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VOLUME 2 ISSUE 1
Introducing the Future of Money
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Transactions Hit All Time High As Microsoft Adopts Bitcoin
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Built For Main Street, Crypto Titan GAW Miners Launches PayBase
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1 Year: +189%*
2 Year: +2,892%*
3 Year: +9,025%* 2000 1000 500 200 100 50 20 10 5
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ySecurity
10 WHAT IS BITCOIN? Everything You Thought to Ask—and More
22 HOW DO I STORE MY BITCOIN? How to Ensure Bitcoin Security— Tips on Safety and Accessibility
By Erik Voorhees
Bitcoin is both a digital currency and a payment system. It can be sent around the world in seconds, at almost no cost.
By Andreas M. Antonopolous
12 WHAT MAKES BITCOIN VALUABLE?
Bitcoins are stored in a digital wallet. Wallets can exist on your smartphone, a computer, on the Internet or printed out on a piece of paper and locked away in a safe deposit box.
Why Bitcoin Has Value— Notes on the “Network Effect”
24 WHAT IS THE MOST SECURE WAY TO
By David Perry
STORE LARGE AMOUNTS OF BITCOIN?
Bitcoin has value because of all the good things you can do with it. Whether you need to quickly transfer money internationally, shop online without a bank account, accept payment from a compromised land with no risk of fraud, or have a store of value you can easily convert into local currency, Bitcoin is your answer. This base level of demand gives Bitcoin a monetary value that can be used in the exchange of goods and services.
Getting Bitcoin Security Right— And Ready for Main Street
yInvest
26 IS BITCOIN SAFE TO USE?
14 IS BITCOIN A GOOD INVESTMENT? Bitcoin: Perhaps the Most Promising Investment Opportunity of Our Age
By Alan Reiner
Currently, there are a number of measures you can take to completely secure large Bitcoin funds, but they can be complex to achieve. For now, it is best to consult with one of the well-known security companies in the Bitcoin space. Meanwhile, those same companies and others are busy innovating, and greater ease and efficiency are on the way!
The Good, the Bit and the Ugly— Cautionary Tales on Bitcoin Security
By Tuur Demeester
By Kirk Phillips
Similar to online banking information, logins and passwords to Bitcoin services must be kept 100 percent private. Best practices include using a password manager to store unique, long passwords for each site and enabling two-factor authentication using a smartphone whenever possible.
Bitcoin is the best performing financial asset of all time. While still nascent, and with several risks, the opportunity for Bitcoin to appreciate in value is remarkable.
18 HOW DO I BUY BITCOIN? Guide To Buying Bitcoin— The Basics to Get You Into the Market Bitcoin can be bought, mined or exchanged for goods and services. Buying bitcoin is the simplest way to acquire them. You can buy bitcoins in person, direct from another bitcoin holder, purchase them online through an exchange, or buy them through a growing number of Bitcoin ATMs.
ON THE COVER Cover art by Josh Dykgraaf, global artist based in Amsterdam, Netherlands, specializing in 3D and photo-illustration. joshd.com.au
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yLegal 30 WHAT IS BITCOIN’S LEGAL STATUS? Virtual Currencies Hit the World Stage: Bitcoin’s Ever-Evolving Legal Status
By MushkinLaw.com – Bitcoin Law Team
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Bitcoin has been treated as a currency and a commodity by the United States government, meaning most Bitcoin companies fall under existing laws and regulations. In the US, it is legal for individuals to buy, transact, and sell bitcoin for personal use as long as capital gains taxes are paid to the IRS. The New York Department of Financial Services is in the process of establishing regulatory guidelines for Bitcoin companies in the State of New York.
Miami, Florida January 16-18, 2015
yCommerce 34 DO ANY WELL-KNOWN MERCHANTS ACCEPT BITCOIN? Merchant Adoption: Full Speed Ahead!
By Trace Mayer
Multi-billion dollar companies are beginning to accept Bitcoin, and more are doing so every day. Overstock.com, TigerDirect, Dish Network, Dell Computer, Expedia, Microsoft, Newegg, Anheuser-Busch, Virgin Galactic, the Sacramento Kings NBA basketball team, OkCupid, WordPress, and even the rapper 50 Cent!
36 WHY DO MERCHANTS WANT TO ACCEPT BITCOIN? Four Reasons Why Your Business Should Accept Bitcoin! Getting Started With Payment Processing
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Singapore: January 29-30, 2015 and more
By Tony Gallippi
Bitcoin offers numerous advantages for businesses. Merchants are able to save the fees that are generally charged by credit card companies, never have to deal with chargebacks, and can accept payment without requiring personal information from their customers. And with payment processors, merchants don’t have to worry about Bitcoin’s volatility.
ySpend 40 WHERE CAN I SPEND MY BITCOIN? Growing The Market—A Bitcoin Shopping Guide
By Alan M. Silbert
There are more than 100,000 merchants accepting bitcoin—and more every day. You can use your smartphone to spend bitcoin at a local brick and mortar store, or you can spend them online direct from your digital wallet.
BLOCKCHAIN TECHNOLOGIES
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INNOVATING START-UPS
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PIONEERING ENTREPRENEURS
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CONTENTS cont.
yMining 44 HOW ARE BITCOINS CREATED? What is Bitcoin Mining?
By Alexander Lawn
A process called Bitcoin mining ensures that bitcoins are created at a predetermined rate until reaching the total number that will ever exist: 21 million. Miners also confirm transactions, ensuring that bitcoins are not “double spent.”
History & Events 46 HOW LONG HAS BITCOIN EXISTED? History and Events Bitcoin has had a storied history since its birth five years ago. From the initial whitepaper to a $10 billion market cap, the Bitcoin ecosystem has grown in leaps and bounds. Despite occasional setbacks, there is no sign of a slowdown.
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yBlockchain 56 ARE THERE OTHER TYPES OF CRYPTOCURRENCY? A World of Blockchain Technologies There are currently more than 1,000 different cryptocurrencies, but Bitcoin is magnitudes larger than its closest peer. Bitcoin pioneered the space and is without doubt the most trusted currency, but new innovations are happening regularly.
yInnovate 62 IS BITCOIN A COMPANY? 70
Innovating Start-ups—Building the Bitcoin Ecosystem No, Bitcoin is an open source technology that can be freely used by any individual much like the Internet. However, there are hundreds of start-ups around the world that are using Bitcoin's technology to power a whole host of useful service products that revolutionize how commerce is done today.
yPioneer 66 WHO RUNS BITCOIN? Get-to-Know—Leading Pioneers in the Bitcoin Movement
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yBitcoin.net
No one! This is one of its beauties! Bitcoin is open source software that anyone can use and build on. Thousands of pioneers are actively building out the applications and services used every day by millions of users. Daily, established entrepreneurs from respected fields are entering the ecosystem and improving the protocol.
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Volume 2
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For those of you new to the world of Bitcoin, I would like to extend a warm welcome, along with a promise that what awaits you in these pages will at the very least intrigue you greatly. We debuted yBitcoin magazine a little over a year ago with the purpose of introducing Main Street to Bitcoin—its basics, its promise, and the innovative people and businesses helping to pave its way. From Australia to Canada, England to Israel to Kenya, Bitcoin is making its presence and practical benefits felt, its conversations heard.
Issue 1
Founder/Editor -in-Chief David F. Bailey Publisher Calli S. Bailey
As this publication goes to press, the Bitcoin community is glowing at the prospect of the "Bitcoin St. Petersburg Bowl,” a college football bowl game ready to debut at Tropicana Field on December 26. This is just one more example of Bitcoin’s arrival at the world’s doorstep, and it is complemented by late-breaking news that Microsoft is now accepting Bitcoin for the purchase of X Box and Windows apps.
Business Development Tyler Evans
Clearly, Bitcoin is not only here to stay, it is moving forward with trumpets blaring!
Senior Consulting Editor Andrew Hidas
Within these pages you’ll hear from Bitcoin thought leaders sharing their visions of how cryptocurrencies are changing the world as we know it, from Wall Street to the most distant rural village. You’ll read about entrepreneurs pouring their creativity and energy into Bitcoin products and services that are no longer just a promise to enhance life as we know it, but are here already, as accessible as your computer or smartphone. Our mission with each issue is to give new-to-Bitcoin readers an introduction to Bitcoin and an opportunity to become acquainted with the leading intellectual and entrepreneurial figures in the Bitcoin world. We also offer Bitcoin enthusiasts shared perspectives into the influential people and ideas that are growing the Bitcoin marketplace with innovative products and services. The promise of Bitcoin is that it will do for finance what the Internet has done for information—make it accessible, secure, more efficient. And that is exactly what is happening. Many have predicted doom for Bitcoin, but the opposite has happened. Skeptical headlines have given way to a growing worldwide focus on the sweeping change that Bitcoin promises to effect in almost every corner of the global economy. So please read on, and think about passing this magazine along to that special thoughtful friend (or two) whom you know will appreciate these dispatches from the emerging world of cryptocurrency. This print edition of our magazine may have reached you on a one-time basis through a strategically targeted distribution. If you'd like to receive subsequent issues, please register at ybitcoin.com, and we will send you a complimentary copy of our spring edition as soon as it rolls off the press.
Warm regards,
Calli S. Bailey, Publisher calli@ybitcoin.net
Te c h n o l o g y Andrew DeSantis
Copy Editor Ellen Sullivan Senior Designer Jennifer M. Taylor Contributing Wr i t e r s Andreas Antonopolous Tuur Demeester Tony Gallippi Alex Lawn Trace Mayer MushkinLaw.com – Bitcoin Law Team David Perry Kirk Phillips Alan Reiner Alan Silbert Erik Voorhees Downloadable Digital Edition:
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Advertising Sales Office 256.539.6100 www.ybitcoin.com yBitcoin is published quarterly by BTC Media, LLC, P.O. Box 1411, Fayetteville, TN 37334. Reproduction without the express written consent of the publisher is prohibited. yBitcoin is not responsible for unsolicited manuscripts, photography or art. yBitcoin does not endorse any advertiser or business listed in its directories, and is not responsible for errors and omissions in advertisements, sponsored content or editorial content. The information contained herein should not be construed as an endorsement of any company or individual, nor reflect in any way upon the products/services they provide. yBitcoin does not knowingly accept false or misleading advertisements, sponsored content or editorial content, nor does the publication or its staff assume responsibility if such advertisements, sponsored content or editorial content appears in the publication. yBitcoin makes no warranties or representations and assumes no liability for any claims regarding services, products or claims made by advertisers. yBitcoin is not a broker, seller or buyer of Bitcoin, nor shall it be considered to be promoting or encouraging the purchase of or investment in Bitcoin. ©2014, all rights reserved. *All sponsored content is paid advertorial and marked sponsored in the footer.
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Bitcoin
What Is Bitcoin? Welcome To Cryptocurrency by ERIK VOORHEES
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Bitcoin has taken the world by storm. Yet when most people hear about it, whether for the first or the tenth time, they have one simple question: “What is it?” Like an automobile, Bitcoin is very technically advanced, and it can be extremely complicated, depending on how much you want to know about it. But also like an automobile, you don’t actually need to know much about Bitcoin’s technical details in order to use it—and in order for it to change the way you look at the world. Here’s what you need to know. Generally speaking, Bitcoin is two things: 1) A payment network (“Bitcoin”); 2) The currency unit used on that network (“bitcoins”). Thus, as both a payment network and the specific currency used on that network, you use “Bitcoin” to receive and send “bitcoins” to and from other people. To clarify this, consider a comparison to items with which you’re already familiar: PayPal and U.S. dollars. PayPal is a payment network, but not a currency. On the flip side, the U.S. dollar is a currency, but not a
“The real magic of Bitcoin, the reason it’s so newsworthy, comes from the consequences of its existence.”
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“Bitcoin is two things: (1) A payment network (“Bitcoin”), (2) The currency unit used on that network (“bitcoins”).” payment network. You use the PayPal payment network to make transactions in U.S. dollar currency with people. Now, note that the PayPal payment network is operated and centrally controlled by one company (PayPal Inc.), and the U.S. dollar is created and centrally controlled by one organization (the U.S. federal government). Here’s where things get important, and revolutionary—and a little weird. With Bitcoin, the payment network is decentralized. It is not controlled by any company or organization. Think of it like filesharing—a network of computers that talk to each other, but nobody controls the network itself (there is no central server). The currency unit, called bitcoins, is also not created or controlled by any central party. Bitcoins are created by the network itself over time, in a somewhat random process that distributes the new coins to those computers that are supporting and operating the network. The number of coins created in this way is limited by a clever mathematical system. As of this writing, there are roughly 12 million bitcoins in existence, and this will continually increase over time to a maximum of 21 million bitcoins many years in the future.
Unless you care about how Bitcoin accomplishes this, the above is really all you need to answer the question, “What is Bitcoin?” Answer: It’s a payment network, and a currency used on that network, which are controlled by no central party. The number of bitcoins in existence is limited by mathematics.
“Bitcoin means that for the first time in human history, every person has financial sovereignty. Private property can now truly be controlled by the owner, and nobody else.” Perhaps the more important question, of course, is, “Why should you care?” While computer engineers and mathematicians might find Bitcoin’s technical details fascinating, most people don’t really care about that. And while it’s true that Bitcoin permits financial transactions that have essentially zero cost, and which occur instantly anywhere in the world, these consumer benefits are not really what’s important, either. The real magic of Bitcoin, the reason it’s so newsworthy, comes from the consequences of its existence.
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The fact that Bitcoin is decentralized, with no controlling entity, has fundamental implications. Because there is no central control, the power of the currency and its payment network belong to the people who use it. And this power is tremendous indeed. Bitcoin enables any two people, anywhere on earth, to transact with each other freely. They cannot be censored. There are no rules for their exchange except those they set between themselves. With Bitcoin, there is no third party watching over the participants of economic activity, approving their conduct and charging a fee for doing so. With Bitcoin, one does not need permission to direct one’s own financial life. This means people can contribute to controversial causes they believe are important, with no government agency or financial company able to cut off the payment flow. It means an entrepreneurial child can start an Internet business before he or she is 18. It means a rural African farmer can receive payment
for crops from a neighboring city, even with no bank account. It means a citizen of a tyrannical nation can hide his financial assets from seizure.
“Bitcoin enables any two people, anywhere on earth, to transact with each other freely.” Bitcoin means that for the first time in history, every person has financial sovereignty. Private property can now truly be controlled by the owner, and nobody else. The rules of finance, and our economic relationships, now become set and regulated by markets instead of by politicians. By the individual, not the collective. The value of one’s savings now cannot be reduced through monetary debasement (i.e. inflation). Trade between individuals is now the business of only those individuals. Certainly, some of these implications are controversial. Indeed, they will have profound consequences on human society,
just as do all great technological achievements. A good way to think of it is that Bitcoin represents the separation of money and state—the ability to “practice one’s own economic behavior” without the permission of anyone else. It removes the power over money from governments and banks, putting it in the hands of anyone who learns how to use it. It brings privacy in an age of surveillance, and honesty in an age of manipulation. So what is Bitcoin? It is an experiment. It is a project that, if successful, will change the economic relationship between humans on a fundamental level. Its implications have just barely been explored. Like any experiment, it can fail, but the genie is now out of the bottle. While this genie goes about its business, many things you take for granted will likely change, so it may be wise for you to educate yourself on the technological, mathematical, and economic phenomenon that is Bitcoin.
Erik Voorhees
Erik Voorhees is a serial Bitcoin entrepreneur and longtime advocate of “the separation of money and state.” He believes Bitcoin to be one of the most important technological tools ever created by humanity. Current CEO of Panama-based Coinapult, and former head of marketing for BitInstant, he has been at the center of the Bitcoin movement since April, 2011. He has been a featured guest on BBC Radio, The Peter Schiff Show and The Tom Woods Show, discussing the economic and social implications of Bitcoin.
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Bitcoin
Why Bitcoin Has Value Notes on the “Network Effect” by DAVID PERRY
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We all have what feels like an intrinsic understanding of value, On the other hand, silver coins have their inherent problems though it is actually learned as we come to know our world. A gold too, when traded on extremely large or extremely small scales. bar has value, an empty soda can, not so much. When we This is what is truly valuable about Bitcoin: It’s better money. encounter new things it’s usually fairly easy to assess what kind of The Evolution to Bitcoin value they might hold, but Bitcoin is a different beast. Bitcoin is It’s been a long time since those first “hard” moneys were developed, harder to define and understand, and for many beginning and today we transact primarily with digital representations of paper Bitcoiners the question of value is one of the most puzzling. currency. We imagine bank vaults filled with stacks of cash, but that’s So why does Bitcoin have value? almost never the case these days—most money exists merely as To begin, we really need to understand why anything has value. numbers in a database. There’s nothing wrong with this type of Fans of post-apocalyptic fiction will often point out that in the system, either; it works fantastically well in an age where physical end, the only things of real value are those that sustain and defend presence during a transaction is not a given. The problem is that the life. Perhaps they’re right on one level, but with the rise of civilized system is aging and far too often plagued by incompetence or greed. societies things got a bit more complex, Every IT guy knows that from time to time “Bitcoin is instead a because the things that sustain and defend you have to take a drastic step: throw the old simple, elegant and those societies also gain a certain degree of system in the trash and build a new one from value. It is in this context that all moneys, modern replacement for scratch. Old systems, such as our current Bitcoin included, gain their value. Since our monetary system, have been patched so many the entire concept societies rely heavily on trade and commerce, times they are no longer functioning as of money.” anything that facilitates the exchange of efficiently as they should. goods and services has some degree of value. We previously patched our problems with gold and silver by introducing paper banknotes. We patched further problems by From Barter to Money Imagine, for example, a pre-money marketplace where the removing the precious metal backing those banknotes, then patched them again and again to allow wire transfers, credit cards, barter system is king. Perhaps you’re a fisherman coming to market debit cards, direct deposit and online billpay. All the cornerstones with the day’s catch and you’re looking to go home with some eggs. of modern life are just patches on this ancient system. Unfortunately for you, the chicken farmer has no use for fish at the But what would you do if you had the chance to start over? moment, so you need to arrange a complex series of exchanges to What if you could make purely digital money based on modern end up with something the egg seller actually wants. You’ll probably technologies to solve modern needs? What if we didn’t need those lose a percentage of your fish’s value with each trade, and you dusty old systems or the people making absurd profits maintaining also must know the exchange rate of everything with respect to them? This is Bitcoin. everything else. What a mess. This is where money saves the day. By agreeing on one intermeReplacement, Not Repair Bitcoin isn’t another patch, another layer of abstraction added on diate commodity, say, silver coins, two is the maximum number of top of an aging and over-complex system. Bitcoin isn’t another bank exchanges anyone has to make. And there’s only one exchange rate for every other commodity that matters: its cost in silver coins. or payment processor coming up with new ways to move old dollars. In truth there is more complexity involved—some things, like Bitcoin is instead a simple, elegant and modern replacement for the your fish, would make very poor money indeed. Fish don’t stay entire concept of money. It has value for exactly the same reason as good for very long, they’re not particularly divisible, and depending the paper money in your wallet: It simplifies the exchange of goods on the exchange rate, you might have to carry a truly absurd and services, not in the antique setting of a barter system bazaar, amount of them to make your day’s purchases. but in the current setting of modern Internet-enabled life.
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“Imagine being able to invest in the concept of email back in 1965 when some clever hacker at MIT found a way to use their primitive multi-user computer system to pass messages.” “But that’s only why it’s useful,” I hear some of you saying. “Why does it actually have value?” The two-word answer is one most economists are familiar with: Network effect. The network effect is a lovely piece of jargon that refers to the quite commonsense statement that networked products and services tend to have more value when more people use them. The most common example is the telephone: During its early days when few people had access to telephones their utility, and therefore their value, were minimal. Today practically everyone has a phone, so their utility and value is so high as to be unquestionable. In this way the value of Bitcoin is directly tied to the number of its users and the frequency of their use. Of course Bitcoin’s value stemming from the network effect is not without its own unique difficulties. When the network is still relatively small, each new group’s entry or egress can create massive price fluctuations, resulting in huge profits for early adopters. Unfortunately, this makes Bitcoin look, on the surface, too good to be true—a bit like a Ponzi or pyramid scheme. Ponzis and pyramids are distinct and different forms of fraud, but they share one thing in common: The first ones in make a lot of money while the last ones in foot the bill. Both feature initial “investors” being paid out directly from new investors’ money. The return is always too good to be true and the gains (for those who actually get gains) are exponential.
Because Bitcoin’s value has risen so dramatically since its 2011 debut, it seems to fit this sort of a profile at first glance, but then so does every new technology. It’s just not normally the case that we get to invest in this sort of technology and profit as it’s adopted. Imagine being able to invest in the concept of email back in 1965 when some clever hacker at MIT found a way to use primitive multi-user computer systems to pass messages. It might have seemed like a silly waste then, but owning even a tiny percentage of the rights to email today would make one wealthy beyond imagining. Technologies follow a known adoption curve, which tends to include a period of exponential rise. Bitcoin is no exception. Ponzis and pyramids both create value for their oldest investors by stealing from the new. There’s no economics involved—just theft. Bitcoin creates value for the old investors and the new by splitting a finite currency supply more ways. That’s not trickery or theft, just good-old-fashioned supply and demand at work— a basic and ancient economic principle applied to the world’s newest currency system.
David Perry
David Perry is the chief architect for BitcoinStore and author of the popular Bitcoin blog, “Coding In My Sleep.” When he's not breaking (or making) Bitcoin news, he can often be found moderating the Bitcoin StackExchange Q&A site, attending Bitcoin meetups and conventions, or tending to his Bitcoin mining operation.
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Invest 1 Year: +189%*
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Bitcoin: Perhaps the Most Promising
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A technology is called “disruptive” if it creates a new market that first disturbs and then displaces an earlier technology. Bitcoin is potentially such a technology and much more. The fact that it can disrupt the largest and most interconnected marketplace in the world—money, banking, and finance—makes it perhaps the most promising investment opportunity of our age. Unlike our current increasingly unstable and unpredictable financial system, Bitcoin has 21st century technologies at its very core. The digital currency and clearing network is open source, mobile, peer-to-peer, cryptographically protected, privacy oriented and native to the Internet. The fusion of these technologies allows for a level of security and efficiency unprecedented in the world of finance. These are some of the areas in which Bitcoin-oriented technology can directly compete: • $2 trillion annual market for electronic payments, • $1 trillion annual e-commerce market, • $514 billion annual remittance market, • $2.3 trillion hedge fund market, • $7 trillion gold market, • $4.5 trillion cash market, • $16.7 trillion offshore deposit market. Indeed, Bitcoin has been noted in glowing terms by industry moguls such as: • Microsoft Founder Bill Gates (“A technological tour de force.”) • SWIFT CEO Gottfried Leibbrandt (“Don’t see why we could not send transactions in Bitcoin as a currency.”) • Entrepreneur Marc Andreessen (“Personal computers in 1975, the Internet in 1993, and I believe, Bitcoin in 2014.”) • Legg Mason Portfolio Manager Bill Miller (“If it becomes 10% as popular as gold, you can make 120 times your money.”) • Fortress Investment Co-CIO Michael Novogratz (“Put a little money in Bitcoin, come back in a few years, and it’s going to be worth a lot.”)
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The core value proposition of this network is the fact that, in the words of IBM executive architect Richard Brown, “Bitcoin is a very sophisticated, globally distributed asset ledger.” What Brown and others hint at is that Bitcoin will in the future be able to serve not only as a decentralized currency and payment platform, but also as the backbone for an “Internet of money.” This entails a decentralized global platform, smartphoneaccessible, on which companies and individuals can issue, buy, and sell stocks, bonds, commodities and a myriad of other financial products. The effect will be to remove much of the current bureaucracy and barriers to entry, presenting a huge opportunity for the world’s 2.5 billion unbanked people.
Since inception of Bitcoin in 2009, its market cap has grown by a minimum of 10 times every year. It now stands at over $8 billion, with an annual turnover of +$50 billion. This raises the question: why Bitcoin, and not some other cryptocurrency? The answer may lie in the network effect: of all the cryptocurrencies, Bitcoin is the one with the highest adoption rate and the strongest security. The combined computing power of the Bitcoin mining industry serves as a protective firewall around the payment network, with a replacement cost of at least $1 billion— and it is growing quickly. In short: no other cryptocurrency is as secure as Bitcoin. This attribute in itself attracts more capital, which in turn makes the network even more secure and performant. Because of its robustness, the Bitcoin network is now the reference protocol for the new paradigm in finance. And just like TCP/IP became the mainstay for the Internet of information, the Bitcoin network will likely become the value anchor for the
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Internet of money and finance. Speed may be provided by off-chain or side-chain transactions, but for the high-value transactions of tomorrow, Bitcoin could very well become the security-providing reference currency. So, how much of all this potential is already realized? Well, since inception of Bitcoin in 2009, its market cap has grown by a minimum of 10 times every year. It now stands at over $8 billion, with an annual turnover of +$50 billion. According to Coinometrics.com, this makes the Bitcoin currency stock more valuable than that of 108 national currencies, including Panama, Macau, Ghana, and Malta. Currently over 80,000 merchants accept Bitcoin as payment. Enticed by its great potential, venture capital is also warming up to Bitcoin. In 2013, 40 deals were made that raised a total of $74 million, and the 2014 run rate for the year is currently US $250 million. To put this into context, investments in the Internet of 1995 were an inflation-adjusted $387 million— which is why many Bitcoin investors believe we are at a stage similar to the Internet in 1993 or ’94. Furthermore, the Bitcoin price has been rising at an exponential rate. This can be explained mostly by the fact that it is a scarce commodity (maximum supply is 21 million) with a rapidly growing user base. Here are a few possible scenarios for the future value of one bitcoin:
Scenario
Potential value of one bitcoin
Hedge funds allocate 1% to Bitcoin2 Argentines sell USD cash for Bitcoin3 Gold holders divest 1% into Bitcoin4 Bitcoin replaces remittance market5 Becomes global E-Commerce currency6 25% of black market transactions in Bitcoin7 Bitcoin replaces reserve currency8 Bitcoin replaces offshore deposits9
$ $ $ $ $ $ $ $
1,230 2,480 3,500 6,860 11,500 44,000 500,000 800,000
The scenarios projected above are, of course, not cast in stone. Bitcoin faces several risks going forward. These include: • Compromised security of the major exchanges, • The emergence of a much better digital currency that steals its market lead, • An undetected bug in the system, • A sustained attack by an organization with substantial computational resources, • A coordinated clampdown on Bitcoin by a multi-national entity such as the G20.
“Bitcoin does not appear to be a fad or bubble, nor merely a one-off hedge against gold.” How serious of a risk do these challenges pose? Let us examine them. A better currency is possible, but experience shows that disruptive protocols—such as SMTP for email and TCP/IP for Internet—have proven to be very resilient once adopted by a critical mass of the population. An organized attack on the network is possible but expensive, and there are many potential defense mechanisms. As with any software application, the discovery of bugs may destabilize the system, but the open source nature of Bitcoin allows for many eyeballs to help track problems, and many brains to help figure out a solution. That leaves government clampdown as the most likely risk to Bitcoin. However, with many regulators implicitly or explicitly already accepting Bitcoin, and the robust, decentralized nature of its network, such a move would have little long-term structural impact and is thus unlikely. Because of its strong network effect, the outcome of the Bitcoin story is likely to be binary: either it will experience a downfall as it is superseded by a vastly superior technology, or the value of bitcoins will rise dramatically over the coming years as an increasing share of the global population adopts the currency. In any case, to me it's exceedingly clear that the technology of the cryptocurrencies is here to stay. Bitcoin does not appear to be a fad or bubble, nor merely a one-off hedge against gold. With a risk-reward proposition this attractive, holding a small percentage of bitcoins in one’s portfolio as a speculation on increased adoption may be one of the wisest investment decisions of our age. 1) Sources: http://tinyurl.com/remittance2012 and for volume estimates in BTC economy: http://blockchain.info/charts (the latter also for estimates in footnotes 5, 6, and 7) 2) Source: http://tinyurl.com/HFresearch2013 3) Source: http://tinyurl.com/argentine-USDcash 4) Source: http://tinyurl.com/GMabovegroundgoldstock 5) Source: http://tinyurl.com/worldbank2012remittances 6) Source: http://tinyurl.com/ecommerceglobal 7) Sources: http://tinyurl.com/VOXEUshadowecon and http://tinyurl.com/CIAworldGDP 8) Source: http://mises.org/content/nofed/chart.aspx 9) Source: http://tinyurl.com/HKMAoffshore 10) http://www.coindesk.com/bitcoin-report-q1-2014/
Tuur Demeester
Tuur Demeester is an independent investor and commentator. He has a background in Austrian economics, the school that specializes in the study of boom-and-bust cycles in the economy. He first discovered Bitcoin on a research trip in Argentina, and started recommending it as an investment at $5 in January 2012. yBitcoin.com
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Invest
W
Wondering how you can buy your first bitcoin? Fortunately, it’s much easier today than it was even a year ago, and thanks to innovative companies entering the market, it’s getting easier all the time. There are multiple ways to get started: you can mine them yourself, trade goods for them, or apply for a loan in bitcoin. Some employers—especially those in the Bitcoin space—will even pay a portion of your salary in bitcoin. However, the simplest way to break into the world of Bitcoin is simply to purchase them. There are a variety of ways to do so, and this guide will walk through some of the most popular options.
Buy Directly Online The simplest way to buy bitcoin online is by using a consumer site like Coinbase, Circle, Expresscoin, or Trucoin. Each of these companies will walk you through the process of setting up a wallet and linking your credit card or bank account to complete your purchase. However, the companies must verify your identity to comply with U.S. “Know Your Customer” (KYC) regulations. The availability of these services varies worldwide due to regulatory restrictions, although Coinbase and Circle maintain a presence in multiple countries. In order to control fraud, these sites typically impose limits on the number of bitcoin you can buy, and they charge transaction fees.
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The bitcoin you purchase through these companies are held in an online wallet linked to your account. From there, you can send bitcoin to another user, make an online purchase of items that sell in bitcoin, or transfer them to a different wallet. Many of these companies offer insurance for your bitcoin stored with their wallets, and they implement security features like two-factor authentication and multi-signature wallets to keep your account safe. If this is your first journey into the world of Bitcoin, consider these companies for a relatively quick and convenient way to get started.
Use a Traditional Bitcoin Exchange Traditional exchanges such as Bitstamp or Bitfinex are the most common sources for traders or large investors. These sites allow you to create an account and fund it with a deposit of fiat currency such as U.S. dollars. (“Fiat” refers to a currency that is issued or considered legal tender by a government e.g., euros, pounds, or dollars.) You can deposit your local currency into an exchange trading account using either a wire transfer or an ACH withdrawal directly from your bank account. The deposit options vary by exchange, and this process can take several days depending on the method you use. Once you’ve moved money to your exchange account, you can buy and sell bitcoin with other traders using the exchange. The exchange doesn’t actually sell you bitcoin directly, instead it
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matches you with someone else who’s willing to trade at that price using an order book. Yes, that means it works essentially like a stock exchange that matches buyers with sellers at an agreed-upon price. The order book is a list of all the prices and amounts of bitcoin that other traders are willing to buy or sell. For example, if you want to buy bitcoin, you can either place an offer at the current market price (“market order”) or you can set the price you are willing to pay and wait to see if anyone else will sell at that price. Once someone decides to sell at your asking price, the exchange executes the trade, transfers the fiat currency to the seller, and credits your account with bitcoin. Since exchanges are designed for professional trading, they offer advanced features like limit orders and margin trading. However, you must be careful to choose a reputable exchange since they maintain control of any bitcoin or currency held in your exchange account. Many exchanges are also required to comply with KYC and other anti-money laundering rules. These rules can require additional identity verification from users before they’re allowed to transact.
One of the most popular ways to find other people to trade with is the site LocalBitcoin.com, which allows you to search for people in your city who are willing to sell you bitcoin for cash. However, if you choose to meet someone for a transaction in person, be sure to take basic safety precautions like meeting in a public place.
Buy In-Person There are a growing number of locations worldwide where you can purchase bitcoin directly from a convenience store or ATM. A Bitcoin ATM will let you exchange local currency for bitcoin directly—often the fastest and most convenient option. A map of all Bitcoin ATM locations can be found online at http://bitcoinatmmap.com. Companies such as ZipZap in the UK, GogoCoin in San Francisco, and Ripio in Argentina allow you to purchase bitcoin through local convenience stores. This process is as simple as buying a gift card or telephone minutes; you receive a card that allows you to redeem it for bitcoin online. These services usually include substantial transaction fees, but are a convenient way to get started.
Modern technology and savvy entrepreneurs have made buying bitcoin easier and much more convenient than opening a bank account. If you own a cell phone, there are hundreds of ways you can start buying and spending bitcoin today. Find An Over-The-Counter Seller
Conclusion
Another way to buy bitcoin is through an over-the-counter (OTC) trade, which is a direct transaction with another party instead of using an exchange. There are a number of website and apps that facilitate these transactions by helping you find other people interested in trading. You can often contact these people and negotiate a transaction directly, paying with PayPal, cash, gift cards, or even gold depending on what the seller is willing to accept. For example, you can use the Facebook app Get Bits (https://bitpay.com/getbits) to find friends on Facebook who are willing to sell you bitcoin. This allows you to contact friends directly and negotiate a transaction without a middleman. There are also brokers who will connect you directly with a seller if you’re looking to buy a large amount of bitcoin at once. These brokers, such as Binary Financial and SecondMarket, specialize in transactions over $100,000.
While this guide covers some of the most popular ways to buy bitcoin, it is not exhaustive: new options and marketplaces are springing up rapidly as the Bitcoin economy grows. Startups worldwide are building easier and more convenient ways to transfer value with bitcoin and increase investment opportunities, including the ability to buy bitcoin with your 401k or retirement account. In addition, exchanges and services are expanding worldwide as the global regulatory environment adapts to this relatively new player on the world financial scene.
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Invest Buy/Sell Directory*
BITONIC BITCOIN.DE
Netherlands
Germany
https://bitcoin.de/en
https://bitonic.nl contact@bitonic.nl
BTC, EUR
BTC, EUR
CEX
CIRCLE
London, UK
Boston, MA USA
https://cex.io
https://circle.com info@circle.com
BITSTAMP Slovenia
BITVC
https://bitstamp.net info@bitstamp.net
Hong Kong, China
BTC, EUR, GBP, USD, CHF
https://bitvc.com service@bitvc.com BTC, LTC
COIN.MX Frisco, TX USA
COINBASE San Francisco, CA USA
https://coin.mx support@coin.mx
https://coinbase.com
0% Trading Fees
BTC, USD
BTC, LTC, USD
HUOBI
ITBIT
KRAKEN
Santa Monica, CA USA
Beijing, China
Singapore
http://expresscoin.com support@expresscoin.com
https://huobi.com support@huobi.com
https://www.itbit.com info@itbit.com
BTC, LTC, DOGE, BLK, DRK, STR, ETH, USD
BTC, LTC, CNY
BTC, SGD, USD, EUR
OK COIN
SAFELLO
Hong Kong, China
Stockholm, Sweden
Helsinki, Finland https://localbitcoins.com support@localbitcoins.com
https://okcoin.com support@okcoin.com
https://safello.com info@safello.com
ALL CURRENCIES ACCEPTED
BTC, LTC, USD, CNY
BTC, EUR, SEK, GBP
BTC, LTC, NMC, USD
BTC, USD
*Every effort has been made to ensure accuracy of information presented here – see disclaimer page 9
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San Francisco, CA USA
https://kraken.com support@kraken.com BTC, USD, EUR, XRP, LTC
SHAPESHIFT Switzerland
https://shapeshift.io mail@shapeshift.io BTC, LTC, PPC, DRK DOGE, NMC, FTC, BC
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Security
How to Ensure Bitcoin Security by ANDREAS M. ANTONOPOULOS
“...Bitcoin security is increasingly implemented with hardware tamper-proof wallets.”
B
Bitcoin allows anyone to be his or her own bank. If that sounds to you like a potential scenario for chaos, it’s only because you haven’t yet heard of the great lengths to which Bitcoin users can go to ensure the security of their “one-person banks.” By following a handful of basic security guidelines, they can achieve a level of security for their money that is actually unavailable in the banking world as we know it. The truth is that banks are barely able to keep accounts secure. Although banks promise to have your deposited funds available for you, none of them could withstand a “run” in which all depositors simultaneously decide to withdraw their funds. In that respect, bank funds are just an abstract reference to value, because your money isn’t really there. It’s just a number in a ledger, but the actual money is out on loan to the bank’s borrowers. Bitcoin is not like that. Instead, it functions very much like digital cash or gold. You deposit it in your account, you
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maintain it, and when you want to use it for a purchase, it is there for you— yours and yours alone. With Bitcoin, possession is 10/10ths of the law. This means it comes with its own security challenges. Having the keys to unlock a bitcoin is entirely equivalent to possessing a chunk of precious metal. Which means if you misplace it, have it stolen or accidentally send the wrong amount to someone, you would have as much recourse as if you dropped cash on the sidewalk and didn’t notice until you got home. However, Bitcoin has capabilities that cash, gold and bank accounts do not. A Bitcoin wallet, containing your keys, can be backed up like any file. It can be stored in multiple copies, even printed on paper for hard-copy backup. A backup of bitcoin keys is as good as possession of the original keys. You can't "backup" cash or precious metals. Banks can recover funds for you, but only at their discretion. And they can also confiscate funds, adding a risk that doesn’t exist in Bitcoin. Bitcoin is different enough from anything
that has come before that we need to think about its security in a novel way, too. What should end-users do to secure their Bitcoin wallets? Here are five guidelines. 1. Balance the risk of loss and theft. While most users are rightly concerned about theft, loss is an even bigger risk. Data files get lost all the time, but if they contain bitcoins the loss is much more painful. In the effort to secure their Bitcoin wallets, users must be very careful not to go too far and end up losing the bitcoins instead. In the summer of 2010, a well-known Bitcoin awareness and education project lost almost 7,000 bitcoins. In an effort to prevent theft, the owners had implemented a complex series of encrypted backups. In the end they accidentally lost the encryption keys, making the backups worthless and losing a fortune. Like hiding money by burying it in the desert, if you hide it too well you might not be able to find it again.
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“...Bitcoin has capabilities that cash, gold and bank accounts do not.” 2. Use two-factor authentication. Many first-time users will use a web-based wallet or online service as their Bitcoin bank. Unfortunately, this has led to a rash of thefts from Bitcoin users, almost all due to compromised desktop computers. Hackers will install trojans and keyloggers looking for access to well-known Bitcoin sites. As soon as users log on, their own computer will compromise the account and surreptitiously transfer all their money to another Bitcoin address. Once stolen, there is no recovery, as Bitcoin transactions are not reversible. The most effective defense against this attack is using what is known as a “two-factor authentication scheme” or using a smartphone application to generate one-time codes. (See “Google Authenticator” at http://code.google.com/p/googleauthenticator/.) 3. Spread the risk. Would you carry your entire net worth in cash in your wallet? Most people would consider that reckless, yet Bitcoin users often keep all their bitcoins in a single wallet. Instead, users should spread the risk among multiple and diverse Bitcoin wallets. The prudent user will keep only a small fraction—perhaps less than 5%—of their bitcoins in an online or mobile wallet as "pocket change." The rest should be split between a few
different storage mechanisms, such as a desktop wallet and offline-storage as described below.
are many free tools that can be used to create them. Users should consider keeping the vast majority of their bitcoins (95% or more) stored on paper wallets and locked in a safe. 5. Consider hardware wallets.
4. Use physical storage. Humans have used physical security controls for thousands of years. By comparison, our experience with digital security is less than 50 years old. Bitcoin keys are nothing more than long numbers. This means that they can be stored in a physical form, such as printed on paper or etched on a metal coin. Securing the keys then becomes as simple as physically securing the printed copy of the Bitcoin keys. A set of Bitcoin keys that is printed on paper is called a "paper wallet," and there
In the longer term, Bitcoin security is increasingly implemented with hardware tamper-proof wallets. Unlike a smartphone or desktop computer, a purpose-built Bitcoin hardware wallet has only one purpose and function—holding bitcoins securely. Without general purpose software to compromise and with limited interfaces, hardware wallets can deliver an almost foolproof level of security to non-expert users. Most industry observers expect to see hardware wallets become the predominant method of Bitcoin storage, or eventually embedded in smartphones as a secure hardware module. For an example of such a hardware wallet, see the Trezor at http://www.bitcointrezor.com/. In summary, Bitcoin is a completely new, unprecedented and complex technology. Over time we will develop better security tools and practices that are easier to use by non-experts. For now, Bitcoin users can employ many of the tips above to enjoy a secure and trouble-free Bitcoin experience.
Andreas M. Antonopoulos
Andreas M. Antonopoulos is an expert in security and distributed systems, an entrepreneur, and a coder. He has founded six companies and advised hundreds more in a career spanning two continents and two decades. He lives in San Francisco, where he is writing a technical Bitcoin book for developers. He can be contacted at: http://antonopoulos.com
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Security
A
Assuring Bitcoin security is a challenge. The most secure ways to store large amounts of bitcoins are also the least convenient ways. Even users with the patience to learn and practice the best security techniques discover that there are not many tools to help them do it. The easiest “cold storage” solutions available are still advanced tools with a learning curve beyond the reach of non-technical users. And while the Bitcoin community hails “multi-sig” (see glossary) as the next Holy Grail of Bitcoin security, no one is quite sure how to access it without writing a custom application. In the world of traditional banking these are not serious problems. Laypeople are not expected to understand cryptography, certificate authorities, or hardware security modules (HSMs). Big institutions have the resources to create, deploy and maintain security systems, and users only have to look for the little “locked” symbol in their browser or type in the six-digit code displayed on their keychain token. The user remains blissfully unaware of all the complexity going on behind the scenes. However, in the world of Bitcoin, neither the users nor institutions know what to do. At least not yet. This is a new world in which the best practices have not been defined, and the necessary software and hardware tools do not yet exist. This should not be surprising—Bitcoin is still quite young and has had little time for these aspects of its ecosystem to evolve. But change is coming, as it will have to come if Bitcoin is going to make it into the mainstream of everyday life and commerce. I think one of the biggest issues facing Bitcoin right now is not the lack of a “killer app.” It is lack of insurance options. Early adopters would like to believe that the majority of users will hold their own Bitcoin, but I believe that is not a realistic option when life-changing quantities of
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Getting Bitcoin Security Right and Ready for Main Street by ALAN REINER
Bitcoin are involved. We should not trust Grandma to secure her own retirement savings via complicated computer maneuvers.
Bitcoin needs a strong backbone of insured storage options so that Grandma can confidently participate in this new technology. More to the point, she should not trust herself or anyone else to hold it unless there is strong protection against loss events. Right now the solution is for Grandma to avoid keeping her money in Bitcoin. Bitcoin needs a strong backbone of insured storage options so that Grandma can confidently participate in this new technology. So what does Bitcoin have to do to bridge this gap? Well, a few big companies have already been able to get insurance on their holdings. This is a huge first step, but it is no small feat to convince insurance companies to come along. The premiums are also very expensive because the insurance companies have no idea how to assess the risks. Luckily, many of the problems faced in Bitcoin security already have longestablished solutions in the world of financial and institutional security. Not only do these solutions protect digital assets from external threats, but also from dishonest insiders in privileged positions. Merging Bitcoin with established security
infrastructure will make it easier to both assess and mitigate the risks associated with a secure storage system. At the current time, all the available secure Bitcoin storage methods use singlesignature wallets. By definition, these methods all have a single point of failure, and the goal has been to make that single point as secure as possible. Vaulted cold storage systems combined with fragmented backups go a long way toward achieving this goal, but they have to be deployed on consumer PCs which are not securityhardened, and it is difficult for organizations to enforce segregation of duties on the employees managing the funds. One critical advance needed by Bitcoin is to adopt the use of Hardware Security Modules (HSMs). The entire security of the Internet flows down from a small number of high-value cryptographic keys, each protected by HSMs. Commercial-grade HSMs cost tens of thousands of dollars and are capable of resisting all kinds of physical and electronic tampering, including destroying the key material if any abnormalities are detected that resemble tampering. They can be programmed to enforce any kind of access control policy, usually paired with smartcards given to authorized users. These devices represent single points of failure for systems of immeasurable value, so the cost of this protection is usually irrelevant.
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Transitioning from offline consumer PCs to offline HSMs for Bitcoin key management is a no-brainer for large institutions. But it might be a while before we see HSM-based cold storage solutions for the broad commercial market, and their cost may always make them prohibitive for consumers. Another important piece of this puzzle is the availability of well-defined operational security procedures. There needs to be a set of documented procedures for configuring signing devices and distributing backups, along with strong access-control procedures with proper segregation of duties. For instance, there may be a requirement that no signing devices can be accessed without at least three people present to ensure proper handling and documentation of an operation. This not only limits the opportunity for dishonest employees to steal funds, but also guarantees that proper security procedures are being exercised— such as verifying serial numbers on tamper seals, checking transaction data before signing, and guaranteeing that all sensitive devices and documents are properly secured after use. This approach also creates an auditable paper trail. Operational security also includes well-defined authorization channels to ensure that employees do not execute the secure signing procedure for malicious/theft transactions. A super-secure wallet split between seven HSMs in vaults managed by company employees could be bypassed if authorization to execute the signing process only requires an email from the CEO. Then an attacker only needs to access the CEO's email account to authorize a transaction to steal the funds. Physical security is irrelevant if the system is vulnerable to social-engineering attacks.
The most important advance in Bitcoin security is the proliferation of multi-signature storage systems. This is usually referred to as an “M-of-N” storage scheme. For instance, in 3-of-5 multi-signature storage, five devices will be designated as signing authorities for the funds and the network will require signatures from any three of them to move the money. This not only provides extra security, but also redundancy—any two of the devices can be lost or destroyed without losing access to the money being protected. The versatility of the multi-sig enabled by the Bitcoin protocol is astounding. It allows organizations to manage funds with varying calibrations of security, redundancy and convenience. Petty cash can be managed with 2-of-3 storage requiring hot wallet signatures of any pair of three company officers. Capital accounts for large purchases could be stored in a 3-of-5 using a combination of hot and cold wallets. Large investment funds holding $100 million or more could be stored using 5-of-7 offline HSMs kept in vaults around the world, each one requiring physical access by a different company executive. Yes, companies would find this to be an awful lot of trouble, but the point here is that it’s possible to make Bitcoin storage every bit as secure as you would like it to be. Multi-sig can be even more flexible if you consider that some parties or devices could be giving multiple signing keys for asymmetric signing authority. For instance, the CEO of a company might have two keys of a 3-of-6 storage scheme, and four other officers could each hold one. Only two signatures are required if the CEO is one of them, otherwise three signatures are needed.
Another interesting idea is that the insurance company itself could hold a key for the funds it is insuring. In the event that multiple signers die in a plane crash or simply lose access to their keys, the insurance company may be able to provide a critical signature to restore the funds instead of having to replace them. In all cases, the devices can be configured and maintained completely independently, with no knowledge of security profiles of the other devices. The creation of wallets and all subsequent operations using them never requires direct communication or co-location of sensitive data. From start to finish there is never a single point of failure in the system. Combine this with HSMs and solid well-defined operational security procedures, and we might finally have a Bitcoin backbone that can be trusted not to lose your money Gox-style—and thus be ready for prime time on Main Street.
QUICKIE GLOSSARY • Hot Wallet: A wallet for which the signing authority is on an Internet-connected computer. • Cold Wallet: A wallet on a device that has never had an Internet connection and never will. • Full Cold Storage System: This gives you the ability to create a cold storage wallet on an offline computer, yet monitor the funds online. Funds are moved by taking a transaction to the offline computer to get it signed and bringing it back online to finalize it, with the signing keys never touching an Internet-connected computer at any step. • Single-Signature Wallet: All funds in the wallet are associated with single identities on the network, and thus only one signing key is needed to move them. Anyone with access to the signing key is authorized to do what they would like. • Multi-Signature Wallet: The network has multiple signing keys associated with the funds, and some threshold of signatures needed to authorize transactions.
Alan Reiner
Alan Reiner is founder and CEO of Fulton, Maryland-based Armory Technologies, Inc. and core developer of Armory Bitcoin Wallet, an open-source wallet application focused on security for enterprise business and advanced users. He has degrees in applied mathematics and engineering mechanics, and additional background in statistics, data mining and cryptography.
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Security
by KIRK PHILLIPS , CPA, CMA, CFE
Bitcoin Exploration The Bitcoin ecosystem has many different types of platforms such as exchanges, payment service providers, reporting platforms and an array of other supporting services. Every time you create a new account your online profile expands, increasing the risk of breach with one or all of your accounts. Private keys and passphrases should be managed as securely as possible, and the same for login credentials. The following tales are filled with valuable lessons for stepping up your game with digital identity management.
T
Gone Phishing Paul Boyer, creator of the “Mad Money Machine” podcast on the “Let's Talk Bitcoin” network, learned a tough lesson recently. Paul happily received donations totaling 3.3875 bitcoins, about $2,000, from loyal listeners until he discovered a zero balance in his wallet at the end of June 2014. He collected donations using a payment service provider normally paying out bitcoins in U.S. dollars on a daily basis, but he never submitted a bitcoin payout address, so the coins just accumulated, awaiting the attention of hackers. That was his first mistake. A creative BitPay look-alike phishing scheme cleverly disguised an email with a “View Invoice” link requesting the refund of a customer payment. Unfortunately, Paul took the bait by clicking the link and unknowingly handed his password to the hacker who changed the payout address and received 3.3875 bitcoins the following day.
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Seven Steps to Digital Security
7
Best practices for digital identity management are encompassed in the following seven steps. Let's put some golden security nuggets to use before we end up as another cautionary tale. Best practices for digital identity management are encompassed in the following seven steps.
Step 1: CHOOSE PLATFORM Select a password management system such as LastPass, Secret Server, OneID or Roboform, create an account, activate two-factor authentication and start adding website and login credentials. Browser-based password managers should not be used, so just do a Google search for reviews on the best password managers. Businesses should create an enterprise level account with an admin console for managing users. You are 100% responsible for managing your bitcoins, so reducing the risk of compromising your entire online profile starts by managing one account at a time.
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One last mistake: Paul hadn’t activated a security feature for his account known as “2-factor authentication,” which would have prevented hackers from cashing in his bitcoins, even if they had hacked into his computer. Fortunately, 2-factor authentication is becoming more widely used on Bitcoin platforms. After a standard username and password login, a 2-factor box pops up asking for a code generated by a smartphone app such as Authy or Google Authenticator. If hackers obtained your login credentials, they couldn't log in without your smartphone and the code. The lesson here is to activate every 2-factor authentication available upon setting up a new account—and beware of downloading overhyped free software.
Step 2: ADD SITES
When the same email is used for all accounts it effectively weaves everything together with a single thread.
Step 3: TEST SITES
Identity Ransom Longtime Bitcoin evangelist Roger Ver was attending a conference when friends started messaging their suspicions of a Facebook imposter. Someone hacked into his old Hotmail account using it like a master key to retrieve logins for other accounts. The hacker demanded a 37.6-bitcoin identity ransom worth $20,000 at the time. Roger offered up a 37.6 bitcoin table-turning reward via Facebook and Twitter for info leading to the hacker's arrest. The viral bounty was too much for the hacker to bear, so he or she quickly bowed down, handed over login credentials and disappeared. No bitcoins were stolen, but this tale shows how a single email account can be an attack vector or weak point for exposing an entire online digital identity. When the same email is used for all accounts it effectively weaves everything together with a single thread. In addition, the more well-known and the more perceived wealth someone has, the greater the risk for getting attacked. A Tale of Social Engineering Sam Lee, CEO of Bitcoins Reserve, and his company were victims of a creative social engineering attack starting with the U.S. Marshals’ public email leak of the Silk Road Bitcoin auction list. Hackers were licking their chops over a juicy list of high rollers handed to them with a white glove. Sam then got an email from a hacker asking for a media interview while proceeding to open a Google docs link supposedly containing interview questions. The link unleashed malware that sucked out all the usernames and passwords from his Chrome browser, leading to control of all the company's email addresses. The hacker then sent an email from Lee's account to the CTO requesting a client withdrawal of 100 bitcoins— worth about $65,000. In this case the “client” was actually the hacker and the bitcoins evaporated. Browser-based password managers are convenient but non-secure ways to store passwords. The hackers took over Lee's entire digital identity but still couldn't penetrate the company's securely stored bitcoins. However, it's hard to defend against a hacker falsely posing as a trusted party, one of the slickest tools in a hacker's toolbox. “This is a weakness in our internal processes and procedures; it has nothing to do with weaknesses in Bitcoin because frankly Bitcoin so far has none,” says Lee. cont.
Once the password manager is set up, you can easily add sites by logging into an account as you normally would. Most systems will prompt you to save the site with a simple click. You can also add sites manually with the URL, site nickname, username and password. If you previously saved all your usernames and passwords in a spreadsheet, adjust the columns to the import format and upload. Easy tutorials are usually available for mastering the setup.
Always go back and test-click the site after saving it whether you save sites one by one or import a list. Sometimes little nuances like the login URL or username need to be adjusted. When you create new accounts the URL automatically picked up by the system is often not the login URL, so testing and correcting helps to avoid frustration.
Step 4: DELETE THE OLD LIST After you've successfully transitioned from a password list it's time to delete the file. If you set up a password manager and keep your old file then you have not reduced any risk. If you’re among those who have a difficult time parting with the old for fear of losing access to something or wanting to keep it just in case, you can get over the hump by copying your old password list and pasting it into a secure note available in most password managers.
Step 5: CREATE A UNIQUE EMAIL Email is the golden thread that weaves your entire digital identity together, and unfortunately, most folks use the same email and the same or similar passwords for all their accounts, including social media, financial accounts and everything in-between. The critical distinction is understanding how emails are used for both communication and account creation. Securing your online identity means that these two roles must be separated by using two different email addresses. In other words, the email you use for communication should be different from the one you use for new account setup. Create a new second email account without using your own name or a word that could be associated with you. For example, set up an email like (any word)admin@gmail.com or use the random password generator to create an email “prefix” such as 3rxyHk4p98@gmail.com rather than JohnSmith@gmail.com. Then swap the email on each site with the new email the next time you log in. It will be easier to change accounts one by one instead of turning it into a major all-at-once project.
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Security Keys to the Kingdom Androklis Polymenis, aka klee, is an early Bitcoin adopter and NXT stakeholder who recently discovered his $1 million stash of bitcoin and NXT, another cryptocurrency, had vanished. The breakdown likely came from a hacker who found klee's unencrypted plain text password file sitting in Dropbox, where klee had left it exposed. He responded by putting out a 500-bitcoin bounty, worth nearly $300,000, for return of the stolen crypto and identification of the hacker, who eventually returned 462 of 1,170 bitcoins while keeping the rest as the bounty in exchange for klee calling off the hunt. In the meantime, the NXT community was able to rally together and retrieve some of the stolen NXT tokens. Although about two-thirds of the cryptocurrency wasn't recovered, it could easily have been a total loss. The keys to the kingdom were practically sitting on a park bench waiting to be picked up. It's a painful lesson highlighting the importance of safeguarding bitcoins and other cryptocurrencies. Armory founder Alan Reiner, a self-proclaimed ultra-paranoid crypto-nerd says, “Holding your own bitcoin is like harnessing fire,” and then adds: “Sometimes the biggest threat to users is themselves.” Conclusion There are many great password managers, however LastPass has multiple two-factor authentication options with a free version available for individual users and an enterprise paid version for businesses. The paid version, only $24 per user per year, has an admin dashboard for multiple users and access controls. It even has a security scorecard showing the strength of your overall password profile. The free personal version can plug into a separate enterprise account for a seamless user experience. In addition, install anti-virus and anti-malware software on your computers. You can't afford to waste another day. If one account gets hacked they can all get hacked. Your password manager contains the keys to your kingdom so create and remember a good password. Start securing your digital identity and your bitcoins with these seven easy steps and go on more vacations with all the time you save. The average person has 25 logins per day, so one minute of fumbling per login multiplied by 250 working days equals 2.6 wasted weeks per year logging into websites. Enjoy peace of mind on your newfound vacation instead!
Step 6: CHANGE PASSWORDS Hackers can simply use brute force to break an easy-to-remember password. Change all of your passwords to a minimum 16-character, hard-to-break random password using the random generator provided within the password management software. Password resets should be done in conjunction with the new email resets described above. If you can't remember the password then it's harder to break. If you use a password manager you no longer have to remember passwords because the system keeps them encrypted.
Step 7: SECURE BITCOIN WALLETS Bitcoin-related sites may require special attention beyond standard login credentials. Sometimes a passphrase, a group of random words, is required to access your bitcoins. If you lose the passphrase you lose your bitcoins, period, so it must be handled very carefully. Some sites don't have standard login credentials and only require a passphrase. In either case, the passphrase should be saved in the encrypted password field in the password manager. Also consider writing down your passphrases and keeping them in a safe. There are many other advanced techniques that are beyond the scope of this article, but these strategies are meant to significantly reduce risk for people who would otherwise keep login credentials in a text file, spreadsheet, on scrap paper or in draft emails.
Kirk Phillips
Kirk Phillips is an entrepreneur, certified public accountant (CPA) and a certified fraud examiner (CFE) who is passionate about technology and the possibilities for Bitcoin to disrupt, decentralize and bring transparency into the business world. Author of the forthcoming, The Ultimate Bitcoin Business Guide, an inspirational book for entrepreneurs and SMBs, he weaves risk management into business process outsourcing, crypto-business consulting and education. He can be reached at TheBitcoinCPA@gmail.com
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Legal
Virtual Currencies Hit the World Stage: Bitcoin’s Ever-Evolving Legal Status
By MushkinLaw.com Bitcoin Law Team
Bitcoin Friendly Bitcoin Neutral Bitcoin Ambivalent Bitcoin Hostile
Martin Mushkin, Joseph Sahid and Joseph Taub
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Congratulations, virtual currency world—New York wants to expressly regulate you! That’s how important Bitcoin and other digital currencies have become in recent years. And as we know, what happens in New York's financial world often has implications for the wider world. All the recent attention New York has paid to virtual currency is raising many important legal questions, with potentially profound implications. This article will offer a brief survey of just some of them. A Cryptic History of Money Bitcoin is the latest and best known in a long line of digital currencies. The basic premise of digital currencies is that they try to establish a medium of exchange based on immutable mathematics, thus putting the currency beyond the control or manipulation of any government. Not long after the
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computer was invented people started discussing the development of currency based on that series of zeroes and ones called “bits.” But mediums of exchange go back to the first bartering by cave people. When A and B first exchanged goods, each was getting something from the other that he wanted. Soon, there came a point when B didn’t really want more apples but knew that he could exchange them with C for the tomatoes B really wanted. Soon he had an inventory waiting to be bartered. And shortly after that B needed some means of storing his accumulating wealth other than in the tomatoes and other produce he had bartered for. Initially, B’s excess wealth might have been represented in certain beads or special rocks. Next came smelted copper and eventually gold and silver.
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Then there was the problem of storage for this wealth inventory. So here came banks and coins minted by governments, followed by the age of paper or fiat money, checks and credit cards. Today, instead of masses of paper moving through the banking system, all this transfer of wealth—debiting and crediting—takes place electronically. That means we are already in the digital currency era. A Few Legal Questions The introduction to the original white paper by Bitcoin’s pseudonymous founder "Satoshi Nakamoto" states: “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud … . The fraud system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.”
Given Bitcoin’s endurance and ever-evolving prominence on the world’s financial stage, governments everywhere are considering regulation, and they will most certainly be closely observing what happens in New York. What Nakamoto could not address at the time was Bitcoin’s legal status in the currency and taxation worlds. What exactly is Bitcoin for legal purposes? This is a critical question, because Bitcoin’s legal characterization makes a difference as to whether it is regulated, how it is regulated, and who regulates it. Thus far, Bitcoin has been regarded as both a currency and a commodity. In SEC v. Shavers, a federal court in Texas held that since Bitcoin could be used to buy things other than Bitcoin itself, it was money. The court found that paying in bitcoins for shares in a business run by others for profit was buying a security and subject to SEC regulation. The court did not deal with the nature of what the business was going to do with the “money.” The business intended to deal in bitcoins. The court could have classified the transaction as an investment in commodities, as a Bitcoin trading business, or as trading in forex. The case presented different ways of looking at Bitcoin, along with several possible regulatory schemes: currency, securities, commodities and forex.
All of that suggests another question: Who has legal jurisdiction over Bitcoin transactions? Suppose Company A, physically in country X, uses the Internet to find an exchange, “GiveandTake,” upon which it can offer its shares. It accepts payment only in Bitcoin. The exchange is only virtual and Company A does not know where the exchange is located. Company A offers its securities, and investors pay for it by depositing bitcoins into Company A’s electronic wallet. The wallet is administered by “Maybesafe,” thought to be in country Y. Company A does not have the physical name and address of “Maybesafe” or the investors. All it has is email addresses. Of course, the securities the investors purchase are really electronic entries. Later, Company A pays dividends to the investors by sending the dividends to their virtual wallets via their email addresses. These recipients could be anywhere in the world. Suppose things go wrong. Perhaps some of Nakamoto’s “honest nodes” succumb to “attacker nodes.” Maybe the business simply goes bankrupt. What government(s) can take jurisdiction? To what court can the injured party go to seek justice? Where the physical offices of the various participants are located, or the location of their servers? The New York Story New York, Wall Street’s home, has published proposed regulations defining its jurisdiction as covering any transaction “involving New York or a New York resident.” There are stated limits to “involving,” but even so, anybody in the Bitcoin business “involving” New York will have to obtain a license. The only real exclusion is for “merchants and consumers” who “utilize Virtual Currency solely for the purchase or sale of goods or services.” In the banking world, New York’s highest court has ruled its courts have jurisdiction over Lebanese Canadian Bank sued by U.S., Canadian, and Israeli citizens resident in Israel who were victims of Hezbollah rocket attacks. The claim was that the bank assisted Hezbollah by “facilitating international money transactions” by using its New York correspondent bank to transfer money to Hezbollah agents. This approach could be applied to Bitcoin. Beware Bitcoiners! In our hypothetical case, New York’s proposed regulations could require that Company A know the physical address of the exchange, that the exchange and wallet be licensed, and that all parties, including the investors, know with whom they are dealing beyond mere email addresses. The proposed regulation requires all advertisements by licensees to include their name and a statement that they are licensed to engage in a “Virtual Currency Business” by New York. The license will serve as an advertised badge of integrity, like a bank saying it is a member of the FDIC. Hopefully, there will be no Mt. Gox or Silk Road fiascos by New York licensees.
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Legal But it’s a tough regulation. Applicants must submit fingerprints, extensive personnel background information, certification of an outside investigator, a detailed business plan, and audited financials— much like a bank. Once in business, a licensee must have a written compliance plan, maintain compliance personnel, be audited, and report frequently to the regulators. Among other things, if for instance, $10,000 in bitcoin or money is transmitted in “one day by one person,” as in buying shares "involving New York or any resident of New York," the licensees will have to report the transaction to the New York regulators. Some Laws That Might Apply The Treasury’s Financial Crime Enforcement Network (FinCEN) requires U.S. financial institutions to assist U.S. government agencies to detect and prevent money laundering and other criminal activity. Under the Electronic Funds Transfer Act, any transfer of funds, other than a transaction originated by check, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, or computer, must be reported. “Money transmitting” includes transferring funds on behalf of the public by any and all means within this country or abroad. These laws would ostensibly cover Bitcoin transactions such as the illegal drug dealings in the infamous Silk Road case. Bitcoiners, like all businesses, will have to comply with the securities laws, privacy, tax, health, Social Security laws, and money transmitter laws, and honor their contracts—or risk being sued. For Bitcoiners, regulation will greatly compromise the vaunted anonymity of the currency. This is a matter of more than a little concern for many in the Bitcoin community. Will a New York badge of integrity be worth it? And About the Rest of the World ... New York isn’t the only jurisdiction considering whether and how to regulate Bitcoin, but with New York being the 800-pound gorilla of the financial world that it is, you can bet that the rest of the world is watching very closely. Given Bitcoin’s endurance and ever-evolving prominence on the world’s financial stage, governments everywhere are considering regulation, and they will most certainly be closely observing what happens in New York. As it stands now, Russia and others may criminalize Bitcoin in the future. On the other hand, they may find that tactic to be unsustainable and a bad move for their own financial system. The best advice from here is to stay tuned. Bitcoin remains an ever-evolving legal quandary.
Bitcoin Snapshot: Russia The situation in Russia has many players, and has shifted ambiguously in 2014. In January, the Bank of Russia issued a statement discouraging the use of bitcoins, warning that Russians who use them risk becoming unwittingly involved in illegal activities. After a meeting with the Bank of Russia, Russia’s Prosecutor General announced in February, 2014 that with the ruble being the official currency of the Russian Federation, existing Russian law categorically prohibits Bitcoin. The Bank of Russia, however, came away with a different interpretation of that meeting. In March the bank clarified that it had not concluded that all “cryptocurrencies” were prohibited, and that the meeting was merely intended to develop a regulatory framework to combat illegal operations and protect the rights of users. It seems that the matter will be settled soon enough, though, as Russia’s Finance Ministry is now backing a bill that would fine individuals involved with virtual currencies the equivalent of between $100 and $840, according to the nature of the offense. Officials and legal entities would face substantially higher fines, up to $12,500. While the Finance Ministry has backed off of its earlier attempts to impose more severe fines, its underlying hostility to virtual currencies remains intact. Its position is, however, opposed by the chair of the Duma’s Committee on Financial Markets. Given Russia’s well-documented ambivalence on the matter, the bill’s fate remains uncertain as a vote looms soon.
Martin Mushkin
Joseph Sahid
Joseph Taub
The authors are the Virtual Currency Law Team at MushkinLaw.com, located in New York, Connecticut and California and concentrating on corporate finance, business regulation, and litigation. Martin Mushkin was an SEC Senior Trial Attorney, has published extensively, and has been listed in Who’s Who in American Law. Joseph Sahid is a litigator handling commercial and financial disputes, was a partner in Cravath, Swaine & Moore, and is listed in Who’s Who in America. Joseph Taub has counseled in many business litigation and corporate matters. Rony Guldmann assisted in the research. 32
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Merchant Adoption: Full Speed Ahead!
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Almost every introduction to computer networking courses taught that the “Byzantine Generals’ Problem” was impossible to solve. In simplified terms, the “problem” is how multiple generals are able to arrive at consensus of when to attack when they are able to communicate only through messengers, with the possibility that some of the generals are malicious or the messengers are compromised. Then Satoshi Nakamoto released Bitcoin. Thus was born the innovative solution to a previously impossible computing problem, one that created the world’s first practical implementation of triple-entry bookkeeping. One of the most basic applications resulting from this groundbreaking technology is “transactional currency” use. While confusing to some in the Bitcoin network, the largest decentralized distributed computing network in the world encompasses both the blood (currency) and veins (transmission system). An average of 60,000 daily transactions are processed by the network, accounting for approximately 600,000 bitcoins, which as of this writing, equals about $435 million. So, who is sending all this magic Internet money around, and why? Bitcoin users range from individuals to large publicly traded companies. Here is why increasing numbers of them are doing so: • Transactions are instantly verifiable and irreversibly settled within a day (usually an hour), • There can be no fraud by way of charge-backs, • Counter-party risk is nonexistent in
contrast to a bank operating with fractional reserves, foreign currency settlement risk or credit card processing problems, • Identity protection is built in to keep users safe from identity thieves, • Fees are extremely low or non-existent. A prominent example: On July 18, 2014 Michael Dell tweeted, “Received PowerEdge order @ dell.com for more than 85 #bitcoin (~$50K USD).” One can assume Dell did so in order to receive payment from anyone anywhere in the world, thus expanding his market from a mere 50-60 countries where credit cards or PayPal currently function. If Dell used a feeless Bitcoin processor, this would result in a savings of about $1,000 when compared to credit cards.
It appears that lawmakers and regulators are cognizant of the tremendous benefits to be gained from digital currencies like Bitcoin but are also aware that like any technology, it can be used for nefarious purposes. The merchant processor does its part by processing Bitcoin transactions, converting them into the fiat currency of choice, and making a direct deposit to a merchant's bank account the same day. Another advantage: Everyone has heard of the massive data breach of customers’ personal information at Target stores.
by Trace Mayer, J.D.
With Bitcoin transactions there is no personal customer information. There is even a YouTube video of someone making a Zynga Bitcoin payment in two clicks. No more hassle using obsolete technology for which you have to input your name, address, zip code and all the other information an identity thief would need to go on a shopping spree under your name. Bitcoin has identity protection built in. Eventually Target, Amazon, Walmart, etc. will all be forced to accept Bitcoin. Why? Because Overstock, another publicly traded company, along with major electronic retailer TigerDirect, began accepting bitcoins in January 2014. At Overstock, Bitcoin transactions accounted for 4.7 percent of gross revenues for the month, and the average order amount was about 30 percent higher than transactions using other payment methods. The most popular item ordered? Sheets! So, let’s crunch some numbers. Assuming the same gross revenue percentages for Bitcoin transactions, and assuming the merchant processor fee for processing would cost $3,000 per month for $5 million or more of volume, and assuming average credit card processing costs are 2 percent, then annual savings for Target would be about $75 million, for Walmart about $150 million, and Amazon $60 million. Does anyone really think they will cede this cost advantage and profitable market demographic to competitors without a fight? Which leads us to the next major point. Target, Amazon et al. will want to know they are on solid legal ground when accepting
Trace Mayer, J.D.
The author hosts the podcast Bitcoin Knowledge (www.bitcoin.kn) is an early Bitcoin thought leader, entrepreneur, investor with companies such as Armory, BitPay, Kraken, and Netagio, journalist, monetary scientist and ardent defender of the freedom of speech. He holds accounting and law degrees, and has studied Austrian economics. 34
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Companies need a Bitcoin strategy just as in the mid-1990s they needed an Internet strategy. Bitcoin’s innovative payment method. Lawmakers and regulators around the world, from Germany to Singapore to the UK and U.S., have all started to weigh in on dealing with this matter. The highest profile event in cryptocurrency lawmaking was the Senate hearings in the United States late last year, which included testimony from major Bitcoin service providers, venture capitalists, investors and law enforcement on how regulation of this nascent industry should move forward. Edward Lowery of the U.S. Secret Service had this to say: “Digital currencies provide an efficient means for moving large sums of money globally for both legitimate and criminal purposes.” It appears that lawmakers and regulators are cognizant of the tremendous benefits to be gained from digital currencies such as Bitcoin but are also aware that like any technology, it can be used for nefarious purposes. Jennifer Shasky Calvery, director of the Financial Crimes Enforcement Network at the United States Department of the Treasury, told the Senate: “The meetings are designed to hear feedback on the implications of recent regulator responsibilities imposed on this industry, and to receive industry’s input on where additional guidance would be helpful to facilitate compliance. … We are very encouraged by the progress we have made thus far. We are dedicated to continuing to build on these accomplishments by remaining focused on future trends in the virtual currency industry and how they may inform potential changes to our regulatory framework for the future.” So: where does Bitcoin go in the remainder of 2014 and into 2015? Well, my cautious prediction is we will at least see more merchant acceptance. Companies need a Bitcoin strategy just as in the mid-1990s they needed an Internet strategy. Meanwhile, lawmakers and regulators seem to recognize the possibilities and, at least in word, appear willing to encourage this new flower to grow. Consequently, while the financial world at large continues to experience commotion, the Bitcoin industry appears to be in forward motion like never before! yBitcoin.com
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Commerce
Four Reasons Why Your Business Should Accept Bitcoin
by TONY GALLIPPI
Bitcoin is a digital currency that is growing in popularity every day, offering unique advantages to businesses in a wide range of industries around the world. But does it make sense for your business to accept bitcoin? Let’s explore why it may.
Businesses That Adopt Bitcoin Benefit in at Least Four Unique Ways
1
Bitcoin payments happen instantly, so the funds are in your account (known as your “wallet”) and available for your use as soon as you receive the payment. There is no waiting or settlement period, so it stands to improve your business’s cash flow and bookkeeping. The moment you receive your customer’s bitcoin, the digital transfer of value is immediate and final, without the risk of chargebacks sitting on your books. For businesses that handle a great deal of physical cash, it makes sense to accept bitcoin. With your data cryptographically secure, there is nothing an employee or a thief would gain by stealing your computer or accessing other data.
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2
Bitcoin payments carry no risk of the identity theft or payment fraud that are common to online businesses, so both you and your customers benefit. With bitcoin, your customers can shop your store or purchase your services without having to enter any sensitive financial information that thieves can use to access your customers’ bank accounts. That also could mean reductions in the PCI DSS costs that ensure you are in compliance with security measures for accepting credit cards in your business.
3
Bitcoin can help expand your international audience. It is no secret that the Internet plays an integral role in almost every company’s efforts to expand its customer base. While the United States has the dollar and Europe the euro, bitcoin is quickly becoming recognized as the currency of the Internet. Because Bitcoin is borderless by design, you can accept payment from someone in China just as easily as from someone sitting in the same room. If your company already relies on international business, consider how instant, borderless transactions can enhance your customers’ experience. Accepting your customers’ bitcoin does not require exchanging to a local currency, and it does not come with the hassle of processing foreign credit cards. Your customers’ shopping experiences are quick and seamless no matter where they are in the world. They’ll remember you for that.
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Commerce
4
Bitcoin dramatically reduces your transaction costs. When bitcoin is transferred in a payment or trade, it goes directly from sender to receiver—without the need for a middleman. That means greatly reduced transaction fees. Credit card companies charge you up to 3 percent or more per transaction to ensure that the payment changes hands. With as many credit card sales as there are in an increasingly “cashless” economy, that adds up to a severe hit on the bottom line. The number of businesses accepting bitcoin worldwide grows every day as more consumers realize its benefits. Given that accepting bitcoin at your business can enable instant payments, eliminate the risk of fraud, open you to an international market and reduce the costs associated with simply accepting your customers’ money, the question is no longer why or how, but when will you begin accepting bitcoin? Many of your competitors are choosing today. Will you?
Getting Started With Payment Processing
I
Integrating bitcoin payments into your business is a fairly simple process. If you have a small business or online store, you can start accepting bitcoin in just a couple of hours. Billion-dollar enterprises take a little longer, but even TigerDirect, the huge tech retailer, was able to integrate bitcoin payments in as little as four days. Once you decide how you want to accept bitcoin, the matter of integrating it is both simple and free. There are two ways to accept bitcoin for payment: directly or indirectly. If you choose the direct route, customers can send bitcoin to your wallet by scanning a QR code. You can set up a “business wallet” using a free wallet service, and you can store it on your computer, tablet or smartphone. If you then intend to hold bitcoin as an asset and watch its value rise over time, it would be your responsibility to convert the bitcoin to cash to cover your expenses, which can be done on an exchange. Accounting for any capital gains and assuming the risk of the price volatility would also be up to you. Some businesses find it more convenient to accept bitcoin indirectly, through a bitcoin payment processor. These processors can offer services to make bitcoin use more effective, from bitcoin-to-currency settlement to sales and accounting integration. Each bitcoin payment processor has different service models, so be sure to shop carefully for what you need.
Most payment processors allow you to set your prices in your local currency. There’s no need to peg your prices to bitcoin’s exchange rate. The payment processors offer point-ofsale systems that can easily calculate the bitcoin price at the point of checkout. More important, they can settle incoming bitcoin funds in your local currency to maintain value stability. This way, the rise or fall in the price of bitcoin doesn’t affect the price of your product or service. A partnership with a payment processor can essentially eliminate any risk with bitcoin. These processors will ensure you receive the USD value (or your local currency) of your invoice and are not exposed to the price fluctuations of bitcoin. In fact, due to the lower cost of accepting bitcoin payments and the free publicity it can bring as a byproduct, your business has more to gain than to lose. Most payment processors allow you to receive a daily settlement in your local currency, and many can enable you to receive a mix of bitcoin and your local currency, depending on your preference. If you elect to receive a portion or all of your bitcoin transactions in bitcoin, it would be up to you and your accountant to report any capital gains. If you receive 100 percent of your transactions in your local currency, no additional reporting would be necessary. Be sure to discuss this with your accountant before making any changes to your settlement preferences.
The Bitcoin Neon Sign – www.cryptocables.com
Tony Gallippi
Tony Gallippi serves as the co-founder and Executive Chairman of BitPay, which was founded in 2011 and is a premier Bitcoin payment processor handling millions of dollars worth of transactions per month. He has 15 years of experience in sales and marketing working in the robotics industry, was a district sales manager for Aerotech and a regional sales manager for Industrial Devices Corporation. He holds a bachelor’s degree in mechanical engineering from the Georgia Institute of Technology.
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Commerce Merchant Processor Directory*
Atlanta, GA
Copenhagen, Denmark
Wilmington, Delaware
bitpay.com info@bitpay.com
https://bitpagos.com
https://bips.me BTC
BTC
BTC
San Francisco, CA Belfast, UK
https://bitnet.io BTC
Toronto, Canada
https://coinkite.com connect@coinkite.com
Hungary
http://bitsofproof.com
San Francisco, CA USA
https://www.gocoin.com
https://coinbase.com BTC, LTC
BTC
BTC
BTC, DOGE, LTC
*Every effort has been made to ensure accuracy of information presented here – see disclaimer page 9
Building the Bitcoin Ecosystem One Job at A Time Register at our website and get notified about upcoming Bitcoin Job Fairs.
www.bitcoinjobfair.com Job Seekers Join leading companies in the crypto-currency and crypto-equity space. Learn about career opportunities in one of technology’s leading ecosystems.
Employers Get access to top talent in the digital currency community. Hire Bitcoin Developers, Altcoin Creators, and Blockchain Experts.
Your opportunity to work for top companies and startups in the crypto-currency space. Start earning income in digital currency!
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Spend
Growing The Market A Bitcoin Shopping Guide by ALAN M. SILBERT
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If years ago someone were to guess what products would kick off Bitcoin adoption, alpaca socks might not make the top of the list. Fuzzy socks to launch a disruptive technology and global currency? Yet that’s exactly what occurred when alpaca socks were among the very first consumer items to be purchased with bitcoins. Similar feelings were no doubt engendered when early enthusiasts were directed to make their initial Bitcoin purchases using an ominous red phone at a grocery store, speaking to an operator to route U.S. dollars through an intermediary to a Bitcoin exchange. This was the future of currency? But just as the red phone led the way to many international exchanges, alpaca socks helped launch a burgeoning Bitcoin consumer ecosystem. With over 60,000 transactions per day and that number growing, it is evident that bitcoins are making headway in the world of consumer purchasing.
Consumer Market As of the end of November, there were around $5 billion worth of bitcoins in circulation that are ripe for spending. In the evolving Bitcoin market, consumers can now buy electronics, clothing, food, precious metals, Internet services, creative services and even luxury cars and homes.
The Growing Market
David’s Antiques 322 Royal Street New Orleans, LA davidsnola.com
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PayPal is starting to integrate Bitcoin into its payment network. Spendbitcoins.com and the Bitcoin wiki show growing lists of merchants, and Bitcorati is developing a directory and rating system for Bitcoin businesses. BitcoinShop.us and CoinsForTech are constantly broadening their inventory of electronics, clothing, gifts and other items, as they vie to be the “Amazon of Bitcoin.” Food take-out and delivery service Foodler accepts bitcoins from its 14,000 customers. Dell Computer is the largest merchant to accept bitcoin to date.
Bitcoin ATMs are appearing in several countries worldwide including, recently, the first ATM in New York City. Gyft offers gift cards from more than 200 different retailers. Overstock, Expedia, 1-800-Flowers, Newegg and Wikipedia’s acceptance of Bitcoin shows that more mainstream businesses are starting to adopt it. Entire communities, such as Berlin’s Kreuzberg neighborhood, are embracing Bitcoin and accept it in many of their local businesses. Bars and restaurants and even luxury goods purveyors are now accepting Bitcoin worldwide.
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“In the evolving Bitcoin market, consumers can now buy electronics, clothing, food, precious metals, Internet services, creative services and even luxury cars and homes.” Lower Prices and International Barriers The frictionless, low-cost nature of Bitcoin allows for lower prices to be passed on to consumers. (The Bitcoin network is fee-free, albeit for a voluntary nominal fee that benefits the miners who support the Bitcoin network.) These economics mean that Bitcoin merchant processors offer lower fees than the VISAs and PayPals of the world, enabling merchants to deliver lower prices to consumers. Similarly, due to the borderless and peer-to-peer characteristics of Bitcoin, consumers can bypass costly middlemen altogether and go directly to the source. The Roast Station Project is but one example, as consumers can buy coffee beans directly from a grower in Bali, bypassing the barriers and costs of middlemen, and have the product shipped to them anywhere in the world. An American family renting a home in France can send bitcoins to the property owner without concern for intermediary or currency exchange fees, and without waiting for PayPal to release their funds. A foreign worker can send bitcoins back home to his or her family abroad, and avoid the 8-9+ percent fees traditionally charged, thus providing the family with more bitcoins to spend in their local economy. Additionally, Bitcoin can reach many countries where traditional credit cards and PayPal aren’t accepted, giving more reach to consumers, especially those who are “unbankable” by traditional banking. East Africa is a perfect example of where this is taking hold.
More Safety Consumer security is another benefit of Bitcoin. Giving out a credit card number and associated information involves divulging an uncomfortable amount of personal detail while opening consumers up to future charges, possibly illegitimate, as long as the credit card is valid. In contrast, each Bitcoin transaction is a one-time, irreversible event that uses only your pseudonymous
Bitcoin address. Escrow services, such as the one offered on BitPremier, mitigate the risks of large-ticket transactions. Bitcoins can be held in escrow by a trusted third party until both parties to the transaction consider it final and binding.
Maintenance of Purchasing Power Inflation protection is another benefit to the Bitcoin consumer. The purchasing power of the U.S. dollar has been almost halved in the last 25 years due to inflation, with a $100 basket of goods and services in 1988 costing nearly $200 today. The limitation on the number of bitcoins in circulation provides protection to consumer purchasing power.
Dangers for the Consumer While Bitcoin may be almost perfect, it does have its challenges. As the ecosystem evolves and develops, it will naturally attract nefarious characters. Consumers should deal with trusted merchants, perform their due diligence, and use escrow services for large transactions. And while the irreversible nature of Bitcoin has its positives, it leaves little margin for error. Bitcoins should be treated like cash in that once you walk away from a transaction you and your cash have parted ways. Buying from a business that uses a trusted merchant processor like BitPay, Coinbase or BIPS is a good start toward secure shopping. So is shopping at e-commerce sites run by reputable names in the Bitcoin community, or using local brick-and-mortar merchants. As always, transactions that seem too good to be true should be viewed cautiously.
To the Future While the choices for the Bitcoin consumer are growing, the Bitcoin economy is still in its infancy. With some help from the Bitcoin community, and as the benefits of Bitcoin become more well known around the globe, the consumer market for Bitcoin should grow into a thriving global merchant economy.
Alan M. Silbert
Alan Silbert is founder and CEO of BitPremier, the first-of-its-kind Bitcoin luxury marketplace, and a vice president at GE Capital. He has more than 16 years’ experience in commercial finance. Previously, he was a vice president at Merrill Lynch Capital and held various positions at Heller Financial, Access National Bank, and HealthCare Financial Partners. He holds a B.S. degree in finance from Towson University, and currently resides in Maryland with his wife and two children.
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The Uncommon Florida...ST. GEORGE ISLAND PLANTATION
ON THE MARKET Bitcoin Preferred
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Mining
by ALEXANDER LAWN
B
Bitcoin mining is how the cryptographic information distributed within the Bitcoin network is secured, authorized, and approved. It is in essence a colloquial term to describe the processing of payments that have taken place once they occur. What makes this different from traditional electronic payment processing is that there is no need for an issuing bank, an acquiring bank, merchant accounts, or mandatory centralized clearing houses, such as Visa and MasterCard holding on to funds until they process transactions at the end of each day. Bitcoin mining is in fact reliant on individuals sharing computer hardware in a collective effort to decentralize and streamline this process. Each piece of Bitcoin mining hardware is a supercomputer that maintains a ledger of every transaction that has ever taken place. As a consequence there is no need for many layers of intermediaries, delayed payment confirmations, and a syndicate of corporations dictating associated transaction fees. With so many people dictating a percentage of the fees incurred, and an archaic system too bloated to refine without
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rebuilding itself from scratch, the resulting cost to the consumer is vastly greater than an instantaneous payment secured, authorized, and approved by Bitcoin mining.
“Bitcoin mining is in fact reliant on individuals sharing computer hardware in a collective effort to decentralize and streamline this process.� In fact the customer can currently choose to not pay any fee, or voluntarily pay an amount to facilitate a more expedited payment confirmation. What do the miners gain from dedicating the use of the hardware and electricity they have purchased? They gain a block reward equal to a predetermined amount of Bitcoins as specified within the Bitcoin protocol. The current block reward is equal to 25 bitcoins, or 3,600 coins each day distributed among the entire network, and this reward halves every four years. This reduction in reward is believed to behave in an inversely proportional manner to that of
Bitcoin’s value as its adoption increases over time to a wider audience. The cryptographic Bitcoin protocol may sound like a mouthful, but essentially it's a security related function based upon a complex mathematical algorithm that needs to be solved, and the mining hardware completes that task autonomously. It authenticates the wealth transfer as sales take place, or money is sent from one wallet to another. For all intents and purposes it is a digital signature hidden behind code that authenticates the originator and the recipient of the transaction that has taken place. The mining hardware must solve an algorithm to create a block, and that occurrence is then verified by other miners. A block is solved about every 10 minutes on average, with slight variance as an increasing or decreasing amount of computational power comes online. As a result, the complexity of the problem varies with the cumulative amount of computational power of the Bitcoin network. Simply put, the larger and more widely distributed the network, the more secure it
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Mining
becomes for the general public to utilize as a means of payment. Unlike traditional banking, it is incredibly open, as everybody knows, and eventually confirms every transaction that has taken place. Each transaction that occurs is recorded within a block, and each block is represented in the blockchain: a digital ledger of every transaction that has ever happened between every wallet and every bitcoin. As this ledger grows over time, so does the demand on the computational hardware responsible for maintaining and updating the blockchain. The hardware itself has undergone various iterations, starting with using the humble brain of your computer, the CPU. The processor found solving the complex 3D imaging algorithms within a graphics card became the subsequent evolution for miners. Aside from being able to process Bitcoin's transactions faster and more efficiently, their arrangement within desktop PCs meant more than one graphics card could be housed on a motherboard. This was already a feature of high-end gaming and 3D design rigs. As such, Bitcoin’s popularity grew with those associated within such fraternities, as they could dedicate their machines to mine bitcoins, and thus cover the cost of their hardware. Alas, this wasn’t the most power-efficient option, as both CPUs and GPUs were very efficient at completing many tasks simultaneously, and consumed significant power to do so, whereas Bitcoin in essence just needed a processor that performed its cryptographic hash function ultra-efficiently.
“The cryptographic Bitcoin protocol may sound like a mouthful, but essentially it's a security related function based upon a complex mathematical algorithm that needs to be solved, and the mining hardware completes that task autonomously.” Enter the Field Programmable Gate Array (FPGA), which was capable of doing just that with vastly less power demands. There was one issue: due to the reprogrammable nature of the chip, it had a significantly high cost-per-chip outlay for something that solved blocks on par, somewhat greater than a GPU. Its real virtue was the fact that the reduced power consumption meant many more of the chips, once turned into mining devices, could be used alongside each other on a standard household power circuit. As Bitcoin’s adoption and value grew, the justification to produce more powerful, power-efficient and economical per-chip devices warranted the significant non-recurring engineering costs that entail developing the final and current iteration of Bitcoin mining semiconductors: the Application Specific Integrated Circuit, or ASIC. ASICs are super-efficient chips whose hashing power is multiple orders of magnitude greater than the GPUs and FPGAs that came before them. Succinctly, it’s a bespoke Bitcoin engine capable of securing the network far more effectively than before. The year 2013 was very much a land race for Bitcoin ASIC technology. A year later and we find ourselves in the midst of an ensuing race for the mining of alt-coins using the Scrypt algorithm.
Unlike Bitcoin’s SHA-256 algorithm, Scrypt requires memory available to hash the encrypted data. This requirement was developed as a means to limit the disruptive aspect of ASIC technology. This time around the disruptive effect of ASIC technology on the alt-coin network should be less dramatic. However, with a larger variety of coins using the Scrypt algorithm, with varying popularity, liquidity, age and consequent market capitalization, the risk of a 51% attack on some of these coins is far greater than Bitcoin experienced. In fact some companies have been asked to accept orders from entities intent on doing just that. On this occasion it won’t be the fastest to the market that wins the race, but those competent enough to offer refined and optimized silicon design. This is something that wasn’t a necessity in Bitcoin due to the effect ASIC-utilizing cutting edge silicon could have on a non-memory intensive hashing algorithm with minimal competition. Whatever the outcome, we are currently experiencing the twilight hours of GPU mining, as many miners still using GPUs cannot profitably justify the electricity expenditure required to run their old equipment.
Alexander Lawn, MSc.
Hailing from London, Alex Lawn is a well known character in the cryptocurrency scene. Responsible for not only the fundraising and building some of the most successful branding in Bitcoin, specifically in hardware, but for bringing journalists in many of the world’s financial and tech press up to speed on the subject of cryptocurrencies. An effort to ensure a balanced and fair foundation within the subject exists. Currently Lawn works within disruptive finance alongside the principals of Bourne Capital.
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GENESIS Bitcoin first appears as an academic paper and a computer program in late 2008. Very little is known about its creator, Satoshi Nakamoto, as his only presence on the Internet consists of a profile on the P2P foundation listing him as “36, Male. Japan” and his posts on the Bitcoin forums and the cryptography mailing list. He has since disappeared from the Internet entirely, and while some continue to speculate as to his physical identity, most are content to leave the legend as it is.
Oct. 31
Satoshi Publishes the Whitepaper: Bitcoin’s seminal concept paper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” is first published, describing the technical and economic foundations of the currency in detail.
2009
THE BLOCKCHAIN BEGINS
Jan. 3
Bitcoin’s year starts on January 3 and an official Bitcoin client is released soon after on the cryptography mailing list. The Bitcoin community itself grows slowly in the first two years, picking up new members by word of mouth. New members begin mining, causing the Bitcoin network’s hash power to increase, with mining difficulty increasing exponentially. The Genesis Block: The original “genesis block” was mined by Satoshi, officially starting the Bitcoin blockchain.
2010
INITIAL GROWTH
May 22
Bitcoin for Pizza: The first known Bitcoin transaction for a physical item occurs when a forum user pays 10,000 bitcoins, then worth $25, for another forum user to order a pizza for him. At current bitcoin prices, the cost of that pizza would be equivalent to approximately $1 million.
Dec. 12
Satoshi Disappears: Bitcoin founder Satoshi Nakamoto makes his last forum post before disappearing, and Gavin Andresen quickly assumes a more central role in Bitcoin development.
2011
A DEVELOPING ECONOMY
Bitcoin begins to fulfill Satoshi’s vision as a store of value and transactions begin on several online exchanges. The community grows slowly throughout this year, which is marked by technical innovations such as the first hosted wallets and mining pools. GPU mining is also developed, leading to a large increase in the network’s hashing power.
A large number of new businesses appear, growing to meet the needs of the Bitcoin economy. Bitcoin gains more and more prominence in the media. This year is also marked by a number of technical developments and innovations, but also a number of hacks and thefts. The price of Bitcoin rises as high as $32 before dropping back to $10 in a period of high volatility.
Apr. 20
Jun. 8
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Bitcoin in the Media: An article on Bitcoin by Forbes appears online and in print, and is translated into many languages around the world. The online release on April 20 and print release on May 9 are immediately followed by sudden rises of nearly 50% in the price of Bitcoin, bringing the price up from $1.20 on April 20 to nearly $6 on May 10. Rising to New Highs: The price, after peaking at an all-time high of $32 on June 8, drops precipitously to $10 and bounces back up and down several times before stabilizing at $17.
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GLOBAL EXPANSION At the beginning of June, Bitcoin finally breaks out of its nearly 4-month-long period of extreme stability as prices shoot past $6. News attention is once again positive and a speculationinduced bubble begins to fester, leading to another price crash in August. During this time period, a number of the original Bitcoin companies and exchanges begin to be replaced by new challengers. Blogging site WordPress begins to accept bitcoin, and Bitcoin Magazine publishes its first issue.
Jan. 16
Bitcoin’s TV Appearance: Bitcoin is featured on an episode of The Good Wife, creating a threefold blip in Bitcoin’s prominence as measured by Google search volume.
May 26
Growing Chinese Bitcoin Adoption: The volume of international Bitcoin users continues to increase, and Bitcoin makes a sudden appearance in China as BTCChina becomes the world’s second largest exchange for one day. The Bitcoin price begins rising shortly afterwards.
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JANUARY 2013 Jan 13
Feb
Mar
Apr
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Aug
Sep
Oct
BOOM AND BUST Days after the beginning of the new year, the bitcoin price begins picking up once again. Bitcoin business also booms; gambling sites like SatoshiDice are the first to post unprecedented returns, and merchant providers and mining companies follow soon after. Soon enough, the Bitcoin economy is right back to where it was in spring 2011— except this time with 10 times the force. The Bitcoin network hashing power increases exponentially as the first ASIC Miners come online. Conferences: The San Jose Bitcoin Conference, held in May, brings together more than 1,200 Bitcoin users from around the world to discuss the technical, legal and business issues around the currency. It’s followed by a number of similar conferences in London, New York, Atlanta, Amsterdam and Latin America. Merchants: This year, mainstream companies including OKCupid, Shopify, Virgin Galactic, Overstock and Reddit begin accepting bitcoin for payment. Startup Activity: Silicon Valley begins to get involved with Bitcoin as several leading venture capitalists announce investments in Bitcoin companies. The BoostVC accelerator launches in San Mateo to invest specifically in Bitcoin startups. The New York Bitcoin Center opens its doors to provide a central location for education and trading on Wall Street.
2013 Mar. 16
Cyprus Freezes Bank Assets: Residents of Cyprus, a small island nation east of Greece, wake up to find that their bank accounts have been frozen and 10% of deposited funds will be seized to pay for a bailout for a failing bank. The Bitcoin price shoots past $50 for the first time two days later and will soon top $100.
Apr. 9
The Bitcoin price hits a high of $266, and promptly crashes back down to $50 before making a partial recovery. However, this time there is something unusual in the aftermath of the bubble: hope is not lost. At the Bitcoin conference in May, the community is as excited as ever, a feeling that continues to dominate even in the London conference at the beginning of July. The main challenge will prove to be government regulation, especially in the United States, but businesses step up to handle the challenge.
Oct. 2
Silk Road Shut Down: The Silk Road, the largest black market site on the Tor network, is shut down by the US FBI, and its alleged owner, Ross Ulbrecht, is arrested in San Francisco. The Bitcoin price briefly falls from around $127 to a low of $85 amidst fears that Silk Road is responsible for a large part of the Bitcoin economy before almost immediately recovering to $110; one week later, the bitcoin price is back exactly where it was before Silk Road went down.
Oct. 20
Bitcoin Breaks 1000 CNY, Rally Continues: The bitcoin price has been shooting up quickly in recent weeks. The price steadily picks up, reaching near all-time highs. What has been fueling the price movements? To some, it is the rapid growth of the Chinese community, bolstered by a division of Chinese search engine Baidu accepting Bitcoin for one of its services.
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Nov. 18
First US Senate Hearing on Bitcoin: The Senate Homeland Security and Governmental Affairs Committee summons witnesses from the Bitcoin community and the US Government for the first Bitcoin-related hearing on Capitol Hill. The hearing is entitled, “Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies.” The hearing starts off with the first panel of representatives from branches of the US Government, including the Treasury Department, Department of Justice, and Secret Service.
Nov. 28
Driven by consistent media attention, merchant adoption and steady growth, the Bitcoin price begins to increase. Increased media coverage and speculation drives the price to $1,200, its highest price ever, before falling back down into the $800s. Many attribute the steep decline to uncertainty about the Chinese government’s stance on Bitcoin amid rumors of a ban.
cont.
2014
A MATURING INDUSTRY The year begins with a period of increased interest and media attention even though the price has fallen from its November highs. The concern of regulation is weighing on everyone’s minds as Bitcoin undergoes a transition to mainstream consumers. Bitcoin is a growing topic of discussion for traditional financial institutions, investment banks and central bankers worldwide. Conferences: Bitcoin conferences and meetups are held all over the world. From Singapore to Toronto, and Indonesia to Dubai to Tel Aviv. Bitcoin also begins to make appearances at consumer tech and finance conferences, including the Consumer Electronics Show, South by Southwest and Money20/20. Merchants: TV Provider DISH, electronics retailer TigerDirect, and charities United Way and Wikipedia all begin accepting Bitcoin donations and payments. PayPal announces that it will integrate Bitcoin into its payment processing software for merchants.
Jan. 3 BITCOIN CELEBRATES FIVE YEARS! Five years ago the first Bitcoin block was mined, and at one time, had grown in value to over $1,000 per coin. Thousands of companies are accepting Bitcoin for payment and individuals around the world are utilizing it as a form of transaction and a store of value. This makes Bitcoin the best performing investment in history.
Feb. 20 Exchange Mt. Gox Fails: Mt. Gox, one of the oldest and most popular exchanges, announces that it is filing for bankruptcy as a result of hacking, mismanagement and theft. While the closure of Mt. Gox is unfortunate, it represents the failure of a single business, not of Bitcoin. Mt. Gox’s closure also serves as a wake-up call for Bitcoin community members to not place trust in one centralized exchange, but to diversify where their bitcoin is stored and even which exchanges are used.
Mar. 6 Newsweek Claims to Identify Satoshi Nakamoto: Newsweek reporter Leah McGrath Goodman writes a cover story claiming that a 64-year-old engineer is Satoshi Nakamoto, the creator of Bitcoin. However, he denies any involvement in Bitcoin and after further investigation, it appears that Satoshi’s true identity is still unknown.
Mar. 25 The IRS issues tax guidelines on Bitcoin: Less than one month before Tax Day in the US, the Internal Revenue Service issues guidelines as to how users of virtual currencies should treat these currencies and report gains and losses. The Bitcoin community’s reaction is less than enthusiastic due to the IRS stating Bitcoin will be treated as a commodity and not a currency. Further dialogue and negotiations are expected.
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Acceptance in China
Apr. 11
Bitcoin 2014 Conference in Amsterdam
May 15-17
Official Says China Will Not Ban Bitcoin: The Governor of the People’s Bank of China issues a statement clarifying China’s stance on Bitcoin. The Chinese government sees Bitcoin as more of an asset than a currency and a ban is out of the question.
The Bitcoin 2014 Conference: The Bitcoin Foundation hosts the most diverse international Bitcoin conference to date, with attendees from more than 50 countries gathering in Amsterdam, Netherlands. Attendees include Bitcoin enthusiasts, entrepreneurs, investors, and even representatives from Botswana and Kenya. Bitcoin 2015 is set to take place in Asia next year.
US Marshals Hold Bitcoin Auction
June 27 US Marshals Hold Bitcoin Auction: The US Marshals Service holds an auction for approximately 30,000 bitcoin seized from Silk Road. After a private bidding process, venture capitalist Tim Draper is revealed as the winner of all auctioned bitcoin.
2014 July 17
First Draft of BitLicense Proposal Published: The New York State Department of Financial Services (NYDFS) publishes the first draft of their proposal for regulating digital currency companies. It is followed by a 45-day period for the community to comment on the proposal.
Aug. 21
NYDFS Extends BitLicense Comment Period: After numerous responses from the Bitcoin community and business leaders, NYDFS Superintendent Benjamin Lawsky extends the comment period by an additional 45 days and issues clarifications regarding the scope of the proposed regulation.
Sept. 23
PayPal Begins Bitcoin Integration: PayPal executive Scott Ellison announces that the company has developed partnerships with leading Bitcoin payment processors to enable all PayPal digital goods merchants to accept Bitcoin seamlessly.
Dec. 4
T h e U S M a r s h a l s S e r v i c e holds a second auction for an additional 50,000 bitcoin seized from alleged Silk Road owner Ross Ulbricht. The auction winners are revealed to be Tim Draper and a syndicate led by Barry Silbert's SecondMarket.
Dec. 26
Bitcoin St. Petersburg Bowl: BitPay and ESPN have achieved the improbable by merging college football and sophisticated tech. On December 26th, Bitcoin will experience its largest mainstream push, introducing the digital currency to 30,000 fans and reaching over five million American households. The match-up between University of Central Florida and North Carolina State University takes place at the Tropicana Stadium in St. Petersburg, Florida.
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Austin City Limits Live At The Moody Theater Downtown, Austin, Texas March 28 & 29, 2015
Austin, Texas March 28 & 29, 2015
Bitcoin is clearly the most exciting Internet protocol today. The Texas Bitcoin Conference will allow attendees to explore this new technology from a host of angles. Leading industry experts will help answer the questions a range of people have about Bitcoin and what it means to them personally, to their businesses, and to the future.
No matter your knowledge level or involvement with Bitcoin, you will feel welcome and come away with valuable information putting you ahead of the curve.
TEXAS IS THE BITCOIN FRIENDLY STATE!
Speaker Sessions
“The Texas Bitcoin Conference is the perfect blend of tech, innovation, discussion of regulation and fun.”
Networking Opportunities
James D'Angelo Bitcoin 101 Blackboard Series
Million Dollar Hackathon
Vendor Exhibits Weekend After SXSW*
Million Dollar Bitcoin 2.0 Hackathon *We are not affiliated with the SXSW Music/Film/Interactive Festival
“Bitcoin technology is one of the most exciting things going on in the world today. The Texas Bitcoin Conference captures the energy, magic and buzz we see in the space and gives it back to the attendees.” Bruce Felton, Managing Director and Founder of Atlantic Financial, Inc.
“Bitcoin isn't just a currency and payment system; it is a globally distributed asset register...enabled through a stunning breakthrough in computer science: decentralized consensus.” Richard Brown, IBM Executive Architect
“The first Texas Bitcoin Hackathon led the charge for developer participation in Bitcoin conferences, and served as a launching point for our platform. We look forward to the next one!” Shawn Wilkinson, Lead Developer and Founder storj.io
TexasBitcoinConference.com Register Online
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Address: Similar to an email address and generated at no cost, this string of 27-34 characters represents the destination for a Bitcoin payment. ASIC: Application Specific Integrated Circuit. ASICs are an integrated circuit customized for a specific use. In the BTC space they are now used for mining bitcoins. Bitcoin: A payment network (“Bitcoin”), the currency unit used on that network (“bitcoins”). As digital/virtual currency, it uses peer-to-peer technology to facilitate instant payments. Bitcoin is an alternative currency known as a cryptocurrency, which uses cryptography for security, making it difficult to counterfeit. Bitcoin issuance and transactions are carried out collectively by the network, with no central authority. The total number of bitcoins that will be issued is capped at 21 million to ensure they are not devalued by limitless supply. Users store their bitcoins in a digital wallet, while transactions are verified by a digital signature. Block: Data is permanently recorded in the Bitcoin network through files called blocks. A block is a record of some or all of the most recent Bitcoin transactions that have not yet been recorded in any prior blocks. Blocks are links in a chain of transaction verifications. Outstanding transactions get bundled into a block and are verified roughly every 10 minutes on average. Each subsequent block strengthens the verification of previous blocks. Each block contains one or more transactions.
Cryptography: The branch of mathematics that creates mathematical proofs to provide high levels of security. Online commerce and banking already use cryptography. In Bitcoin, cryptography is used to make it impossible for someone to spend funds from another user’s wallet or to corrupt the blockchain. It can also be used to encrypt a wallet, so that it cannot be used without a password. Deflation: Reduction of prices in an economy over time. It happens when the supply of a good or service increases faster than the supply of money, or when the supply of money is finite. This leads to more goods or services per unit of currency, meaning that less currency is needed to purchase them. This carries some downsides. When people expect prices to fall, it causes them to stop spending in the hope that their money will go further later. Difficulty: Every 2,016 blocks, Bitcoin adjusts the difficulty of verifying blocks based on the time it took to verify the previous 2,016 blocks. The difficulty is adjusted so that given the average estimated computing power of the whole Bitcoin network, only one block will be verified on average every 10 minutes for the next 2,016 blocks. Double Spending: When a malicious user tries to send his bitcoins to two different recipients at the same time. Bitcoin mining and the blockchain are there to create a consensus on the network about which of the two transactions will be confirmed and considered valid.
Blockchain: A public record of Bitcoin transactions in chronological order. The blockchain is shared among all Bitcoin users. It is used to verify the permanence of Bitcoin transactions and to prevent double spending.
Escrow: Holding funds in a third-party account when two parties are engaged in a transaction. Advisable when making a transaction via a Bitcoin account with an unknown party, or when transacting high value items.
BTC: Most common unit representation of Bitcoin currency, similar to USD with dollars.
Exchange: A central resource for exchanging different forms of money and other assets. Bitcoin exchanges are typically used to exchange the cryptocurrency for other, typically fiat, currencies.
Cold Storage: Keeping bitcoins safely offline through a USB or other drive, paper wallets or a physical coin.
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Fiat Currency: Currency that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith. Halving: Refers to reducing reward every 210,000 blocks, approximately every four years. Due to reward halving, the total supply of bitcoins is limited. Hash Function: A computer algorithm which takes an arbitrary amount of input data and deterministically produces fixed length output, known as the data's "hash." It can be used to easily verify that data has not been altered. If you change any single bit of the original data and run the hash algorithm, the hash will completely change. Because the hash is seemingly random, it is prohibitively difficult to try to produce a specific hash by changing the data that is being hashed. Hash Rate: Measuring unit of the processing power of the Bitcoin network. The Bitcoin network must make intensive mathematical operations for security purposes. Inflation: When the value of money drops over time, causing prices for goods to increase. The result is a drop in purchasing power. KYC: Know Your Client rules require financial institutions to vet the people they are doing business with, ensuring that they are acting in good faith and adhering to all applicable regulations. Mining: Process of using computer hardware to do mathematical calculations for the Bitcoin network to confirm transactions and increase security. As a reward for their services, Bitcoin miners can collect transaction fees for the transactions they confirm, along with newly created bitcoins. Mining is a specialized and competitive market where the rewards are divided up according to how much calculation is done.
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A Guide To Bitcoin Terms Paper Wallet: Method of storing bitcoins offline on a physical piece of paper that holds both the private key and the public address.
Transaction: A specific section of data that is broadcast to the network and then collected into Blocks.
Private Key: A secret piece of data that proves your right to spend bitcoins from a specific wallet through a cryptographic signature. You can think of this as your PIN number. Your private key(s) are stored in your computer if you use a software wallet; they are stored on some remote servers if you use a web wallet. Private keys must never be revealed as they allow you to spend bitcoins from their respective Bitcoin wallets.
Transaction Fee: Possible with any transaction of bitcoin, fees are processed and received by the Bitcoin miner. Transaction fees are voluntary but can help speed confirmation times.
Public Key: An alphanumeric string which is publicly known, and which is hashed with another privately held string to sign a digital communication. You can think of this as your bank routing number. In the case of Bitcoin, the public key is a Bitcoin address.
Wallet: Loosely the equivalent of a physical wallet on the Bitcoin network. The wallet actually contains your private key(s) which allow you to spend the bitcoins allocated to it in the blockchain. Each Bitcoin wallet can show you the total balance of all bitcoins it controls and lets you pay a specific amount to a specific person, just like a real wallet.
51% Attack: When more than half the computing power on a cryptocurrency network is controlled by a single miner or group of miners. Controlling 51% of the computational power theoretically makes a party the authority on the network, allowing it to: • Issue a transaction that conflicts with someone else’s. • Stop someone else’s transaction from being confirmed. • Spend the same coins multiple times. • Prevent other miners from mining valid blocks. While a 51% Attack poses a theoretical threat to Bitcoin, structural safeguards are in place to make an occurrence highly unlikely. Chief among them is the open source nature of the network, allowing others to quickly recognize an attack and take defensive measures.
QR Code: A two-dimensional graphical square containing a monochromatic pattern representing a sequence of data. QR codes are designed to be scanned by cameras, including those found in mobile phones, and are frequently used to encode Bitcoin addresses. Reward: When a block is discovered, the discoverer is awarded a certain number of bitcoins agreed upon by everyone in the network. Currently this bounty is 25 bitcoins; this value will halve every 210,000 blocks.
Our vision is to ensure all people have the opportunity to realize Bitcoin’s potential.
Satoshi: Smallest unit of Bitcoin currency (1/100,000,000 BTC or 0.00000001 BTC). This unit has been named in collective homage to the founder of Bitcoin. Satoshi Nakamoto: Anonymous creator and founder of the Bitcoin cryptocurrency.
Protect
Standardize
Promote
Signature: A cryptographic signature is a mathematical mechanism allowing proof of ownership. In the case of Bitcoin, a Bitcoin wallet and its private key(s) are linked mathematically. When your Bitcoin software signs a transaction with the appropriate private key, the whole network can see that the signature matches the bitcoins being spent.
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Blockchain
The arrival of Bitcoin on the international economic stage created an earthquake in the world of math-based currency. But even as that world continues to absorb its impact, it is clear that Bitcoin represents neither the beginning nor the end of how money will change in the future. While Bitcoin is far ahead of its peers, currency entrepreneurs have taken its cue to heart and embraced the concept of “programmable money.” Many bright minds have been working tirelessly to improve the protocol, either by creating alternative competing systems or by building right on top of the Bitcoin protocol itself. This section of yBitcoin magazine is intended to keep readers abreast of innovations in the cryptocurrency world. Here, you’ll catch the latest developments in Bitcoin and its various competing visions for how to leverage blockchain technology and create value in an increasingly digitized and interconnected world. Read on to keep yourself both inspired and informed.
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Factom: A Data Layer for the Blockchain
I
If the world were a completely transparent, open and scrupulously honest place there wouldn’t be much need for police officers, attorneys or investigators. Or for the services of Paul Snow and his cohorts at the open source project known as Factom. But that dreamworld isn’t here yet. So while we’re waiting for it, Factom provides an elegant tool to create airtight authentication for a wide range of legal and financial processes. Before Factom, interested parties had to rely on vague and ambiguous documentation of the kind that often descends into mostly fruitless “he said/she said” scenarios in lawyer’s offices and courtrooms around the world.
“Essentially, we provide a clear ‘proof of process’ to validate each transaction through the entire history of a process.” Longtime Bitcoin entrepreneur Snow founded Factom in May of 2014 after seeing clearly that the ingenuity of Bitcoin blockchain technology had forever solved the problem of how to provide decentralized, secure and verifiable data for all the parties in a transaction. The fact that no details could be counterfeited or reversed had implications for many other types of transactions in the world, he realized. One example: Bank of America, Wells Fargo and other banks in the pantheon of global finance who have recently been paying billions of dollars in fines for certain “irregularities” in the way they managed mortgages and foreclosures in the wake of the 2008 banking crisis. Those mortgages were Sponsored Content
snipped up and passed around so many times and the follow-up on them became so fragmented that in many cases, no reliable record-keeping existed that could document what did and didn’t occur as the banks tussled with homeowners over the details of their mortgage terms and payment history. The result was that even if the banks’ activities had been beyond reproach, the lack of verifiable data doomed them to be on the losing end of multiple judgments. The lesson being, says Snow, that there is no substitute for solid, unalterable data to trace the history of countless transactions that take place every day, and there is no better tool to fully authenticate it than the blockchain technology. Factom extends this by creating a data layer for the blockchain. “We can record the hash (which is like a small digital fingerprint) of every single document in a transaction into a Factom Chain so that it can’t be replicated or altered in any way,” Snow says. “Now any party can go through an entire history of a mortgage and know that they have all the documents they need—even if those documents come from a range of sources.” “Essentially, we provide a clear ‘proof of process’ to validate each transaction through the entire history of a process. Using the mortgage example, we create a system of record despite the many systems involved in managing a mortgage over its history. That level of certainty in record-keeping didn’t exist before blockchain technology made it possible.” The security factor looms large for multiple reasons, Snow says. “You can get everything you need to validate a
history of transactions with just the Factom Chain. That means you don't have to engage a trusted central party, or to download tons of data. And while the Factom Chain can validate a process, it keeps the actual data private, so it poses no security risk."
“Our norm and continual goal is complete transparency and complete security for all transactions” Factom is funded by seed money from the DApps Fund for building decentralized applications, so true to form, it is a protocol like Bitcoin itself, completely open source and with no owners. Snow is the core developer leading a team of cryptocurrency veterans to establish the protocol and participate with others in harvesting the tokens that will come of their efforts. Combine that with Snow’s status as founder and president of the Texas Bitcoin Association, and the group’s pedigree in the cryptocurrency world is as solid as can be. “Our norm and continual goal is complete transparency and complete security for all transactions,” Snow says. “And we now have the means to achieve it, so it is no longer pie in the sky. Open source and cryptocurrencies are changing the world, but we’re just at the beginning of their ultimate applications, which can extend into virtually every business process one can think of—and many we haven’t even thought of yet. The most exciting days are still ahead of us.”
Photo by Bryan Winter
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Blockchain
We live in an online world in which information sharing has become ubiquitous and instantaneous, and the special kind of information carried by money makes it a perfect match for the convenience, efficiency and low transaction fees associated with the world’s digital currencies. Which is why the time has never been more right for the emergence of PayBase, a new digital payment platform built on top of the digital currency PayCoin. PayBase is the world’s first “cryptopayment” platform truly designed and supported for the mass adoption its originators are aggressively pursuing and expecting to achieve over the
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coming years. That means consumers will have the ability to send or spend money for virtually any purpose, anytime, anywhere in the world—right now.
“We’re looking to be as handy as your credit card but with multiple other benefits that make PayBase superior in every way to any credit or debit card system ever devised.”
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Though you can read white papers and documents galore about all the nifty technical features purring away in the background to bring PayBase into your life, three key benefits make it abundantly clear that it is poised to become an increasing force in the financial world, its impact just beginning to be felt. 1. Substantially reduced costs—With the 3% or more transaction fees typically charged by PayPal and credit cards, consumers and merchants wind up paying higher prices for all goods. PayBase basically eliminates those “middleman” costs, because the “coins” in your digital wallet go straight from you to the merchant. A negligible fee to facilitate that process is about 0.5% or less. In addition, consumers purchasing from major retailers such as Amazon and Wal-Mart will enjoy 2%-4% discounts. A third financial benefit: all money that stays in PayCoin wallets at least 30 days grows at a rate of 5% annually. That figure beats by more than a country mile the typical .01% growth rate of bank savings accounts. 2. Security—There has simply never been a safer way to store and spend your money. Every time you make a credit card purchase, your card number and reams of vital information about you is exposed to many people, from a merchant’s employees to hackers around the world. Not so with PayBase. Only you know the keys to your account, and when you use your funds to send money to someone else’s wallet, no vital information such as residence, billing address or mother’s maiden name travels along with it. All accounts are also insured against losses. In addition, no one can access your money except you. Unlike banks that can put a hold on your money and even limit access to it during a “run” as experienced during the Great Depression, no third party has the keys to your money. It’s yours to control, spend and keep as you choose. 3. Simplicity—PayBase engineers have created a payment platform that functions with utter simplicity while organizing your transaction data for you in a way that will never again have you searching through overstuffed drawers or boxes for an elusive receipt. All your purchases are saved in one place, keeping it simple and much easier to access and understand than a bank statement. On the purchase end, it will allow for one-click purchases from all the merchants you’re buying from, without having to establish separate accounts and sign-ins with them all.
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“Digital currency has the capacity to change the world, but for that to happen, we have to engage the world where it is—– not where we need it to be.” “We’re looking to be as handy as your credit card but with multiple other benefits that make PayBase superior in every way to any credit or debit card system ever devised,” says Josh Garza, founder and CEO of PayBase and GAW Miners (the world’s largest cryptocurrency mining company). Garza’s crypto titan has attracted sufficient capital from investors and an Initial Coin Offering (ICO) to launch the world’s first Coin Adoption Fund (CAF).The fund’s sole mandate is to promote mass adoption of the PayCoin digital currency and the PayBase payment platform so they become the everyday choice of merchants and consumers around the world. “No cryptocurrency in history has had the backing of a company with the capital and resources that we do,” Garza says. “We’ve hired dedicated, full-time staff who are committed to extending PayCoin acceptance to merchants and consumers all over the world.” Key to the entire PayBase enterprise, Garza says, is the simple truth that anyone designing an online global payment system today would focus on customers, not the banks that stand behind credit card companies, all of whom take their hefty cuts of your purchase. “What we’re built for is inexpensive, peer-to-peer transfer of value,” he says.“Digital currency has the capacity to change the world, but for that to happen, we have to engage the world where it is—not where we need it to be. So we’ve been busy building the tools and buying the companies that are going to help us accomplish that.” Ultimately, Garza sees digital currency through a broad historical and visionary lens: “We seem to raise the image of the Wright brothers pretty regularly, but there’s plenty good reason for that. Digital technology is no less earth-shattering, no less significant in its impact on the way we live and interact, than the airplane was. Older workers who have hopped on the digital train tell me their previous work lives are almost unrecognizable to them. We’re going the next step down that path by bringing digital into everyday commerce. Everyone buys stuff in this world, so when you change the way people buy, you change the way they live.We are right in the thick of that change with PayBase, and I tell you, it is exhilarating.”
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Blockchain
Litecoin Treading Softly But Surely Into The Digital World
A
As befits its name of “Litecoin,” the world’s second most popular cryptocurrency treads rather softly and speaks with a gentle voice in the conversations that take place on its website and the various chat rooms and forums devoted to digital currencies. Although a full two years behind industry pioneer Bitcoin, its market capitalization north of $300 million has established Litecoin as a solid, no-nonsense alternative in the ever-expanding cryptocurrency world, which now sports some 200 entities competing for the attention of enthusiasts.
One difference is Litecoin’s 84 million coin cap, quadruple Bitcoin’s 21 million. Litecoin has no grand plans to replace Bitcoin atop the ever-growing heap, but has instead focused on carving out a functional niche for itself as the go-to alternative.This may prove to be just the right approach to ensure its long-term success. Litecoin’s lack of grandiosity closely tracks that of its founder, former Google engineer Charles Lee, an unassuming MIT grad and son of an entrepreneur. Lee is not the type to take victory laps celebrating Litecoin’s success, but instead emphasizes its practical orientation, accessibility and flexibility as a smaller and more nimble player in the field. One difference is Litecoin’s 84 millioncoin cap, quadruple Bitcoin’s 21 million. Litecoin developers say this ensures faster confirmation times than Bitcoin, also by a factor of four.
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Litecoin has no grand plans to replace Bitcoin atop the ever growing heap, but has instead focused on carving out a functional niche for itself as the go-to alternative. On the technical mining end, Litecoin was initially developed in 2011 with a computer algorithm called “scrypt,” different from Bitcoin’s “SHA-256” algorithm. Both serve the same purpose—to mine cryptocoins—but scrypt does so with less specialized equipment that makes it more accessible, less centralized and more given to cutting edge innovation in the burgeoning cryptocurrency market, according to Dr. Marco Krohn of Genesis Mining, a leading scrypt-based mining equipment provider. “All the innovation is happening in the alt-coin space,” says Krohn, who holds a Ph.D. in mathematical physics. “Why? Because Bitcoin is too big now to be just an experiment for hackers. Scrypt also has the advantage of being applicable to hundreds of alternative coins, but the challenge there is figuring out how to mine the right alt-coins at the right time. Our solution has been to develop an advanced multipool. The algorithm constantly watches market prices and mining data of many coins. Based on that data the portfolio of the most profitable coins at any point in time—say, Litecoin over Dogecoin, or vice versa—is mined and then exchanged automatically to Bitcoin in order to maximize the profit for our clients.” Allowing for the varying appeal and value of alt-coins, some observers have speculated that when the cryptocurrency dust settles, people’s digital wallets could include Bitcoin for purchase of cars,
televisions and other big-ticket items, while Litecoin and other smaller alt-coins could fill the smaller niche for entry to your local movie theater and the popcorn and drinks you’ll line up for at the refreshment counter. Lee remains indebted to Bitcoin for the laying the groundwork for cryptocurrencies. He makes no bones about having incorporated many Bitcoin features straight into the Litecoin protocol, and has referred to Litecoin as “silver to Bitcoin’s gold.” The intention is not to shove aside the more glittery entity but only to offer an alternative for a slightly different emphasis. Litecoin’s engagement with readers on its website and various forums is exactly in line with its intention to simply add to the democratization that all digital currencies are trying to project, even though the technical aspects of the enterprise often make it seem that it’s a game only advanced engineers can play. A Q & A section answers every question in as patient and accessible-to-the-layperson fashion as possible. It’s a refreshing experience for anyone whose eyes have ever blurred with the engineer-speak common to cryptocurrencies. That “lite,” no-pressure touch may be exactly the right amount to keep Litecoin in the mix as a viable long-term player in the digitized currency world.
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Blockchain Innovate
In a world where one new technology builds upon another and yesterday’s revolution becomes tomorrow's quaint history, innovation is in the very air we breathe. Perhaps nowhere in modern technology is that innovation revealing itself more clearly and urgently than in the world of Bitcoin. Today’s leading edge Bitcoin companies continue to shake their own foundations by bringing products and services to market that were inconceivable until one or two or ten of their people asked a question, worked a hunch, reacted to a team member’s stray comment, or otherwise shook off the chains of everyday thinking to pursue something inspired and true. Their products then become coveted by a market that didn’t even know what it lacked until innovation put it in front of them. The following section highlights companies in the Bitcoin space who continue their revolutionary ways, one innovation and inspiration after another, toward an unknown future that awaits only the imagination and industriousness of so many other players in this ever more dynamic industry .
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Innovate
The world of Bitcoin knows no borders. Indeed, central to its immense appeal is its completely international, transborder identity as a universal currency, able to be transmitted instantly, to any place where there’s a computer connection. So it is little wonder that the expertise and sheer collective brain power of Bitcoin and the larger cryptocurrency world it leads would be just as international in scope. That internationalism is on full display with Bitmain, a Chinese company headquartered in Beijing, but already making a worldwide impact after being in business less than 18 months. Company spokesperson Yoshi Goto travels the globe spreading the word and helping to open markets for his company’s multiple products.
“It’s a 24-hour place, with great flexibility built into the workplace,” he says. “We serve customers all over the world, so it only makes sense we are always open for business.” Founded in June 2013, Bitmain is no longer a new player in the fast-moving cryptocurrency world, and it has shown a growth trajectory that would be the envy of traditional industries. The company’s website describes an “IC (integrated circuit) design company … which specializes in research, development and sales for custom mining chips and miners.” The team is comprised of technologists, venture capitalists, entrepreneurs and other Bitcoin enthusiasts, many of them young, Goto says, and ready to ride an expansion wave. “It’s a 24-hour place, with great flexibility built into the workplace,” he says. Sponsored Content
“We serve customers all over the world, so it only makes sense we are always open for business.” He adds that Bitmain is primed to hit 140 employees by year’s end, with no end in sight. Bitmain’s core activities and customers are focused in the highly technical engineering world of Bitcoin mining. It has moved aggressively to pursue lower costs and more powerful equipment (those two factors work in sync) for miners who take on the challenge of solving the difficult computer algorithms that put bitcoins into their digital wallets. Bitcoin miners have in the past suffered their share of heart-and-wallet ache in this still-emerging industry. Bitmain set a standard by simply refusing to take pre-order money and yet established an admirable record of on-time and even early delivery on their product line. “We did not feel it was right to hold customers’ money before they could put our equipment to use,” says Goto.“In the Bitcoin world just as in the business world at large, time is money, so we wanted to fully respect our customers by not asking for payment until we were 100% certain of the delivery date.” Bitmain is growing both from within and by acquisition, its most recent purchase being Hashnest.com—a hash platform in the cloud that was originally named Snowball Exchange (Snowball.io).Hashnest technology has allowed Bitmain to build an even more reliable, economical and decentralized platform to serve mining enthusiasts and hosting operators worldwide, and to do so in a more secure environment. The June 1, 2014 launch of Bitmain’s Hashnest saw a rapid influx of users that accounted for about 2% of the total Bitcoin network hash rate—an astonishing sum given the far-flung international scope of Bitcoin mining.
Bitmain Offices – Beijing, China
Bitmain Factory – Shenzhen, China
Mining chips rolling off the factory line
“Our goal is to be able to consistently provide the most power-effective Bitcoin mining solutions in today’s market—and tomorrow’s market as well,” says Goto. “By every measure, whether one examines infrastructure, technical expertise or product development, Bitmain is uniquely positioned to play a leading role in helping Bitcoin and the cryptocurrency world achieve new levels of advancement. Digital currency is not only here to stay, but its future will continue to grow brighter. We are very pleased to be part of its developing history.” yBitcoin.com
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BitPay: Building The Future of Cashless Commerce
I
In 2011, when many Bitcoin startups were focusing on how to get the digital currency into the hands of individual consumers, Stephen Pair and Tony Gallippi saw their opportunity in merchant adoption. The two entrepreneurs evaluated the technology and realized that Bitcoin could create an entirely new way of doing business—one in which merchants had protection from fraud and could retain revenue lost from hefty transaction fees. They also saw that Bitcoin’s consumer adopters needed places to spend their digital cash. In a move aimed at bringing these buyers and sellers together, Pair and Gallippi founded BitPay—the world’s leading bitcoin payment processor. With BitPay, businesses gain the unique advantages of Bitcoin—the fastest, most secure, and least expensive payment system in the world—without the complication of learning a new technology. The company’s payment processing allows businesses to accept bitcoin with the convenience of immediate settlement to the currency of their choice. BitPay’s software tools, such as its website payment plug-ins and point of sale app, make adding a bitcoin payment option even easier. BitPay works with businesses ranging in size and type from small shops to large corporations.The setup process is simple and seamless. Setting up BitPay, however, was not so simple for Pair and Gallippi.When the company began three years ago, Bitcoin was only two years old, and merchants accepting it were few and far between. Pair and Gallippi faced an uphill battle. Armed with their product, the two set about pitching Bitcoin’s potential, and businesses responded. Bitcoin’s elimination of fraud and minimization of transaction costs did indeed appeal to a market seeking an alternative to the costly insecurity of credit cards and the clunkiness of cash. In little over a year, BitPay was serving more than 1,000 merchants.
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Since its debut, BitPay has matched Bitcoin’s exponential growth step for step. The company now serves more than 40,000 merchants in hundreds of countries. With offices in the United States, Argentina, and the Netherlands, BitPay has every intention of making its presence felt wherever Bitcoin is used.
“BitPay’s impact on bitcoin payment processing has not gone unnoticed. In May of this year, the startup received 30 million in venture capital funding, breaking previous records in the Bitcoin space.” BitPay has also gained a number of prominent clients in the past couple of years: electronics companies Newegg and TigerDirect, blogging giant WordPress, and sports news provider ESPN have all begun accepting bitcoin through the BitPay service.The company’s partnership with these businesses has helped to significantly raise Bitcoin’s public profile, which will be further heightened by BitPay’s sponsorship of this December’s “Bitcoin Bowl” in St. Petersburg, Florida, an event that promises to be the biggest in the digital currency’s history. BitPay’s impact on bitcoin payment processing has not gone unnoticed. In May of this year, the startup received $30 million in venture capital funding, breaking previous records in the Bitcoin space. However, BitPay is not resting on its laurels; its goal is to serve more than 1,000,000 merchants by the end of 2016. To this end, the company recently announced that its basic payment processing service and tools would be free for all users. With the cost of entry for the bitcoin payment option reduced to zero, BitPay does not expect to see Bitcoin’s breakneck merchant adoption rate slow anytime soon.
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Pioneer
The people featured in the following “Get to Know� section share a capacity for rigorous thinking and the kind of visionary outlook that has helped them lead their respective companies into the thick of the Bitcoin revolution. Behind each of their formidable intellects there also perks a restless imagination, a yearning to take hold of their world and steer it in previously uncharted directions. That spirit of entrepreneurship runs deep in the worldwide Bitcoin community, helping to define a new generation of leaders poised to create a way of commerce and a currency system worthy of these dynamic times. We invite you to meet these outstanding pioneers in the following pages of sponsored content, all of it written by yBitcoin staff after conducting interviews.
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Pioneer
VENTURE
C A P I TA L I S T
Founder and CEO Tally Capital “Building and investing in the ‘roads, bridges and tunnels’ of Bitcoin will help foster adoption” Deep into a dream career involved largely with identifying promising tech start-ups and providing just the right strategic and financial nudge to get them rolling down the entrepreneurial highway, Matthew Roszak has noticed a curious phenomenon over the last year as his involvement in the Bitcoin world deepens. “I’ve gotten to where I check Bitcoin news even before I brush my teeth in the morning,” he muses. “I think that says something.”
“Bitcoin presents a generational opportunity for entrepreneurs and investors” Roszak, who began his private equity career with Keystone Capital Partners and Advent International, is founder and CEO of Tally Capital, a venture capital firm focused on investing in the digital currency ecosystem. He first encountered Bitcoin in 2012, and then took a more serious dip by personally investing into it amidst much study a year later. His funding choices have followed, with a dozen investments now closed (BitFury, BitGo, Blockstream, ChangeTip, Kraken and
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Xapo among them) and several more expected to fund over the coming months. “Bitcoin presents a generational opportunity for entrepreneurs and investors,” he says. “It has the potential to fundamentally change how we manage, transfer and store value.” Roszak has thus expanded his direct investing circle in the Bitcoin space as a founding partner with Cryptocurrency Partners. Roszak is a lifelong Chicago resident, where he graduated in economics from small, liberal artsy Lake Forest College. “I grew up wanting to build companies, to be an entrepreneur,” he says. He followed that ambition in his typically forthright manner by founding the school’s Entrepreneurs Club, where he managed to coax the likes of Amazon’s Jeff Bezos and Crate & Barrel founder Gordon Segal to drop by and address his group. Roszak currently sees adoption and regulation as the key areas to address. “Adoption is still a challenge, as there’s lots of friction, so we need to find ways to enhance the onboarding experience and make it much easier to purchase, store and use bitcoin,” he says. “Building and investing in the ‘roads, bridges and tunnels’ of Bitcoin will help foster adoption—
think multi-sig wallets, convenient ATMs and institutional-grade exchanges. As for regulation, people think investors fear regulation, but that’s not true—investors fear uncertainty. The key is that the amount of regulation doesn’t suppress adoption and innovation (not to mention funding and jobs), and is a thoughtful and calibrated process that helps build added trust on Main Street and Wall Street.” Outside of his direct investments in the ecosystem, Roszak founded the charity BitcoinCares, and was a producer of the first ever Bitcoin documentary The Rise and Rise of Bitcoin. Roszak cites relationships as one of his supreme values, in both his personal and professional life. His longtime friend and business partner is tech mogul Flip Filipowski. “Relationships matter. To be able to do business with the people you want to do business with—that’s the ultimate luxury for an entrepreneur.”
@MatthewRoszak
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Pioneer
Marco Streng, Co-Founder and CEO, Genesis Mining Inc.
ome three years ago, Marco Streng had every intention of parlaying his lifelong fascination with math and physics into the completion of university work in his native Germany before going on to an academic or scientific career. But then Bitcoin came into his life via a link to some networking research he was conducting online. And a fateful link it was, compelling Streng to bid adieu to all his previous plans. Like many people in the Bitcoin world, Streng, co-founder and CEO of the international cryptocurrency company Genesis Mining, has an outsized intellect that helped him both gravitate to and quickly grasp the complexity, symmetry and opportunity that Bitcoin’s blockchain technology offers the world. He dove directly into mining on his home computers, first for Bitcoin and then Litecoin. The venture proved to be both lucrative and a dazzling intellectual challenge. He was 21 years old. “I had always done very well in school, earning a scholarship to university when I was 15 and attending classes there with
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much older students,” Streng says. “I was on track for a promising math and physics career, but Bitcoin was just too attractive to resist. I was going deeper and deeper into emerging networks from the mathematical side, then got very engaged in economics and monetary systems. It’s a very fast-moving field, very exciting. I finally decided to go fully into Bitcoin.”
He dove directly into mining on his home computers, first for Bitcoin and then Litecoin. The venture proved to be both lucrative and a dazzling intellectual challenge. Streng launched Genesis late in 2013 with partners Dr. Marco Krohn and Jakov Dolic. The trio has built the Munich-based company into a colossus in the mining world, establishing mining facilities in Eastern Europe, China and Iceland. (The latter’s renowned cold weather is particularly conducive to providing cheap cooling for hot-running mining computers.)
Asked about the family tree that may have been responsible for producing a math and physics prodigy, Streng comes up blank. Sometimes the apple, as the saying goes, does fall rather far from the tree. Perhaps the family’s most common ground is how hard each member works— his father in the wine industry as a vintner in the renowned German winemaking region of Franconia, his mother in the restaurant industry, and his younger brother in auto mechanics. No aunts or uncles showed any scientific bent either, he reports.
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All he knows is that math, science and the theoretical frameworks behind them always came easily to him, and he has been moving along a trail seemingly paved by those fields his entire life. Streng was born in the Franconia capital of Würzburg. Like most Germans, he speaks flawless English and is at complete ease with international business dealings, a skill set tailor-made for the Bitcoin world’s borderless ethos and structure. He marvels at his luck in finding a way of life so in sync with his passions and interests.
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“It’s quite funny that when we’re dealing with businesses not involved at all with Bitcoin, all our contacts turn off their mobile phones at 6 p.m. and never do business on weekends,” he observes. “In the Bitcoin world, we work almost all the time, every day, because every day counts! It’s not a problem at all, though. I love what I do, and when you love what you do, you can’t get enough of it.” Still, he concedes, there is such a thing as life outside Bitcoin, though it is spare. What there is of it he spends with his
girlfriend, who happily is as flexible as he is regarding the demands of his work. “I’ve told her we’ll go on holiday soon, but it’s very difficult to get much time to go away. Things move so fast that planning much ahead is just not possible. Meanwhile, we get a few hours in the evening or a day off sometimes. But almost never two in a row.”
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Pioneer
Back in the early days of globalization and tech revolutions, when management gurus and politicians were going on about “borderless commerce” and something called the “information superhighway,” they were speaking in near rhapsodic terms of a new human doing new things in new places in new, ever-faster ways. The projected model was of a “planetary citizen,” born near a millennium’s end, who would be nimble and flexible enough to be at home in multiple cultures, speak multiple languages, and be hyper-motivated by the intensity of competition from around the globe. He or she would also be whip-smart from all the information available instantaneously in the computer age. A person, in other words, very much like Changpeng Zhao.
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Zhao, known by his initials moniker “CZ” to friends and colleagues, is the chief technology officer at OKCoin, a Beijing, China-based cryptocurrency exchange that has torn through the borderless Bitcoin world with a rapid-fire multi-national approach, attracting both talent and capital from around the globe since its founding in 2013. Zhao himself exemplifies all the most prominent features of a citizen of the world, which is an increasingly common perspective in the cryptocurrency sphere. Born and raised in Jiang Su, China until the age of 12, Zhao first immigrated to Vancouver with his family (older sister and parents), where he graduated from high school. He later moved to Montreal, where he went to college. While there,
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Pioneer
His team hails from China, Japan, USA, UK and Costa Rica. Their love for hard work and long hours is typical in the cryptocurrency world, helping to foster, he says, a sense of cohesiveness and motivation that has driven the company’s continuous and robust growth.
he managed to add some French (still Quebec’s only official language) to his fluent English and Chinese. He later added what he modestly calls “taxicab Japanese” (enough to transact with cabbies and restaurant servers) after beginning his post-college career in Tokyo developing software for the stock exchange. His career later sent him to New York City with Bloomberg LP, to Shanghai as co-founder and president of Fusion Systems in China, back again to Tokyo and London as head of development for BlockChain.info, then to his current post in Beijing. That takes care of the planetary citizen part. Zhao has lived and worked in multiple world centers of commerce on large global projects. And he’s all of 37 years old. OKCoin founder and CEO Star Xu plucked Zhao away from BlockChain.info (an amicable departure, with all parties on friendly terms) to have him primarily lead the company’s technology effort, in addition to its international marketing program. He heads a steadily growing crew that now numbers 150 employees. Ninety of them are technical, roughly a dozen from abroad. His team hails from China, Japan, USA, UK and Costa Rica. Their love for hard work and long hours is typical in the cryptocurrency world, helping to foster, he says, a sense of cohesiveness and motivation that has driven the company’s continuous and robust growth. Of his decision to come on board, he says: “I could see that OKCoin has all the elements to become one of the leading entities within the Bitcoin landscape. We have a great group of young professionals, a strong product development team and a clear vision on where we’re going. What drives all of us is our belief that we can become the Google of the Bitcoin arena. There’s not a person here who isn’t working toward that goal.” Before that happens, of course, Bitcoin must make far more serious inroads into the general population than it has thus far. But Zhao sees that occurring as well. “I firmly believe Bitcoin
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can be compared to the Internet during the early to mid 1990s. And like the Internet then, Bitcoin is poised for dramatic growth over the next two decades. That’s because it has the ability to reshape the way our society functions. The Internet disrupted the way we communicate, making it faster and exponentially more efficient. Bitcoin can do the same for financial transactions that are a part of everyone’s daily life.” Zhao himself tends to work 14-hour days, living a spartan, job-oriented life made slightly easier to manage by the fact that his wife and children (a daughter age 11 and a son 9), live in Tokyo, a two-and-a-half-hour hop across land and seas that Zhao makes every weekend. He is typically forthright about the reasons for the separation: “The air, food and education system in China isn’t as good as Japan’s, so for now, we do it this way.” His wife, also native Chinese, has lived and worked in Japan since her own teen years. An outdoors fanatic, Zhao misses the resplendent skiing, snowboarding, hiking, windsurfing and running opportunities previously available to him in say, Vancouver. He settles now mostly for dumbbell workouts indoors. When the air magically clears from Beijing’s famously troubled skies, he’ll sneak a quick run. Vacations, however, do afford him trips to recreation-focused getaways. Having a high profile, demanding job that carries him along a variety of digital highways is certainly nothing new to Zhao’s experience. This is a man who has traversed an ocean or three in his still youthful life, and plied his trade on multiple continents that continue to call on his many talents for engineering and entrepreneurialism. Where Zhao and his company go from here would appear to be limited only by imagination. Zhao’s vision has proven capacious enough in him to continue forging ahead in new, ever more expansive directions.
OKCoin Corporate Headquarters – Beijing, China
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Pioneer
“I like to see people make use of what I build,” says Eric Lombrozo, in about as succinct a one-sentence self-description as you’ll ever hear from a corporate CEO. Lombrozo was introduced to computers at an early age and didn’t take long to begin programming them. He was 7 years old. “About a year later, when the original Mac was released, my dad brought one home. He showed me how to use it and gave me a programming manual. I was instantly captivated by these amazing machines. I’ve been passionate about computer technology ever since.” Fast forward to the present, with Lombrozo the co-founder, co-CEO, and chief technology officer of Ciphrex Corporation, a company that builds premier infrastructure products for Bitcoin and other decentralized consensus networks. He teamed up with his father, Enrique Lombrozo, an MIT graduate with extensive business experience, to co-found Ciphrex in 2013. “The cryptocurrency movement is at the confluence of computer science, cryptography and cybersecurity,” says Eric. “I’ve spent a good part of my work life acquiring and developing knowledge in those three fields, and we have positioned Ciphrex to take advantage of that.” A friend at a party introduced Lombrozo to Bitcoin in 2011. Intrigued by what he
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heard, he went home and over the next weeks applied the considerable repertoire of his nearly 15 years as a prominent software engineer to hack away at the protocol and determine why it ultimately would not work. What he confronted instead was “a breakthrough that started an entire movement,” he says. “Satoshi Nakamoto (Bitcoin’s pseudonymous inventor) deserves serious respect for having solved a major problem with computer networks—namely, how to establish decentralized consensus and use that to create a peer-to-peer money transfer system. It is very admirable that he was able to implement the idea and prove it out. That has assured him a place in history.”
“Bitcoin wallets don’t actually store bitcoins.” Lombrozo has been a longtime member of the Bitcoin core development group and an active participant in the open source effort behind the Bitcoin reference implementation—the software comprising the backbone of the Bitcoin network. “I really enjoy my time with the core developer group,” he says. “Fun people working on a great cause.” As remarkable as he believes Nakamoto’s invention is, Lombrozo respectfully critiques the original protocol’s shortcomings and uses that critique to craft improvements that have directly fed into Ciphrex.
“There are some flaws in the design of the Bitcoin architecture that make it tedious, slow, or risky to make the big changes you sometimes need or would like,” he says. “Our focus at Ciphrex is to push the state of the art in decentralized consensus and blockchain technology and build the infrastructure that will ultimately make these technologies practical and accessible to everyone.” Among the most immediate needs are tools giving people easier and better control over their bitcoins. One such tool is mSIGNATM, a next-generation multisignature wallet available for download at Ciphrex’s website (https://ciphrex.com). For individuals, mSIGNATM offers an easy-to-use Bitcoin wallet. For businesses, it provides an enterprise-grade foundation for Bitcoin application development. Lombrozo is quick to point out that strictly speaking, the term “wallet” is a misnomer. “Bitcoin wallets don’t actually store bitcoins. The blockchain stores bitcoins. Bitcoin wallets are really tools to help you manage cryptographic keys and view your balances and transaction history.” Ciphrex’s multi-sig platform allows users to develop comprehensive security policies, and it automatically manages the low-level cryptomechanisms enforcing them. “Do you want five different levels of authentication in five different computers in five different cities?” Lombrozo asks. “Ciphrex’s platform easily supports this. You can configure security policies that are like the Pentagon, so that even if the
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first lines of defense are breached, the others will hold. Our platform allows for multiple checks and balances at the institutional level so single points of failure can be avoided.” Lombrozo is also a contributor to the Ripple and Ethereum open source projects. (Ripple and Ethereum are other payment networks that use and extend many of the ideas that Bitcoin pioneered.) Moreover, Ciphrex’s wallet mSIGNATM was selected by the Ethereum project for its crowdfunding campaign, being the only wallet that met the strict security and usability requirements. The campaign raised nearly 30,000 bitcoins, worth over $10 million at the time of this
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“Our focus at Ciphrex is to push the state of the art in decentralized consensus and blockchain technology and build the infrastructure that will ultimately make these technologies practical and accessible to everyone.” writing. The Ethereum project continues to use Ciphrex’s software to protect and manage these funds. “The way we see it, the Bitcoin of today is like the Wright brothers’ early aircraft—it’s a proof-of-concept. It took several design iterations before we were able to transport hundreds of passengers across the ocean at once…or fly supersonic. Eventually, decentralized consensus protocols will enable anyone
anywhere in the world to contribute resources online, from computing power to storage, connectivity, content, code, contracts on property, goods, and services. And these resources will be instantly traded peer-to-peer, without middlemen, using this technology we’re creating today.”
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THE LAST WORD FROM OUR FOUNDER/EDITOR-IN-CHIEF
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We launched yBitcoin in the fall of 2013 with the express purpose of helping bring Bitcoin to the masses. So it is with great pride that we observe (and enthusiastically support) the debut of the Bitcoin St. Petersburg Bowl, where this special edition of the magazine is being distributed to college football fans who will have a lot of opportunities during game weekend to learn about Bitcoin and its historic entrance in the world economy. To our Bitcoin Bowl readers, we say “Welcome!” You have now joined readers from nearly 140 countries who have responded to our dispatches about Bitcoin and the world of digital currency. It’s a world that is intriguing, intellectually stimulating, and holds forth the kind of promise that has previously been spoken of with reference to large-scale cultural transformations such as the printing press and manned flight. Given Bitcoin’s pioneering ways, we’ve also experienced first-hand the so-called “Wild West of Finance,” as we’ve watched bitcoin prices explode to more than 12 times their value a year ago, only to correct more than 60 percent below their high. We’ve seen both the meteoric rise and spectacular collapse of Bitcoin institutions as the digital currency’s user base grew 500 percent, and established companies such as Dell, Expedia, PayPal and now Microsoft climbed on board to embrace the technology. Along the way, we’ve also been honored to welcome 90+ advertising partners, from bootstrapping start-ups to multibillion-dollar conglomerates, who have joined in our mission to educate the world about the wonders of decentralized money. While we could not be more pleased with what we’ve accomplished, we’ve also realized that our mission includes much more than a magazine. We’ve come to see our role as an education leader for an entire revolution that is only beginning with Bitcoin, and we must be prepared to engage potential users and bring them along with us wherever they are. That means an expanded focus, beginning with the founding of BTC Media, a media group that will be bringing Bitcoin education to the masses via print and online media, events, video and more. To say that we are thrilled with all that is happening in the Bitcoin world qualifies as one of the more dramatic understatements of my life. We are energized, heartened and very, very excited to be playing a role in helping to shape Bitcoin’s future. Please stay tuned and consider joining us in whatever way might work for you. Bitcoin is, and will always be, a decentralized team effort. And please know with full confidence that BTC Media and the yBitcoin team will be working tirelessly to ensure that this will be the most inclusive and productive revolution the technology world has ever seen.
David F. Bailey david@ybitcoin.net
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