Bitcoin - the Basics

Bitcoin

http://www.flickr.com/photos/31119160@N06/8007585111/

Vesa Linja-aho — T-76.5753 Law in Network Society

About me
 Vesa Linja-aho, M. Sc. in electrical and electronics
engineering.
 Professional background:
 7 years at Aalto university (research and teaching)
 1 year in Computerworld Finland magazine (editor)
 3 years at Metropolia, senior lecturer
 Electronics and electric safety
 Accounting and economics
 Open educational resources
 Everything new 
 http://www.google.com/#q=vesa+linja-aho

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Bitcoin = open source cryptocurrency
 Bitcoin = distributed accounting system
 No central authority -> does not depend on
trust to single or couple of institutions.
 Like cash, but for the internet
 1 bitcoin = 50 euros (20th of Mar 2013).
 Created by pseudonym Satoshi Nakamoto
 Based on a peer-to-peer network of
computers running the bitcoin software.
 The transactions are verified by proof-of-
work system of computers running a mining
software.

3

Pros
 No unpredictable inflation by ”printing more
money” by political decision.
 Transactions travel instantly
 Send money in seconds to anyone with internet
access – with zero transaction costs.
 Highly anonymous, in certain conditions
 Every transaction is public, though!
 If you memorize your private key, the only way
to steal your bitcoins (even for the authorities)
is to torture you (or spy or hack your computer).
 Easy to use
 You can choose the tool (usability / security)

4

Cons
 Bitcoin is rather new and its still in marginal
use -> high volatility.
 BTC money supply: 500,000,000 €
 EUR money supply: 5,000,000,000,000 €
 It’s currency for the internet – take down the
internet, and you cannot use bitcoins.
 Perhaps not suitable for any country’s official
currency.
 Lose your private key -> lose your bitcoins.
 No means to cancel the transaction!

5

Someone’s pro is someone’s con!

6

Stupid arguments against bitcoin
 People buy guns and drugs with it!
 But it proves it works!
 And people use plain cash for the same.
 Early adopters benefit too much
 Is it really a problem?
 Bitcoin has actually no value
 Same applies to euros and dollars.
 They only have value because people believe
they have value.

7

Good or at least considerable arguments
against bitcoin
 The value is unstable.
 There might be a bubble!
 Bitcoin can be replaced with a similar product.
 The government can shut it down.
 Or at least try to, by making it illegal to use
bitcoins.
 The slowness of transaction verification (about
10 minutes per block).
 The scalability: the current version can not
handle the transactions if everyone in the world
used bitcoins.
 MtGox handles most of the trade -> raid it -> ?
8

Is there a bubble?
 Media attention will inspire people to buy
bitcoins
 Media attention will inspire companies to
accept bitcoins (and vice versa)
 The price of bitcoins rise -> media attention
 The circle is ready.

 As long as the price rises together with the use
of bitcoin, there is (probably) no bubble.
 I emphasize the word probably. The
circulation speed of bitcoin is low if
compared to regular money.

9

How it works
 Every ”account” consists of the public key (=
bitcoin address) and the private key.
 Anyone who knows your public key, can send
you bitcoins.
 To spend bitcoins, you have to know the
private key.
 The transaction is broadcasted to the bitcoin
network.
 The miners confirm the transactions

10

The addresses
 An example of a bitcoin address:
 14nRKoXJAUpKYYbzw6Yrqh9gW2p26zerpW
 2 160 (about 10 48)possible addresses
 The corresponding private key:
 5HuEupX3DNFJ7UypjFtXDTm4BVuAwZtAgY
f94sMALPyakgafVnU
 256 bits
 About 10 77 possible private keys

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Confirmations
 In the process called mining, all transactions
are collected in a block. A new block is mined
in about every 10 minutes.
 For small payments or with payments with
trusted peer, 0 confirmations is usually ok.
 For large amounts, 6 confirmations is
considered safe.

12

Double spend elimination
 Because bitcoin has no central authority, one
of the main security problems is eliminating a
double spend fraud (wherein the same money
is spent twice).
 The main innovation in bitcoin is the
blockchain. Each full node (= computer
running the bitcoin program) in the network
has a copy of all mined blocks.
 Disrupting the system would need enormous
computing power.

13

Anonymity
 Understand how bitcoin works
 Every transaction from address to address is
public.
 How much and when = public, who owns the
address = not public (can be
analyzed, though).
 Create a new address for every transaction
 Use mixing services
 The larger the transactions, the easier it is to
carry out traffic analysis

14

Who accepts bitcoins?
 Namecheap
 Wordpress
 Many nonprofits accept bitcoin donations
 Archive.org
 Bitpay (= simple interface for merchants)
 Bitspend.net (order anything with bitcoins)

15

Legal stuff
 In Finland, the Board of Accounting recognizes
bitcoin:
 treated like stocks
 or if selling and buying bitcoins is the core
business of the company, they are put in the
current assets.
 Its completely legal to use bitcoins as money
(as it is legal to use potatoes or gold as
money)
 Anti-terrorism and money laundering law:
selling bitcoins for > 15 000 € -> ask for ID.

17

Bitcoin and taxes
 I asked the tax authorities about bitcoin: 'we
have a group of experts working on it’.
 Currently, VAT 24% is imposed on selling
bitcoins.
 Exchanging bitcoins for a customer is VAT 0%
 That is, the dealer buys the bitcoins for the
customer.

18

Bitcoin and taxes?

19

Worth reading
 http://www.reddit.com/r/Bitcoin
 http://bitcoin.it/
 https://blockchain.info/tx/8b555a4399797c78
4033863dda38abef7b8adcaf6748e9519dcb1
75fb1d04ee0
 http://krugman.blogs.nytimes.com/2011/09/07
/golden-cyberfetters/
 https://twitter.com/carsonj/status/314382483
468713984

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Tools for beginners (and everyone)
 http://easywallet.org
 http://blockchain.info/
 https://www.bitaddress.org/

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Bitcoin - the Basics

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