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Revision as of 09:04, 31 May 2018
Blockchain is a relatively new technology that stores and verifies information, such as information related to transactions made with cryptocurrency. Unlike fiat currency, which uses centralized authorities such as banks or government organizations to verify the passage of different amounts of currency between individual accounts, blockchain is decentralized. There exists not a single entity or person who holds total power over editing the blockchain. Instead, it relies on a massive, digital, worldwide community of individual computers, or "nodes", to verify and maintain records of transactions.
Blockchain was originally developed by Satoshi Nakamoto and a team of developers in order to create a peer-to-peer system of managing and verifying all transactions made with bitcoin. This technology uses complex mathematical algorithms in place of third-party financial institutions like banks or government agencies to verify possession of, and transactions made with, cryptocurrencies such as bitcoin.
Unlike a simple password-protected centralized system, the blockchain stores only enough information to verify the cryptographically-generated code, or hash, of the transaction's genesis and destination. This does not include the identity of the person who manipulated the transaction's source or destination, or where the computers used to do so are located - only a hash that is not tied to any kind of personal identifier or IP address. This information is distributed across millions of individual nodes worldwide. It does not include enough information that, if hackers accessed the database containing the data for stored past transactions, the user accounts on that database would be immediately compromised, because there is no easy way to pinpoint the identity of the people involved in the transaction from these data alone. This allows users to remain totally anonymous.
Because the blockchain does not exist in any centralized entity or authority, "hacking" the blockchain means figuring out how to do so retroactively, which means cracking an extremely difficult cryptographic math problem for each block one wishes to alter. Even then, by changing the data in a blockchain, one invariably changes the hash on that block, making it immediately apparent to the entire network that this block has been changed, as the hash on that block no longer resembles the hash on the millions of copies of that block stored on nodes across the globe. In order to circumvent this, a hacker would have to somehow alter the block in the same exact way on every single node in the network. While technically not impossible, it is extremely unlikely that any individual or group would be able to accomplish this; the computational power alone that would be required to do so is immense, and the anonymity of users makes locating and hijacking a sufficient number of nodes highly unlikely to succeed with current technology. Researchers have speculated that the technology to do this may be possible, but will not be developed for around another ten years. In other words, it's easy to go from the data contained in a block to its hash - it's nearly impossible to go from a hash to the block's data. This "consensus mechanism" creates an entirely new way of managing data - because blocks are cryptographically secure, third parties are not required to verify the data contained therein.
Projects such as Hyperledger, Bakkt, and GMEX represent efforts by enterprise-level businesses, traditional financial institutions, and governments to investigate and experiment with blockchain adoption. While these projects are significant, many who are not already blockchain developers, promoters, or enthusiasts still lack confidence in the technology. A survey conducted by PricewaterhouseCoopers (PwC) in April and May 2018 revealed that, according to its responders (mostly business executives with roles relating to technology), the biggest barriers to adoption are regulatory uncertainty, lack of trust among users (ironically this is what blockchain was built to achieve), and the ability to bring networks together. According to a Barclays analysis conducted around the same time, some technology analysts believe blockchain in its current form is incapable of living up to the capabilities its proponents insist it can. This analysis primarily focused on bitcoin's blockchain.
The state of some existing, enterprise-level blockchain projects have likely not positively impacted such a widespread lack of confidence among potential institutional investors. In August 2018, former employees of Project Infinity, a blockchain project launched in May 2017 by NEX Group, reported that the project had seen "significant" layoffs, including the project's entire London team. One former staffer even said the project, which had cost about $31.7 million, had been "canned." To date, this is the most expensive distributed ledger project to have ended in such a way. Despite such disheartening news, there have been signs of increased institutional adoption in some blockchain-based projects. Ripple reported in Q2 of 2018 that, although XRP sales and XRP's overall market cap had seen a sharp decrease, its customer base increased during the same period. According to employees at Ripple, the increase of customers represents a positive turn for XRP in terms of adoption, because the decrease in price can be attributed to existing investors holding on to the XRP they have already purchased, expecting its value to increase.
According to a research report from Forrester published in November 2018, many companies have begun substituting the word "blockchain" for "DLT" (distributed ledger technology). The study said this was due to the over-hyping of blockchain technology, as well the fact that many projects touting their use of "blockchain technology" actually lack key characteristics of a blockchain.
The blockchain is a public, distributed, decentralized string of interconnected data clusters, called "blocks", tied to a single, original "genesis block." The "genesis block" is a cluster of data built to attach information such as cryptocurrency transactions to itself. Figuratively speaking, the genesis block is like the anchor for the rest of the blockchain. Each block contains data as well as two computer-generated, cryptographic codes, or hashes: its own hash, and the hash of the block that came before it. Functionally, a hash is like a digital fingerprint - it is unique, and is used to identify a specific block.
Each time a new block is made through the transaction of a specific cryptocurrency, the data from that transaction - including the amount transferred from one node, or user, to another; the digital identification information of both nodes, and other cryptographically-generated data - are encoded into a new "block," or timestamped bundle of digital records. This block is the product of multiple computers/nodes calculating complex mathematical formulae of varying size, solving them, verifying the results with the other nodes, and encoding the results in a fixed size. Each node receives a copy of the block, so the entire network can verify that the transaction happened (a block may contain data for more than one transaction, so one block does not necessarily equate to one transaction). Each block contains data that is used to keep track of how much digital currency users have stored on multiple computers in a closed network, hence the term "distributed ledger." This is the proof-of-work function that allows cryptocurrency to function as a medium of trade, despite having no tangible form.
Each block contains the hash pertaining to the one that came before it, which creates a chain of blocks, or "blockchain." This process - the process of "solving" blocks, verifying the solutions and adding them to the blockchain - is referred to as "mining" cryptocurrency.
Editing the Blockchain
The method by which the blockchain is edited depends on the data contained in the block. In the case of bitcoin, for example, the editing process begins with a transaction. If Person X wishes to transfer, for example, one half-share of a bitcoin, or 50,000,000 Satoshi (the smallest unit of measurement for shares of a bitcoin) to Person Y, first they both have to have bitcoin wallets, or software that accesses the blockchain without identifying the user to the system (such as GDAX). The transaction begins with Person X requesting that the blockchain be edited to reflect a decrease in their wallet by 50,000,000 Satoshi, and an increase by 50,000,000 Satoshi in the wallet of Person Y. Next, this change is examined by various computers, or "nodes" in the network, to make sure that Person X actually has that much cryptocurrency to transfer to Person Y, that the request to transfer did indeed occur, and that the rest of the network agrees.
Because the data in each block is distributed, as opposed to being tied to a central source, data in each block cannot be altered retroactively unless the entire network does so cooperatively.
Mining cryptocurrency is the process by which nodes within a blockchain network calculate the validity of cryptocurrency transactions and, upon verifying their validity, add another block to the blockchain. Each time a new block is generated, it includes the solution to the mathematical function generated using the cryptocurrency transaction. This works similar to a password, securing the block from outside attempts to alter the data contained within it. This process can take a tremendous amount of processing power, even with the effort of doing so being distributed across a huge network of computers.
Though it was originally developed to serve as a distributed ledger for bitcoin, blockchain technology may have other applications as well. It is, theoretically, a widely-adaptable concept; experimental startup companies all over the world have begun utilizing it for everything from supply chain management to ride sharing to birth and death certificate archiving and real estate registry.
Bitcoin (BTC) is a digital asset (or cryptocurrency) and payment system run by a decentralized peer-to-peer network of computers. Bitcoin was created in 2009 by a programmer or group of programmers under the pseudonym Satoshi Nakamoto.
Bitcoin is the world's first cryptocurrency. It is essentially a software program that slowly releases new bitcoins into a network of computers running the software. These "coins" are awarded to computers that successfully verify transactions made between users before the rest of the network. This process is referred to as "mining" bitcoin. The program is designed such that coins become more and more difficult to mine as time passes. As of February 2018, approximately 80% of all bitcoins have been mined. The limit of 21 million bitcoins is expected to be reached around 2140.
The underlying technology for bitcoin is the "blockchain," a type of distributed ledger technology. This technology uses complex mathematical algorithms in place of third-party financial institutions like banks or government agencies to verify transactions made with bitcoin or other digital tokens. Because bitcoin is not issued by any government or central authority, it is considered independent, and transactions using bitcoin are anonymous. It is theoretically not impossible to "crack" the blockchain; however, the technology was deliberately designed to be "computationally impractical to reverse," so it is very, very unlikely that one attempting to do so would succeed, at least in theory.
As of December 2017, the total value of all bitcoin tokens outstanding was estimated to be around $326.5 billion. To date (Feb. 2018), this is the highest total value bitcoin has ever reached.
Since the value of bitcoin surged in late 2013, it began to attract the attention of major media outlets as well as regulatory authorities. This led to the creation of new cryptocurrency regulation in the case of some countries (such as the U.S., Canada, and Russia), and outright bans in others (China, South Korea).
As of December 2017, about 40 percent of bitcoin was held by around 1,000 users. Holders of such large amounts of bitcoin are often called "whales."
With the volatility of bitcoin prices and values, hysteria and evangelism are not uncommon among the bitcoin community. The term "HODL" was popularized as a colloquial way of saying "Hold On for Dear Life", or simply "don't sell."
The great bitcoin bubble
In mid-December 2017, bitcoin's price hit a high of nearly $20,000 per BTC. Over the course of 2018, its price slowly but steadily declined. In September, Galaxy Digital's Michael Novogratz declared bitcoin had hit its new "bottom" at just over $6,400 per coin; the price of bitcoin remained relatively stable until mid-November when bitcoin saw an additional price decrease of almost 50 percent. By mid-December 2018, bitcoin's price had decreased by more than 80 percent compared to the highest price in December 2017. Some declared this to be the popping of the bitcoin "bubble."
Using the NSA-developed SHA-256 cryptographic hash function as a proof-of-work function, Satoshi Nakamoto and their team created a system that could run on almost any platform to carry out anonymous, secure transactions that are extremely difficult to forge.
Of course, this process is not by any means a simple one. When a bitcoin miner attempts to add a "block" to the blockchain, they are receiving a transaction sent out into the blockchain network by someone with a "bitcoin wallet", or account containing their owned bitcoins. The computer or computers (nodes) of said miner then set out to calculate the solution to the SHA-256 problem using the wallet owner's "public key", a cryptographically-generated set of letters and numbers of varying lengths not tied to their personal identity in any way. This is used to solve a complex mathematical problem - called a hash function - in order to produce a digital address that will serve as the transaction's destination. This math problem can't be solved with simple logic, however; because of the anonymity of users and their hashes, the hash must be guessed. This creates a sort of contest between bitcoin miners to see who can guess a correct hash first. The bitcoin network increases the difficulty of this task in proportion to how many miners there are in the network, in order to keep the time between blocks created in the blockchain constant, around 10 minutes or so.
Blockchain is, theoretically, a widely-adaptable concept. Experimental startup companies have begun utilizing it for everything from supply chain management to ride sharing to birth and death certificate archiving. It was originally developed by Satoshi Nakamoto in order to create a peer-to-peer system of managing and verifying all transactions made with bitcoin. The blockchain ensures that all records of transactions made with bitcoin are securely archived. This ensures that, since new blocks of data are added by the bitcoin software client (which is also the sole proprietor of newly-mined bitcions), the total number of bitcoins in circulation and the number of bitcoins possessed by each user is maintained accurately, while also maintaining total anonymity of all users.
Transactions between bitcoin users are made with bitcoin wallets over bitcoin exchanges. Some popular exchanges include Coinbase (GDAX), Kraken, and Bitfinex. There are, however, several exchanges around the world, including several that operate on a national level.
Executing a bitcoin transaction involves paying fees of varying size. These are meant to incentivize miners to prioritize transactions offering nonzero fee rates first. The miner who solves the transaction and adds the resulting block to the blockchain receives the fee, like a waiter receiving a tip at a restaurant. Though bitcoin fees are meant to be optional gratuities, the act of assigning fees to a transaction has become commonplace; as a result, users who do not utilize fees can expect to wait much longer for their transactions to be verified. The time it takes for a transaction to become verified also depends on the volume of users making requests to alter the blockchain; in mid-December of 2017, the average wait time for transaction verification was around 78 minutes, but on Sunday the 17th, the average was closer to 1,188 minutes. At this time, the average fee needed to make a bitcoin transaction was approximately $28. By March 1st of 2018, that average had plummeted to $2.37.
Fees are often calculated using algorithmic software built into a cryptocurrency exchange, but they can also be entered manually. The rates for fees and the manner in which they are collected varies depending on the exchange; for example, the transaction fees of Kraken involve taking into account a rebate disbursed to its user's wallets, depending on when they are processed and what the rates relative to market volume are at the time the transaction is made.
Some of the more prominent bitcoin exchange entities are listed below:
In November 2017 it was reported that Nasdaq planned to launch bitcoin futures in the first half of 2018. Separately, Cantor Exchange said it was seeking to launch bitcoin derivatives on its Cantor Futures Exchange LP, also in the first half of 2018.
In 2017, the Chicago Mercantile Exchange and the Cboe Futures Exchange (CFE) self-certified new contracts for bitcoin futures products, and the Cantor Exchange self-certified a new contract for bitcoin binary options. The Commodity Futures Trading Commission (CFTC) oversees trading in the crypto-futures markets. In 2014, the CFTC declared virtual currencies to be a “commodity” subject to oversight under its authority under the Commodity Exchange Act (CEA).
The CFE launched trading in Cboe bitcoin futures on December 10, 2017 under the ticker symbol "XBT". The CME Group launched its own bitcoin futures contract a week later (Dec. 17) under the ticker "BTC." The Cboe settles its futures against a daily price auction from Gemini, while the CME uses its own bitcoin reference rate which tracks several cryptocurrency exchanges.
At the same time, Cboe announced plans to launch bitcoin future contracts using data from Gemini Trust, the virtual currency exchange run by the Winklevoss twins. The bitcoin futures debuted at CBOE Dec. 10, rising from a price of $2,730 to $18,190 the morning of Dec. 11. The price of bitcoin itself surged to around $16,800.
Bitcoin is, by design, not backed by any government or financial institution. This means that it is not insured or well-regulated, so those who suffer losses as a result of investing in bitcoin, such as victims of fraud or theft, do not have the options for recourse that investors in the traditional financial system do. Originally, the United States Securities and Exchange Commission (SEC) released an Investor Alert document that described bitcoin as a "ponzi scheme" in 2013. As bitcoin and other cryptocurrencies have grown in popularity and steps toward greater regulation of the crypto space have been taken, the SEC's take on bitcoin has tentatively become more agreeable.
The IRS treats Bitcoin as property, for taxation purposes. Employees paid in bitcoin or other cryptocurrencies must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
United States federal law does not provide for direct, comprehensive oversight of underlying Bitcoin or virtual currency spot markets. As a result, U.S. regulation of virtual currencies has evolved into a multifaceted, multi-regulatory approach. State banking regulators, the Internal Revenue Service (IRS), the United States Treasury's Financial Crimes Enforcement Network (FinCEN), and the Securities and Exchange Commission (SEC) monitor bitcoin and cryptocurrency trading to enforce state money transfer, tax, anti-money laundering, and fraud protection laws.
On March 25, 2014 the Internal Revenue Service announced that bitcoin should be viewed and taxed as property and not as currency. This meant that employers who pay wages in bitcoins would have to report those wages like any other payment made with property, and that bitcoin income will be subject to federal income withholding and payroll taxes. The agency's official statement declared, “it does not have legal tender status in any jurisdiction."
In May 2014 the U.S. Federal Election Commission voted to allow political committees to accept bitcoin donations.
In March of 2017 the SEC refused to grant an exemption that would have let the Winklevoss Bitcoin Trust ETF trade on the Bats BZX Exchange.
Bitcoin is classified by the Commodity Futures Trading Commission (CFTC) as a commodity, under the Commodity Exchange Act (CEA). The CFTC enforces all bitcoin derivatives contacts in the U.S., as well as all fraud and manipulation protection laws.
Because much of the bitcoin and cryptocurrency trading that occurs happens via cash markets, the dark web, or other online methods which may not be totally secure or regulated, potential investors or traders of such should be highly vigilant of fraud. Buyers can verify whether a party offering bitcoin or other cryptocurrency options or futures services are registered with the CFTC using SmartCheck.gov, a consumer protection website owned and operated by the United States federal government.
As with regular brokers and investment professionals, consumers can use the CFTC's website Smartcheck.gov to look up investment professionals to see if they are registered and accredited by the CFTC.
Bitcoin was named as the currency of choice for the Russian intelligence officers indicted by the U.S. Government for spying on the Democratic National Committee - including hacking into their computers - during the 2016 presidential campaign. The indictment indicated that in addition to using bitcoin for payments, the intelligence officers mined new bitcoin. Along with the other complaints against them, the officers were charged with money laundering connected to their bitcoin use.
In October 2018 Nouriel Roubini, an economist and New York University professor famous for correctly predicting the popping of the U.S. housing bubble in 2007, called cryptocurrency and bitcoin "the mother or father of all scams and bubbles" while testifying at a congressional hearing on Capitol Hill. He said that everyone he knew that was actively involved in cryptocurrency trading was "financially illiterate," and "could not tell the difference between stocks and bonds."
Similar to "boiler room" fraud schemes, which aggressively pushed penny stocks on investors by misleading them about their potential future value, some individuals or organizations have used social media to mislead victims into investing their money in altcoins, or alternative cryptocurrencies. These "pump-and-dump" ICO scams use misinformation to trick large numbers of people into investing in a new digital asset with the promise of huge returns, then sell all of their shares once its price reaches a certain point, causing a significant price drop, leaving investors with essentially worthless digital tokens. Some use false news reports, testimony from fake "experts," and other unscrupulous means to accomplish their goals. The CFTC warns potential investors that they should be especially wary of very new cryptocurrencies, and that extensive research on a particular company or coin is imperative for potential investors. Fraudulent digital asset scams can be reported at Whistleblower.gov.
"IRS-approved" Digital Asset IRA's
Some frauds have advertised "IRS-approved" IRA funds and similar services involving digital assets. These typically rely on misinforming potential investors (for one thing, the IRS never endorses investments). Because self-directed IRA's can hold unregistered investments and are not taxed until withdrawn from an IRA account, they make for attractive, if false, potential investments to the unwary consumer.
Bitcoin was invented by a programmer or programmers using the name Satoshi Nakamoto. In 2008, Satoshi published a whitepaper entitled, "Bitcoin: A Peer-to-Peer Electronic Cash System" on the Cryptography Mailing List Metzdowd.com. In this paper, Satoshi proposed an alternative to traditional fiat currency in favor of "a purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution." In 2009, Satoshi released the first bitcoin software client, as well as the first mined bitcoins, marking the launch of bitcoin.
The very first blockchain component, or "Genesis Block," was recorded on January 3, 2009. This coincided with the release of the original software client. The first recorded cryptocurrency transaction occurred nine days later, on January 12, 2009.
For the first several years after its creation, bitcoin held limited appeal. By 2011, multiple prominent Internet-based institutions began accepting donations through Bitcoin, including WikiLeaks, FreeNet, the Internet Archive, and the Free Software Fondation. By 2012, the Orlando-based bitcoin payment processing company BitPay announced that over 1,000 merchants had signed up for its service within the previous year. In 2013 the value of the virtual currency exploded, with prices moving from $13 to over $1200. By 2017, a number of extremely high-profile companies, including Microsoft, Expedia, Subway, and Newegg.com had begun accepting Bitcoin payments.
The CME Group, in collaboration with Crypto Facilities Ltd., a digital assets trading platform, launched CME CF Bitcoin Reference Rate (BRR) and CME CF Bitcoin Real Time Index (BRTI) on November 14, 2016. BRR provides a final settlement price in U.S. dollars at 4 PM London time on each trading day, and RTI gives users real-time access to bitcoin prices.
In March of 2017 Bitcoin's price plunged briefly and then recovered after the SEC refused to grant an exemption that would have let the Winklevoss Bitcoin Trust ETF trade on the Bats BZX Exchange.
In June 2017, the market cap for all cryptocurrencies surpassed $100 billion, due to a 300% increase that occurred in just over 2 months.
Since bitcoin launched in 2009, thousands of cryptocurrencies have been created, many of which have since failed. In fact, a report by Chris Skinner in 2018 revealed that only 8% of ICOs that launch survive, and that 50% that had launched in 2017 had already failed. At time of writing (February 28, 2018), there are currently 2943 in-market cryptocurrencies worldwide, including bitcoin, Ethereum, and Ripple.
In 2018, U.S. Federal investigators discovered that bitcoin was the currency of choice for the Russian hackers charged with influencing the 2016 U.S. Presidential election. The hackers allegedly used bitcoin to launder approximately $95,000 to pay companies such as the Romanian company dcleaks.com in their efforts. This was done in order to avoid direct relationships with financial institutions by utilizing the anonymity of bitcoin's transactions.
On Halloween 2018, the ten-year anniversary of bitcoin's whitepaper being published, bitcoin was trading at around $6,250 per coin.
On January 27, 2014, BitInstant founder Charlie Shrem was arrested at JFK International airport returning from a conference in Amsterdam. His company, which allowed users to digitally exchange bitcoins for fiat currency, had knowingly transferred money for criminals trading on the Silk Road website. Although Shrem had been aware of this, and sent an email to the user telling them, "you better stop," Shrem did not inform Federal authorities. This led to BitInstant closing its doors for good, and Shrem sentenced to two years in prison. Shrem became the first high-profile cryptocurrency luminary to be convicted on felony charges.
In 2014 Mt. Gox, one of the world's first-ever bitcoin exchanges, ceased operations indefinitely following a series of hacking attacks that caused its customers to lose millions of dollars worth of crypto. Mark Karpelès, the CEO of Mt. Gox, faced several lawsuits and criminal charges as a result. In 2016, a Russian hacker named Alexander Vinnik was arrested in Greece after numerous law enforcement agencies from the U.S., as well as independent investigators, traced some of the bitcoins stolen from Mt. Gox to a wallet owned by Vinnik. Vinnik was charged with helping criminals launder money through BTC-e, an exchange he allegedly ran.
Bitcoin Cash hard fork
Bitcoin made the most significant change in its 9-year history in July of 2017 when it split into two currencies after a splinter group launched a newer version of the currency with a different configuration. The two competing currencies are known as Bitcoin and Bitcoin Cash. The group behind Bitcoin Cash copied bitcoin’s software, added a couple of new features, and released it to the public. It will be an almost identical copy, and anybody who has a bitcoin balance can automatically hold the exact same amount of Bitcoin Cash. The main difference between the two is how fast they trade and how many trades can happen in a short amount of time.
John Lothian News Special Report, December 2013
On December 7, 2013, John Lothian News published a special report, "A Bitcoin for Your Thoughts" featuring:
To view the report, click HERE.
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