recommence. La cible est ajustée automatiquement pour que, en moyenne, un nouveau bloque apparait chaques 10 minutes. Alors, plus qu’il y a de mineurs qui s’engagent dans l’activité de miner, le plus difficile que c’est pour chaque mineur de produire un bloque.

Alors quelle est la motivation des mineurs de dépenser tous ses efforts pour essayer de produire des bloques, si ça prend au temps de temps et d’énergie? La réponse est que la personne qui réussit a produire le bloc reçoit une récompense. Cette récompense est en deux parties. Premièrement, le producteur du bloc reçoit une abondante somme de bitcoins, celle-ci est convenue par le réseau (présentement, cette somme est de 50 bitcoins; cette valeur va être coupée en deux en décembre 2012 et environ a chaque quatre ans qui suivent pour que le nombre de bitcoins récompensé approche, mais ne dépasse jamais, 21 millions). Deuxièmement, tous les frais de transaction qui apparaissent dans les transactions incluses dans le bloc se font réclamés par le producteur du bloc.

Donc, autre que d’être important pour maintenant la base de données des transactions, miner est aussi le seul mécanique par le quelle des bitcoins puissent être crées et distribués aux personnes dans l’économie du Bitcoin.
Miner avec le CPU vs GPU

Dans les premiers jours de Bitcoin, c’était facile pour n’importe qui de trouver des nouveaux blocs en utilisant seulement des CPU standards. Mais ainsi que de plus en plus de gens commençaient à miner, la difficulté a grandement augmenté au point que le temps moyen pour un CPU de trouver un simple bloc a été augmenté en années. La seule méthode de miner qui en vaut la peine est d’utiliser une carte graphique haut de gamme avec un logiciel spécialisé ou de joindre une piscine de mineur.

Certains utilisateurs Bitcoin peuvent se demander pourquoi il y a une aussi grande différence de rendement entre le minage CPU vs le minage GPU. Un CPU est principalement désigné à être un exécuteur et à prendre des décisions, dirigées par un logiciel. Les CPU sont facilement capables de suivre des instructions du genre “si cela arrive, fais cela, sinon fais telle affaire”. De l’autre cote, les GPU ont été désignés pour être excellents a faire des procédés de vidéo et moins de travail d’exécution. Le procédé des vidéos est beaucoup de travaux répétitifs, vu qu’il faut faire presque la même chose sans cesse pour afficher un grand nombre de pixels a l’écran en continu. Pour faire fonctionner cela efficacement, les processeurs vidéo sont beaucoup plus capables de faire les travaux répétitifs, que de changer de tache rapidement. Les GPU ont une grosse somme d’ALU (Unité Arithmetique/Logique), plus que les CPU. Ce qui a pour effet qu’il peut faire un plus gros travail mathématique en plus grande quantité que les CPU. Une manière de voir cela serait, pour le CPU, de s’imaginer un petit group de genre vraiment intelligent qui puisse faire n’importe quelle tache qu’on leur donne rapidement. Un GPU serait un gros groupe de gens stupides qu’individuellement sont pas trop intelligent ou rapide, mais qui puisse être entraîné a faire des tache répétitives et que collectivement, ils puissent être plus productifs simplement à cause de leurs grands nombre. Essayer plusieurs haches rapidement – le processus derrière le minage du Bitcoin – est une tache vraiment répétitive très approprié pour le GPU, parce que c’est presque la même travail chaque essai mais avec la changement d’un seul nombre (appeler le “nonce”) dans les données qui se font hacher. Et voilà pourquoi, rapidement, qu’un GPU peut miner plus rapidement des Bitcoins qu’un CPU. Miner pour des bitcoins nécéssite aucune décision – c’est une tache mathématique répétitive pour un ordinateur. La seule décision qu’il ont a faire dans le minage Bitcoin est : Est-ce que j’ai un bloc valide ou non. C’est une excellente charge de travail à exécuter sur un GPU.

 
 

Dans les débats communs, Bitcoin est souvent traité comme un nouveau compte révolutionnaire de comment nous manions nos fonds, remplaçant les finances irréversibles avec des finances réversibles, automatique avec prépaillage, asymétrique avec symétrique et les dettes avec l’équité. Les promoteurs de Bitcoin acclament souvent ces aspects en disant qu’il faut changer notre culture économique, tandis que les négateurs déplorent la perte de la protection du consommateur que la réversibilité et les responsabilités des banques pour la fraude amènent normalement. La réversibilité est devenue un grand point de concentration dans la communauté Bitcoin, avec une large comprennance que les médias a paiement réversible comme Paypal ne peuvent simplement pas interagir avec les médias irréversibles tels que WebMoney, Liberty Reserve, plusieurs formes de monnaie virtuelle dans les jeux et Bitcoin et que, éventuellement, un des deux types de finances doit gagner. Cependant, ce que la discussion oublie souvent de dire c’est qu’en dehors de l’Amérique et l’ouest de l’Europe, le débat est inutile vu que le problème a déjà été réglé: les paiements réversibles sont quasi non-existants.

En Russie, pour exemple, en dehors de quelque quartier riche à Moscow et St Petersburg, les cartes de crédit n’ont pratiquement aucun marché, et l’économie roule sur l’argent. Si vous avez une abonnement à l’internet ou un cellulaire, il y a des kiosques dans presque tous les centres d’achat qui te permettent de déposer de l’argent pour garder ces plans mensuellement. Vous êtes payé en comptant, vous payez votre manger en comptant et vous payez vos factures en comptant. Même les biens digitaux fonctionnent comme cela – Valve, avec son plan de s’étendre en Russie, avait a configurer 45 000 kiosks à travers du pays pour permettre aux gens de déposer de l’argent dans leurs comptes Steam. Et le système fonctionne bien. Contrairement a l’économie de l’Ouest, où que pour commander un bien en ligne il faut donner accès a nos infos bancaires, protégées seulement par l’assurance qu;il y a l’option de faire une refacturation et que la banque soit ultimement responsable pour toutes les pertes causées par la fraude. Contrairement, en Russie, vous pouvez ne faire confiance aux gens qu’avec le montant qui mérite d’être mis en confiance – une valeur qui est souvent pas trop élevée.

Au Moyen-Orient, CashU est une méthode de paiement en ligne populaire pour les e-commerces et les jeux, mais encore une fois, c’est du prépayé et non réversible. En Chine, des systèmes tels que Alipay sont dominants avec leurs règles similaires : comme le créateur de Bitcoinica Zhou Tong le décrit, “la racine de toute réversibilité est le système utilisé par les Américains, basé sur les cartes de crédit tel que Visa et Mastercard. Les chinois n’utilisent pas Visa et Mastercard pour les achats domestiques, les achats en ligne nécessitent une authentification stricte, les banques ne sont généralement pas responsables pour les pertes de fonds, etc. Tout ressemble au système Bitcoin, et non-réversible.” Mais le problème persiste : comment ses systèmes contournent le problème de la protection des consommateurs? Ils utilisent exactement la même solution qui a été proposée et sporadiquement implantée par Bitcoin: le service séquestre (escrow).

Escrow fonctionne en ayant l’acheteur, au lieu d’envoyer directement l’argent au vendeur, envoyer l’argent à une agence de service séquestre. L’agent séquestre notifie le vendeur qu’il a reçu les fonds et le vendeur envoie le produit. Quand l’acheteur reçoit le produit, il le dit à l’agent, qui, à son tour, envoie l’argent au vendeur. Ceci est une bonne méthode de combattre les fraudes et est généralement adopté dans les scénarios avec peu de confiance et aucune réversibilité. Comme Zhou Tong a dit, “plus que la moitié des transactions de Alipay utilise un agent”.

L’Afrique est en pleine révolution bancaire par lui même avec le “M-banking”, envoyer et recevoir de l’argent par messages texte avec les cellulaires. Les téléphones mobiles sont surprisement accessibles même au plus pauvre des pauvres ; même en Afrique, où que la majorité de la population sont encore dans la pauvreté, il y a en moyenne un téléphone par maison. Malgré que les systèmes bancaires ont essayé de fermer les compagnies de ces services quand ils ont commencé a prendre de l’expansion, il sont maintenant en train de travailler ensemble et tout le monde y bénéficie ; avoir de l’argent digital c’est particulièrement important dans un monde où les voles sont en abondance et la protection physique est un luxe.
Tandis que dans l’économie de l’ouest c’est facile de croire que Bitcoin est une nouvelle forme fondamentale de finance du consommateur, dans le monde en développement, les finances de style Bitcoin y sont déjà présentees. Partout où que c’est implanté, son efficacité crée de plus en plus de richesse à travers le monde. Et il y a pas de différence entre acheteur ou vendeur – n’importe qui peut envoyer ou accepter de l’argent, et le potentiel d’une économie décentralisée est maximisé. Il y a en masse d’opportunité et de temps pour que Bitcoin, lui-même, soit impliqué. Changer de faire de la finance avec les shillings kényans avec M-Pesa à utiliser des Bitcoins via MtGox n’est qu’une simple changement de fournisseur, et de là, aussitôt que les smartphones deviennent plus fréquents que les téléphones moins sophistiqués le sont présentement, ça semble être une étape simple pour que les gens entreposent leurs bitcoins directement dans leurs téléphones. On prédit que dans une couple d’années il y va avoir près de 1.7 milliards de personnes avec des cellulaires et sans compte de banque, alors Bitcoin a beaucoup d’années pour prendre sa place dans le marché vu que l’internet va se rendre facilement accessible en inde, la Chine rural et l’Afrique avant les banques et les cartes de crédit. Et, démontré par l’exemple de toutes les sociétés en dehors de l’ouest, la culture nécessaire pour soutenir une économie basée sur les paiements symétriques non réversibles est déjà la.

 

---

Explications des différences des finances entre le style Bitcoin et le style carte de crédit

• Symétrie – avec des systèmes tels que les cartes de crédit et Paypal, c’est beaucoup plus difficile d’avoir un compte de marchand comparé au simple compte d’acheteur, et ils ne sont pas désignées a être utilisés en dehors du contexte formel de magasins. Avec les finances Bitcoin, n’importe qui qui peut envoyer de l’argent peut en recevoir aussi facilement, diminuant les barrières facilitant l’entré des compagnies nouvelles
• Réversibilité – les cartes de crédit et Paypal ont des mécanismes pour les clients de refacturer des frais en cas de fraude, et si le marchand veut contester la refacturation, il doit traiter ça avec la résolution de dispute formelle, ce qui effectivement bouge entièrement le problème au vendeur. Certains argumentent que c’est pire parce que les acheteurs peuvent choisir de pas acheter d’une compagnie suspecte tandis que les compagnies ne peuvent pas d’une manière pratique évaluer et chosir leurs clients. Dans le système Bitcoin, les transactions sont finales et d’autres mécanismes sont utilisés pour faire affaire avec ces scénarios.
• Dettes vs Équité – Une carte de crédit permet d’acheter un produit maintenant et de payer plus tard, tandis que le système Bitcoin ne le permet pas et nécessite que tout le monde maintienne une balance positive. Pendant que d’autres systèmes tels que Paypal son en théorie pas basés sur les dettes, en pratique, il le sont souvent si tu reçois une refacturation après d’avoir dépensé l’argent reçu
• Automatique vs Prépayé – dans un système financier basé sur les cartes de crédit, les services où il y a régulièrement les mêmes achats, tels que des abonnements et les jeux en ligne, gardent les numéros de carte de crédit dans des fichiers pour les prendre quand le temps vient. Dans un système Bitcoin, une approche prépayée est préférée, où vous déposez de l’argent dans votre compte et l’argent est pris directement de la. Ici, pour la protection des acheteurs, l’approche du système prépayé est supérieure vu qu’il y a une limite aux frais imprévus qu’on puisse engager

 

 
 

The views expressed in this article are those of the author and do not necessarily reflect the position of Bitcoin Magazine

Over the past five months, the Bitcoin community has seen the emergence of savings funds offering interest rates far higher than any seen in the traditional economy. The most innocuous form of high-interest deposits, mining contracts, have been around for a long time, allowing anyone to financially participate in mining operations by buying shares and collecting a percentage of the profits in return, offering returns of up to 1.4% per week, or an annual percentage rate (APR) of 106%. Non-mining opportunities began to offer even higher returns than this. GLBSE assets like TYGRR-BANK return up to 2.2% per week, or 211% APR, and in mid-January a forum user known as “imsaguy” offered 6% per 2 weeks, or 357% APR, although at the cost of a somewhat long-term commitment. More recently, however, the interest rates seem to have lost all sanity. Looking at the “lending” and “securities” subforms at bitcointalk.org, we see headlines like “ShadowAlexey’s Deposits 12-18% per month“, “Savings Account, 4% Weekly“, and even “Hashking’s 6.75% Weekly Deposit Special” – a staggering 2921% APR.

The largest of these lenders, and likely the one that many of the other funds are at least partially themselves invested in, goes by the name “pirateat40”, or Pirate for short, and Pirate’s deposit operation is formally called “Bitcoin Savings & Trust”. Accounts in BST are heavily coveted, with Pirate enforcing limits on the number and size of deposits, and interest rates are very high: 4.2% for deposits of at least 100 BTC, 5.6% at 500 BTC and 7% (that’s 3313% APR) at 2000 BTC. Pirate has been unwilling to reveal much about how he is able to earn such high interest rates in the first place, although the reasons that he has given include market arbitrage and “private loans to network members”. Pirate boasts that his activities in such fields provide returns of 10.65% per week, and he pays out an average of 5.98%.

However, both of these methods of earning money are highly suspect. The prevailing interest rate on the lending forums is at about 1.5-8% per week depending on the duration and risk, and reasonably trustworthy individuals can get capital for free from the Islamic Bank of Bitcoin, so even assuming that money is shuffled from borrower to borrower at 100% efficiency with no defaults, earning 10.85% per month is impossible. Market arbitrage may sound more plausible at first glance, but the reason why it cannot explain Pirate’s earnings is that it simply does not scale. At low levels, if bitcoins are worth $4.95 on one exchange and $5.05 on another, and such a thing happens just as often in the other direction, it can indeed provide decent profits. However, the act of buying on one exchange and selling on the other itself helps bring the prices back together, so the process is ultimately self-defeating. Pirate claims that 300000 BTC passes through his accounts every month, but, at the time of this writing, selling even 50000 BTC on MtGox would push the price down to $4.99, and buying that much would push the price up to $5.38, negating any possible profits. Such a large sale on any other exchange would almost certainly send the prices there to either below the $1.992 low of November of above the $31.9 high of June. Furthermore, the idea that market trading activities are less lucrative than their most zealous proponents claim has some empirical evidence: although the activity in question was speculation and not arbitrage, the last time trading was used as a justification for extremely high returns on deposit accounts, Bitscalper, it turned out to be a scam.

The other problematic question with regard to Pirate’s deposit accounts is that of why he is willing to offer such high interest rates in the first place. Rather than offering loans within the Bitcoin community, he could have instead obtained private funding for his ventures. Even if he was unwilling to betray his proprietary financial strategies at all, plenty of lenders are willing to provide interest at rates lower than the average of 6% that he is paying no questions asked, and credit card debt bears an interest rate of less than 0.5% weekly. The response that Pirate gave when asked this question is this:

Ok lets say your business was in “pet rocks”.  Now, there’s a demand for them from an active but relatively small community (like Bitcoin) that believe these rocks are worth their weight in gold.  So you run to your bank and withdraw everything you can, hell you might even ask the banker for a loan.  You tell him it’s for some home remodeling and because he’s known you since grade school you get the loan.  With money in hand you run to the rock market and spend everything you got on certified “Pet Rocks”.

You get your business off the ground while paying off the loan but in the back of your mind you can’t shake the thought of “What happens if people find out these are just rocks or if the rock market is overtaken by nano pets?”.  You take the risk and keep building your business by reinvesting your profits back into buying more rocks.

You wake up one morning, roll over and look at your phone to see the current price of “pet rocks” to be worthless.  With a ill feeling creeping over your body you start to think about how many rocks you have in the warehouse and how much money you’ve actually creamed off the top.

Why didn’t I just borrow the rocks from the rock community and pay them a portion of my profits?  That way if something was to happen, I made good money doing it and my long time friend (the banker) still likes me.

Essentially, Pirate wishes to avoid having USD-denominated debt to secure himself against the risk of Bitcoin price fluctuations. However, this excuse does not stand up to close scrutiny for a simple reason: the possibility of shorting. Sites like Bitcoinica, and soon Kronos.io, offer the ability to deposit a small amount of bitcoins and then trade that for a large positive USD balance and a negative BTC balance, earning a profit if the Bitcoin price goes down. This would essentially give Pirate the ability to cancel out any positive USD exposure that he has with a sufficiently large and highly leveraged short. To see how this works, consider a simplified mathematical example.

In Pirate’s current setup, let us assume that he is borrowing $25000, in the form of 5000 BTC, from investors at 6% weekly and investing that 5000 BTC at 11%. His net exposure to USD is zero, and every week he has a revenue of 550 BTC and an expense of 300 BTC, for a net profit of 250 BTC, or $1250. What would happen if Pirate decided to borrow the money from a non-BTC source and short BTC to compensate? The interest rate that Pirate would have to pay would be much lower, so he might perhaps be able to secure that same $25000 loan at an interest of only 1% weekly (68% APR, still a very high rate for traditional investors). In order to short, Pirate would need to set aside, for example, $5000 of collateral balance, which he can then convert into $25000 USD and -4000 BTC (4x leverage). He can then convert the remaining $20000 into 4000 BTC and use that for his market activities. The positive $25000 USD balance in his margin trading account perfectly balances out his $25000 debt, once again giving him a net USD exposure of zero. As for his profits, however, he is earning 11% weekly on 4000 BTC, or a revenue of $2200 per week, but is paying only 1% weekly on $25000, or $250 per week. Net profit: $1950 per week.

Of course, Bitcoinica has been hacked, and Pirate would have lost $5000 this month had he done this exactly (although compensation is likely to come for Bitcoinica users in the future), but even still Bitcoinica has only shut down once in the 26 weeks since Pirate started lending, so this would only have reduced his weekly profits from $1950 to $1758. Alternatively, he could choose to avoid using Bitcoinica at all, and simply short bitcoins on his own by offering highly leveraged positive Bitcoin, negative USD accounts.

Finally, even if Pirate prefers to stay within the Bitcoin community, there is simply no reason to offer such high rates to investors. He is already forced to restrict supply for his high-interest deposit accounts, so he could easily have kept the rates at a much more reasonable 2.5% per week and gotten as much capital as he needs. Setting deliberately high interest rates to attract more depositors than one needs is a strategy that only makes sense for a Ponzi scheme.

If Pirate is indeed participating in a Ponzi scheme, something which he has repeatedly denied, there are three ways in which he could be doing it. First, he could be running the Ponzi himself. Second, he could be investing in a larger Ponzi scheme outside of Bitcoin – Sergey Mavrodi’s MMM is a likely possibility because of the heavy Russian presence in the Bitcoin community. Finally, he could be even further down the chain, investing in high-interest funds outside of the Bitcoin community which are themselves investing in a Ponzi scheme; in this case, perhaps Pirate does not even realize that he’s investing into a Ponzi scheme at all.

If the Bitcoin lending economy is indeed backed by a Ponzi, the situation is further complicated by the surprisingly large number of middlemen in the Bitcoin lending economy, which creates a complex pyramid of investors.

On the first level of the pyramid, MMM intermediaries invest in pyramids like MMM receive returns of 40-60% per month, and are offering BTC-denominated investment accounts to acquire more capital for these investments. However, because the supply in these accounts is artificially restricted, and the interest rate is kept above the level that the market requires, demand inevitably arises for some of these investors to re-lend, pocketing a portion of the profits for themselves. Pirate, a high-interest lender on the Bitcoin Forum, also encourages this by offering his highest interest rates to very high balance accounts, so the average small investor would get a better return through an intermediary than through Pirate himself.

Some of these re-lenders are actually funds, which invest partially in what are arguably more legitimate ventures, like mining contracts and Bitcoin startups, but decided to accept the risk of one of their investments turning out to be a Ponzi scheme and defaulting for greater returns. This complex web of intermediaries can often make it difficult for both individual investors and even funds to invest without accidentally exposing themselves. The re-lenders themselves, of which the openly admitting Pirate re-lenders are often called “Pirate Pass Through” (PPT) bonds, either allow customers to deposit in them directly or through the Global Bitcoin Stock Exchange (GLBSE), which itself takes a small fee for buying and selling. Each level takes a profit, but the interest rates at the end are nevertheless as high as 3-6% weekly.

However, the question that must be inevitably asked is: what happens when the pyramid collapses? The lower-level MMM investors can easily default on all their debts and disappear, having earned a substantial profit from the difference between their rates with MMM and the rates that they offer their depositors. As for the BTC lenders, if Pirate turns out to be an MMM investor and defaults explicit PPT bonds will be able to get away with a default as well, but the more diversified funds, especially those who do not realize that they are exposed to an MMM default, face a more complex situation. Some will attempt to take the losses and keep operating, while others will shut down and perhaps offer their investors partial payback for their losses, explaining that they did not realize that the funds that they were investing into were connected to MMM. The GLBSE will only benefit, because the brief period of uncertainty between rumor of a default and outright announcement may generate a large volume of panic sales, all generating the exchange fees. The investors, however, will bear the brunt of the losses, and some will likely lose thousands of dollars.

The chance exists that Pirate is engaged in legitimate activity, and if that is true the likely scenario is that interest rates will soon go down, since the Bitcoin economy cannot possibly be growing fast enough to continue to earn Pirate a 19545% APR return. Parts of the Bitcoin economy are indeed growing quickly behind the scenes, as Coinabul and BitInstant are both reporting massive growth over the past six months and BitPay is claiming a 3x growth in transaction volume processed every month, but such a rate be sustained. The high interest rates on the GLBSE and in the Bitcoin community as a whole were also justified by the currency risk, as the value of a bitcoin itself might go up or down by a factor of 2 in the space of a month, however as much of this risk, especially in the downward direction, has faded away in the past four months, forces of supply and demand will likely push interest rates down as time passes.

On the other hand, if Pirate is running, or indirectly investing in, a Ponzi scheme, a default will likely have a serious impact on the Bitcoin economy because of the sheer number and size of the deposits involved, although legitimate businesses like MtGox, BitInstant and BitPay will survive unscathed. Whatever the outcome of the present lending bubble may be, since Bitscalper and now Bitcoinica have failed to return user investments in a reasonable amount of time, there is growing awareness that anonymous investment funds are a dangerous tool, and the result of this latest round of investment opportunities will likely determine what the community’s attitude toward such practices will be for years to come.

Vitalik Buterin is the main writer for Bitcoin Magazine and a passionate advocate of safe Bitcoin investments

 

This interview can also be found on Coinabul’s official blog

A 17 year old coder and entrepreneur named Zhou Tong (pictured above) created a website last year. The growth that his website exhibited is inspirational. In less than 6 months Bitcoinica.com was home to over one million dollars in assets. That young entrepreneur sold Bitcoinica a couple months ago and the new owners are having troubles operating the site securely. Zhou Tong is one spectacular, inspiring, and very young entrepreneur and I had the opportunity to ask him about his experiences. Hopefully the questions I asked will help others achieve the enormous growth his website generated.

Q: So, let’s start out with the basics. What type of family did you grow up with? What portions of your childhood do you think contributed the most to your character and work ethic?

A: I grew up in an ordinary Chinese extended family with hard-working parents. My grandparents were the ones looking after me in childhood. Up to the age of 12, I had no pocket money at all because my family pretty much decided everything for me. The only thing that I had to concentrate on was studying. I was not good at anything else, basically.

I would say there’s nothing interesting in my childhood. No toys, no cartoons and no comic books. I stayed happy because I could always get very good results and everyone in family was proud of me, and luckily I loved most of the compulsory subjects in school – especially Math, Physics, Chemistry and English.

The greatest influence to myself happened after going to Singapore. After being posted to The Affiliated High School of SCNU, the best high school in Guangzhou city, I subsequently received a scholarship offer from Ministry of Education, Singapore. I accepted it with only a few days of consideration, without much understanding about its potential influence to me. Being completely self-independent at 14 was really challenging for a lot of people, and for a long time, I wasn’t achieving anything in life. I became lazy, passive and I fell in love.

I didn’t really know how to have fun, because I didn’t play computer games at all. So I ended up reading books. I bought a few books about PHP, Ruby on Rails, personal finance and startups. At that time, I could use PHP to program a simple meta search engine (to combine search results from different source, de-duplicate and extract keywords). Coding became my only passion because I could get the sense of achievement. I joined my classmate’s blog TechXav and started writing tech articles as well (http://www.techxav.com is still alive, but the new owner killed my design and stopped updating. You can still read my articles though.) After I started learning Ruby on Rails, I got a feel about web developers’ community and I started to explore the popular philosophy – being small, simple and lean. At the same time, I got a lot of inspiration from books about Tony Hsieh (Zappos), Robert Kiyosaki (Rich Dad) and Steve Jobs. I dreamed about a private library of all O’Reilly books too.

Every year, I learned more than all previous years since birth combined. And I aim to achieve this in the future.

Q: When you created Bitcoinica, you managed to make a very lean startup, what tips do you have for keeping costs so low?

Being a technical founder, I didn’t really need anything to get started. I didn’t have money or any partners and I didn’t know any investors either. Even though my community members dismissed the importance, I still think the cloud was what made Bitcoinica lean. I started on Heroku and spent less than $100 a month to handle million of page requests every month. I outsourced sysadmin, security, banking and everything I couldn’t handle to third parties. Early users of Bitcoinica even complained about the inability to accept Bitcoin deposits directly (since Bitcoinica handled no Bitcoin wallets at all).

Cloud computing enabled Bitcoinica to be started at zero capital and grow up quickly with a very high up-time. I couldn’t really afford a powerful dedicated server when I started running the service.

Q: A lot of community members have commented on your exemplary morals and demeanor. What things do you keep in mind to hold yourself to such a high standard. Do you have any mentors or figures you look up to?

A: I didn’t do anything much. For me it was just intuitive to behave like that. Or I can say, I was influenced by Tony Hsieh, Steve Jobs and many startup people. I always have the habit of reading Hacker News everyday so I know the usual way of handling most problems in daily operations.

Q: If you’re comfortable with the question, how much did you sell Bitcoinica for?

A: It was strictly NDA’d. I have only signed one NDA in my life and I don’t generally feel comfortable about NDAs. I signed it because I deeply understood the investor’s reasoning behind the confidentiality.

Q: What have you learned during the brief life of Bitcoinica?

a. Customer service is important.

b. A tech startup founder must be a developer.

c. Ideas are worthless.

d. The best way to make money is to generate value for others, and take a cut.

e. Never outsource core competency and always outsource incompetency.

Q: What do you have planned for the future? Will you continue working for yourself? Continue starting new businesses?

A: I have started working on NameTerrific since mid-March. It’s another solo venture. I was invited to join a few startups earlier but all of them failed before gaining any traction.

Q: I recall one time when talking to you that you denounced NDAs. What brings/brought you to that opinion?

A: Ideas are worthless. NDA results in adverse selection – only the people who care about you will talk to you. Everyone else is behind the NDA wall. You can’t learn from them if you require an NDA. If you seriously want to improve the ideas while having a capability of perfect execution, share it with the world and the real high-calibre people will care.

Q: What is the most important thing aspiring young entrepreneurs should keep in mind when starting a business?

A: Do what you love and love what you do.

Q: What do you think Bitcoin needs to grow? Do you think Bitcoin will last longer than two years?

A: Bitcoin needs a lot of professional developers. The best software people in the Bitcoin world concentrate in the open source project itself. Not many people are actually doing the killer apps. What I see is long development timeframes and low product quality (in most, not all, of these projects). That’s one of the reasons that I decide to leave Bitcoin. Honestly, I think the business environment is not up to standard.

Bitcoin will last forever. It’s the first currency or commodity or whatever that relies on Math. Math is all about making general assumptions and proving logically. It never fails under the assumptions. Also, it’s the best choice for currency for a modern Anarchist state.

Q: I heard you’ve started a new website! What’s it called and what does it do? Do you see it being as successful as Bitcoinica?

NameTerrific. It’s a domain registrar (I’m not sure if I can call it a registrar if I’m only a reseller). You can get a powerful DNS powered by Route 53. It’s extremely simple to use and set up. Currently it’s in early stage of development and I aim to launch in late August.

It’s a low-margin business so it’s not really comparable to Bitcoinica. Also it’s way more scalable than any Bitcoin business in general. So the level of success depends more on my ability to scale (including hiring people) and maintain quality. I can easily calculate the break-even conversion rates so as long as it can pass the proof-of-concept stage by the end of 2012, the business can be run very predictably.

We hope you enjoyed this interview! We’d also would like to thank Zhou for taking his time in sharing his experiences from Bitcoinica. As he moves on to new ventures, we at Coinabul wish him luck!

 

Faced with the growing need to justify the fees, delays, chargebacks and centralization of power that are behind modern fiat currencies, one argument that Bitcoin detractors are turning to more and more to attack the alternative is that Bitcoin is uninsured. As Forbes writer Tim Worstall writes, for example, “Sure, it’s true that real world banks (which is a useful analogy for Bitcoinica) get robbed all the time and this doesn’t stop people using bank notes. But banks are backed up by governments: everywhere has deposit insurance. So, if some robber were to make off with all of the cash that, say, JP Morgan had then all the depositors would be made good by the government deposit insurance as JP Morgan goes bust. Bitcoin, of course, does not have this back up.”

However, this argument is flawed in a number of ways, the largest of which is that the concept of a currency being “insured” is meaningless. Insurance is not an inherent property of a currency, it is a type of contract that can be made between any pair of individuals or organizations. The conceptual error that Worstall, and others who make this argument, are making is that of having what can be termed a hierarchical worldview: seeing “the government” as a special entity in itself, as something which is an inherently higher level process than the mere individuals and businesses that are operating in a sandbox set out by government laws. The reality is, the government is an entity just like any other, and claiming that the US dollar is fundamentally secure and Bitcoin is fundamentally unstable because one has the government backing it and the other does not is incorrect – governments are fallible too, and judging by the high bond yields of many countries on the market, investors do not have nearly the same confidence in the government debt that backs up the power of institutions like the FDIC that Worstall does. The Bitcoin investment industry has been offering insurance contracts such as credit default swaps for months now, and if you want a MtGox, Bitcoinica or any other deposit insured all you have to do is either find someone offering insurance for your deposit already or simply make a post on the Lending forum and just ask for someone reputable to sell you such a service. You can even purchase slices of insurance from multiple providers to minimize your overall risk. It is a core feature of Bitcoin as a whole that its value, its security and even its basis of existence are backed not by any centralized institution but by immutable mathematical algorithms on the one hand, and society itself on the other. Safety is found in diffusion of risk, not a rigid framework of power.

There is also a practical point to be made. FDIC government insurance is not insurance for the US dollar as a whole, it’s insurance for bank deposits. If you lose a hundred dollar bill, whether to a thief, scammer or simple carelessness, you’re out a hundred dollars; there is no insurance to protect you. If you lend money to someone and he defaults, there is no insurance to protect you. One might argue that as a consumer using US dollars electronically it’s all protected by the banking system and therefore ultimately by the FDIC, and you can do a chargeback to recover your money from accidental or malicious losses, but this is not true for everyone. If you are a merchant, for example, and you get a fraudulent chargeback from a customer there is no protection. Theoretically, you can go to court over the issue, but the costs of doing so are so high that practically it is simply not worth it. Thus, with regard to the online payments infrastructure our system does not even offer any insurance at all; instead, it simply shifts the risk from one party to the other, at the cost of delays and fees that are unacceptable in an internet-connected society. In a way, this artificial “merchant beware” system is even worse than the alternative of buyer beware: while consumers can comparison shop and refuse to deal with shady merchants, merchants cannot practically pick and choose their customers.

Lastly, Worstall is wrong in comparing Bitcoinica to a bank. Bitcoinica is a high-risk margin trading platform specially designed for people who are willing to take 100% losses over price fluctuations that take place once every two months, so the risk of losing your account balance due to platform failure is merely a small addition to a risk that is already there. If you want your money to be secure, with Bitcoin you do not need to use a bank at all; an offline or brain wallet setup (or a combination of both through multi-key transactions) is a far better alternative, and has even lower risk than a deposit in a bank account. While a bank depoit is safe unless the government collapses or the FDIC is shut down, your private key stored written down in a treasure chest will retain its value as long as there is at least one person connected to the internet who cares enough about Bitcoin to mine and support the network.

Bitcoin as it stands is indeed more risky and unstable than the US dollar, but most of this risk can be attributed to Bitcoin’s small scale, not any inherent weakness of the currency. As Bitcoin continues to gain in popularity, and attracts a more and more mainstream audience, its banking industry will continue to develop to meet the needs of its customers, and eventually even traditional insurance companies will be willing to set up arrangements with institutions like Bitcoinica to compensate depositors in the event of bankruptcy or theft.

Of course, keeping your bitcoins stored at a third party investment or speculation service is not risk free. But nothing is. It is a basic law of economics that every investment that generates a profit (or interest rate) also carries a risk, and any system that claims to offer one without the other is guaranteed to be either a pyramid scheme or a Martingale-like setup that is mathematically designed to hide risk away by concentrating it into a small chance of total collapse. Bitcoin gives you the freedom to invest your money in whatever way you want, and accept the risks that go along with an investment, or store your money for personal use without relying on any institution whatsoever. It’s up to you to decide which of the available choices is right for you.

  
 

The Russian-based PiratePay startup is attempting an old, but in this application novel, strategy to help Hollywood fight against the file sharers that they claim are costing the economy 373000 jobs and $58 billion per year: DDOSing them. As Pirate Pay CEO Andrei Klimenko describes his company’s strategy, “We used a number of servers to make a connection to each and every P2P client that distributed this film. Then Pirate Pay sent specific traffic to confuse these clients about the real IP-addresses of other clients and to make them disconnect from each other.” Pirate Pay’s first testing run of their technology, helping obstruct downloads of the film Vysotsky: Thanks to God I’m Alive, appears to have been moderately successful, blocking 44845 attempted file transfers. Pirate Pay aims to charge $12000 to $50000 for their service depending on the scale of the project, and believes they can scale up their efforts to cause a much larger amount of disruption if necessary.

The question is, can this attack be used against Bitcoin as well? In terms of P2P disruptions in general, Bitcoin and BitTorrent already have a very similar cryptographic hash mechanism that prevents attackers from feeding in false data, making it impossible to force P2P users to download corrupted or malicious file segments or Bitcoin users to download blocks that are invalid or attempt to rewrite history without paying a cost a thousand times higher than what PiratePay is offering, but neither protocol has any built-in protection against IP-based attacks. It is entirely conceivable that an attacker will attempt to disrupt Bitcoin confirmations by preventing nodes from connecting to each other, and even have some success in disrupting P2P functionality. Indeed, there is one vulnerability which was fixed recently which attempted to do exactly this, and it is indeed possible that doing short term harm to certain parts of the network will be feasible once in a while in the future because of errors in the implementation of specific clients. However, in the long run such a strategy will find its efficacy limited by one feature that Bitcoin has that BitTorrent does not: DNS bootstrap. While BitTorrent is designed to work in a 100% decentralized way with no node being trusted more than any other node, making it vulnerable to attacks where thousands of malicious nodes introduce themselves into the system, the standard Bitcoin client has a bootstrapping system where it connects to a number of hardcoded nodes and gathers a list of trusted addresses from there, making it much more difficult to confuse nodes about where the other nodes’ addresses are. Even all peer-to-peer contact becomes impossible, the Bitcoin network could gracefully decay into a centralized block download service.

Also, it’s difficult to imagine that PiratePay’s disruption system will be able to effectively prevent file downloads for any significant length of time. Internet technology has shown itself to be rapidly advancing, and if PiratePay achieves any prominence whatsoever then it’s almost inevitable that someone will develop a slight modification to the protocol that will quickly render this attack obsolete. Possibilities include a decentralized IP reputation system, where clients connect to IPs that have been faithful to them (or other nodes that they already trust) in the past, an obfuscation system that makes it hard to tell what torrent users are sharing or even what protocol they are using, forcing PiratePay to risk arousing the ire of Blizzard, Skype (now part of Microsoft itself) or even governments, or defenses targeting specific aspects of the attack that PiratePay is currently not revealing but which will become public once the attack becomes widely implemented. It’s even conceivable that organizations like Anonymous will try to use various forms of denial of service attacks against PiratePay itself.

Finally, even if some disruption scheme is able to prevent some clients from connecting to the Bitcoin network even through the bootstrap system, unbroken network access is not nearly as necessary to participate in Bitcoin as it is in file sharing protocols. If you are attempting to download Vysotsky and PiratePay successfully disconnects you 99.9% of the time, it will take you 1000 times longer to download the file – increasing the download time to several months, making it a compelling proposition for many to either buy the movie instead or ignore it outright. If you are trying to send a Bitcoin transaction, however, and you experience 99.9% disruption, it will simply take a few hours for the transaction to get across the network rather than a few seconds. All it takes is one message to send a transaction from one node to another. There will of course be heavy blockchain splitting, and transactions may take a day to reliably confirm, but the transactions will eventually be relayed somehow.

Neither this attack nor any other will arrive at anything close to the end of copyright infringing file sharing, and Bitcoin has the advantages of far higher protocol efficiency and less need for secrecy that counteract even most attacks that may succeed against BitTorrent. Decentralized systems have proven themselves to be more reliable than centralized ones, but Bitcoin’s combination of the two paradigms is even stronger still. The best strategy to protect Bitcoin right now is not to worry about attacks against other protocols that may not even be used against Bitcoin at all, but rather to promote adoption of Bitcoin in general to help increase the size of the network and buffer it against any attacks or disruptions that attackers may try to implement no matter what their specific form.

  
 

The internet and the blockchain that power Bitcoin are unique in that they make any significant events in the Bitcoin ecosystem public, even if the identities carrying out the acts may sometimes be pseudonymous. Anomalies like the so-called “mystery miner”, large buys and sells on MtGox and SatoshiDice causing the Bitcoin network to exceed its all-time transaction record are available for all to see and comment on. The recent Bitcoinica theft, however, takes this form of publicity to a whole new level.

The Bitcoinica theft, like all others in the Bitcoin world, is visible on the public blockchain, but this time the thief has decided to exploit this functionality for a novel purpose: to send us a message. The idea of using the blockchain for this purpose is not new; a proof of concept has been demonstrated by one individual putting up one of Shakespeare’s sonnets, and block chain message services appearing online since 2011, but this is the first time this technique has found a use in practice. The message comes in the form of a transaction using the decimal places of the value spent to encode the text in binary:

12ukfPXZXf1c9BAA1mnEJx3di3wHFRgate - (Spent)   1.01100101 BTC
12t7J13pGkQRw1fqmXCAC6AtcgMt6WuQ11 - (Unspent)   2.01111 BTC
1BvF2mAT1wJBRk1RQdevKr9Y86xJU1xC7r - (Unspent)   3.0111 BTC
18Dw1jXWmSN5kc6Ss892LvnjaR7fGmEM4e - (Unspent)   4.01100101 BTC
1B45M5U8LEf6SjyKcYhNabRhfTZf7XuFRi - (Unspent)   5.01100011 BTC
13uGxhXa7vSgsCVL8k9iAPKnHMT8GNmCN4 - (Unspent)   6.011101 BTC
17Q8E5ja1vcPV1iButAiRnL8wP3egWWWDf - (Unspent)   7.001 BTC
18mNvmHKWnEDswhY1a4jGRVdnMyLn2S2vq - (Spent)   116.4569963 BTC
17ReQJWabDWG3MCYRfv48huZX6BvGc8NQX - (Unspent)   8.01101101 BTC
116FM8p14RTPmUE9hPga2fN1M5W314ACNV - (Unspent)   9.01100001 BTC
1JzwRdeeCnPRvBWTJWjmeD1CKAHcfmVZ3N - (Unspent)   10.01110011 BTC
1CH62vfy7JsP1CyDAcdVNAeW8ojQvcnGaV - (Unspent)   11.01110011 BTC
1A7m74Bak6YXfh4S3zZXrGgStCXbcnE49E - (Unspent)   12.001 BTC
1J8vS5HfGFHYDdRaT6Qc6GKYXNzgqFnHLe - (Unspent)   13.011011 BTC
1PA5AfAnbZsmZSZsihGfBvR1pHLVXb1vi6 - (Unspent)   14.01100101 BTC
1FdQpjwo5vYwgo1D3Rx8QusrzUfisPzJbY - (Unspent)   15.01100001 BTC
1CWVQ9itPYo8AAmGtfNXPJPyA2byY3QrcY - (Unspent)   16.01101011 BTC
1Hax1B8LY4gJQgC8i6LKkCWtQ8ptshTGEC - (Unspent)   17.001 BTC
1Hbru1fBYjE8Bp29L9vVCZUDkf84EHPbXW - (Unspent)   18.01110011 BTC
1M2EZg1YzhRo4CvS2dd4CeYHGGCCHwLRQc - (Unspent)   19.01101111 BTC
15aiB25xw3JSpaoV5pit4BBxpVQwhF2Mwn - (Unspent)   20.01101111 BTC
15ArtCgi3wmpQAAfYx4riaFmo4prJA4VsK - (Spent)   21.0110111 BTC

The decimal places give binary ASCII codes for the individual letters of the message, which spell the cryptic “expect mass leak soon”.

Also of interest is the thief’s generosity. The last 21 bitcoin transaction was sent to the address of the Bitcoin faucet, which gives every Bitcoin user 0.005 bitcoins, and the faucet has distributed these coins to over a thousand people since then. The thief also generously gave out bitcoins on the Bitcoin IRC chat, handing out over thirty in total.

There are many possible motives for these actions. Clearly they were in part motivated by a simple desire to have fun, but the generosity may also have ulterior motives behind it. After the previous 43000 BTC Bitcoinica Linode theft, MtGox responded by freezing any accounts which contained coins that came from the original 43000 BTC transaction, reopening the accounts only in exchange for identification documents. It’s likely that the same will happen as a result of this theft. Thus, by distributing the coins so widely what the thief is trying to do is get as many people flagged as being connected to the theft as possible. While a Joker-like desire to wreak havoc for its own sake could be the end of the thief’s motives, and it fits perfectly well with the “expect mass leak soon” message, there is another reason why the thief would want to do this. By flagging so many people as potential thieves, the thief is diluting the value of the blockchain as a forensics tool in the first place. When he himself gets around to cashing out on his remaining 17200 bitcoins, if he gets caught at any point he can simply claim to be one of his lucky recipients.

The long-term strategy of the thief seems to be to hold on to most of his loot. While the perpetrator of the 25000 BTC theft in June 2011 quickly spread the wealth, mixing it in with large, active pools of money that likely represent major services and exchanges, both the Linode thief and this thief instead spread the coins out slightly, but were then content to keep their loot untouched. There are many reasons why the thieves would want to do this; one is the much stricter policy now compared to last June on the part of MtGox, leading the thieves to embark upon a more slow and steady strategy of cashing out by mixing coins a few at a time with various laundry services and accounts. Another is that the thieves are Bitcoin users just like everyone else, and optimistically believe that Bitcoin will have a higher value in the future. Unfortunately, at this point it’s impossible to know. While the more recent thief may be eager to hand out bitcoins and send messages, he has not yet released any kind of manifesto, and unless he does such a thing we have no information to go on; the blockchain may tell us what is happening, but it says nothing as to who or why.

 

This article was originally written on March 28, 2012

Following the recent Linode theft, in which over 43000 total bitcoins were stolen from Bitcoinica, MtGox enacted a new policy in an attempt to help stop the thief get away with his illicit gains: they began freezing accounts with bitcoins that could be traced back to the theft and demanding that they submit identification to regain access to their accounts.

MtGox has admitted that they are cooperating with the Japanese CyberPolice in an attempt to determine the identity of the thief, and it is possible that their strategy will help achieve such a goal. Even if someone trying to sell the tainted bitcoins through MtGox is not the seller himself, a fact that even MtGox themselves have admitted is almost certainly true in every case, they would likely know something about the person who sent the coins to them, and the police, working with MtGox and other Bitcoin services, could theoretically trace their way back through each link, asking the receiver of each transaction who sent it to him, until they arrive at the original thief. It’s hard to tell how practical such a strategy actually is, although if it is possible at all it is the largest heists, those whose value swamps any mixing pool that the thief tries to use, that would be the easiest to unravel.

However, some suspect that there may be motives at play beyond simply wanting justice for Bitcoinica. Over time, MtGox has built in more and more authentication features, first requiring email addresses for accounts since last June, and later requiring identification for accounts handling large amounts of bitcoin, and this too may be part of a long-term plan to slowly get the Bitcoin community used to accounts being linked to their owners’ legal identities. Anti-money laundering law requires businesses transferring significant quantities of money to “know your customer”, and MtGox may have realized that they are bound by such laws and are currently not in compliance with them, so they are doing their best to become legal without clamping down too hard all at once. During the security crisis and the media attention on illegal uses for Bitcoin last June, MtGox stated their willingness to work with law enforcement authorities to track down criminals and resolve legal issues, so it has for a long time been known that those interested in using Bitcoin as a tool to fight against government surveillance and probihitions should not look to MtGox for aid. And this is arguably the most logical position for them to take; since they are such a central entity to the Bitcoin economy it would hurt the economy, both legal and illegal, far more if they were shut down than if they enacted some authentication requirements that can still be bypassed simply by going through less prominent exchanges instead.

Others accuse MtGox of simple theft, but this seems highly unlikely. MtGox has no way of knowing if a frozen account will ever be claimed, so if they were to cash out on their gains they would effectively be operating under a fractional reserve, a policy which, if it were ever leaked or otherwise revealed, would effectively destroy MtGox’s reputation and seriously hurt Bitcoin’s public image, both of which they have already demonstrated a willingness to sacrifice short-term profits for when they bailed out the hacked exchange bitomat.pl in August.

MtGox’s move raises other concerns too. The most common is that it undermines the fungibility of bitcoins; the idea that one bitcoin is one bitcoin, no matter which bitcoin it is and where it came from. By flagging 43000 BTC as tainted, MtGox is substituting this model with one where some bitcoins have more value than others. Some have suggested that this is a good thing, and the Bitcoin community can expand upon the idea and adopt a self-policing mechanism by which most clients are configured to reject bitcoins that have been confirmed as stolen. However, there are many ways to criticize such a system. First of all, such a scheme would rely on a centralized authority, which Bitcoin was designed to avoid. A polycentric system may be possible, but if one authority becomes accepted by the majority of users the system will fall into a stable equilibrium of centralization which is so hard to get out of that it would be easier to create a new currency. Once the mechanism is in place, governments can easily take it over and gain the power to penalize whomever they want and make any bitcoin-handling service unusable. Second, the thief will most likely exchange his stolen coins immediately, before the community even finds out what’s going on, and it would be average users, not the thief, who are inconvenienced when they discover that a fraction of their money is suddenly worthless. The system would essentially serve as a chaotic transaction tax, not affecting those who simply hoard their bitcoins but adding an element of fear to every transaction as the coins that the receiver received may suddenly become worthless. The end result would be an undermining of the trust and integrity of the Bitcoin system as a whole.

Fortunately, MtGox is not confiscating tainted coins or declaring them worthless; for now they are simply requiring identification for a few accounts. The move should be interpreted not so much as MtGox asserting themselves as a government of the Bitcoin world, but as a step toward the legitimatization of the currency. MtGox is not mandatory; those who prefer not to be tracked in their bitcoin usage can always go to one of the many secondary exchanges or even arrange a physical transaction and throw potential investigators even further off their tracks by depositing and withdrawing their coins through Silk Road. If we want to restrain MtGox’s power to decide how the Bitcoin economy functions, perhaps it is most appropriate look not at each specific move that they are making, but at their near-monopoly 86% market share, and question why they have so much power in the first place.

  
 

The last few days have unfortunately brought one piece of grim news after another to the Bitcoin community. As if the 43000 BTC Linode theft in March was not enough, another 18457 BTC was stolen from Bitcoinica’s reserves, and Zhou Tong was barely able to prevent the thief from getting his hands on 30000 more. Unfortunately, given the financial stress that Bitcoinica was already in after the Linode theft two months ago, even this smaller loss turned out to be the straw that broke the camel’s back. The site was immediately shut down for security reasons, and less than one day later Zhou posted another message compounding the bad news: “It’s more serious than we thought. We need some additional time to come up with a compensation proposal – Likely we will either shut down the platform or re-develop entirely (which will take months instead of days).”

Bitcoinica users who have a balance in the service are likely safe. Bitcoinica’s staff is building an account claim page, and the latest news is that users will receive all of their money back, with their US dollar balance liquidated at a settlement price of 4.94-4.98. Bitcoinica itself has, as of two weeks ago, been taken over by Intersango, and the use that the new leadership will put the platform’s code to, if any, is not yet certain.

As for Zhou Tong himself, he has decided to leave Bitcoin entirely. The main reason that he gave for leaving is not any lack of confidence in Bitcoin itself – as he himself writes, “I always believe in Bitcoin, or simply anything that brings people financial liberty. I have heavily invested in Bitcoin (I purchased one 1,000 BTC gold coin from Casascius and will keep it for as long as I can).” Rather, he is leaving because he feels that Bitcoin is not his destiny. “I failed at one thing though,” he writes, “that is generating value for the society. Bitcoinica did create a place for people to trade more efficiently and provide liquidity to the market. However, speculation is a zero-sum game (or negative-sum, strictly saying). I know there can be many justifications for Bitcoinica’s value, but all of them are against my intuition and values. With the confidence and the innate intuition to build wonderful things for a better world, I decided to move on.”

Many will disagree with him about the social utility of financial speculation services; there is an argument to be made that it promotes price stability and, as the wide array of Bitcoin casinos shows, even negative-sum gambling has value in itself. But where Bitcoinica and Zhou brought the most value to the community has nothing to do with the service itself. Rather, Zhou showed us that the world of Bitcoin is a world where freedom and opportunity reign supreme, and where even a 17 year old with no prior connections can make a difference by virtue of his talent alone. In many ways, he represents Bitcoin’s everyman; the largely self-educated, highly independent individual with a wide variety of interests ranging from computer science to finance and economics to politics to philosophy seizing upon a chance to apply his talents to the world. One could even argue that he is an echo of Satoshi himself.

Despite his position as the creator of a financial speculation service and his strong belief in libertarian capitalist ideals, Bitcoinica to him has never been about the profit. “Bitcoinica is not a money making machine,” he writes. “It’s just a product that sets a high standard for the Bitcoin community.” This is something that we all lose track of from time to time. The polarized political dialogue that we are forced to listen to every day on the mainstream media often forces those of us who support financial freedom to at least subconsciously align ourselves with the likely nonexistent ideal type of an individual who cares about nothing but short term wealth, but ultimately, as none other than Ayn Rand pointed out, money is only a tool. It is indeed a very good tool, allowing us to enjoy the products that come out of a highly specialized economy characterized by the division of labor, command services from individuals halfway across the world with whom we have had no prior contact whatsoever and invest for the future without tying ourselves down to a specific project, but it cannot replace the personal drive and vision that is at ultimately the core of both great businesses and projects like Linux, Wikipedia and even Bitcoin itself.

Zhou Tong has often been reviled as a scammer, and this crisis has, predictably, only amplified such cries. But his actions over the past eight months do not paint the picture of a man who consciously set out to defraud the public with a Ponzi scheme or an arcane system of liquidation rules; rather, they paint the picture of a teenager, still uncorrupted by the rigidities of the status quo, ready to discover the world and find a place where he can make a difference. Of course, Bitcoinica’s history is marked by security blunders and telling signs of Zhou’s inexperience. However, failure is an inevitable part of learning and innovation, and if the Bitcoin community begins to treat failure as an unforgivable sin and every blunder as proof of moral turpitude, then it will cease to be a community that values learning and innovation at all. Instead, it will become yet another manifestation of the inflexible and bureaucratic status quo. The Apollo program killed three people before it got a single one on the moon, and Socrates’ contributions to philosophy would never have appeared had he listened to his detractors’ complaints that he was corrupting the youth. Rather than disparaging Zhou for being too inexperienced to succeed, we should be praising him for daring to try. While his first endeavor has now failed, and even his second may fail too, perhaps his third might succeed, and in our world of unlimited growth and infinite possibility the amount that we all gain from one great success outweighs the disappointment of even a hundred failures.

Lastly, although this first implementation of Bitcoinica may have died, the idea has not. The demand for a service like Bitcoinica has been proven to exist, and it’s only a matter of time until it resurfaces in some other form. Ringcoin’s new Kronos.io will soon provide an even more secure alternative by using its ZipConf instant Bitcoin transfer technology to remove the need to have a potentially vulnerable “hot wallet” at all, and more competition may be around the corner.

  
 

Присоединившись к последнему всплеску в основных СМИ новых статей, связанных с Биткойном, BusinessInsider опубликовал статью, выражающую точку зрения против Биткойна. Однако, статья, к сожалению, содержит довольно много ошибок, заявлений, которые одновременно кричаще неверны и способны ввести в крайнее заблуждение, и неуместных опасений по поводу потенциальных “проблем”, которые уже более года как разрешены сообществом Биткойн.

• “На данный момент, средняя оплата сделки с Bitcoin равна 0,99%, в то время как Сквэр и PayPal берут 2,75% за обработку приложений и 2,7% за чтение кредитной карточки.” – Согласно статистике сайта blockchain.info, в день пересылается около 150000 BTC с общей суммой операционных выплат 4 BTC, исходя из чего, “средняя” плата за сделку на самом деле составляет 0,00267%. Операционные сборы в сети Bitcoin полностью добровольны и нужны только для того, чтобы обработать вашу транзакцию чуть быстрее.
• “В отличие от кредитной карты, Bitcoin в настоящее время не обеспечивает защиты или компенсации в случае мошенничества”, – я обратил подробное внимание на эту проблему в статье об экономиках с не-западным потребителем, и в течение года было найдено её решение. Решение называется эскроу (передача денег через третье лицо). В общих чертах, если сторона В хочет продать продукт стороне А, но у обеих сторон низкий уровень доверия друг к другу, они могут найти поставщика услуги эскроу С, которому обе стороны доверяют, для посредничества в сделке. Затем, вместо оплаты напрямую В, А вышлет деньги С. Получив продукт, А пошлет С сообщение о том, что операция прошла успешно, и С переправит средства В. Если продукт оказывается некачественным или не приходит, С возвращает средства А, оставляет их себе или жертвует на благотворительность (практика показывает, что первые два варианта дешевле для сторон, но третий гарантирует отсутствие порочной мотивации у А и у С, понуждающей их солгать, чтобы претендовать на деньги). Новейшие транзакционные возможности Биткойн, вообще говоря, предлагают улучшения по сравнению с описанной ситуацией, которые ещё больше снижают уровень вовлечённости третьего лица и необходимого доверия к нему. Так что качество услуг эскроу будет только улучшаться со временем, по мере появления большего числа коммерсантов, принимающих оплату в биткойнах.
• “Недавно один хакер сумел пройтись рейдом по нескольким «банковским» счетам Биткойна – по кредитным и дебетовым счетам «богатых» пользователей Биткойна в разных точках мира, и «ушёл» с уловом в $ 228 845”Этот вопрос я тоже уже рассматривал в подробностях. Стандартной рекомендацией для пользователей Биткойном является хранение подобных больших сумм в автономном режиме или мозговом кошельке, и даже разбитие кошелька на несколько частей, чтобы снятие средств требовало значительных усилий. Если обеспечить должную надёжность этим образом, то снять чьи-то пожизненные сбережения будет в лучшем случае невозможно, а в худшем для этого потребуется вломиться в дом к их обладателю и предпринять обыск его личного имущества и жёсткого диска или применить пытку. В Биткойнике такие потери стали возможны только потому, что фирма – бизнес-поставщик финансовых услуг, а это означает, что большое количество её денег должно находиться в доступе для автоматического снятия со счёта. И даже эта фирма может внести, и уже внесла, такие улучшения в систему безопасности, что даже атаки хакеров, подобных Linode, теперь невозможны.
• У разработчиков “есть отмычка, которая дает им контроль над всей машиной, в любое желаемое время” – Описанная “отмычка” – механизм предупреждения, введённыйпервоначальным разработчиком Биткойна Сатоши Накамото в официальный клиент Биткойна в версии 0.3.11. Система позволяла Сатоши (и Гэвину Андресену после ухода Сатоши), отправить сообщение, подписанное с помощью своего закрытого ключа, которое бы побудило клиенты вывести предупреждающее сообщение и перейти в безопасный режим, не принимая и не отправляя сделок, пока безопасный режим не будет отключен. Идея заключалась в том, чтобы иметь механизм для быстрой задержки распространения ущерба, причиняемого сбоем или злоупотреблением, прежде чем кому-то удастся опустошить с их помощью тысячи Биткойн-кошельков. Однако описание этого механизма как своего рода хозяйского ключа ко всей машине пользователя некорректно с четырех позиций:
  1. Ключ никогда не давал разработчикам контроль «над всей машиной»; наивысшим проявлением его власти могло быть лишь временное отключение Биткойн-клиента.
  2. С самого начала было предусмотрено право коррекции. Запуск Биткойна кнопкой disablesafemode позволял вашему клиенту работать в нормальном режиме независимо от желания Сатоши или Гэвина или любого менее чистоплотного посредника, которому удалось бы захватить ключ в управление.
  3. По большей части из мотивации опасения, что эта функция может быть интерпретирована как выключатель с чёрного входа, отключающий механизм был удален из версии 0.3.19. Теперь все, на что способна “отмычка”, – это отображение предупреждений.
  4. Официальный клиент Биткойна не является его единственным наличным клиентом. Пользователям доступен большой выбор вариантов кошельков, и некоторые из них даже совместимы с файлом официального клиента wallet.dat, так что вы можете мгновенно переходить из одного в другой.
• “В США печать и регулирование курса доллара управляются Федеральной резервной системой. Если Биткойн станет общепринятой мировой валютой, потребуется более сложный и всеобъемлющий регулирующий орган”. – Положение, что такие центральные банки, как Федеральная резервная система, вообще необходимы, гораздо более спорно, чем подразумевается в этом утверждении. Противники централизованности системы банков считают, что махинации центральных банков являются реальной причиной большей части наших текущих финансовых неурядиц. Они припоминают тот факт, что большинство центральных банков возникло не в целях помочь стабилизировать денежную систему на благо людям, а через закулисные политические маневры торговых и банковских элит, ищущих закрепить за собой законное право на извлечение выгоды. Описывая основание Банка Англии, Дэвид Грэбер пишет в статье Долг: Первые 5000 Лет: “В 1694 году консорциум английских банкиров дал королю кредит на £1,200,000. Взамен они получили королевскую монополию на выпуск банкнот. На практике это означало право распространять долговые расписки на часть королевского долга среди подданных королевства, желающих взять у банка взаймы или поместить в него деньги, – по сути, обращать или “монетизировать” только что созданный королевский долг. Для банкиров это была великолепная сделка (им была дана возможность взимать с короля 8 процентов годовых от первоначального займа и одновременно начислять проценты на те же деньги с клиентов, которые их заимствовали). Но сделка могла функционировать только до тех пор, пока первоначальный долг не был погашен. До сего дня этот долг так и не был возвращён”.
• “Рыночная цена на Биткойн резко падает, начиная с 2011 года”, – – Утверждение перестаёт быть верным с ноября 2011. Фактически, с поры последнего крупного падения биткойна 14 февраля его цена была лишь в два раза неустойчивее цены золота.

Кроме того, ложным, к сожалению, является заявление в статье о том, что биткойны сейчас используются в Африке в качестве альтернативы ненадежной местной валюте. Рудигер Кох пытается внедрить принятие Биткойна в Африке, но пока ещё очень рано говорить о каком-либо успехе. Тем не менее, Биткойну находится более широкое применение, нежели лишь в теневой экономике. Он используется в торговле игровыми кодами на Ogrr.com , существуют такие неофициальные эксперименты как Биткойн Сходит с Ума, а некоторые даже пользуются им, чтобы избежать оплаты и задержек международных денежных переводов. Мы можем только предполагать, что в будущем появятся пути более официального хождения Биткойна.

  
 

Martingale betting is a class of betting strategies that originated in 18th century France which can turn any game, whether blackjack, roulette or anything else, ideally something played in short, discrete rounds with a roughly 50-50 win/lose ratio, into one which gave the gambler an almost certain chance of success. The way the algorithm works is like this. Imagine that you are playing a simple slightly biased coin toss game where you can bet any amount of money and if you land heads (49% chance) you win and if you land tails (51% chance) you lose. First, you bet one dollar. If you win, rejoice and go back to step one. If you lose, next turn bet two dollars. If you win, once again go back to step one, but if you lose increase your bet to four dollars. If you are unlucky enough to keep losing, you double your bet each time. Eventually, you are guaranteed to win at least once, at which point no matter how many times you lost you come out having gained one dollar.

However, a strategy that turns a game with a slightly negative expected value each round into one with a guaranteed positive reward each time is mathematically impossible, so there must be some hidden flaw. And the flaw is this: your money is not unlimited. If you are playing with 1 million dollars, once every 705661 rounds you will encounter 20 tails in a row and go bankrupt. Thus, the expected value of a round is in fact -$0.41, negative as expected. However, the strategy is neverthelss a good one to show off to your friends: the 7056 out of 7057 times that you can demonstrate a hundred-round streak of guaranteed profits you will not only gain a small amount of money but also gain the social reward of appearing to your friends to be a mathematical genius.

But there is one circumstance in which the Martingale betting system is hugely successful: if you can count on someone to bail you out if you are in trouble. If you can convince someone that you are systematically important and that allowing you to go bankrupt would lead financial armageddon, your expected value function changes – if, for example, you can expect to only foot half the bill of a crisis in the form of hastily conceived and relatively mild after-the-fact penalties, your expected value each round goes up from -$0.41 to +$0.29, making the losing game a profitable one through artificially externalized costs.

What’s most deceptive of all about the Martingale strategy is just how stable it appears to be. Your profits are guaranteed to be exactly $1 each and every round no matter what happens behind the scenes. Standard deviation: zero. To the outside world, you’re an unstoppable profit-making tycoon. And herein lies the problem. I mentioned earlier that it is, in an informal sense, rational to go play blackjack in a casino because if you win you’re also gaining a reputation among your friends as a mathematical genius. But for hedge fund managers and traders in the financial industry, gaining a reputation as a mathematical genius is not fun and games at all; rather, it’s how they get promoted. If a manager appears to be earning constant above-market returns per year, every year, banks and hedge funds everywhere will look to hire him as an advisor and investors everywhere will eagerly buy up copies of his book is he decides to release one. And if he fails he will simply fade into the background and, if worse comes to worst, may have to find a job elsewhere. Ninety percent chance of a 7% return, ten percent chance of bankruptcy becomes a ninety percent chance of eternal glory and a ten percent chance of simple mediocrity.

It’s human nature to want to soften the harshest blows of what seems like random chance. We see people speeding to get to work faster, but the one in a million times that it doesn’t work out and they end up in an accident we say that they don’t deserve to die for something so trivial. The only way we can maintain such a position and not create perverse incentives, however, is by softening the profits as well, in most healthy societies throughout history through a culture that imposes public shame on such acts. The financial system as it stands, however, is a master of exploiting this tendency. Shame, to them, has no meaning; it cannot be bought or sold, longed or shorted, and has no place on the quarterly balance sheet. Every time we give them the message that we got their backs in case something truly unprecedented happens, what we are giving them at the same time is an unlimited license to print money. Also, by not letting them fail, we are in effect playing a Martingale game of our own. We may avoid having to suffer a moderate amount of pain now, but every crisis where the banks get off scot free, they emerge stronger, and the same incentive structures and the same kind of thinking that led to the crisis in the first place is allowed to remain at the helm and breed new disciples. As with any Martingale game, however, there will eventually be a final round, and I dread to think of what might happen if we lose it.

 

Many of us are familiar with BitInstant, the micro-credit provider that allows anyone to deposit money through bank wire transfers or even cash deposits at the local bank and get the deposit at any major Bitcoin exchange in less than an hour. However, what many do not realize is that, despite the name, BitInstant does not deal with Bitcoin at all; rather, it focuses purely on the fiat currency side of the Bitcoin exchange system. While BitInstant is undoubtedly very useful, helping people get their bitcoins faster, facilitating efficient international fiat money transfers using Bitcoin as an intermediary, and even being credited by some for Bitcoin’s recent price stability as people can easily and immediately buy in whenever the price drops, it does not quite solve the whole problem of transaction delays. Now, Jonathan Ryan Owens and his company Ringcoin is seeking to do just that by introducing Zipconf, a service that he calls “the other side of instant” – instant deposits into exchanges on the Bitcoin side.

While the prospect of instant Bitcoin transactions of any sort rightfully arouses suspicion among many, Jonathan is confident in his system’s ability to prevent or detect attempts to defaud his service by double-spending. The basic principles behind how his system works make sense. Double spend attempts on instant transactions work by first sending a transaction as directly to the receiver as possible and then soon after that sending the same transaction but with yourself rather than the receiver as an output to as many other nodes as possible. The attacker is hoping that the receiver will see the first transaction and accept it as payment but then the second transaction will drown out the first throughout the network as a whole, and ultimately get included in the blockchain, rendering the first transaction invalid. Zipconf’s software stack attempts to prevent this in two ways. First of all, it broadcasts the first transaction as loudly as possible as soon as it gets it, reducing the chance that a double spend will be successful. Transactions also always include a small fee to encourage miners to quickly confirm the transaction into the blockchain, adding a further line of defense. Second, Zipconf is willing to compromise slightly on being instant, waiting 5-10 seconds after receiving a transaction to listen for double spend attempts before finally accepting it. By then, the transaction will have spread to much of the network and it is nearly impossible for a second, conflicting transaction to get a foothold.

There are of course many special cases to deal with as well, but Jonathan believes that his software stack will be able to handle them. Code is in place to deal with block reorganizations and occasional glitches in the network, and he has been working with the owner of Slush, the third largest mining pool, to ensure that his transactions will always be included in blocks. “We’ve been developing this based on edge cases for 6 months,” Jonathan reassures, “including extensive testing ourselves, trying to break it. We’ve found some very simple, and also some very clever ways to avoid risk.” At the moment ZipConf is in private beta testing and will be officially launched around next week. For private beta testing access you can contact [email protected] .

As for use cases for such a service, there are several possibilities. Arbitrageurs and speculators, Bitcoin investors catching market swings and earning a profit by correcting price differences between different exchanges, will of course be Zipconf’s most profitable customers. Aside from that, there is a partner API through which sites which hold bitcoins for their users (eg. wallets, commerce/auction site accounts) will be able to allow their users to instantly withdraw to Bitcoin exchanges. And, finally, Jonathan admits, “the most important use case is impatience.”

Although the service does not have nearly as solid a footing of compelling use cases as BitInstant as it stands, what may be its salvation is that it simply does not need to. While BitInstant must deal with money services licensing and relationships with banking partners across many countries, Zipconf stays entirely within the Bitcoin economy, and will thus be able to keep its costs much lower. The upfront work is already done; the core software stack is well-tested and Zipconf has already signed up multiple arbitrageurs and potential partners, so even if users turn out to be less impatient and arbitrage less lucrative than Jonathan had hoped and no other use cases reveal themselves to pick up the tab the service will still keep operating at a profit even with very minimal volume. But there is cause for hope too, as plans to expand Zipconf’s range of services are already underway. Finally, perhaps where Zipconf shines the most is not even in the practical applications that its current implementation lends itself to facilitating, but rather as a proof of concept, a demonstration of the principle that whatever limitations Bitcoin may have are not fatal – Bitcoin is merely a bottom layer protocol, and whether the issue is speed, consumer protection, anonymity or whatever else the community demands, it can always be overcome by adding another layer on top.

 

Disclaimer: Bitcoin Magazine has run advertisements for Coinabul before. This article was written independent of this fact. -Ed.

Coinabul, Bitcoin’s first and only dedicated gold and silver selling website, is now celebrating its six month anniversary, offering 1% off gold and 3% off silver purchases. Since October 10 last year, the site has been selling dozens of different types of gold and silver coins and bars for investors and collectors alike, giving money enthusiasts two more types of currency to play with.

The site’s owners had considerable experience in startups before joining the Bitcoin community, its owner Jay Shore working in e-commerce and marketing director Jon Holmquist in customer support and marketing. Money was always Jon’s passion as well; “I’ve always been a fan of precious metals,” he writes, “and I’ve always enjoyed saving my money responsibly.” For them, Bitcoin was the perfect synthesis of all their interests. As Jon describes it, “I’ve also worked with a lot of online startups, which is what drew me to Bitcoin. I feel that the Bitcoin community has a really strong entrepreneurial drive.” And as for Jay, after his experiences coding traditional e-commerce applications using Paypal and Authorize.net he found Bitcoin “much nicer to work with”, and was attracted to Bitcoin’s lack of fees.

It was Jay who originally came up with the idea of a gold-selling site. Explaining his reasons for doing so, he writes: “I’ve been a big metal-bug for years. The concept of saving my Bitcoin earnings in precious metal held great appeal, but there was no option to do so. The process of converting my coins to precious metal meant losing large amounts on trade fees and then losing large amounts on withdrawing to my bank account. On top of that, I’d be constantly losing my opportunity to make the conversion itself due to both the stringent cancellation policies of gold dealers(3 days) and the volatile precious metal/bitcoin markets shifting too quickly. After some extensive market analysis, it was clear that the majority of the Bitcoin community felt the same way.”

Once the idea of Coinabul became clear in Jay’s mind, Jon eagerly jumped on and on October 10, 2011 their dream became a reality. The site grew quickly, and launched a first major sale on October 27. Silver products entered the site’s growing catalogue at the beginning of November, and volume picked up rapidly. On December 3, the site first saw a volume of over 1000 BTC within the span of 24 hours, increasing to 2000 BTC in 2 weeks and 6000 BTC in April.

Another long-time interest of Coinabul was its Bitcoin promotional efforts. So far the site has released T-shirts, stickers and a poster, the latter showing Bitcoin’s great duality of the ideological and the practical. “What makes Bitcoin awesome?” the poster asks. The answer is “easy and secure online purchases” on the left and “privacy from governments and banks” on the right. Since then, the site continued a steady growth, slowly increasing the range of its services at the same time. The site released price charts and even unveiled Teleticker, a little-known service through which anyone can call or send a message and receive a live quote of gold or silver spot prices.

After six months of successful operation, the founders are optimistic. Asked about his future plans for Coinabul, Jay writes: “Our first major goal for the future is 24 hours or less turnaround on all orders that occur on a business day, which would make us by far one of the fastest retailers, let alone bullion dealers, in the world. Additionally, we are exploring the viability of adding the much-awaited MintChip payment method. This should ease the barrier-to-entry for our less tech savvy potential clients, as well as appeal to the gold-bugs being turned on for the first time to digitized payments via the Canadian Mint. There are many more things I’d love to tell you about, but for now I have to remain tight-lipped.”

 

Взяв в соображение появление в США таких инновационных платежных решений как Сквэр и возникновение таких проектов как Биткойн, Королевский Монетный двор Канады решил вступить в игру с собственным проектом цифровой валюты – МинтЧип. Этот проект является попыткой дополнить основные преимущества электронной валюты поддержкой канадского доллара. «До этих пор», – читаем мы на сайте, – «не существовало электронного решения, которое бы предлагало экономически эффективный подход к рынкам очень низкостоимостных транзакций, обеспечивало конфиденциальность, всеобщую доступность, и вбирало в себя характеристики живых денег”. И МинтЧип ориентирован на поиск такого решения. Продукт “работает онлайн и оффлайн, на торговой точке, на мобильных устройствах и позволяет легко расплачиваться между собой физическим лицам”. Нет необходимости во внешней авторизации или посредниках, платежи являются необратимыми, система обладает экономической эффективностью, конфиденциальностью и доступностью, каких текущие цифровые платежные решения не способны обеспечить. Она даже имеет несколько преимуществ по сравнению с Биткойн: мгновенность защищённых транзакций, их обеспеченность канадским долларом и возможность решить проблему двойных платежей даже без подключения к Интернету. На первый взгляд кажется, что Монетному двору удалось реализовать все основные черты Биткойна и даже превзойти его концепцию.

Как же работает такая система? Внешне, модель безопасности сходна с Биткойновской: оплата производится путем отправки “стоимостного сообщения” с МинтЧипа отправителя на МинтЧип получателя, причём сообщение снабжено уникальным ID получателя и цифровой подписью в доказательство того, что оно пришло от отправителя. Как только МинтЧип отправителя создаёт стоимостное сообщение, баланс МинтЧипа уменьшается на соответствующую величину.

Вопрос, немедленно возникающий у любого апологета Биткойна: каким образом эта система предотвращает двойные платежи – что предохраняет пользователя от того, чтобы отправить платёж, вернуть чип к исходному состоянию и отправить платеж снова? Здесь, однако, ответы становятся все менее удовлетворительными. В основе Минтчипа  “находится интегральная схема, которая содержит электронные значения и передаёт значения с одного чипа на другой в безопасном режиме”, то есть по сути, патентованное, защищённое от входа в него и надёжное электронное устройство. Этот чип будет хранить баланс пользователя и управлять транзакциями изнутри, но должен быть разработан так, чтобы пользователи не могли войти в него и собственноручно изменить баланс. Подобные системы не являются новшеством, и время показало, что на них, как и на прочих формах цифрового управления правами собственности, слишком небезопасно строить окружающую экономику. Около двух лет назад чип Инфинео, считавшийся неприступным, был взломан Кристофером Тарновски с помощью электронного микроскопа, игл и кислоты, и можно представить, как скоро такой подвиг повторится, если на кон будет поставлена неограниченная возможность печатать по сути деньги. Выглядит как парадокс наделение устройства пользователя способностью односторонне видоизменять его баланс, с одновременным отказом в такой возможности самому пользователю, даже когда устройство находится в его руках. Такой парадокс представляется куда менее убедительной основой для здоровой и сильной системы цифровой валюты, чем алгоритмы криптографической цифровой подписи и проверенный в действии распространённый и публично доступный блокчейн.

Есть и другие аспекты системы, против которых пользователи Биткойна могут возразить. Модель создания валюты является централизованной: значение стоимости изначально введено в систему Королевским Монетным двором Канады, а клиент приобретает стоимость для затрат через доверенных брокеров. В систему запроектирована способность форсировать обновления, что даёт монетному двору власть при желании периодически вводить обременительные функции отслеживания. О таких инновационных средствах стоимостного хранения, как бумажный и мозговой кошельки, не может быть речи, так как ничего нельзя предпринять без физического чипа, а использование электронного кошелька не может не базироваться на доверии поставщику услуг.

Тем не менее, многое в системе работает правильно. МинтЧип – массивное улучшение по сравнению с существующей финансовой моделью, основанной на банковских и кредитных картах, поскольку подтверждение платежа базируется на модели цифровой подписи Биткойн, а не идёт от центральных поставщиков. Легкость в использовании по образцу Биткойн, незначительность платы за перевод, необратимость и другие свойства живых денег, всё это здесь в наличии. Уровень конфидениальности можно сравнить с Биткойновским, поскольку, хотя операции хранятся в чипах, различные устройства МинтЧип можно будет покупать, не предъявляя удостоверения личности, и они достаточно дешевы, чтобы люди могли закупать несколько “кошельков” для дальнейшей защиты своей финансовой безопасности. Кроме того, если пользователи готовы принимать необеспеченные валюты, а Биткойн показал, что они к этому готовы, система теоретически даже может просуществовать без иных доверенных посредников, кроме производителя микросхем.

Что касается внедрения, Монетный двор делает систему доступной для разработчиков с самого начала, выпуская API в языках Java, NET и Javascript и предлагая призы общей стоимостью более $50,000 для разработчиков инновационных платёжных приложений для МинтЧипа.  МинтЧип является не образцом того, как будет выглядеть цифровая валюта в её окончательно зрелом варианте, а скорее знаком тех изменений, что на подходе. Этот проект показывает, что канадское правительство выражает желание двинуться в зону электронной валюты, и другие правительства и компании теперь вероятно проявят гораздо больше желания последовать такому примеру, возможно, даже поспособствуют законному принятию самого Биткойна.

  

Recently, a new Bitcoin startup called Coinlab attracted considerable attention from the community, raising $500,000 startup capital from Silicon Valley angel investors. Operating under the tagline “All your gamers are gold”, what the startup intends to do is to help game companies monetize “that 80% in the middle” – those users who have a significant commitment to the game but not enough of one to buy a monthly subscription or spend heavily on virtual goods. Of course, the method that they intend to employ is Bitcoin mining.

The idea of Bitcoin mining as a means of paying for software is nothing new. About a year ago, Javascript miners attracted considerable buzz as some proclaimed that background browser mining could even replace Adsense as a means of web content monetization. However, that project never got off the ground, and its creator quickly gave up, explaining that “Javascript is just too slow to mine bitcoins. The recent difficulty increases have made this an impractical idea.” This was predictable; since Javascript only has access to a computer’s CPU, and not its much more powerful GPU, now that GPU mining has become mainstream it will never again yield significant profits. Coinlab, however, is much more optimistic. According to their calculations, “the average gamer will generate 50 cents to $2 per day for the game companies by making that computing power available, working out to more than $15 per gamer per month.” According to this estimate, a non-paying customer of a game using Coinlab’s service would generate more revenue than a paying customer for a conventional MMORPG like World of Warcraft.

On the surface, the estimate is sound. Assuming that a computer has 300 MH/s (a reasonable estimate, judging by an informal poll taken last summer), since the mining factor (USD per day per 100 MH/s) is currently about $0.33, a gamer running Coinlab’s background software might be able to earn the company $30 per month. However, there are serious problems with this estimate as it is.

First of all, the business model is not scalable. At a price of $5, Bitcoin mining generates a total of $36000 per day, or $13 million per year, for all miners no matter how many there are, and this figure will fall to $6.5 million per year by the time Coinlab gains substantial momentum due to the upcoming mining reward change in December (although an argument can be made that the change will simultaneously increase the Bitcoin price, undoing some of this loss). If Bitcoin mining is to become the source for even 0.01% of the $65 billion per year video game industry’s revenue, the number of gamers the industry needs to attract to grab each additional dollar would in the worst case scenario approach infinity – in order to capture 90% of the pie, you need to have enough hash power to match 900% of the size of the pie as it currently is (an equilibrium at which each individual user would be generating a mere $3 per month rather than $30), and capturing 100% of the pie or more is impossible. One reply to this is that the size of the Bitcoin economy, and therefore the Bitcoin price, will increase, but even as this happens the mining reward will continue to fall, so it is unlikely that mining revenue will ever exceed a few billion dollars per year even if it Bitcoin does become a significant global currency.

Secondly, the assumption that gamers will be playing on computers that are running 24 hours a day is unlikely to last. Desktop computer sales are on an irreversible decline, and by 2015 the overwhelming majority of users will be on a combination of notebooks, netbooks and tablets. Most worrying of all, it is the computationally weakest category of them all, tablets, that are overtaking the desktop, as the middle categories are remaining constant. Laptops, netbooks and tablets are much weaker than desktops in terms of GPU hash rate, and even the hash power that they do have often cannot be used. Suspend and hibernate mean that they are off for a significant portion of each day, and Bitcoin mining on a computer that is not connected to a power source will quickly drain the battery, which will lead many portable users to reject the software.

Finally, the viability of mining on general-purpose hardware is at the same time threatened from the other direction: that of specialized mining chips. The era of CPU mining is long over and even GPU mining is now entering its twilight as customized hardware like FPGA takes over and custom-built ASIC (that’s application-specific integrated circuits, chips designed for the sole purpose of mining) looms over the horizon, threatening to make all lower-grade mining technologies obsolete. In a year’s time, mining on general purpose hardware is doomed to suffer the same fate that Javascript mining did before it was born.

While Bitcoin mining may make software developers some small change in the near term, it is ultimately not only useless for this purpose but highly environmentally irresponsible. If the business model is to survive longer than a year at all, it will be by deception, relying on users’ ignorance of the cost that they are paying for the electricity that the mining software is consuming overnight. The Bitcoin network, already criticized for what many see as a waste of electricity, would become even more so, spending perhaps an extra $50 million per year mining on inefficient hardware only to increase the investment required by an attacker to overpower the network by a mere $1 million. If we are to be paying for our games with bitcoin, perhaps we should work on developing a microtransaction-friendly Bitcoin economy and helping users buy bitcoins quickly and easily so that they can buy the games directly.

 

As little as five years ago, virtual currencies only had a very niche role in the internet ecosystem. You might see one used to maintain the internal economy of a massively multiplayer online game, but that was just about it. There was simply no need for them, as video game purchases cost more than $40 and were generally done in retail stores. The other form of monetization was subscriptions, and these cost more than $10 per payment, an amount high enough that the transaction fees involved in transferring money through credit cards were bearable.

Then, however, something happened. As the smartphone revolution took over the digital world, a new market for casual games appeared, games which are made by independent developers making a few hundred thousand dollars at most and close to nothing on average and which rely on quantity to earn their largest gains – one of the most popular titles so far, Angry Birds, sells its different versions for $1-$2. The same happened in social media, releasing a completely new class of games based on playing them with your friends and relying on a different model to generate their income: micropayments. The core game would be free, but players who wanted to get ahead could buy additional in-game content or equipment for a low price per piece. Even in the traditional video game market, developers who could not compete with major game production studios for quality adopted microtransactions as their main business model. And such models work; the gamers that are drawn into such games the most may end up spending hundreds or even over a thousand on them, one small item at a time.

However, there is a problem: the credit card fees. Online money transmission services like credit cards and Paypal have a two-part fee structure, with a percentage component of 2-4% and a fixed fee component of 20-30 cents. For a $10 purchase, for example, paying with Paypal (2.9% + $0.30) requires a total fee of 69 cents, giving $9.41 to the payee. For a $2 purchase, however, the fee is 36 cents, or 18% of the purchase price, and for a $0.99 app that figure would almost double. For this reason, Apple’s App Store and social media gaming companies have come up with the same solution: pay into an account in lump sums and spend from there. With social media companies, since players would not necessarily know ahead of time which game they were going to spend their money on and might even want to only spend $2 on each of ten or twenty games, the “accounts” became virtual currencies.

Apple, meanwhile, went with the centralized solution: require all apps sold for their platform to go through Apple’s centralized payment system, which generates considerable revenue as they take a 30% cut of all revenues. Some developers tried to bypass this restriction by sending their users to make in-app purchases elsewhere, but Apple eventually banned the practice. And Facebook, with its new Facebook Credits system, is seeking to do the same. Replacing the choice of competing virtual currencies with a mandate to use their own, they intend to extract the same 30% tax that Apple does from all revenues made within their ecosystem. Also, the move serves to help lock users in to Facebook itself, as independent currency providers would have gladly allowed users to spend their money at any social media platform they prefer while now quitting Facebook entails leaving your deposit behind. Also, much like credit card merchant agreements, Facebook’s new terms of service also prevent game developers from offering discounts to users making purchases outside of Facebook. The end result is that Facebook wins, and everyone else loses. In fact, as any economist would quickly point out, the harm to the users, developers and competing social media platforms is much greater than the gain to Facebook as the policy isn’t just a money transfer – it’s also a deadweight loss dampening the incentive for innovation. Some are so frustrated by this move that they have set up a website, stopfacebookcredits.com, to criticize the move and are even considering filing an antitrust lawsuit.

While some are only concerned about this specific application of Facebook’s near-monopoly power, moves like these are ultimately symptomatic, a mere part of a larger ongoing trend toward the proprietarization of the internet. The internet’s original infrastructure, largely developed by Tim Berners-Lee, was designed to be open and public so that anyone could use it, and it was this strength that caused protocols like HTML to win out over proprietary alternatives. Everyone was equal on the internet, and you did not need anyone’s permission to participate. For the first few years of the internet, this paradigm largely remained. Email was designed from the start to be federated, people maintained personal webpages under their own control and online forums were accessible to everyone. Now, however, the situation is slowly sliding in the opposite direction. The focus of our online activities drifted away from the internet to proprietary “walled gardens” built on top of the internet, accessible to no one but those who are already inside. In 2011, Google lost its position as the most visited site on the internet to Facebook, and its response was to build yet another walled garden, Google+. As the internet began to be monetized, there were no decentralized or federated protocols in the spirit of HTML to do so; instead, we rely on credit cards and Paypal. And these new giants are waking up to the potential to turn their newfound power into profit. Each individual move may be protested, fought and perhaps even banned, but the problem will only persist and grow as long as we deny the core principle that made the internet so strong in the first place: that the basic infrastructure on top of which everything else relies must be open and accessible to all.

There are signs of hope, as OpenID has become a fairly successful standard for authentication to online services, Diaspora has appeared as an alternative to Facebook and Google+ and credit cards and Paypal are under attack by Bitcoin. Indeed, if Bitcoin succeeds the very motivation behind the battle over Facebook Credits may cease to exist as no one would be willing to pay a central provider 30% of their profits. Once free is the norm, for better or for worse changing it is a steep uphill battle. But it is situations like these that remind us why such efforts are necessary in the first place, and why it does not suffice to simply shame the business or petition the government into giving users a temporary reprieve or marginal improvement. The internet is the greatest laboratory of innovation and driver of technological progress that the world has ever seen, and the reason for its initial success is not any central body pushing its development to extract a profit but the sheer openness and freedom of it all, and such freedom must be defended in order for it to survive.

 

 
 
Joining the recent outburst of new Bitcoin-related articles in mainstream media, BusinessInsider has written an article with an anti-Bitcoin view. Unfortunately, though, the article contains quite a few flaws, both blatantly incorrect and highly misleading statements and misplaced fears about potential “problems” that the Bitcoin community has had solutions to for over a year.
 
 
 

• “At the moment, the average Bitcoin transaction fee is .99%, while Square and PayPal’s processing apps charge 2.75% and 2.7% per swipe of your credit card.” – According to blockchain.info charts, about 150000 BTC is sent per day with transaction fees totalling 4 BTC, so the “average” transaction fee is actually 0.00267%. Transaction fees in the Bitcoin network are entirely voluntary and are only needed to make your transactions process slightly faster.
• “Unlike your credit card, Bitcoin currently provides no protection or compensation in the event of fraud” – I addressed this point in detail in my article on non-Western consumer economies here, and a solution has been available for over a year. The solution is called escrow. Basically, if party B wants to sell a product to party A but both have low trust for each other they can find an escrow provider C that they both have high trust for to mediate the transaction. Then, rather than A paying B directly, A would pay the money to C. If A receives the product, he would send a message to C saying that the transaction was successful and C would release the funds to B. If the product turns out to be defective or never comes, then C would either return the funds to A, keep them or donate them to charity (the tradeoff is that the first two solutions are cheaper for the parties involved but the third removes any perverse incentives for A or C to lie to try and claim to money). Bitcoin’s advanced transaction features actually offer improvements over this that reduce the level of involvement and trust required for the escrow provider even more, so escrow services will only get better over time as more Bitcoin-accepting merchants appear.
• “Recently, a hacker managed to raid several Bitcoin ‘bank’ accounts – the credit and debit accounts of ‘rich’ Bitcoin users – around the world and got away with $228,845.” – I also already addressed this point in detail here. Standard advice for Bitcoin users is to keep such large amounts in offline or brain wallets and even keep the wallets in multiple pieces so that releasing the funds takes considerable effort. If this is done securely, taking away someone’s life savings would be impossible at best and require breaking into someone’s house and searching through their personal possessions and hard drive or torturing them at worst. Bitcoinica only lost so much because they are a financial services business, meaning that they have to have large quantities of money available for automatic withdrawal, and even they can, and now have, improved their security to make even the Linode hacker’s attack impossible.
• The developers “have a skeleton key that gives them control of the whole machine, any time they want.” – the “skeleton key” described is the alert mechanism that the original Bitcoin developer Satoshi Nakamoto put intothe official Bitcoin client in version 0.3.11. The system allowed Satoshi (now Gavin Andresen since Satoshi left) to send a message signed with his private key which would cause clients to display an alert message and go into safe mode, not accepting or sending any transactions until the safe mode was turned off. The idea was to have a mechanism for quickly containing the damage caused by a bug or exploit before someone could empty out thousands of Bitcoin wallets with it. However, the description of this mechanism as some kind of master key to a user’s whole machine is wrong in four ways:
  1. It never did give them control “over the whole machine”; the extent of its power even at its height was simply to temporarily disable the Bitcoin client.
  2. It had an override right from the start. Running Bitcoin with the -disablesafemode switch would allow your client to run normally regardless of what Satoshi or Gavin or whatever more nefarious agency managed to take control of the key wants.
  3. Motivated in great part by concerns that the feature would be interpreted as a backdoor off switch, the disable mechanism was removed in version 0.3.19. Now, all the “skeleton key” can do is display alerts.
  4. The official Bitcoin client is not the only client in existence. There is a whole host of wallet options that users can choose from, and some are even compatible with the official client’s wallet.dat file so you can instantly migrate from one to the other.
• “In the U.S., the Federal Reserve handles the printing and regulation of the dollar. If the bitcoin is to become a widely accepted global currency, a regulating agency more complex and thorough than the Fed is required.” – the claim that central banks like the Federal Reserve are necessary at all is far more controversial than this statement implies. Opponents of central banking believe that the machinations of central banks are in fact responsible for a great part of our present financial woes, and cite the fact that most central banks were born not out of a desire to help stabilize the monetary system for the benefit of the people but rather through underhanded political maneuverings by mercantile and banking elites seeking to enshrine for themselves a legal right to profit. Describing the foundation of the Bank of England, David Graeber writes in Debt: The First 5,000 Years: “In 1694, a consortium of English bankers made a loan of £1,200,000 to the king. In return they received a royal monopoly on the issuance of banknotes. What this meant in practice was they had the right to advance IOUs for a portion of the money the king now owed them to any inhabitant of the kingdom willing to borrow from them, or willing to deposit their own money in the bank-in effect, to circulate or ‘monetize’ the newly created royal debt. This was a great deal for the bankers (they got to charge the king 8 percent annual interest for the original loan and simultaneously charge interest on the same money to the clients who borrowed it), but it only worked as long as the original loan remained outstanding. To this day, this loan has never been paid back.”
• “The market price for Bitcoin has been plummeting since 2011” – False since November. In fact, since the last major fall on February 14 the price has only been about twice as volatile as gold.

Also unfortunately false, however, is the article’s claim that Bitcoins are now used in Africa as an alternative to unreliable local currency. Rudiger Koch is trying to achieve Bitcoin adoption in Africa, but it’s far too early to claim any successes. However, Bitcoin is being used in more places than just the shadow economy; it’s being used to trade game codes on Ogrr.com, there are informal experiments like Bitcoin Gone Wild and some are even using it to bypass international money transfer fees and delays. We can only expect that more legitimate uses for Bitcoin will appear in the future.

  
 

While the Bitcoin community has been quick to replicate many industries found in the real world, so far one has been rather lacking: business-to-business services. Bitcoin venture capital has existed in some form for a long time now with various GLBSE-based assets like the (now defunct) LIF-A fund and, more recently, muBit as well as the more professional Islamic Bank of Bitcoin, and many Bitcoin businesses rely on BitPay for their payment processing, but outside of the financial industry business-to-business services have been rather lacking, with only a few abortive attempts in 2011 that even most hardcore Bitcoin users have never even heard of. Helpcoin.com seeks to change this. The site seeks to do for B2B what Bitmit is doing for auctions and Coindl is seeking to do for digital downloads: do what has already been done before, but do it right.

The site offers support in three areas: consulting, support and marketing. “A lot of sites have attempted to create their own support teams,” the site’s front page explains, “but end up getting discouraged because of the high overhead.” When the Bitcoin community was much smaller than it is now, marketing was not a problem as two forum posts would reach almost everyone. More recently, however, as the Bitcoin forum sees 1500 posts a day establishing a brand name in such a vast swamp is much more difficult, and the barriers to entry have been raised considerably due to the competition. The issue of support has also undone many; it’s no longer feasible to see and reply to every forum post as it once was, and in the Bitcoin community a business with inadequate support leads to quick associations with MyBitcoin and scams. As HelpCoin’s own website states, “the best form of marketing is customer support.” The need for a Bitcoin business to offer professional service and professional support has never been greater, and will only continue to rise, and to that end Helpcoin offers a compelling solution: leave it to the experts.

The business is so far only starting, and as of April 8 its team of experts is only one in number: Stefan Thomas. Nevertheless, his credentials are more than adequate. He is the developer of bitcoinjs, a Javascript Bitcoin library, and WebCoin, a Bitcoin wallet based on bitcoinjs, created WeUseCoins, the famous Bitcoin introductory site and spoke at the Bitcoin Conference in Prague in November. It already boasts two clients: WeUseCoins itself, which uses HelpCoin’s live help project, and Coinabul, the Bitcoin gold and silver selling site. As for what happens beyond that, their success or failure hinges on one key factor: as a business that sells not a clear, fungible product for a fixed price but a vaguely defined service where their customers have no idea what to expect, can they create a service that matches the Bitcoin business community’s needs and can they convince the Bitcoin community to give them a chance? In short, this budding crew of marketing experts’ greatest challenge will be to market themselves.
  
 

Of all the formalized monetary systems that have ever been used by mankind, Bitcoin is unique in the fact that it exists entirely as pure information. The blockchain, the database storing Bitcoin transactions so the system can figure out who owns what, it stored simultaneously on tens of thousands of computers and servers around the world. The system’s equivalent of “accounts”, Bitcoin addresses, are also really nothing more than 160-bit numbers, and the private keys that allow withdrawal access are 256-bit numbers themselves. The result of this is that we can literally store our money in whatever way we want, and people have picked up on this: we have QR code wallets, paper wallets, coins with private keys hidden behind a hologram, etc. However, the most interesting of all the alternatives is the place where humans have been storing most of our information for the past 100,000 years: in our brains.

A “wallet” is a collection of two types of numbers: addresses, typically rendered as 33 or 34-character strings like “13ignD31FysQbaBBVJUzffcQoFxxEuEcbE“, that allow deposit access to the address’s associated account and private keys, slightly longer numbers that allow withdrawal access. Technically, you do not need to remember your address as you can always derive it from the private key, but it is better to as you do not want to be typing in your private key all over the place. Thus, the simplest wallet that can be memorized is just one address and one private key.

The major insight that gives us all the various different options to help us remember an address and private key is that addresses and private keys are ultimately not strings of digits and letters – they are numbers. A number is a mathematical entity that we can choose to represent in our traditional base 10 (called “base 10” because it relies on ten symbols to represent all of our numbers: 0123456789) as, for example, “3022885”, in base 16 (“2E2025”), in base 2 or binary (“1011100010000000100101”), as a product of prime numbers (5 * 89 * 6793), in base 58 (“GVbi”) or in any other way that we see fit. Bitcoin uses base 58 because it is a reasonable compromise between brevity and readability – lower bases are longer since you can pack less information into each symbol, but upgrading to a higher base like 60 would introduce distinctions between the letter O and the number 0 and capital I and lowercase l and thus potentially lead to mistakes. You can memorize an address or private key in any base you see fit, provided that you have a base converter to bring it back to base 58 when the time comes to give out your address or use your private key.

Base 58 is the easiest option, and will have you memorizing a fairly reasonable 51 characters for the private key and 34 more for the address, although if you do not want to memorize the address you can also just memorize the first few characters and let firstbits.com retrieve the rest for you (paste the address into firstbits to find out just how much you need to memorize; usually it’s 6 characters). Note that firstbits recovers the address by searching for the chronologically first matching address in the blockchain, so you will need to have sent a transaction to the address, but the upside of firstbits’ algorithm is that your firstbits abbreviation will be valid forever. In terms of raw information content (or, as information theorists refer to it, entropy), the simpler solution is equivalent to memorizing fourteen 7-digit phone numbers, something which those of us who have not yet been drawn in by the seductive allure of storing everything on our smartphones have likely aready done anyway. The full solution of memorizing all 51+34 brings that up to 21 phone numbers. However, the nature of base 58 makes this job considerably easier for us as the presence of letters and numbers triggers auditory and visual memory at the same time, and the pronounceable letter combinations, short words and acronyms that sometimes pop up trigger a mental phenomenon known as clustering where we remember multiple symbols as one unit – think of how you remember “Smith”, not “S…M…I…is that D or T again…H”.

Smaller bases are more difficult to use because of how many characters you will need to memorize, but if you prefer a mix of more numbers and some letters base 16 is a reasonable option, and it has the advantage that private keys can be imported from that format automatically just as easily as base58 keys. Another possibility is, interestingly enough, base 1751, using not letters as digits but words. Grondilu’s Bitcoin Bash Tools convert back and forth for you automatically, giving you a string of words like this:

THE BLOT SET TWIT BARE LEER WAGE LILT LIND CORK GOAL OFT REAR VOTE FLEW WAD KEYS GAVE SEES WAGE EAR YOGA VAST POT BIRD FAKE BEE

It’s up to you to decide if this form of base 1751 is easier than base 58 by a sufficient margin to warrant having to deal with an extra non-standard software package.
There is, however, another solution that is even easier to memorize. In the ECDSA cryptographic system that Bitcoin relies on almost any 256-bit number can be a private key, so you can make your private key as memorable as you want – you can even make your private key “0101010101010101….” and generate a bitcoin address from the key and everything will work just fine, although you can’t control what the address looks like so you will have to memorize at least 6 random base-58 characters for firstbits to do its job. For security purposes though, it’s better not to make the private key itself memorable but to make the private key generated using a standard function using a phrase or password as a “seed”. The SHA256 cryptographic hash function is generally preferred for this, as it outputs pseudorandom data of exactly the right size from any input and online utilities to compute the SHA256 of any string are easy to find (note that if you’re using the Linux command line, use echo -n rather than echo to pipe into sha256sum; otherwise, you’ll get a different result from other utilities since echo adds a trailing newline by default). After hashing, the seed “correct horse battery staple”, for example, becomes:

“c4bbcb1fbec99d65bf59d85c8cb62ee2db963f0fe106f483d9afa73bd4e39a8a“

Then, go to bitaddress.org in private browsing mode, turn off your internet and input the private key that you just generated into the box under the “Wallet Details” tab to get the address out: 1JwSSubhmg6iPtRjtyqhUYYH7bZg3Lfy1T. Notice how little you really need to memorize to have a brain wallet with this method: following the same process with a much smaller seed and using an address shortener, ("123","1Bfvq2ap") is a brain wallet all by itself.

Next comes the question of how you can actually use a brain wallet once you have created one. Seeing how much your balance is is fairly easy: go to any blockchain watching site like blockchain.info or blockexplorer.com and search for it. You will be able to see the address’s total current balance and all the transactions that have ever come in or out of it. If you memorized just the first six characters, both services will search for and find your full address automatically.
To spend your bitcoins, there are two paths that you can take. The first, easier, option is to import the private key into a wallet or client when you want to use it and simply proceed to send a transaction normally. There are three major clients that allow you to do this: Armory, blockchain.info and Electrum. Armory is a fully fledged Bitcoin client with many features, althought it does have the disadvantage that it requires a powerful computer to run as it currently stores the entire blockchain in memory (you need at least 4GB of RAM). Blockchain.info is a web application that requires no installation, which is much more convenient but slightly less secure because you’re essentially re-downloading the application from the server every time. The other major online wallet, Strongcoin, is also an option, although with it the functionality for generating a private key from a phrase is built in, but it charges a small fee for outgoing transactions. Blockchain.info and Armory, if their respective weaknesses are acceptable to you, have graphical interfaces that are very easy to use and self-explanatory. Electrum requires some basic command line use but it also not very difficult. Once you’ve created an address and private key, to import it into Electrum open up a command line, navigate to the directory Electrum is located in and type in:

./electrum import 1JwSSubhmg6iPtRjtyqhUYYH7bZg3Lfy1T:5KJvsngHeMpm884wtkJNzQGaCErckhHJBGFsvd3VyK5qMZXj3hS

And there you go. You can now send transactions with your Electrum wallet, and for added security you can delete the electrum.dat file (located at ~/.electrum/electrum.dat on Linux) when you’re done.

However, if you are storing your wallet in your head because you are paranoid, you may instead prefer the second option: offline transactions. This approach is more secure as it allows you to send transactions without ever having your private key touch a computer that is connected to the internet, so that even if both your computers have viruses on them your bitcoins are still secure. To do this with blockchain.info, you will need to take the following steps:

1. Create a blockchain.info account and log in.
2. Import just your address into your wallet.
3. Log in from a secure computer in offline mode, making sure to use private browsing mode (incognito mode in Chrome). When the system asks you to turn off your internet connection, do so.
4. Import the private key. Your address will automatically appear in your wallet along with it.
5. Click “send money” and follow the onscreen instructions until you get a base 16 number a few hundred characters long. Copy this string down on paper or with a USB key and close the browser window.
6. Copy this string over to the tool at http://blockchain.info/pushtx and send the transaction.

With Electrum, the procedure is slightly more complicated:

1. On an offline computer, import the address:
2. Locate the electrum.dat file on the offline computer. This file should be at C:Users\YourUserName\AppData\Local\Electrum\ on Windows Vista and 7 and ~/.electrum on Linux (sorry, no Mac version as of the time of this writing). Note that for the next step to be valid, the file should be unencrypted. If it’s encrypted (ie. is just a jumble of random data, without any kind of structure), remove it and generate a new wallet (with ./electrum create or the graphical interface) with no password.
3. Make a copy of the file. In that copy, look for the private key that you imported and take it out.
4. Take this neutered wallet and copy it over to your online computer, and wait until the client detects and collects the references to the 5 bitcoins’ worth of transactions that you need to spend.
5. Copy the wallet back to your offline computer and put it back where the original electrum.dat file was.
6. Put the private key back in.
7. Create the transaction offline:

./electrum mktx -s 1JwSSubhmg6iPtRjtyqhUYYH7bZg3Lfy1T -c 1JwSSubhmg6iPtRjtyqhUYYH7bZg3Lfy1T 13ignD31FysQbaBBVJUzffcQoFxxEuEcbE 5.00

From there, proceed as before. This is one of the highest levels of paranoia that you can possibly reach with Bitcoin, but it is worth it if you are handling large amounts of money. Electrum has three advantages over blockchain.info that may make up for the increased effort. First, you do not have to pay the 0.01 BTC fee per transaction. Second, since Electrum is a desktop application you can keep the computer that handles private keys off the internet 24/7, while with blockchain.info this is much harder as it is a web application – with the blockchain.info wallet you are actually downloading the program that runs within your browser every time you use it. The third problem is another consequence of this fact: if blockchain.info is hacked, the transactions that it generates might be compromised and you would not even know it until the intended recipient tells you that they never got the transaction and you realize that you’ve sent off your precious electronic cash to some teenager in Ukraine. With Electrum, you only download it once, you can check it once if you desire and you do not need to worry about such security issues.

Note that Electrum also has a “brain wallet” functionality of its own that offers a compromise between memorizing a premade key and making a key from something you memorized: a 12-word base 1600 “wallet seed” from which Electrum generates five addresses and private keys. You can use roughly the same process as above to send transactions with such a wallet, but removing the seed instead of the private key when copying the wallet over to the online machine.

If your goal for having a brain wallet is not security but either as a backup, for the convenience and versatility of having your wallet literally always on you no matter where you are or what you have with you or just to impress your friends, though, you do not need to bother with offline transactions and simply using it in conjunction with other Bitcoin wallets is enough. Just like Bitcoin in general, the concept of a brain wallet is extremely flexible; you can make whatever tradeoff between convenience and security that suits you best.
 

 

 

Seeking to be the iTunes of the Bitcoin world, a new digital goods marketplace has recently appeared at coindl.com. While the idea of selling digital goods is nothing new, with sites like bitcoinservice.co.uk and BitWillet having been around for many months now, Coindl seeks to provide a more professional alternative.

The service stands out compared to the existing alternatives in a few ways. First, it has a much cleaner interface, giving users a way to look through everything that is sold on the site. Second, while previous services were little more than minimalistic pay-to-download storage boxes, Coindl intends to put an effort into SEO, marketing as well as “first class support for buyers and sellers”. What is the price for all this? A 20% commission; although compared to the 30% that most competing services charge this is nevertheless comparatively cheap. Also, however, the site differs from its predecessors in that it plants significant hurdles for sellers, requiring a registration process involving the seller providing an extended array of personal information and signing a sales agreement before being able to publish any content.

The service intends to attract high-quality content and help Bitcoin enter the mainstream, so the motivation to add increased hurdles for sellers is understandable. So far, there are a few songs and ringtones offered for sale, as well as some icons, wallpapers and even a Bitcoin-themed CSS template for 0.199 BTC. While the more restrictive seller registration policy and the high fees will turn off many, as Bitcoin users are used to instant hassle-free registration and fees ten times lower than those available in the mainstream world, the ease of use and marketing that the service provides nevertheless has the chance to go a long way toward legitimizing Bitcoin as the go-to currency for digital goods. If mainstream independent digital content producers can be convinced to sell their products on Coindl as well as Amazon, Android’s App Store or whatever other service they choose, the 10% difference in fees may convince many digital media consumers to undertake the hassle of buying bitcoins as a sort of “digital media gift card” in order to save a few dollars and help their favorite authors and artists gain a few dollars more. Thus, the opportunity is there for Coindl to finally bring microtransactions to the masses and achieve the success of Bitmit, the centerpiece of Bitcoin auctions with nearly 1000 products for sale, or even BitInstant, a Bitcoin-based money transfer facilitator that is receiving significant business helping people avoid costly international money transfer fees and delays as we speak.

Will they succeed? Unfortunately, just like all new businesses entering the Bitcoin economy, we can only wait and see.

 

 

Picking up on the emergence of innovative payment solutions appearing in the US like Square and projects like Bitcoin, The Royal Canadian Mint decided to get in on the game as well with its own digital currency project: the MintChip, seeking to offer the key benefits of electronic currency backed by the Canadian dollar. “Until now,” the website reads, “there has been no electronic solution that cost-effectively addresses the very-low-value transaction markets, protects privacy, is available to everyone and emulates the characteristics of cash.” And MintChip seeks to address this. The product “works online and offline, at the physical Point-of-Sale, on mobile devices, and enables easy person-to-person payments.” There is no requirement for external authorization or intermediaries, payments are irreversible, and it has the cost-effectiveness, privacy and accessibility that current digital payment solutions do not. It even has a few advantages over Bitcoin; secure transactions are instant, it’s backed by the Canadian dollar and it even manages to solve the double spending problem even without connecting to the internet. At first glance, it seems like the Mint has managed to implement all of the major features of Bitcoin and even improve upon the concept.

So how does such a system work? On the surface, the security model is similar to Bitcoin: payment is done by sending a “value message” from the sender’s MintChip to the receiver’s, bearing the receiver’s unique ID and a digital signature to prove that the message came from the sender. Once the value message is created by the sender’s MintChip, the MintChip’s balance is decreased by the corresponding value.

The question immediately obvious to any Bitcoin afficionado is: how does the system prevent double spending – what prevents the user from sending a payment, resetting the state of the chip to a previous state and sending the payment again? Here, however, the answers become much less satisfactory. The core of MintChip “is an integrated circuit that holds electronic value and transfers value from one chip to another in a secure fashion”; essentially, proprietary tamper-resistant trusted hardware. The chip would store the user’s balance and handle transactions internally, but would be designed to prevent users from going in and modifying the balance themselves. Such systems are nothing new, and time has shown them, like all other forms of digital rights management, to be far too insecure to build an economy around. About two years ago, the supposedly “unhackable” Infineo chip was hacked by Christopher Tarnovsky using an electron microscope, needles and acid, and one can only imagine how quickly such a feat would be repeated when doing so gives you essentially gives you an unlimited license to print money. The paradox of simultaneously giving users’ devices the ability to arbitrarily modify their balance and denying that ability to the users themselves, even while the devices are in the users’ hands, seems far less compelling a basis for a sound digital currency system than cryptographic digital signature algorithms and a proof-of-work based distributed public blockchain.

There are other aspects of the system that Bitcoin users are likely to object to. The currency creation model is centralized: value is originally injected into the system by the Royal Canadian Mint and customers can purchase value to spend by going through trusted brokers. The system is designed to be able to force upgrades, giving the Mint the power to introduce onerous tracking features over time if it so desires. Innovative means of value storage like paper and brain wallets are out of the question, since nothing can be done without the physical chip, and it’s impossible to have an online wallet that does not require trusting the provider.

However, the system gets a lot of things right. MintChip is a massive improvement over the existing bank and credit card-based model of finance, as payment verification is based on Bitcoin’s digital signature model rather than central providers. Bitcoin’s ease of use, lack of significant transaction fees, irreversibility and other cash-like properties are all present. The level of privacy is comparable to Bitcoin since although transactions are stored in the chips the various MintChip devices would be purchasable without ID, and cheap enough for individuals to purchase multiple “wallets” to further secure their privacy. Also, if users are willing to accept unbacked currency, as Bitcoin has shown people are, the system can even theoretically survive without any trusted parties except the chip manufacturer. As for the implementation, the Mint is making the system accessible to developers right from the start, releasing APIs in Java, .NET and Javascript and offering $50,000 in prizes for developers who make novel payment applications with the service. What the MintChip shows us is not what the final iteration of digital currency will look like, but rather a sign of things to come. The project shows that the Canadian government is willing to expand into the area of digital currency and other governments and companies are now going to be much more willing to follow suit, perhaps even helping legitimize Bitcoin itself.

The influence of Bitcoin on such efforts is undeniable. The Mint has been watching digital currency efforts on the internet for many years now, and on the board of the MintChip Challenge’s judges are people like David Birch, who has researched Bitcoin extensively and even spoke at the Bitcoin conference in Prague last November. Five years ago, no government would have even considered supporting a digital payment system with the level of privacy that the MintChip provides, and the project is a sign of how times have changed. Even if Bitcoin itself never succeeds and other, even government-supported, alternatives eclipse it in importance, projects like Bitcoin have played a valuable role in keeping governments honest and ensuring that any system that they back at least pays lip service to concerns about privacy and centralization. Regardless of how well Bitcoin fares in its current implementation, it has already succeeded in spirit.

 

  
 

In the common discourse, Bitcoin is often treated as a revolutionary new concept in how we handle our funds, substituting irreversible finance with reversible, automatic with prepaid, asymmetrical with symmetrical and debt-based with equity-based. Bitcoin promoters often hail these aspects as a necessary shift in our economic culture while detractors bemoan the loss of the consumer protection that reversibility and bank responsibility for fraud normally bring.

Reversibility has become a point of great focus in the Bitcoin community, with a widespread understanding that reversible payment media like PayPal simply cannot interact with irreversible media like WebMoney, Liberty Reserve, various forms of virtual game currency and Bitcoin and that eventually one or the other must win. However, what the discussion often misses is that outside of the American and Western European world the debate is almost meaningless and the issue has already been resolved: reversible payment media are almost nonexistent.

In Russia, for example, outside of some parts of the very wealthy population in Moscow and St Petersburg, credit cards have barely any market penetration, and the economy runs on cash. If you have an Internet or mobile phone service subscription, there are kiosks in nearly every shopping mall that allow you to deposit money into it so that the plan keeps going on a prepaid basis. You get paid in cash, you pay for your food in cash and you pay your bills in cash. Even digital goods work in this way; Valve, as part of its plan to expand into Russia, had to set up 45,000 kiosks across the country to allow people to deposit money into their Steam accounts. And the system works fine. Unlike the Western economy, where in order to buy any kind of online good you have to effectively give the provider unlimited access to your bank account, protected only by the assurance that you have the option of a chargeback and the bank is ultimately responsible for all your losses due to fraud, in Russia you only have to trust people with as much money as they deserve to be trusted with — a value which is often not very high.

In the Middle East, CashU is a popular online payment method for e-commerce and gaming, but it is once again prepaid and non-reversible. In China, systems like Alipay are dominant with similar rules; as Bitcoinica creator Zhou Tong describes it, “the root of all reversibility is the Visa/MasterCard credit card system used by Americans. Chinese banking system is entirely different. Chinese people don’t use Visa/MasterCard for domestic purchases, online payments require strict authentication, banks are usually not responsible for fund losses, etc. Everything is very Bitcoin-like, and non-reversible.” But the issue remains: how do these systems get around the consumer protection issue? It turns out that they use exactly the same solution as that which has been proposed and sporadically implemented with Bitcoin: escrow.
Escrow works by having the buyer, instead of paying directly to the sender, pay to an escrow agency instead. The escrow agency notifies the seller that the funds were received, and the seller sends the product. The buyer, upon receiving the product, says so to the escrow agent, who then releases the funds to the seller. This works well as a solution to combat fraud, and is generally adopted in some form in any low-trust scenario without reversibility. As Zhou Tong points out, “over half of Alipay transactions are escrows.”

Africa is undergoing a banking revolution of its own with so-called “M-banking,” or sending and receiving money through text messages with mobile phones. Mobile phones are surprisingly accessible even to the poorest of the poor; even in Africa, where the majority of the population is still struggling with poverty, there’s on average about one phone per household. Although the local banking systems did attempt to shut down mobile phone banking providers when they first arose, they are now working with them and everyone is benefitting; having one’s money available digitally is particularly important in a world where theft is rampant and physical safety is a luxury.

While for Western economies it’s easy to think of Bitcoin as a fundamentally new form of consumer finance, in the developing world Bitcoin-style finance is already here. And everywhere it’s being implemented its efficiency is creating more and more wealth throughout the world. And as there’s no distinction between consumers and vendors — anyone can send money or accept it — the potential for a decentralized and bottom-up economy is maximized. And there’s plenty of time and opportunity for Bitcoin itself to get involved. Substituting banking with Kenyan shillings through M-Pesa to banking with Bitcoins through MtGox is a simple matter of changing providers, and from there, once smartphones become as ubiquitous as less sophisticated phones are now it’s just as seamless a step to people storing Bitcoins directly on their phones. It’s predicted that in a few years there will be as many as 1.7 billion people in the world with mobile phones and without bank accounts, so Bitcoin will have many years to take its place in the market as the Internet reaches the average Indian, rural Chinese or African before traditional banking and credit cards do. And, as shown by the example of every society outside of the West, the culture to support non-reversible, symmetrical payment media is already there.

 

---

Differences between Bitcoin-style and credit-card style Finance Explained

• Symmetry – with systems like credit cards and PayPal, it’s much more difficult to get a merchant account than a simple consumer account, and they are not designed to be used outside the context of a formal storefront. With Bitcoin-like finance, anyone who can send money can also receive it just as easily, facilitating more informal economy and lowering barriers to entry for business.
• Reversibility – Credit cards and PayPal have mechanisms for customers to “charge back” any fee in case of fraud, and if a merchant wants to dispute the chargeback they have to deal with a formal dispute resolution process, effectively moving the entire problem over to sellers, which some argue is even worse since while customers can choose not to buy from suspicious businesses, businesses cannot practically evaluate and pick and choose their customers. In Bitcoin-like systems, transactions are final, and other mechanisms are used to deal with low-trust scenarios.
• Debt-based vs. Equity-based – A credit card allows you to buy products first and pay for them later, while Bitcoin-style systems do not and require everyone to maintain a positive balance. While other systems like PayPal are in theory not debt-based, in practice they often are if you get a chargeback after spending the money that you received.
• Automatic vs. Prepaid – In a credit card-based financial system services where you regularly pay the same business money, like subscriptions and online gaming, usually keep your credit card number on file and withdraw from it as needed. In a Bitcoin-style system, a prepaid approach is preferred, where you deposit money into an account and money is deducted from there. Here, from a consumer protection perspective the prepaid approach is actually superior as there is a limit to the unexpected fees that you can incur.

 

  
 

MF Global traces its roots back over two centuries, starting as a sugar trading business in 1783, slowly expanding the range of its activities, but staying within the market of agricultural commodities for almost two centuries. In the late 1970s, they discovered the much more profitable area of futures trading, where they rapidly expanded their business with managed futures, hedge fund products and other financial instruments that they had no competition in. By 2000, they abandoned their roots in agricultural commodities entirely. In the next decade, they would expand to become one of the largest hedge fund managers and brokers in the financial world. However, on October 31, 2011, the unexpected happened: the corporation collapsed like a house of cards over a bad bet on European sovereign debt. Later, it would be found that $1.2 billion, equal to almost 100% of its total net worth, somehow disappeared entirely, and as of the end of January investigators are still just as puzzled as to where it is.

The causes of this are obvious: the company was massively overleveraged, with a debt of $39.7 billion backing assets of $41 billion, and the $7.3 billion that should have been held in a segregated account for its customers actually wasn’t. In our world of fractional reserve banking, where the vast majority of our money ultimately exists only as numbers on a balance sheet, such collapses are inevitable, and some say that it is only a matter of time before the number juggling game cannot be kept up any longer, people realize that they are actually broke, and the system collapses entirely. However, what is more interesting is the complete lack of transparency in the entire system. Regulators and ratings agencies had no idea that MF was exposed to $6 billion of European sovereign debt until October 21, and MF had no idea where its customers’ money was. In this day and age, where supposedly every electronic payment and trade made can potentially be tracked and audited for regulatory, tax and anti-laundering compliance, a billion dollars somehow managed to escape the books undetected.

All this reveals just how little power we have over our money, and just how much power the wealthy financial system does. In order to invest our wealth or insure against unexpected economic circumstances, we are forced to deal not with other fellow investors directly but through cumbersome, unstable, essentially unaudited corporations. Organizations which are supposedly brokers, simply making trades on their customers’ behalf, may in fact be running a fractional reserve scheme behind everyone’s back. Some picture the classic image of evil corporate executives grinning in a boardroom over their new secret plans to skim an extra few percent profit by risking their customers’ savings, but strangely enough it often isn’t like that at all – the web is simply so tangled that financial derivatives become Ponzi schemes entirely by accident.

As for the rest of us, we have no choice but to participate in this process not only to invest but also to use any electronic money at all. In fact, with tax-funded bailouts “socializing the losses” of schemes that do fail and laws already present in Italy – and soon to come in many other countries –  that ban cash transactions over 1000 EUR, participation in the financial industry’s gambling activities is becoming, in every sense of the word, compulsory. This is why reform is needed, and a mere round of regulations that temporarily reduces the maximum leverage and attempts to force segregations of funds like those that MF was required to have in the first place, is ultimately doomed to failure. As long as the current system remains, not in its specifics but in its very essence, tax evasion and blatant theft are not truly illegal – they are simply the exclusive domain of the powerful.

 

  
 

The question of “how to store your bitcoins” is one of the most important decisions for a Bitcoin user to make, and that is why we have done an extremely thorough Bitcoin wallet review for all major Bitcoin wallets.

In this article we will perform bitcoin wallet reviews, including providing the current best option, by looking at ease of use, security and advanced features for the major wallets in each category: Online Bitcoin Wallets, Desktop Bitcoin Wallets and Mobile Bitcoin Wallets.

To save you some time our conclusion to maximize ease of use, security and advanced features is to use the most well rounded Blockchain.info mobile bitcoin wallet (Android or Apple Store) coupled with the ultra-secure and advanced desktop bitcoin client Armory.

Regardless of what kind of electronic payment system you are using if you want to spend digital money then you need to have a digital wallet. Bitcoin differs from every other online payment system. Bitcoin has no central provider and anyone can build a bitcoin wallet. Consequently, there are several dozen bitcoin wallets to choose from and they all vary in terms of ease of use, security and advanced features which makes it important to carefully consider these bitcoin wallet reviews.

DIGITAL WALLETS

The Bitcoin wallets come in many different varieties often with trade-offs between ease of use, security and advanced features. Some are websites that simply offer the basic functions of sending and receiving bitcoins and attempt to make these functions as easy to use as possible. Others are fully-featured online bitcoin wallets that offer the user more power and control including advanced options such as custom transactions.

Then there are bitcoin wallets that are desktop applications which tend to be more difficult to setup but offer higher security and more advanced features across the board. And digital wallets would be incomplete without a mobile strategy and there are plenty of mobile Bitcoin wallets targeted at this huge market.

The list of options to choose from is daunting but we have done the hard work of narrowing the list from dozens to a few in this Bitcoin wallet review. First, ask yourself the question: Do I want a client I can download to my own computer, an online wallet interface, or a client for my smartphone? If you are an avid Bitcoin user then you may wish to have two of the above or even all three. It is extremely popular to have an easy-to-use, medium-security, online and smartphone bitcoin wallet for spending and a highly secure desktop Bitcoin wallet for savings and advanced features.

Once you have narrowed down your use case then look at the options available within each category. Do you want a client that offers more powerful features or do you want something that is easy to use? Perhaps you paranoid and want extra security? In all three of the categories there are different bitcoin clients to suit various needs.

Online Bitcoin Wallet Reviews

Online wallets are the easiest to setup and offer extreme convenience of being able to access your bitcoins from any computer. But generally there is a cost of requiring a higher degree of trust in the provider. Three well known options to choose from among online Bitcoin wallets include:

Blockchain.info

Blockchain is a hybrid between an online wallet and a desktop client and seeks to offer close to desktop-level security with the convenience of an online application. Unlike the alternatives, Blockchain works by storing your wallet encrypted, and running the code necessary to decrypt your wallet and sign transactions in your browser, so the operators of Blockchain have no way to access your funds.

However, there are some security complications with relying solely on Javscript cryptography, so users who want to take full advantage of the increased security that Blockchain has to offer should install either the Chrome or Firefox extension or the wallet verifier addon for Safari.

The client also offers a number of advanced options: the ability to download and backup your wallet to your computer or a printed sheet of paper, private key import and export, brain wallet support and an offline transaction mode are all available.

Coinbase

Coinbase is a step up from Instawallet in terms of both complexity and security. But it is still basic with only standard sending and receiving functionality. Nevertheless, Coinbase has two features which make it a very convenient wallet for the beginning user.

First, the wallet allows you to avoid dealing with Bitcoin addresses entirely and instead send directly to an email address. This makes the transfer internally if both parties have a Coinbase account and if the receiver does not then it sends an email message to the recipient instructing them to immediately create an account to receive the bitcoin payment.

Second, Coinbase includes its own built-in bitcoin exchange which empowers users to convert between bitcoins and US dollars directly through their bank accounts using ACH and they have processed tens of millions of dollars worth of orders. Unfortunately, the bank account integration is only available with banks inside the United States and only a limited amount can be bought or sold at a time depending on verification and other Coinbase policies.

Third, there is a Coinbase Android app. Many wallets are cross-platform compatible.

Coinbase does not claim to be trust-free and all bitcoins are stored in a centralized location controlled by its operators. This means you do not have absolute control over your bitcoins and there have been technical incidents which have left users without wallet functionality, unconfirmed transactions and may have comprised data or personal information. But so far no customer funds have been lost and these appear merely as growing pains for this new startup.

Nevertheless, Coinbase raised $5m of venture capital funding and will likely be around the Bitcoin ecosystem for the foreseeable future and the founder and venture capital investors are unlikely to betray their users by absconding with bitcoins. Their current corporate policy of storing 85% of users’ funds in offline cold storage means that the bitcoins are likely well-protected against third-party theft.

WalletBit

Like Coinbase, WalletBit attempts to create an online wallet that is easy to use but has all of the convenience features that beginning users need. WalletBit allows sending to email addresses as well as a built-in conversion to and from the user’s local currency through the Bitcoin exchanges Bitcoin Nordic and MtGox.

These options are less convenient than Coinbase’s bank account integration with ACH but they have much higher deposit and withdraw limits and are more widely available around the world. WalletBit is also a merchant services provider. If you are interested in accepting bitcoins for your business, whether online or brick-and-mortar, then WalletBit has a wide variety of integrated supplementary tools to assist you.

WalletBit’s security model is similar to that of Coinbase but their operators are neither more established and prominent than Coinbase’s nor have they raised the same amount of venture capital. So you should consider the staying power of the developers in the bitcoin wallet reviews.

Desktop Bitcoin Wallet Reviews

Desktop clients are simply software programs that you download onto your computer. They offer increased security and control but at the expense of being more difficult to set up. Hence the trade-off in these bitcoin wallet reviews. There are three main clients to choose from:

Armory

Armory is the most advanced and secure Bitcoin client available and has been developed by Alan Reiner who is one of the world’s premier experts in Bitcoin security. If your use case requires safely storing large value in bitcoins then Armory is the only practical choice.

Armory offers a range of features even larger than either Blockchain.info or the Satoshi Bitcoin client. However, all of these tremendous benefits come at a price: convenience. There are three modes a user can choose: Standard, Advanced and Expert. But even the Standard mode requires some serious study to become competent.

Of course, there is standard bitcoin wallet functionality like storing encrypted wallets, managing an address book, changing or removing a passphrase, backing up either individual private keys or via paper or digital methods, deleting or removing wallets and creating watching-only addresses.

However, beyond the standard functionality expected from any Bitcoin wallet client, Armory pays attention to small details like having a graphical keyboard to protect against keyloggers and other features empower users to manage multiple wallets, import or sweep private keys, sign messages (although this functionality is not compatible with the Satoshi client), perform your own elliptic curve calculations using secp256k1 elliptic curve to supply values as 32-byte, big-endian, hex-encoded integers and most importantly Armory has seamless integration for signing transactions completely offline.

This offline transaction signing can greatly reduce potential attack vectors and there is no other wallet which offers this type of security in as easy to use implementation. This feature should not be underestimated!

The Armory client has no networking functionality and requires the Satoshi client to be running at the same time to interact with the blockchain. This can put strain on an older computer and even with the latest hardware there is significant startup time because it uses the Satoshi Bitcoin client for transaction data and therefore needs to download the entire blockchain.

But this is the only major downside we could find in this particular bitcoin wallet review of the Armory client. And if your use case requires storing significant amounts of bitcoins that you do not want compromised then the Armory client is the best choice.

BitcoinQt

Originally developed by Bitcoin founder Satoshi Nakamoto in 2008-2009, and continuously worked on by the core Bitcoin development team since then, this is the first Bitcoin client ever created. The client is a fully fledged node of the Bitcoin network, meaning that it can connect to other nodes and help verify and relay transactions, although it cannot mine.

Because it is a full node, the client must download the entire (currently 6 gigabyte) blockchain to operate, which can take up to a few days the first time you start the client and several minutes to an hour every time you start the client afterward if you do not keep it running constantly. Your private keys, the mathematical data that makes it possible for you to spend the bitcoins that have been sent to one of your Bitcoin addresses, are stored in a “wallet.dat” file on your computer (which users are encouraged to back up), and the client offers the option of keeping your wallet.dat encrypted.

This client is arguably the most trustworthy, since its development is certainly the most heavily scrutinized and is overseen by very well-known and established members of the Bitcoin community. So the probability of it having security holes is pretty low and one reason for it being so popular in the bitcoin wallet reviews.

Its features include the basic sending and receiving functionality, as well as a feature that allows you to digitally sign a message with one of your addresses, allowing anyone who knows that the address belongs to you to verify that the message was not modified or forged (the verification functionality is also present in the client).

Electrum

Electrum is a solid lightweight desktop client, meaning that it does not download the full blockchain. Instead, it relies on servers to do much of the work. It performs well in the bitcoin wallet review because it empowers you to send and receive transactions, but also has some advanced features: it can generate wallets deterministically from a seed, create and sign transactions offline, sign and verify messages (compatibly with the Satoshi client’s implementation), export a “root public key” that allows applications like AcceptBit to monitor, but not spend from, the wallet, and it can import and export private keys.

Unfortunately, these advanced features are only accessible through the command line. Those who only wish to send and receive bitcoins, however, need not worry about the advanced features. If one wishes just to send and receive bitcoins, Electrum offers the most simple, easy-to-use and minimalistic interface of all the online and desktop wallets.

Multibit

Like Electrum, Multibit is a lightweight client, although it is perhaps one step below Electrum in the regard. Unlike Electrum, Multibit does not need to rely on servers; instead, it connects directly to the network, using a new feature known as bloom filters implemented in BitcoinQt 0.8 to only download a small subset of the Bitcoin blockchain, and thus avoid the 6 GB download that the Satoshi client and Armory require, while still keeping track of all transactions that are relevant to the user. MultiBit is also known for having translations into dozens of languages worldwide, as well as having the ability to manage multiple wallets.

Mobile Bitcoin Wallet Reviews

Mobile Bitcoin wallets are specifically targeted for mobile phones and offer a different array of features to consider in the bitcoin wallet reviews. Advanced private key importing and message signing functionality is out, but features such as the ability to create payment requests in the form of QR codes, and scan such requests made by others, are included in all the options, making sending and receiving bitcoins on a smartphone much easier. Note that this page describes wallets for Android only, as Apple does not allow Bitcoin applications on its platform to offer sending and receiving features.

Blockchain.info

Blockchain’s mobile wallet is similar to its desktop wallet in operation, but it only offers the simplified interface of receiving and sending bitcoins, as well as the standard mobile QR code functionality including importing of private keys. The mobile wallet and the desktop wallet can be made to point to the same account. This empowers you you to spend your bitcoins anywhere.

Just like in the browser wallet, transaction signing is done client-side, so Blockchain themselves never gain access to your wallet. Like the other major mobile wallets, it does offer the ability to set a PIN for security, but the feature is hard to find – it requires adding a second password from within Blockchain’s desktop browser interface, which will then be required on both your smartphone and your desktop.

Bitcoin Spinner

Bitcoin Spinner differs from many of its alternatives in that it does everything client-side; transactions are signed and received locally on your phone, and your private keys are never sent over the internet, even in an encrypted form. Spinner does rely on a server to function, but its role is limited to simply relaying transaction data and it has no way to gain access to your wallet.

However, with greater power comes responsibility. If you forget to back up your private key and your phone breaks or is lost, your funds are gone forever. Fortunately, Spinner does make the backup process fairly easy; all you need to do is go to Settings-> Backup Wallet in the menu and you will be able to QR scan the key or copy it to your clipboard.

Andreas Schildbach’s Bitcoin Wallet

The original Bitcoin wallet for smartphones and written using Mike Hearn’s BitcoinJ Java library. It is by far the most independent of all mobile wallets, requiring no third parties whatsoever to continiue functioning; the client connects to the Bitcoin network directly and stores a small portion of the blockchain locally to verify incoming transactions.

Like Bitcoin Spinner, however, it does require the user to take care to manage their own backups. Until very recently, the wallet was very slow and data-hungry due to its need to process the entire blockchain, but its latest version and the advent of BitcoinQt 0.8 means that it can now download transactions much more quickly which is positive for the bitcoin wallet review.

On March 1, web hosting provide Linode’s servers were hacked, resulting in a theft of 3000 BTC from Slush and, most severely, 43000 BTC from Bitcoinica. There have been two major Bitcoin heists before, one 25000 BTC theft in June and a 17000 BTC theft from the Bitcoin exchange bitomat.pl in August, resulting in the exchange being bailed out and acquired by MtGox. Security is a major issue in the Bitcoin community, and many are worried that if they want to carry out a significant portion of their economic activity in bitcoins their money will not be safe. Many traditional banking proponents see the theft in June and now this heist as clear indications of the inferiority of Bitcoin’s lack of reversibility and an effective audit trail, and it cannot be denied that incidents such as these do shake even Bitcoin proponents’ confidence in the system, but it is critically important that we do not fall into hysteria and exaggerate the consequences and instead approach the issue with a cool head. There are several reasons why this theft is in fact less consequential to the Bitcoin community than it might seem at first glance.

• Bitcoin’s security has gotten better between this theft and the one that happened six months ago, and will only continue to get better in the future. When bitomat.pl was hacked, the 17,000 of their Bitcoins that they lost represented all of their clients’ money, and MyBitcoin’s losses were equal to 51% of their total funds. Bitcoinica’s losses, though staggering to the average individual, were mild enough that they were able to reimburse all of their customers and continue running. They are upgrading their security following this incident and are working on a more secure, specialized server. Soon, innovations like multi-signature transactions will enter mainstream usage and increase security even more.
• Storing $220,000 worth of data is not something unique to Bitcoin. Businesses like Sony and Stratfor had to suffer much worse as their proprietary data was leaked by Anonymous, and there are many low-profile cases that do not make the news. A report by the Ponemon institute shows that the average cost of a stolen laptop is $49,246, including $39,297 due to lost or leaked data. We only pay so much attention to Bitcoin-related losses because the value is so clearly quantified and because Bitcoin business remains extremely open and community-oriented — normally, banks do not announce their robberies to the public because they do not want to be perceived as vulnerable and take a hit to their reputation.
• Bitcoinica is a financial services business and they have to deal with these kinds of risks in ways other businesses do not. It’s worth keeping in mind that such risks are not unique to Bitcoin — MF Global saw $1.2 billion, or roughly 100% of what was then its net worth (the derivatives broker has since collapsed), simply disappear without a trace. Bitcoinica, on the other hand, managed to remain solvent. For the average Bitcoin-handling business, such risks are much milder as all of their Bitcoins can be stored in cold storage as they simply need to accept money coming in all the time, not take it out.
• The little guy is secure. Bitcoinica has taken the entire 43000 BTC hit and the balances of individual Bitcoin users remain untouched. The ironic thing is, this is exactly how things work for the consumer in the real world. When your credit card gets stolen and the thief buys $10000 worth of goods with it, the bank refunds your losses and your balance remains untouched, just as happened here (although the consequences to the merchant who sold the goods are somewhat less pleasant). This is one of the key points of Bitcoin: Bitcoin does not force you to be your own bank. You can keep your bitcoins stored with a Bitcoin bank if that makes you feel safer, and as more and more average users begin to accept Bitcoin such services will begin to appear. There are already various options with as many levels of convenience and paranoia as there are types of smartphones. Freedom is superior to non-freedom not because people always prefer it no matter what the consequences, but because it allows the expression of a preference in the first place.

 

  
 

The Network and the Blockchain

• The Bitcoin network is the network of computers through which Bitcoin transactions are broadcasted and which maintains the public blockchain. Sometimes, the term is used to refer to just miners (see below).
• The blockchain is a public list of all transactions that have ever been sent, ensuring that everyone knows which bitcoins belong to whom. All fully fledged nodes on the network keep a copy of the blockchain.
• A block is an individual unit of a blockchain. Each block contains the hash of the previous block (so someone passing along the blockchain can’t take out or change any block without making some hash along the way not match), as many unconfirmed transactions as can be found in the network, and a number called a nonce. Someone creating a block must find a nonce such that the hash of the block is below a certain threshold (the target), which can only be done by trying out all the nonces one after the other until one that produces a desirable hash is found, and is harder the lower the target is. The reason why block creation is made deliberately difficult is to prevent someone from spending bitcoins and then creating and pushing his own blockchain that doesn’t contain the transaction that shows that the bitcoins are spent, effectively erasing that record and allowing him to spend them twice. When a valid block is created, it is distributed through the network and work on the next block starts.
• The genesis block is the first block of the blockchain released on Jan 4, 2009.
• An unconfirmed transaction is a transaction which is not yet part of a block. A confirmation is when a transaction is put into a block to permanently become part of the blockchain. “6 confirmations” means that the transaction is in a block and there are 5 blocks after it in the chain, which provides added assurance that the transaction is legitimate.
• A miner is someone who tries to create blocks to add to the blockchain (the term also refers to a piece of software that does this). Miners are rewarded for their work by the Bitcoin protocol, which automatically assigns 50 new bitcoins to the miner who creates a valid block. This is how all bitcoins come into existence.
• The difficulty is how difficult it it to create a new block (ie. the inverse of the target), and it is automatically adjusted to ensure that the network takes an average of 10 minutes to find a valid block.
• A mining pool is a service that allows miners to work together on creating blocks and split the profits evenly, providing miners with a reliable income rather than a small chance of 50 BTC profits.
• A 51% attack is an attempt to gain the power to block and reverse Bitcoin transactions by obtaining and using a sufficiently strong pool of computing power to overpower the rest of the Bitcoin network combined (ie. controlling at least 51% of the network).
• A double spend is an attempt to send the same bitcoins twice. Miners generally prevent this, but such an attack is possible against users who accept unconfirmed transactions and in conjunction with a 51% attack.

 

The Market

• An exchange is a service which allows people to buy and sell bitcoins to each other. The most popular at the time of this writing are MtGox,  CryptoXChange, Cavirtex (Bitcoin to Canadian dollars) and Intersango (Bitcoin to UK pounds).
• The “ask” price is the lowest price people on a certain exchange are willing to sell bitcoins for, and the “bid” price is the highest price people are willing to buy for. The ask-bid spread is the difference between the two.
• The volume of an exchange is the number of bitcoins traded during a given time period.
• The market depth is the number of bitcoins that people have put up for sale on an exchange and haven’t been sold yet (since no one is yet willing to accept their price) at a given time.
• A speculator is someone who tries to make money by buying bitcoins at a low price and selling them at a high price. Arbitrage is the activity of trying to make money by taking advantage of price differences across multiple exchanges, and high-frequency trading is the activity of trying to make money by predicting very short term price movements and buying low and selling high on those.
• A bubble is when people are optimistic about the Bitcoin price going up in the future, and buy bitcoins to speculate on this, causing the Bitcoin price to go up, and continuing the cycle until the bubble “pops” and the price crashes back down (a correction). The largest bubble to date has been the April-June 2011 bubble, pushing the price up from $0.75 to over $30 before it crashed back down to $2 (from which level it is, as of the time of this writing, picking up again).
• Margin trading is a risky form of speculation where you trade bitcoins using borrowed money in addition to your own (the ratio of total money to your own money being the leverage), allowing much higher profits but risking liquidation (losing all your money) if the price falls by, for example, 20% at a 5-to-1 leverage. It’s also possible to use margin trading to bet against bitcoins (shorting), in which case you’re buying dollars with borrowed bitcoins, so you earn a profit if the bitcoin price goes down and you get liquidated if the bitcoin price goes up too much. The first margin trading service available was Bitcoinica, which is now no longer operational, and Kronos.io will likely be the first competitor to replace it.

 

Miscellaneous

• A satoshi, named after Bitcoin creator Satoshi Nakamoto, is one hundred-millionth of a bitcoin, or the smallest unit of the currency that can possibly be sent.
• A tumbler, or Bitcoin laundry, is a service that allows people to put their bitcoins in and then randomly hands them back and equal (perhaps minus a small fee) amount of bitcoins from someone else. These new bitcoins cannot be traced back to the old ones through the blockchain except by the tumbler operator themselves.
• An escrow service is one that holds payments made for a service and releases them to the intended recipient only after it has been verified that the recipient has kept his end of the deal.
• A script is an advanced Bitcoin feature that allows for unconventional transactions like transactions that can be spent by anyone and, in the future, transactions that require two or more (or even two out of three) people to sign. Technically, all Bitcoin transactions use scripts but the term is typically used only in discussions surrounding unconventional transactions.
• A fiat currency is a traditional currency like the US dollar and the euro, which ultimately derives its value from its use being mandated by a government for payment of taxes and as legal tender.

 

  
 

Cryptography

• A hash is a function which transforms any number or string into a fixed size output which is impossible to do in reverse without trying all possible inputs. As an example of a simple hash function, consider the square root: the square root of 17202 is easy to calculate – it’s about 131.15639519291463, so a simple hash function might be the later digits of this, 9291463. However, given just 9291463 it’s much harder to figure out what number it came from, and you basically have to go through all the possibilities. Modern cryptographic hashes like SHA-256 are a much more complex and secure version of this. The word is also used to refer to the output of such a function.
• A traditional encryption algorithm is a function that transforms a message into an unreadable, random-seeming string using an encryption key, which cannot be reversed (ie. getting the original message back) except by someone who also knows the key. Encryption is the way that private data is sent over the public internet without serious risk of outsiders finding out what is being said.
• Public key cryptography is a method of encryption where every private key has a corresponding public key, from which it is impossible to determine the private key, and data encrypted with one key can be decrypted with the other. This lets you publish a key that lets anyone send encrypted messages to you without having to exchange a secret key first.
• A digital signature is something which can be attached to a message to show that the sender of the message is the owner of a private key corresponding to some public key while keeping the private key secret. It works by taking the hash of the message and then encrypting the hash with the private key. Someone checking the signature will decrypt the encrypted hash with the public key and check that the result matches the hash of the message. If the message is at all changed, or the private key is wrong, the hashes will not match. Outside of the Bitcoin network, signatures are generally used to authenticate the identity of the sender of a message – people publish their public keys, and send messages signed with the corresponding private key which can then be verified against the public key.

Basic Terminology

• A Bitcoin client is a piece of software that handles receiving and sending bitcoins. The most popular is the standard Bitcoin client downloadable from bitcoin.org, although there are many other options with different features.
• The term wallet can have two meanings: it can either be a synonym for a Bitcoin client (although the terms are in practice used slightly differently, “client” referring more to fully fledged desktop clients and “wallet” more to lightweight browser-based and online managed services) or it can refer to a file which stores bitcoin addresses and the private keys needed to use them.
• A Bitcoin address is a string like “13ignD31FysQbaBBVJUzffcQoFxxEuEcbE” that you need to know from someone to send bitcoins to them. The process of creating a bitcoin address and the private key going along with it can be done by bitcoin clients.
• A private key in the context of Bitcoin is a key connected to an address (technically, the address is the hash of the public key corresponding to the private key) that is stored behind the scenes and allows you to send bitcoins that have been previously sent to that address. Note that because of the way the encryption algorithm that Bitcoin uses (ECDSA) works it is possible to generate the public key and the address from just the private key.
• A transaction is a message that informs the Bitcoin network that a transfer of ownership of bitcoins has taken place, allowing the recipient to spend them and preventing the sender from spending them again once the transaction becmes public.

 

  
 

In this part we will talk about “pooled mining” and compare the different approaches.
With increasing block generation difficulty, mining essentially becomes a lottery, as it may take years before an individual node manages to create . To provide a more smooth incentive to lower-performance miners, several pooled miners have been created. With a mining pool, a lot of different people contribute to generating a block, and the reward is then split among them according to their processing contribution. This way, instead of waiting for years to generate 50btc in a block, a smaller miner may get a fraction of a bitcoin on a more regular basis.A share is awarded by the mining pool to the clients who present a valid proof of work of the same type as the proof of work that is used for creating blocks, but of lesser complexity, so that it requires less time on average to generate.

Pooled Mining Approaches

Currently there are several pooled mining different approaches used:

• The Slush Approach – Sometimes referred to as “slush’s pool”, follows a score-based method. Older shares (from beginning of the round) has lower weight than newer shares, which demotivate cheater from switching between pools inside one round.
• The Pay-Per-Share Approach – This approach consists, in to offering an instant flat payout for each share that is solved. The payout is offered from the pool’s existing balance and can therefore be withdrawn immediately, without waiting for a block to be solved or confirmed. The possibility of cheating the miners by the pool operator and by timing attacks is thus completely eliminated.This method results in the least possible variance for miners while transferring all risk to the pool operator. The resulting possibility of loss for the server is offset by setting the payout lower than the full expected value.
• Luke-Jr’s approach – Luke came up with an approach borrowing strengths from the other approaches. Like slush’s approach, miners submit proofs-of-work to earn shares. Like puddinpop’s approach, the pool pays out immediately via block generation. When distributing block rewards, it is divided equally among all shares since the last valid block. Unlike any preexisting pool approach, this means that the shares contributed toward orphaned blocks are recycled into the next block’s shares. In order to spare participating miners from transaction fees, rewards are only paid out if a miner has earned at least 1 BTC. If the amount owed is less, it will be added to the earnings of a later block (which may then total over 1 BTC). If a miner does not submit a share for over a week, the pool sends any balance remaining, regardless of its size.
• The Triplemining approach – The Triplemining approach is to bring together a medium-sized pool with no fees and clever redistribution of 1% of every found block to allow your share to grow more rapidly than on any other bitcoin mining pool.For every found block, Triplemining redistributes 1% of the profits to all minipool owners (people with 1 or more friends mining with them). The redistribution is connected to the shares found by the members of the minipool. So if the hash rate of the minipool members equals or is bigger than yours, the part in the redistribution will be equally bigger.
• P2Pool approach – P2Pool mining nodes work on a chain of shares similar to Bitcoin’s blockchain. There is no central point of failure and thus P2Pool becomes DoS resistant.P2Pool works different from existing mining pool technologies — each node works on a block that includes payouts to the previous shares’ owners and the node itself. 99% of the block reward (the 50BTC reward plus any included transaction fees) is distributed evenly to miners based on work done recently. An additional 0.5% is awarded to the node which solves the block.
• The puddinpop approach – Another approach is the ‘metahash’ technique, used by puddinpop’s remote miner. Clients generate hashes, and also submit ‘metahashes’, which are hashes of a large chunk of generated hashes. The server checks that the metahashes are correct (in a round-robin fashion, picking up a metahash from a client that hasn’t been checked on the longest), thus preventing clients from simply claiming that they have done work without actually doing the work. The withholding of good blocks by the clients is prevented via the server being in possession of the private key, just as in the previous approach. Rewards are distributed based on the number of metahashes submitted by the clients.The generated blocks contain multiple keys in the generation transaction, giving fractional bitcoin amounts to each key, in proportion to their hashing contribution for that block. As of February, 2011, there are no puddinpop pools running.

Comparison

The cooperative mining approach (slush and Luke-Jr) uses a lot less resources on the pool server, since rather than continuously checking metahashes, all that has to be checked is the validity of submitted shares. The number of shares sent can be adjusted by adjusting the artificial difficulty level. Furthermore, cooperative mining allows the clients to use existing miners without any modification, while the puddinpop approach requires the custom pool miner, which are as of now not as efficient on GPU mining as the existing GPU miners.

Puddinpop and Luke-Jr miners receive coins directly, which eliminates the delay in receiving earnings that is required on slush-based mining servers. Additionally, the puddinpop and Luke-Jr approaches of distributing the earnings by way of including precise sub-cent amounts in the generation transaction for the participants, results in the presence of sub-cent bitcoin amounts in your wallet, which are liable to disappear (as unnecessary fees) later due to a bug in old (before 0.3.21) bitcoin nodes. (E.g., if you have a transaction with 0.052 in your wallet, and you later send .05 to someone, your .002 will disappear.).

P2Pool’s main advantage is not technical, but rather political – if all the miners mine through a few traditional pools, then the owners of those pools end up having a great amount of power over the network, while P2Pool operates without anyone having control of it.

 

  
 

Введение в Биткойн

Биткойн – это одноранговая децентрализованная электронная валюта. По своей сути, она сходна с банковским счетом в том, что ваши деньги хранятся в виде чисел в базе данных и в ходе операции система перемещает эти числа с одного счета на другой. Однако поскольку система децентрализована, база данных хранится одновременно на каждом компьютере-участнике.

Bitcoin – первая рассредоточенная таким образом валютная система, и вследствие этой структуры система не имеет посредников, взимающих комиссию с каждой вашей сделки, и не контролируется никакой организацией или правительством.

Электронная почта позволяет отправлять сообщения бесплатно в любую точку мира. Тем же отличаются телефонные разговоры по Скайпу. А теперь есть Bitcoin, дающий возможность пересылать деньги из любой точки мира в другую, забыв о каких-либо ограничениях или государственных границах, за менее чем один процент платы за сделку.

Система была впервые описана в 2008 году Сатоши Накамото в его документе, разъясняющем технологию Биткойна, который был разослан через криптографический список адресов электронной почты; а сам оригинальный проект с открытым исходным кодом был пущен в ход 3 января 2009 года. В течение первых двух лет он постепенно расширял свою пользовательскую базу, пока в конце 2010 года упоминание о нём в статье на Slashdot не стимулировало внезапный приток в проект новых пользователей и внимание к нему СМИ, а также стремительный рост цен, поскольку Bitcoin впервые по-настоящему предстал перед реальным миром. С момента своего создания, система выросла до размера более миллиона пользователей и 8500000 существующих сейчас узлов обладают общей стоимостью в десятки миллионов долларов.

Децентрализованная база данных Биткойна обеспечивает переводы между счетами (или, в терминологии Биткойна, адресами) с использованием математического алгоритма, известного как цифровая подпись. Проблема так называемых двойных расходов – отправки тех же биткойнов двум разным людям – предотвращается путём трансляции всех транзакций в сеть, которая отслеживает, какие биткойны были потрачены и в какое время, и синхронизирует эту информацию для всех участвующих машин.

Поскольку операции транслируются по всей сети, они в самой своей основе публичны. Обычная банковская система обеспечивает финансовую безопасность клиента тем, что держит в тайне записи о его операциях. В отличие от этого, Биткойн сохраняет нераскрытыми данные обладателей адресов, и тем достигается анонимность самих операций.

Когда активно участвующий в сети компьютер, который называется “майнером”, получает информацию о новой сделке, если он удовлетворен проверкой её допустимости, он добавляет эту сделку со штампом времени в конец коллективно поддерживаемого списка всех известных операций, тем самым её «подтверждая». Этот общий список называется «блокчейн» («цепь блоков»). Любая попытка послать те же биткойны снова будет отклонена, так как блокчейн обеспечивает четкое доказательство того, что монеты уже были потрачены.

Процесс добавления блока к цепи (блокчейну) был сознательно разработан как сложный, требующий времени и вычислительной мощности для выполнения. Поэтому практически невозможно создать поддельный блокчейн без наличия большей вычислительной мощности, чем в целом во всей остальной сети Биткойн. Каждый блок имеет значение, называемое хэш. Это число, математически генерируемое из данных блока с использованием функции, которая специально разработана, чтобы быть настолько запутанной, что её результат по своей природе случаен, и невозможно заранее предсказать, каким будет вывод из данного ввода. Сложность создания блока выходит из факта, что хэш действительного блока должен быть ниже некоего очень низкого “целевого показателя”. Майнеры, таким образом, вынуждены продолжать видоизменять блок, подставляя различные значения фиктивной переменной, называемой “Нонс” до тех пор, когда одному из них повезет и он заметит, что хэш одной из его версий блока падает ниже целевого показателя. В этот момент блок добавляется и процесс начинается заново. Целевой показатель автоматически регулируется так, что новый блок появляется примерно каждые 10 минут.

Каков же стимул, побуждающий майнера тратить усилия на попытки создания блоков, если на это уходит так много вычислительного времени и энергии? Ответ заключается в том, что человек, которому удаётся создать блок, получает вознаграждение. Это вознаграждение состоит из двух частей. Во-первых, производитель блока получает премию, состоящую из некоторого числа биткойнов. Размер данной премии согласован участниками сети. В настоящее время он составляет 50 биткойнов, но это значение снизится вдвое в декабре 2012 года и впредь будет ополовиниваться примерно раз в четыре года, так чтобы общее число премиальных приближалось к, но никогда не превышало 21 млн. биткойнов. Во-вторых, производитель блока вправе претендовать на любые биткойны, поступившие в оплату операций, включенных в блок. Правила сети таковы, что постоянство примерного времени производства одного блока (10 минут) поддерживается добавляемой сложностью. Таким образом, чем больше майнеров вовлечено в вычисления, тем труднее для каждого отдельного майнера создать блок.

Помимо его важности для поддержания базы данных транзакций, Добыча биткойнов также, и в первую очередь, является единственным механизмом, посредством которого Биткойны создаются и распространяются среди людей в Биткойн-экономике.

Добыча биткойнов используя центральный и графический процессор

На заре существования Биткойна каждый мог с лёгкостью находить новые блоки с использованием стандартных центральных процессоров. По мере того, как в майнинг включалось все больше и больше людей, трудность нахождения новых блоков значительно возросла, до того, что теперь среднее время, необходимое ЦП для нахождения единственного блока, мерится годами. Единственным экономически эффективным способом добычи стало использование высококачественных графических карт со специальным программным обеспечением и / или вход в майнинговый бассейн.

Некоторые пользователи Биткойна могут задаться вопросом, почему существует огромный разрыв между майнинговой эффективностью ЦП по сравнению с ГП. Ответ на этот вопрос кроется в принципиальных различиях в функционировании этих двух типов процессного оборудования и в цели их создания. ЦП спроектирован в первую очередь как гибкий исполнитель, принимающий решения в соответствии с указаниями программы. ЦП очень эффективен в следовании инструкциям типа “если – то, в противном случае – что-то иное”. С другой стороны, ГП были разработаны таким образом, что они очень хороши для видеообработки и менее ценны в отношении гибкости. Обработка видео являет собой большое количество монотонной работы, так как постоянно выполняются те же команды в отношении больших групп пикселей на экране. Для обеспечения эффективности этой функции, видеопроцессоры разработаны с упором на способность совершать повторяющуюся работу, а не на способность быстро переключаться между задачами. ГП снабжены большим количеством АЛУ (арифметико-логических устройств), в отличие от ЦП. В результате, они могут производить в большом количестве громоздкие математические вычисления, в гораздо большем количестве, чем ЦП.

Для наглядности можно представить себе ЦП в виде маленькой группы очень умных людей, которые могут быстро выполнить любое данное им задание. ГП же представляет собой большую группу относительно недалёких людей, каждый из которых сам по себе не слишком хорошо и быстро соображает, но которые могут быть обучены выполнять повторяющиеся задания, и в совокупности могут быть более продуктивны только за счёт своего количества. Повторяющаяся проверка версий хэша – процесс, лежащий в основе добычи биткойнов, – очень монотонное задание, подходящее для ГП, поскольку с каждой попыткой оно варьируется лишь изменением одного номера (так называемого «Нонса») в данных хэша.

Вот почему, в двух словах, графические процессоры способны добывать биткойны намного быстрее, чем центральные. Добыча биткойнов не требует принятия решений – для компьютера это повторяющиеся математические вычисления. Единственное решение, которое должно быть принято в процессе добычи биткойнов, это “является ли мой блок действующим” или “он таким не является”. Это отличное задание для загрузки им графического процессора.

 
перевод на русский язык Богданы Некрасовой
 
  
 

Bitcoin is a new kind of digital currency originally created by Satoshi Nakamoto in 2009. Of course, the idea of digital money is not new; for many years now we have had Paypal, credit cards, WebMoney dollars and even the virtual gold in video games like World of Warcraft. What makes Bitcoin different from anything that came before it, however, is that Bitcoin exists only on the internet, and is not dependent on any government or corporation. Instead, the Bitcoin system is collectively maintained by thousands of computers owned by various individuals around the world. Because of this, Bitcoin is able to offer a number of advantages over other methods of digital payment:

1. Bitcoin has very low fees. Technically, you do not need to pay any fees at all, although if you do not include a small fee of about 0.0001 BTC (~$0.01) transactions below 0.01 BTC (~$1) will be processed more slowly.
2. Your Bitcoin wallet cannot be frozen or seized. Some kinds of organizations – particularly political organizations, must frequently deal with Paypal or credit card companies refusing to process payments for them and even freezing their account, leaving their owners to maintain them out of pocket. With Bitcoin, there is no way for anyone to block or reverse transactions.
3. You have increased privacy with Bitcoin. Although all transactions between Bitcoin addresses are public, you do not have to tell anyone which Bitcoin addresses belong to you (to further increase privacy, most Bitcoin wallets give you a new address every time you receive money), making it very difficult for anyone to link you with your transactions.
4. Bitcoin transfers are nearly instant. When someone sends you bitcoins, you will see the transaction within five seconds, and it will usually be “confirmed” by the network within ten minutes. Accepting transactions without confirmations is sufficiently low-risk for nearly all applications, so many merchants will accept your payment immediately.
5. Bitcoin is international. Paypal is unusable in 60 countries around the world, and international payments often charge hefty fees, but with Bitcoin sending money from Kyrgyzstan to Guatemala is exactly as easy, quick and cheap as sending money to your own neighbor.

Essentially, Bitcoin does to finance what email did to our communications.

Bitcoin Wallets

In order to use Bitcoin, you need to have a Bitcoin wallet. The purpose of a Bitcoin wallet is, as the name implies, to let you receive, store and send bitcoins. To receive bitcoins, you need to have a Bitcoin address; this is a series of numbers and letters like “1McqmmnxRwZRCpD2VoGEMzCYcdeXYvCBsB” that is essentially the equivalent of a bank account number – you give your Bitcoin address out to people so that they can send you money. Your wallet will generate Bitcoin addresses for you. When you want to send money, your Bitcoin wallet will have a form where you can paste in the Bitcoin address you want to send to, enter the amount, and hit “Send”. It’s just like email or a bank account; if you just want to use Bitcoin to send and receive money that’s all there is to it.

Bitcoin wallets can be desktop programs, smartphone apps (Android only so far unfortunately; blame Apple’s policies) or websites. Here is a page listing the more popular ones.

Transactions: the Technical Description

There are three numbers connected to each Bitcoin address:

1. The private key. This is needed to sign transactions (more on this below).
2. The public key. This can be derived from the private key, and can be used to verify that a signature made with the associated private key is legitimate, without actually knowing the private key.
3. The Bitcoin addreess itself. This is the hash (a mathematical one-way compressing function) of the public key.

Here is one example of such a triple:

• Private key: c4bbcb1fbec99d65bf59d85c8cb62ee2db963f0fe106f483d9afa73bd4e39a8a
• Public key: 0478d430274f8c5ec1321338151e9f27f4c676a008bdf8638d07c0b6be9ab35c7
1a1518063243acd4dfe96b66e3f2ec8013c8e072cd09b3834a19f81f659cc3455
• Address: 1JwSSubhmg6iPtRjtyqhUYYH7bZg3Lfy1T

In order to send money to someone, you (or rather, your Bitcoin wallet) must create a file called a Bitcoin transaction and publish it to the network. A Bitcoin transaction contains five basic parts: (1) the previous transaction that originally gave you the money that you are trying to spend, (2) the public key associated with the Bitcoin address that the previous transaction was sending money to (ie. your address), (3) the destination Bitcoin address that you are sending to, (4) the amount to send and (5) a digital signature of the rest of the transaction signed by the private key associated with the same address whose public key you included. To verify that a transaction is legitimate, the Bitcoin network does the following:

1. Check the signature to make sure that (i) the transaction was signed by the private key connected with the public key included in the transaction and (ii) the transaction was not tampered with.
2. Check that the public key included in the transaction matches the receiving address of the previous transaction.

If you know (1) and (2), you know that the transaction was signed by the owner of the private key connected to the receiving address, and so they are entitled to spend the money. Every “full node” in the Bitcoin network makes this calculation, and if everything checks out the transaction is accepted.

Mining

Mining is the other important part of Bitcoin’s underlying cryptographic mechanism. The transaction system solves one major problem of security: it ensures that no one can spend other people’s money, either by making transactions themselves or by modifying other transactions in transit. However, there is still another attack that the transaction system by itself does not solve: the double spending attack. The attack works like this:

1. Alice sends 10 BTC to Bob, and publishes the transaction.
2. Alice waits for Bob to give her some product (in order to be effective, it must be some instant-transfer digital good, like a one-time code or another cryptocurrency)
3. Alice makes a transaction sending the exact same 10 bitcoins to herself, and publishes that transaction. She then floods the network with this second transaction with thousands of computers, hoping that the majority of computers will accept her transaction (thus nullifying the conflicting transaction to Bob) even if Bob’s came first.

The naive way to resolve this is by saying that the first transaction always wins. However, the problem is that this can easily fragment the network; for example, evil Eve might send a 10 BTC transaction to Alice to one half of the network and a 10 BTC transaction to Bob to the other half, and then watch in glee as Alice and Bob make further transactions and the Bitcoin network splits in half over the disagreement. To ensure consensus, Bitcoin uses the mechanism that is known as mining.

Roughly every ten minutes, Bitcoin transactions are gathered together and published in what is called a “block”. A block has certain mathematical properties that make it very hard to create – so hard, in fact, that it takes the entire Bitcoin network an average of ten minutes to create one (the difficulty of the mathematical property in question is deliberately adjusted to ensure this). The only algorithm for making blocks is basically to change around insignificant details in the block until the mathematical property checks out. This is what Bitcoin miners do – they keep on trying different values until eventually one gets lucky, creates a valid block, and the process continues from there. Note that each block also contains a pointer (technically, a hash) to the previous block, so if someone tries to change one block in the middle then the next block will need to also be re-created (there are no shortcuts here; this is just as hard as creating that block was originally), and from there the block after that will also need to be re-created, and so on. Now, what happens if Alice wants to carry out her attack?

1. Alice sends 10 BTC to Bob, and publishes the transaction.
2. Bob, being a particularly security-conscious merchant, waits for three confirmations, and sends off the good. This means that he waits until his transaction was put into a block and then two further blocks were published after it.
3. Alice sends 10 BTC to herself. This transaction will not be accepted by the network, because a conflicting transaction was already made three blocks ago. She cannot simply modify a block in the middle, because of how the blocks are linked to each other. Thus, her only choice is to replace every single block after the one that she wishes to change.
4. Even though Alice spent $100,000 on Bitcoin mining hardware, she still has a hundred times less computing power than the rest of the Bitcoin network put together. Thus, in the time that she creates the three blocks needed to catch up, the rest of the network will already be three hundred blocks ahead. Once Alice catches up to there, the rest of the network will be thirty thousand blocks ahead, and so on.

Thus, Alice’s situation is hopeless. The only way she could possibly catch up to the rest of the network is if she had more computing power than the rest of the network combined – perhaps the weakest security assumption in the entire Bitcoin system, but nevertheless a very daunting task. To date, no one has managed to do such a thing and it is getting harder for an outside attacker to pull this off every month. Since the more legitimate miners there are, the harder this gets, the Bitcoin network incentivizes mining by giving every miner that creates a block 25 BTC plus all transaction fees (about 0.25 BTC per block right now).

Should I Mine?

Probably not. Mining these days is done by computers with specialized chips known as ASICs (application-specific integrated circuits), which are hundreds of times more efficient than the average CPU. If you have a computer with a powerful graphics card, you may or may not be able to profitably mine with your GPU; you may want to check your local electricity costs, get a Kill-A-Watt to measure your electricity usage and try it out for yourself. You may also wish to consider mining Litecoin instead; there are currently no Litecoin ASICs (and when they do come out they will have less of a speed advantage), so the situation is stacked somewhat more in your favor. If you wish to own bitcoins, it is probably a better idea to buy or earn them instead.

 
Client side browser wallets almost exactly resemble managed online wallets in terms of how they appear to the user, but the key difference is how they work behind the scenes. Encrypted backups of the wallet are stored securely by the provider, but the provider has no way of decrypting them – the encryption and decryption is done within your browser with Javascript using your password as a key, so your unencrypted wallet, and the password you use to encrypt it, never leaves your computer.

 

Advantages include:

• Very easy to use, no software installation required
• You can access your bitcoins from any computer
• No need to worry about accidentally deleting your wallet or losing it to a computer failure
• Less of a need to trust the provider; the only opportunity the provider has to act maliciously (eg. upload your unencrypted wallet and use it, send bitcoins to its own address) is when you are actually using the wallet. If, for any reason, you stop trusting a provider, if you keep your own backup of the wallet (which both major providers make it easy for you to fo) you can switch to another provider and transfer all your bitcoins to a new address.

The disadvantages are:

• You still need to trust the provider to some extent. If the provider gets hacked, the hacker can change the code that gets downloaded to your browser when you use the wallet, and potentially upload your unencrypted wallet or send a transaction to the hacker’s address.
• Potentially the worst possible option in terms of privacy. You don’t gain privacy from the large pool of bitcoins operated by a centralized server-side controlled wallet service, and the provider can still see your transactions. Although providers may have policies of not keeping track of or even remembering transactions, there is no way to verify this.
• Both major options charge small fees (0.01 BTC or 1%) on outgoing transactions

The major options are the blockchain.info wallet and Strongcoin.