About Bitcoin (By Coindesk)
HOW MANY CONTRACTS MAY I PURCHASE?
There is no limit to how many contracts you may purchase.
AFTER I PURCHASE, HOW LONG UNTIL I AM MINING?
After making your purchase, you will be able to look at the start and ending contracts date.
HOW DO I COLLECT MY BITCOIN?
We send your bitcoin directly to your bitcoin address.
DO YOU MINE WITH A MINING POOL?
Our miners mine with GHash. GHash is the largest bitcoin mining pool and collectively mines at over 8,000 TH/s (8 Petahashes/second).
WHAT HAPPENS AFTER MY CONTRACT EXPIRES?
At the end of the contract term you are under no obligation to renew. Any offer of renewal will be based upon the current rate at that time.
WHERE CAN I EXCHANGE BITCOIN FOR MONEY?
You can exchange bitcoin for money either in person or online. There are numerous website sites that allow you can exchange bitcoin for money, including: bitstamp.net, coinbase.com, and localbitcoins.com.
Please note: These are 3rd party businesses and we cannot endorse or guarantee their services.
About Bitcoin (By Coindesk)
What is Bitcoin?
Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros – they’re produced by lots of people running computers all around the world, using software that solves mathematical problems. It’s the first example of a growing category of money known as cryptocurrency.
What makes it different from normal currencies?
Bitcoin can be used to buy things electronically. In that sense, it’s like conventional dollars, euros, or yen, which are also traded digitally.
However, bitcoin’s most important characteristic, and the thing that makes it different to conventional money, is that it is decentralized. No single institution controls the bitcoin network. This puts some people at ease, because it means that a large bank can’t control their money.
Who created it?
A software developer called Satoshi Nakamoto proposed bitcoin, which was an electronic payment system based on mathematical proof. The idea was to produce a currency independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees.
Who prints it?
No one. This currency isn’t physically printed in the shadows by a central bank, unaccountable to the population, and making its own rules. Those banks can simply produce more money to cover the national debt, thus devaluing their currency.
Instead, bitcoin is created digitally, by a community of people that anyone can join. Bitcoins are ‘mined’, using computing power in a distributed network. This network also processes transactions made with the virtual currency, effectively making bitcoin its own payment network.
What are its characteristics?
Bitcoin has several important features that set it apart from normal fiat currencies.
1. It’s decentralized
The bitcoin network isn’t controlled by one central authority. Every machine that mines bitcoin and processes transactions makes up a part of the network, and the machines work together. That means that, in theory, one central authority can’t tinker with monetary policy and cause a meltdown – or simply decide to take people’s bitcoins away from them, as the Central European Bank decided to do in Cyprus in early 2013. And if some part of the network goes offline for some reason, the money keeps on flowing.
2. It’s easy to set up
Conventional banks make you jump through hoops simply to open a bank account. Setting up merchant accounts for payment is another Kafkaesque task, beset by bureaucracy. However, you can set up a bitcoin address in seconds, no questions asked, and with no fees payable.
3. It’s anonymous
Well, kind of. Users can hold multiple bitcoin addresses, and they aren’t linked to names, addresses, or other personally identifying information. However…
4. It’s completely transparent
…bitcoin stores details of every single transaction that ever happened in the network in a huge version of a general ledger, called the block chain. The block chain tells all. If you have a publicly used bitcoin address, anyone can tell how many bitcoins are stored at that address. They just don’t know that it’s yours. There are measures that people can take to make their activities more opaque on the bitcoin network, though, such as not using the same bitcoin addresses consistently, and not transferring lots of bitcoin to a single address.
5. Transaction fees are miniscule
Your bank may charge you a £10 fee for international transfers. Bitcoin doesn’t.
6. It’s fast
You can send money anywhere and it will arrive minutes later, as soon as the bitcoin network processes the payment.
7. It’s non-repudiable
When your bitcoins are sent, there’s no getting them back, unless the recipient returns them to you. They’re gone forever.
So, bitcoin has a lot going for it, in theory. But how does it work, in practice? Read more to find out how bitcoins are mined, what happens when a bitcoin transaction occurs, and how the network keeps track of everything.
Why use bitcoin?
Bitcoin is a relatively new form of currency that is just beginning to hit the mainstream, but many people still don’t understand why they should make the effort to use it.
Why use bitcoin? Here are 10 good reasons why it’s worth taking the time to get involved in this virtual currency.
why use bitcoinWhen you pay a cheque from another bank into your bank, the bank will often hold that money for several days, because it can’t trust that the funds are really available. Similarly, international wire transfers can take a relatively long time. Bitcoin transactions, however, are generally far faster. Transactions can be instantaneous if they are “zero-confirmation” transactions, meaning that the merchant takes on the risk of accepting a transaction that hasn’t yet been confirmed by the block chain. Or, they can take around 10 minutes if a merchant requires the transaction to be confirmed. That is far faster than any inter-bank transfer.
What’s that you say? Your credit card transactions are instantaneous too? Well, that’s true. But your merchant (and possibly you) pay for that privilege. Some merchants will charge a fee for debit card transactions too, as they have to pay a ‘swipe fee’ for fulfilling them. Bitcoin transaction fees are minimal, or in some cases free.
Central governments can’t take it away
Remember what happened in Cyprus in March 2013? The Central Bank wanted to take back uninsured deposits larger than $100,000 to help recapitalize itself, causing huge unrest in the local population. It originally wanted to take a percentage of deposits below that figure, eating directly into family savings. That can’t happen with bitcoin. Because the currency is decentralized, you own it. No central authority has control, and so a bank can’t take it away from you. For those who find their trust in the traditional banking system unravelling, that’s a big benefit.
There are no chargebacks
Once bitcoins have been sent, they’re gone. A person who has sent bitcoins cannot try to retrieve them without the recipient’s consent. This makes it difficult to commit the kind of fraud that we often see with credit cards, in which people make a purchase and then contact the credit card company to make a chargeback, effectively reversing the transaction.
People can’t steal your information from merchants
Credit cardsThis is a big one. Most online purchases today are made via credit cards, but in the 1920s and ’30s, when the first precursors to credit cards appeared, the Internet hadn’t yet been conceived. Credit cards were never supposed to be used online and are insecure. Online forms require you to enter all your secret information (the credit card number, expiry date, and CSV number) into a web form. It’s hard to think of a less secure way to do online business. This is why credit card numbers keep being stolen. Bitcoin transactions, however, don’t require you to give up any secret information. Instead, they use two keys: a public key, and a private one. Anyone can see the public key (which is actually your bitcoin address), but your private key is secret. When you send a bitcoin, you ‘sign’ the transaction by combining your public and private keys together, and applying a mathematical function to them. This creates a certificate that proves the transaction came from you. As long as you don’t do anything silly like publishing your private key for everyone to see, you’re safe.
It isn’t inflationary
The problem with regular fiat currency is that governments can print as much of it as they like, and they frequently do. If there are not enough US dollars to pay off the national debt, then the Federal Reserve can simply print more. If the economy is sputtering, then the government can take newly created money and inject it into the economy, via a much-publicised process known as quantitative easing This causes the value of a currency to decrease. If you suddenly double the number of dollars in circulation, then that means there are two dollars where before there was only one. Someone who had been selling a chocolate bar for a dollar will have to double the price to make it worth the same as it was before, because a dollar suddenly has only half its value. This is called inflation, and it causes the price of goods and services to increase. Inflation can be difficult to control, and can decrease people’s buying power. Bitcoin was designed to have a maximum number of coins. Only 21 million will ever be created under the original specification. This means that after that, the number of bitcoins won’t grow, so inflation won’t be a problem. In fact, deflation – where the price of goods and services falls – is more likely in the bitcoin world.
It’s as private as you want it to be
Sometimes, we don’t want people knowing what we have purchased. Bitcoin is a relatively private currency. On the one hand, it is transparent – thanks to the block chain, everyone knows how much a particular bitcoin address holds in transactions. They know where those transactions came from, and where they’re sent. On the other hand, unlike conventional bank accounts, no one knows who holds a particular bitcoin address. It’s like having a clear plastic wallet with no visible owner. Everyone can look inside it, but no one knows whose it is. However, it’s worth pointing out that people who use bitcoin unwisely (such as always using the same bitcoin address, or combining coins from multiple addresses into a single address) risk making it easier to identify them online.
You don’t need to trust anyone else
In a conventional banking system, you have to trust people to handle your money properly along the way. You have to trust the bank, for example. You might have to trust a third-party payment processor. You’ll often have to trust the merchant too. These organizations demand important, sensitive pieces of information from you. Because bitcoin is entirely decentralized, you need trust no one when using it. When you send a transaction, it is digitally signed, and secure. An unknown miner will verify it, and then the transaction is completed. The merchant need not even know who you are, unless you’ve arranged to tell them.
You own it
There is no other electronic cash system in which your account isn’t owned by someone else. Take PayPal, for example: if the company decides for some reason that your account has been misused, it has the power to freeze all of the assets held in the account, without consulting you. It is then up to you to jump through whatever hoops are necessary to get it cleared, so that you can access your funds. With bitcoin, you own the private key and the corresponding public key that makes up a bitcoin address. No one can take that away from you (unless you lose it yourself, or host it with a web-based wallet service that loses it for you).
You can create your own money
In spite of the amazing advances in home office colour printing technology, most national governments take a fairly dim view of you producing your own money. With bitcoin, however, it is encouraged. You can certainly buy bitcoins on the open market, but you can also mine your own if you have enough computing power. After covering your initial investment in equipment and electricity, mining bitcoins is simply a case of leaving the machine switched on, and the software running. And who wouldn’t like their computer to earn them money while they sleep?
How to store your bitcoins
Bitcoin wallets store the private keys that you need to access a bitcoin address and spend your funds. They come in different forms, designed for different types of device. You can even use paper storage to avoid having them on a computer at all. Of course, it is very important to secure and back up your bitcoin wallet.
Bitcoins are a modern equivalent of cash and, every day, another merchant starts accepting them as payment. We know how they are generated and how a bitcoin transaction works, but how are they stored? We store fiat cash in a physical wallet, and bitcoin works in a similar way, except it’s normally digital.
Bitcoin paper, coin and USB wallets
Well, to be absolutely accurate, you don’t technically store bitcoins anywhere. What you store are the secure digital keys used to access your public bitcoin addresses and sign transactions. This information is stored in a bitcoin wallet.
Bitcoin wallets come in a variety of forms. There are four main types of wallet: desktop, mobile, web and hardware. Here’s how they work.
If you have already installed the original bitcoin client (Bitcoin-Qt), then you are running a wallet, but may not even know it. In addition to relaying transactions on the network, this software also enables you to create a bitcoin address for sending and receiving the virtual currency, and to store the private key for it. There are other desktop wallets too, all with different features. Multibit runs on Windows, Mac OSX, and Linux. Hive is an OSX-based wallet with some unique features, including an app store that connects directly to bitcoin services. Some desktop wallets are tailored for security: Armory falls into this category. Others focus on anonymity: DarkWallet – a product still in development – will use a lightweight browser plug-in to provide services including coin ‘mixing’ in which users’ coins are exchanged for others’, to prevent people tracking them.
Desktop-based wallets are all very well, but they aren’t very useful if you are out on the street, trying to pay for something in a physical store. This is where a mobile wallet comes in handy. Running as an app on your smartphone, the wallet can store the private keys for your bitcoin addresses, and enable you to pay for things directly with your phone. In some cases, a bitcoin wallet will even take advantage of a smartphone’s near field communication (NFC) feature, enabling you to tap the phone against a reader and pay with bitcoins without having to enter any information at all.
One common feature of mobile wallets is that they are not full bitcoin clients. A full bitcoin client has to download the entire bitcoin block chain, which is always growing and is multiple gigabytes in size. That could get you into a heap of trouble with your mobile service provider, who will be only too happy to send you a hefty bill for downloading over a cellular link. Many phones wouldn’t be able to hold the block chain in their memory, in any case.
Instead, these mobile clients are often designed with simplified payment verification (SPV) in mind. They download a very small subset of the block chain, and rely on other, trusted nodes in the bitcoin network to ensure that they have the right information.
Examples of mobile wallets include the Android-based Bitcoin wallet, Mycelium, and Blockchain (which keeps your bitcoins encrypted on your phone, and backed up on a web-based server). Some have special features unique to them. Kipochi, for example, lets people use their phone numbers as their bitcoin addresses. Apple is notoriously paranoid about bitcoin wallets. Coinbase had its mobile wallet app pulled from the app store altogether in November 2013, and this was followed in February 2014 by removal of Blockchain.info’s iOS app. You can still use bitcoin using a browser on the iPhone, and CoinPunk are developing such a solution, which Apple cannot ban.
Web-based wallets store your private keys online, on a computer controlled by someone else and connected to the Internet. Several such online services are available, and some of them link to mobile and desktop wallets, replicating your addresses between different devices that you own.
One advantage of web-based wallets is that you can access them from anywhere, regardless of which device you are using. However, they also have one major disadvantage: unless implemented correctly, they can put the organisation running the website in charge of your private keys – essentially taking your bitcoins out of your control. That’s a scary thought, especially if you begin to accrue lots of bitcoins. Coinbase, an integrated wallet/bitcoin exchange operates its online wallet worldwide, but only allows people to buy bitcoins in the US. Blockchain also hosts a web-based wallet, and Strongcoin offers what it calls a hybrid wallet, which lets you encrypt your private address keys before sending them to its servers – encryption is carried out in the browser.
Hardware wallets are currently very limited in number. These are dedicated devices that can hold private keys electronically and facilitate payments. Trezor and Mycelium currently have wallets in development, but, as of February 2014 neither of them had delivered finished products. Announced on February 4th 2014, though, is the Nymi sports wristband from Boinym, which can act as a bitcoin wallet and uses your heart rhythm as a security key.
Are bitcoin wallets safe?
It depends how you manage them. The private keys stored in your wallet are the only way to access the transaction data stored in a bitcoin address. If you lose them, you lose your bitcoins. So, they are only safe in so far as no one else can access them, and they don’t get lost.
How can I secure my wallet?
There are several ways to make your bitcoin wallet more secure:
One way to protect your wallet from prying eyes is to encrypt it with a strong password. This makes it difficult to access your wallet, but not impossible. If your computer is compromised by malware, thieves could log your keystrokes to find your password.
Back it up
If you have your private keys stored in one wallet, then if you mislay that wallet or it gets corrupted, then you will lose your keys. Backing up your wallet makes a copy of your private keys, but it’s important to back up your whole wallet. Some addresses are used to store change from transactions, and may not be shown to you by default. Back the whole thing up in several different places, and keep them safe from prying eyes.
Take it offline
Safe with cash insideIf you are too nervous to store your bitcoin keys digitally, for fear that they may be stolen by hackers, there is another option: ‘cold storage’. Cold storage wallets store private bitcoin keys offline, so that they can’t be stolen by someone else on the Internet.
It’s a good idea to use cold storage for the bulk of your bitcoin fortune, and transfer just a little to separate bitcoin addresses in a ‘hot’ wallet with an Internet connection, making it easy to spend. That way, even if your mobile phone is lost, or the hot wallet on your notebook PC is erased during a hard drive crash, only a small amount of bitcoin cash is at risk.
Many software bitcoin wallets feature a cold storage option. Or, you could go completely analog, and simply use paper for offline storage in the form of a ‘paper wallet’.
There are several sites offering paper bitcoin wallet services. They will generate a bitcoin address for you and create an image containing two QR codes: one is the public address that you can use to receive bitcoins; the other is the private key, which you can use to spend bitcoins stored at that address.
What can you buy with bitcoins?
More merchants are beginning to accept bitcoins in exchange for goods and services, although the best place to find these merchants is marketplaces and aggregator sites that gather large numbers of supporting establishments together at once.
Spending your bitcoins
What can you buy with bitcoinsWe’ve told you how to mine bitcoin, and how to buy it. However you choose to acquire your digital currency, at some point you’re going to want to spend it. But where can you go to exchange your bitcoins for goods and services?
There are several different types of sites – online and off – that you can go to spend your bitcoin, as described in this guide. So, what can you buy with bitcoins?
Buying physical goods with bitcoin
Although bitcoin is well-suited to purchasing services online, that doesn’t mean it can’t be used for physical goods too. There are various sites that sell physical products for bitcoin – although they mostly accept payments over the Internet. Even so, a growing number of standard high-street businesses are accepting bitcoin paid for on the spot via a digital wallet on a mobile device.
Some of the directories that exist online provide a long list of merchants that accept bitcoin. However, these are not necessarily 100% up-to-date and you may discover that these merchants have tested bitcoin as a payment option at one point, but no longer use it. Or they may be selling a very limited range of goods in a particular geographical area.
Of the sites that are left, the pickings are rather hit-and-miss. You may sometimes feel like you are looking for a place that accepts your bitcoins just for the sake of spending them. In an ideal world, you would look for a product first and expect the merchant to accept the currency as a matter of course. We are a long way from that utopia yet.
That said, there are options for people who don’t wish to pick their way through hundreds of listings just to find products vaguely approximating those they want. There are some more general e-commerce sites selling multiple products in a particular category and offering cross-category sales.
Overstock websitePerhaps the biggest of all is Overstock, which offers everything from furniture to jewellery to electronics. Prices are in dollars but there is an option to pay in BTC on the checkout page. They offer international shipping to over 100 countries and some US territories. For now, though, bitcoin purchases are limited to US buyers. That is likely change in the near future.
Popular e-commerce platform Shopify added a bitcoin payment option for its sellers in late 2013. With a base of over 70,000 online stores, the number of goods that can potentially be purchased with bitcoin suddenly expanded significantly. Strangely, finding them is not currently very easy, because the Shopify.com marketplace page no longer exists, however there is a list of 75 stores now accepting BTC on their blog.
TigerDirect, the online retailer of computers and consumer electronics also now accepts payments in bitcoin. This is handy, perhaps, for miners who can buy kit with coin they have mined.
Bitcoinshop.us offers products from air-conditioners to watches, all priced in bitcoin, for those wanting to make a purchase. The catch: it only ships to people in the continental US.
BitcoinStore.com sells electronics and ships internationally, but you should check its shipping rates for your country before ordering.
Memory Dealers carries a range of networking hardware equipment and computer memory. It has been a ‘bitcoin believer’ from the beginning.
The UK’s Theatre Tickets Direct has recently started accepting bitcoin, offering a ticket booking service for mostly London shows, such as West End theatre and musicals.
CoinDesk frequently discovers interesting local sellers: Keystone Pet Place will handle all your pet’s needs, The Java Nomad will ship you fresh coffee beans from Bali and Persian Shoes will sell you handmade shoes and bags from Iran. Several local, niche merchants accept bitcoin only and will not/cannot accept fiat currency.
The good news is that there are hundreds of small retailers accepting bitcoin too. Coinmap, Spendbitcoins.com and UseBitcoins.info keep up-to-date databases of these shopping destinations.
Bitcoin gift cards
eGifter cardsIf you can’t find any physical stores that accept bitcoin directly, the easiest way to turn your digital currency into ‘real-world’ goods and services is via gift cards. Plenty of gift card businesses accept bitcoins and these cards can be used at a surprising number of major retailers like Walmart, Amazon, Target and Nike. For US customers, companies like Gyft, eGifter, iTradeBTC and GiftCardZen have the widest range of options, and there are also store-specific card sellers like GiftcardBTC (for Amazon.com gift cards).
Note: many gift cards are only valid in their country of issue, which is usually the United States (although overseas shoppers may still make purchases with gift cards from US retailers in many cases). Other countries have their own options; for example, Australians can see what’s available at Bitcoin Gift Cards. You will usually pay a little more to trade your bitcoins for gift cards (around 5-10% is normal) but on the upside, you don’t need to deal with exchanges or transfers.
Some sites, like Europe’s BitCC, will exchange bitcoins for disposable prepaid debit cards.
Physical establishments that accept bitcoin
The Old Fitzroy pub, Australia
Source: The Old Fitzroy Pub
Bars and restaurants that accept bitcoin remain the exception, rather than the rule. Luckily they’re usually great places to go. If you’re determined to spend your digital currency on a plate of fish and chips, or a cold beer, there are easy ways to find out where you can go.
Bitcoin.Travel is a respected site, offering a mappable list of accommodation, apartments, attractions, bars, and beauty salons around the world. Coinmap also maintains a worldwide database of establishments.
If you’re in London, UK, the Pembury Tavern is well known, as is the Old Fitzroy pub if you’re in Sydney, Australia. If you make it to Tokyo, you’ll find local bitcoiners dining out on bitcoin at The Pink Cow.
When it comes to food and drink, there are other ways to spend bitcoins, even if a restaurant doesn’t directly accept them.
Foodler, a site enabling you to browse and order delivery and take-out meals from restaurants across the globe, has over 13,000 restaurants in 3,150 cities on its books. You can use bitcoins to pay for ‘Foodler credits’, which can be used at any of the restaurants.
Interestingly, we are starting to see nascent clusters of bitcoin-friendly establishments. For example, the Bitcoin-Kiez in Berlin is persuading local establishments in small numbers along the Graefekiez there to support bitcoin.
Bitcoin gambling sites
One of the biggest destinations for people’s bitcoin is online gambling. It’s fast, with an immediate return (or loss) and bets can start relatively small. When done properly, it’s also easy to prove that bets are fair – either by tracking payouts in the block chain, or by using external proof.
SatoshiDice has been the most popular online gambling site. Users mail money to one of a set of addresses, and in return they get a payout based on the probability of winning. Others include PeerBet – which accepts a host of cryptocurrencies other than bitcoin – plus Just-Dice and BetCoin Dice.
If you prefer your sound money in slightly heavier form, Amagi Metals has been trading bitcoins for precious metals since 2012. Based in Denver, the company sells bullion via its e-commerce site to almost anywhere in the world and says bitcoin is a great tool for promoting interest in financial responsibility.
Online bitcoin marketplaces and auctions
Online marketplaces are another way to spend bitcoins. They are effectively clearing houses that enable anyone to sell products to anyone else.
It all started with Silk Road, an underground marketplace that enabled people to sell illicit goods and services using bitcoin. The site, only accessible via the Tor anonymous browsing system, capitalized on the currency’s ability to facilitate anonymous trades (if you know what you’re doing).
Silk RoadSilk Road got shut down in October 2013 and promptly ‘returned’ a month later. If that’s not your game, there are more legitimate bitcoin marketplaces where you can spend your coins. Most of them are still in the fledgling stage and have a limited range of goods to offer, though.
Bitcoin Market and Cryptothrift are two category-driven sites, albeit sparsely populated. Flibbr allows you to search listed products by name. Reddit offers a subthread called Bitmarket, that allows people to list their goods as Reddit posts.
There are other, specialist sites popping up. BitPremier will sell your high-end luxury items for bitcoins, using an escrow service. It has an impressive selection of high-end listings including luxury cars, yachts, condos, antiques, and artworks. There is even an island for sale.
Online bitcoin services
Perhaps not surprisingly for a movement that requires a fair bit of technical know-how, bitcoin has garnered a lot of support from the online services community. Hosting companies in particular are willing to give your website or server a home on the Internet in exchange for bitcoin.
The bitcoin wiki has a good list. WordPress is among the most visible and popular sites, and will offer you a blogging presence online for payment in cryptocurrency. You can also go to BitcoinCodes to buy credits for Steam, Spotify, XBoxLive, PlayStation Network and AirVPN. Namecheap accepts bitcoin directly as payment for domain services. If you want a little more privacy online, several VPN (virtual private network) providers now accept only bitcoin after being blocked by credit card companies and PayPal.
Tipping, or donating bitcoin to a cause
Feel like giving your bitcoins away to a good cause, or to reward an interesting comment? Here’s The Sri Lanka Campaign for Peace and Justice, a London-based NGO that campaigns for “justice, human rights and reconciliation” in Sri Lanka, and Sean’s Outpost – a homeless shelter in Pensacola, Florida.
Is bitcoin legal?
Bitcoin is of interest to law enforcement agencies, tax authorities, and legal regulators, all of which are trying to understand how the cryptocurrency fits into existing frameworks. The legality of your bitcoin activities will depend on who you are, where you live, and what you are doing with it.
Bitcoin has proven to be a contentious issue for regulators and law enforcers, both of which have targeted the digital currency in an attempt to control its use. We are still early on in the game, and many legal authorities are still struggling to understand the cryptocurrency, let alone make laws around it. Amid all this uncertainty, one question stands out: is bitcoin legal?
The answer is, yes, depending on what you’re doing with it.
Read on for our guide to the complex legal landscape surrounding bitcoin. Most of the discussion concerns the US, where many of the legal dramas are currently playing out.
What are the concerns about bitcoin?
is bitcoin legalGovernment agencies are increasingly worried about the implications of bitcoin, as it has the ability to be used anonymously, and is therefore a potential instrument for money laundering. In particular, law enforcers seem to be concerned about the decentralized nature of the currency.
As early as April 2012, the FBI published a document highlighting its fears around bitcoin specifically, drawing a distinction between it and centralized digital currencies such as eGold and WebMoney. It voiced concerns that while US-based exchanges are regulated, offshore services may not be, and could be a haven for criminals to use bitcoin for illicit activities without being traced.
Bitcoin was the only form of currency accepted on Silk Road, an anonymous marketplace that was only accessible over the TOR anonymous browsing network, and which was closed by the FBI in October 2013. Silk Road was commonly used to sell goods that are illegal in many countries, including narcotics. This prompted US Senator Charles Schumer to call for the site to be shut down, explicitly linking it to bitcoin, which he called a “surrogate currency”. The US Drug Enforcement Administration seized bitcoins from a US resident for purchasing a controlled substance in June 2013.
Who regulates it?
Regulators will vary on a per-country basis, but you can expect to see national financial regulators interested in bitcoin and other virtual currencies, potentially along with regional regulators at a sub-country level.
In the US, the Financial Crimes Enforcement Network (FinCEN), which is an agency within the US Treasury Department, took the initiative. It published guidelines about the use of virtual currencies. FinCEN’s March 18, 2013 guidance defined the circumstances under which virtual currency users could be categorized as money services businesses (also commonly known as money transmitting businesses or MTBs). MTBs must enforce Anti-Money Laundering (AML) and Know Your Client (KYC) measures, identifying the people that they’re doing business with.
The US Commodity Futures Trading Commission (CTFC), which looks after financial derivatives, hasn’t announced regulation yet, but has made it clear that it could if it wanted to.
The US Securities and Exchange Commission (SEC) hasn’t issued solid regulations on virtual currencies, but its Office of Investor Education and Advocacy published an investor alert to warn people about fraudulent investment schemes involving bitcoin. In particular, it warned of Ponzi schemes, after charging Texas resident Trendon T Shavers (aka ‘pirateat40’), founder and operator of Bitcoin Savings and Trust, with allegedly raising 700,000 bitcoins by promising investors up to 7% weekly interest.
The SEC case has forced the legislative branch of government to consider bitcoin’s legal status. Shavers had claimed that he could not be prosecuted for securities fraud, as bitcoin wasn’t money. However, Judge Amos Mazzant issued a memorandum arguing that bitcoin can be used as money.
In August 2013, the US Senate wrote to several law enforcement agencies, inquiring about the threats and risks relating to virtual currency. The letters included this one to the Department Of Homeland Security, fretting about the lack of a paper trail for regulators and enforcement agencies to follow for virtual currency transactions. It requested policies and guidance related to the treatment of virtual currencies, and information about any ongoing strategic efforts in the area.
November saw responses from the various agencies. The Department of Homeland Security was the most worried about the criminal threat from illicit use of bitcoin, while the Department of Justice, the Federal Reserve and the Department of Justice all acknowledged the legitimate uses of virtual currencies. The SEC argued that “any interests issued by entities owning virtual currencies or providing returns based on assets such as virtual currencies” were considered securities and thus fell under its remit.
United States of America flagEach US state has their own financial regulators and laws, and each approaches bitcoin differently. California and New York have been particularly aggressive in their pursuit of bitcoin-related organizations, for example, while others, such as New Mexico, South Carolina, and Montana, don’t regulate money transmitting businesses. A list of state approaches to money transmitter laws can be found here.
In May 2013, California’s state financial regulator issued a letter to the Bitcoin Foundation, a nonprofit organization designed to promote bitcoin, warning it that it may be a money transmission business, and threatening people there with potential fines and jail time.
Then, in August 2013, the New York Department of Financial Services issued subpoenas to 22 bitcoin-related companies, although these letters were more conciliatory, asking for a dialogue to develop appropriate regulatory guidelines for the digital currency industry. Since then, New York has acted more positively, with the state’s Superintendent of Financial Services, Benjamin M. Lawsky, announcing that it will accept applications for digital currency exchanges. Lawsky indicated that these businesses will be regulated under new New York regulation, which he committed to having in place by the end of the second quarter of 2014.
Private sector companies (banks)
Several banks have stopped accounts owned by people operating bitcoin exchanges. In at least one case, this was because the bank was unhappy that the company involved did not have a money transmitting business (MTB) account.
The US Senate addressed the issue of banking and federal regulation in a set of hearings held in November. The hearings were exploratory in nature and may not lead to legislation, but feedback from agencies included acknowledgements that there were legitimate uses for the coin.
What this means to you
The legality of bitcoin depends on who you are, and what you’re doing with it.
There are three main categories of bitcoin stakeholder. Someone may fall under more than one of these categories, and each category has its own legal considerations.
These are individuals that obtain bitcoins, and either hoard them or spend them. Under the FinCEN guidance, users who simply exchange bitcoins for goods and services are using it legally.
FinCEN: “A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter.”
According to the FinCEN guidance, people creating bitcoins and exchanging them for fiat currency are not safe.
FinCEN: “By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter.”
Miners seem to fall into this category, which could theoretically make them liable for MTB classification. This is a bone of contention for bitcoin miners, who have asked for clarification. This issue has not to our knowledge been tested in court.
Exchanges are defined as MTBs.
FinCEN: “In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.”
US tax formIn 2009, the US Internal Revenue Service (IRS) posted information about the tax applications of using virtual currencies inside virtual economies, arguing that taxpayers can receive income from a virtual economy and could be required to report it as taxable income. However, it based this largely on guidance related to bartering, gambling, business, and hobby income.
However, the IRS has not yet posted guidance on ‘open flow’ virtual currencies that can be used outside of virtual economies. In a 27-page report [PDF] published in May 2013, the US General Accounting Office (GAO) called for more guidance from the IRS on this issue.
The IRS responded that its guidance could now be taken to cover virtual currencies as used outside of virtual economies. It added that it was also looking at the potential tax compliance risks posed by anonymous electronic payment systems, and was working with other federal agencies on the topic.
In June 2013, the director of an IRS unit that investigates cyber threats also told the Financial Times that the use of “cyber-based currency and payment systems” to hide unreported income from the IRS is a threat that it was “vigorously responding to”. And at Senate hearings in November, FinCEN director Jennifer Shasky Calvery confirmed that the IRS would be releasing more guidance on virtual currencies. In short, don’t expect to evade taxes by earning bitcoins instead of fiat currency.
What is the industry doing?
The industry has responded to growing regulator concerns in several ways.
Several companies created a committee to form a self-regulatory body called DATA, designed to encourage open conversation with regulators.
The Bitcoin Foundation formed committees to offer legal guidance, steer policy, and liaise with regulators.
Exchanges have been attempting to secure MTB licenses at the state and federal levels, and some have avoided doing business with US customers until this is resolved.
Few governments have announced any explicit intention to prevent bitcoin use completely. However, around the end of 2013 and start of 2014 there were a series of warnings and directives from central banks and regulators to varying degrees of severity. They ranged from the simple “be careful, bitcoin is neither regulated nor officially a currency”, to blocks on financial institutions and even raids on bitcoin businesses.
Many claim to be worried about the effect that large-scale bitcoin adoption might have on the stability of the financial system, especially if prices are volatile.
Currently, Iceland and Vietnam are the only two countries which some level of bitcoin ban in place – see the list below for more details; while others such as Russia and Thailand seem to have outlawed digital currencies then backtracked.
CNN's Bitcoin Legality Map (Using Data from BitLegal)
CNN’s Bitcoin Legality Map Uses Data from BitLegal (Image from April 2014)
North America (non-US)
Canada flagCanada has announced that it will tax bitcoins in two ways. Transactions made for goods or services will be treated under its barter transaction rules, while its “Transactions in Securities” document says that profits made on commodity transactions could be income or capital. It confirmed these rules in November 2013.
Mexico flagOn 12th March 2014, the Bank of Mexico issued its first statement on the issue of cryptocurrencies. The bank warned the public via a statement on its website about the “the inherent risks of acquiring these assets and using them as substitutes for conventional methods of payment”. The warning was generally similar to those issued by many of the world’s central banks in recent months.
However, most notable were potential restrictions for domestic financial institutions, that some reports implied might strangle bitcoin businesses. Translations of the statements suggest that financial institutions regulated in Mexico “are not authorized to use or carry out any operations with [digital currencies]“. Whether that means banks may not deal directly in cryptocurrencies, or may not have relationships with companies that deal in them, is not yet clear.
Colombia flagThe Superintendencia Financiera de Colombia (SFC) may be close to outlawing bitcoin transactions in the South American country, a newspaper claimed on 20th March 2014. The report said that the SFC, in conjunction with Banco central de Colombia, Colombia’s central bank, and the Ministerio de Hacienda y Crédito Público, the executive body responsible for budgetary concerns, is preparing to issue a document outlining the government’s stance on bitcoin and bitcoin-related activities.
A source connected to the Colombian Ministry of Finance told El Tiempo that the ban may very well focus on bitcoin handling activities, rather than outright purchase by consumers. CoinDesk is monitoring the situation and will update this guide as the story develops.
EU flagThe EU’s banking regulator, The European Banking Authority (EBA), issued a warning statement on 13th December 2013 warning of investment risk, but focusing mainly on issues of fraud, tax evasion and other crime connected to virtual currency use. The statement also warned that if news of misuse continued to emerge, it “could lead law enforcement agencies to close exchange platforms at short notice and prevent consumers from accessing or retrieving any funds that the platforms may be holding for them”.
Belgium flagThe National Bank of Belgium has no intention of intervening in bitcoin business or regulating it, says the Belgium Bitcoin Association. On 16th January 2014, however, the central bank issued a joint warning with the Belgian Financial Services and Markets Authority (FSMA) that digital currencies are not issued by any central authority, and as such are at risk of volatility, fraud, and business non-acceptance.
Cyprus flagLong an offshore financial services hub, Cyprus has entered the bitcoin fray with enthusiasm and aims to be a hub for bitcoin business in the EU and surrounding territories. It is also home to the world’s first brick and mortar bitcoin savings institution, Neo (and its payment processing partner Bee). Still, the Central Bank of Cyprus issued a statement on 7th February 2014 warning about bitcoin’s volatility and reminding citizens it is not recognized as legal tender.
Denmark flagSo far the Danish authorities have stopped short of regulating digital currencies, although a stern warning was issued in which bitcoin et al. were compared to “glass beads” – a reference presumably to an ancient method of trading baubles of little worth.
More significant is the nation’s stance on the taxation of bitcoin for general transactions. Because it is not considered “real”, physical money, bitcoin is considered a private asset and any gains are tax exempt; similarly, losses are not deductible. However, for companies whose sole business is related to trading or speculating in digital currencies, gains will be taxed. By how much remains to be seen.
Estonia flagEstonia’s central bank has not issued a formal statement on bitcoin but one of its managers wrote to Bloomberg on 31st January 2014 calling bitcoin a “problematic scheme”, warning investors assumed all risks and reminding people that bitcoin businesses have been known to disappear overnight with customers’ money.
Finland flagFinland issued a regulatory guide to bitcoin in September 2013, which imposed capital gains tax on bitcoins, and taxes bitcoins produced by mining as earned income.
France flagThe French Senate held hearings into bitcoin and digital currencies in mid-January 2014 that were considered mostly investigatory and positive in tone. The focus was mainly on the opportunities presented by the new technology and how existing laws and organizations could be used to catch wrongdoers. Making bitcoin illegal was not an option, according to observers, and France needed to catch up to neighboring countries in its approach.
More recently, France’s Minister of Economy and Finance, Pierre Moscovici, issued a call on 4th March for European regulators to collaborate on digital currency regulation as part of an effort to ease the concerns of financial institutions and policymakers.
Germany flagGermany is perhaps the most advanced country when it comes to regulating bitcoin and virtual currencies. Although some issues remain unresolved, the German government has exempted bitcoin transactions held for over one year from 25% capital gains tax. It also categorized bitcoin as a form of private money. In early January 2014 the Bundesbank repeated a warning that bitcoin was “not an alternative to national currencies”, and values were “highly speculative”.
Greece flagGreece, quite remarkably, has also taken time out from its years-long government spending-related financial crisis to warn you about the dangers of bitcoin.
Iceland flagOne of only two countries to have instigated a ban on bitcoin and other digital currencies due to capital controls resulting from the banking crisis of 2008. Personal ownership does not seem to be an issue, rather buying (importing) bitcoins from outside the country is illegal because it constitutes a movement of capital out of the country. Furthermore, selling products or services for cryptocurrencies is also prohibited
The locally created digital currency auroracoin recently made headlines with its ‘Airdrop’ to all Icelandic citizens and is not illegal due to its provenance within the country.
However, Iceland’s Economic and Trade Committee of Parliament recently met to discuss taxation of auroracoin and to see whether it falls within the capital controls that restrict bitcoin. At the same time they warned of the risks of using the altcoin, which they said is not a currency or regulated by the central banking authorities. Frosti Sigurjónsson, Chairman of the committee, even went as far as to say: “There is evidence however that this is a case of [a money] scam and illegal” on his blog.
Lithuania flagLithuania, wedged between the European Union and its largest trading partner, Russia, issued a warning at the end of January and hinted at a ban on non-government currencies, but later tempered the statement by saying new regulation was “under discussion”.
Netherlands flagHolland in typically liberal style has tacitly assented to the use of digital currencies by issuing guidelines on their tax status. Logically, bitcoin and other cryptocoins are treated as any other currency for tax purposes.
Slovenia flagSlovenia is one of the more permissive governments towards digital currency use, though regulators there issued a statement on 24th December 2013 to remind people that bitcoin is considered neither a currency nor a financial instrument. The country’s Tax Administration and Ministry of Finance also said that bitcoin is subject to income tax like any other non-monetary income, and would be calculated based on the bitcoin-Euro exchange rate at the time of transaction. Selling bitcoin would not be subjected to capital gains tax.
Sweden flagSweden’s Finansinspektionen financial regulator now considers bitcoin as a means of payment, following guidance issued last year. Exchanges must register with the regulator and meet the requirements faced by other financial institutions.
Russian Federation flag“The official Russian currency is the ruble. The use of any other monetary instruments or surrogates is forbidden,” announced Russia’s General Prosecutor’s Office in early February 2014. “The anonymous payment systems and crypto-currencies, including bitcoin [...] are monetary surrogates. As such, their use by private citizens or legal entities is not allowed.” So, bitcoin and other digital currencies seemed to have been are banned in Russia to the shock of the bitcoin world.
However, on 6th March, Russia seemed to soften its stance in a letter from the central bank to an individual who had asked for clarification. In it they said that a meeting of top Russian financial authorities in February did not result in a bitcoin ban, but rather was devoted to “combating crimes in the sphere of the economy devoted to the use of anonymous payment systems and cryptocurrencies on the territory of Russia”. Furthermore, the goal of the meeting was also to “develop a unified approach to the determination of the legal status of cryptocurrencies”. If the letter is genuine, the exact status of cryptocurrencies in Russia is still a grey area, but it is likely they will be tolerated until such time as proper legislation is brought in.
Ukraine flagDespite the unstable political situation in early 2014, Ukraine’s central bank has still managed to issue statements on digital currencies, saying related businesses “must register with the agency and abide by existing laws related to the management of electronic money”.
United Kingdom flagMeetings with policymakers in the UK in September 2013 suggested that bitcoin-based businesses would not have to register with regulators, at least for the time being, while they consider their regulatory position. For a while, the UK suggested that bitcoins wouldn’t be treated as money, but would instead be classified as single-purpose vouchers, which could carry a value-added tax (sales tax) liability on any bitcoins that are sold.
However, this idea was reversed in guidance issued on 3rd March. Although the UK tax department, HMRC, stepped back from explicitly recognising bitcoin as a currency, its approach effectively treats it like any other form of payment for tax purposes: “In all instances, VAT will be due in the normal way from suppliers of any goods or services sold in exchange for bitcoin or other similar cryptocurrency.”
Japan flagAt present there are no laws covering cryptocurrencies in the country. However, since the collapse of bitcoin exchange Mt. Gox and the attention that garnered from the international media, Japan seems to have been pressurised into taking some action.
Initially it appealed for a coordinated effort from the international community to agree on regulation. More recently, Japan’s ruling party, the Liberal Democratic Party (LDP) has launched an committee to investigate cryptocurrencies, and issued a statement saying it is “not a currency, but taxable”. Currently the situation seems to be that bitcoin will be treated as a good and is subject to taxation if transactions fulfil standing tax requirements. Gains on exchange rates are taxable too.
The government has also blocked related banks from “brokering bitcoin transactions or opening accounts holding the virtual unit”. Exactly what constitutes a ‘bitcoin account’ remains unknown, but it presumably refers to one with a known bitcoin service like Blockchain.info or Coinbase.
The Japanese government is, however, generally curious about bitcoin and will not make any further statements on the matter until it has discussed matters with local bitcoin interests, a government representative has said.
China: People’s Republic of China
China flagChina’s authorities have had arguably the biggest impact on bitcoin adoption and values in the past months. In early December 2013, the People’s Bank of China (PBoC) issued a statement warning of bitcoin risks and banning financial institutions from engaging in bitcoin business themselves or transferring funds to/from bitcoin exchanges. Another statement just days later also blocked third-party payment processors from dealing with exchanges, and the price of bitcoin worldwide crashed from its record high of over $1200 by about 50%. The moves have had a dramatic effect on the market share of large bitcoin exchanges in the country.
In mid-January, a PBoC official claimed there is no move to suppress or discriminate against bitcoin in China, and exchanges have been allowed to remain open for business. There does seem to be an official campaign to limit bitcoin trade to the fringes, however, and China’s state-owned business TV channel broadcasted a documentary the same week full of dire warnings about risks to investors from price volatility.
China: Hong Kong
Hong Kong flagHong Kong’s Secretary for Financial Services and the Treasury issued a warning about risks associated with bitcoin on 9th January 2014. The Special Administrative Region (SAR) of China and financial hub has remained otherwise hands-off in its approach to bitcoin, saying it does not pose a risk to the financial system if it is not widely adopted.
Taiwan (Republic of China)
Taiwan flagThe Financial Supervisory Commission of the Republic of China and the Central Bank of the ROC issued a joint statement at the very beginning of 2014 warning against bitcoin use in Taiwan. Regulators there have also said they will block any attempt to install Robocoin bitcoin ATMs.
Singapore flagSingapore is another major international financial services hub and appears to be one of the world’s most permissive environments for bitcoin. The Monetary Authority of Singapore has stated it “will not interfere” with bitcoin business, despite an earlier warning in September 2013 of the risks. In mid-January 2014 Singapore’s taxation authority, the Inland Revenue Authority of Singapore (IRAS) sent a statement to local brokerage Coin Republic with details on how bitcoin business would be taxed.
Bitcoin will be treated not as a currency, but as either a good or asset, said IRAS. As a good it would be subject to GST (VAT or sales tax) when traded to and from local currency by Singapore-resident businesses and goods purchased with bitcoin would also be subject to sales tax. As an investment asset, bitcoin would not be taxed as Singapore does not have a capital gains tax.
Most recently, on March 13th 2014, MAS announced it will regulate virtual currency exchanges and ATMs, in order to address potential money laundering and terrorist financing risks. Such intermediaries will have to verify the identities of their customers and report any suspicious transactions.
Thailand flagOn March 18th 2014, after flip-flopping on the issue for the last nine months, the Bank of Thailand issued its first clear statement on bitcoin, warning consumers that it is not a currency and that its use comes with inherent risks. The statement bears similarities to others issued from central banks around the world, but could be considered an improvement in the legal status of bitcoin users, as Thailand was widely considered to have implemented a bitcoin ban in the summer of 2013.
One issue in Thailand is not so much the legality of owning bitcoin, but whether exchanges qualify for a licence to trade in cryptocurrencies, which could be considered a foreign exchange activity and therefore illegal. Hopefully, the legal status of exchanges in the light of the new statement will become clear in coming days.
Malaysia flagMalaysia’s central bank, Bank Negara Malaysia (BNM), issued one of the shortest statements of its kind on 4th January, cautioning people to be careful when investing in bitcoin but otherwise saying simply ,“The Central Bank does not regulate the operations of bitcoin”.
Indonesia flagIndonesia’s central bank, Bank Indonesia, issued a warning on 16th January 2014 that bitcoin was not regarded as a currency and accepting it as payment might even break national currency laws. No subsequent action against exchange businesses has been taken as yet, however.
India flagIndia’s central bank is said to be “watching” bitcoin. In a series of dramatic moves, the Reserve Bank of India (RBI) issued a warning about bitcoin in late December 2013, which was followed almost immediately by exchanges choosing to suspend operations. One exchange had its premises raided and another was paid a “friendly” visit by tax officials to investigate how digital currencies could be managed and taxed. Some exchanges have since re-opened for business.
Vietnam flagThe second country in this list (and the world) to have banned bitcoin: Vietnam’s central bank forbade financial institutions from using digital currencies as a means of payment or from offering services in exchange for them back in February 2014. The country had previously warned against their use, stating that the government and State Bank did not recognize bitcoin as a legitimate method of payment.
All that considered, some small bitcoin businesses are still plying their trade in the Southeast Asian country and a bitcoin conference is to be held there in May.
Israel flagThe Israeli Tax Authority was said to be considering a tax on bitcoin, but no further statements have been made at the time of writing. The Bank of Israel (BoI) and the Israeli Ministry of Finance issued a joint statement in February 2014 warning of investment risks as well as the dangers digital currencies posed as vehicles for fraud, money laundering and terror financing. However, the Israel Bar Association ruled in August 2013 that bitcoin “is an appropriate form of payment for attorneys” and authorized its members to accept it.
Lebanon flagThe country’s central bank, the Bank of Lebanon, issued a warning statement on 2nd January 2014 saying that bitcoin did not offer consumer protections, had a volatile price and was often used in criminal transactions. It advised people not to use digital currencies.
Jordan flagThe Central Bank of Jordan has also issued a similar warning of digital currencies’ unregulated status in February 2014 and has prohibited banks, financial companies, payment processors and currency exchangers from dealing with them, particularly bitcoin.
New Zealand flagBoth the Governor and Assistant Governor at the Reserve Bank of New Zealand (RBNZ) issued personal warnings in mid-December 2013, warning of risks associated with volatility, but also commenting that the technology was “interesting”.
While the Governor of the Reserve Bank of Australia has previously warned of “speculative excesses”, the Australian Tax Office (ATO) has now provided businesses with guidelines on how it intends to deal with bitcoin, stating that income and profits derived from bitcoin transactions are taxable.
In a letter to an individual, the ATO said that transferring bitcoins to a private company in return for shares would count as income, and that transferring bitcoins to another party would be subject to Goods and Services Tax (GST). Bitcoin profits would also be subject to capital gains tax, it said.
How bitcoin mining works
In traditional fiat money systems, governments simply print more money when they need to. But in bitcoin, money isn’t printed at all – it is discovered. Computers around the world ‘mine’ for coins by competing with each other.
So, how does mining happen?
People are sending bitcoins to each other over the bitcoin network all the time, but unless someone keeps a record of all these transactions, no-one would be able to keep track of who had paid what. The bitcoin network deals with this by collecting all of the transactions made during a set period into a list, called a block. It’s the miners’ job to confirm those transactions, and write them into a general ledger.
Making a hash of it
how bitcoin mining worksThis general ledger is a long list of blocks, known as the block chain. It can be used to explore any transaction made between any bitcoin addresses, at any point on the network. Whenever a new block of transactions is created, it is added to the block chain, creating an increasingly lengthy list of all the transactions that ever took place on the bitcoin network. A constantly updated copy of the block is given to everyone who participates, so that they know what is going on.
But a general ledger has to be trusted, and all of this is held digitally. How can we be sure that the block chain stays intact, and is never tampered with? This is where the miners come in.
When a block of transactions is created, miners put it through a process. They take the information in the block, and apply a mathematical formula to it, turning it into something else. That something else is a far shorter, seemingly random sequence of letters and numbers known as a hash. This hash is stored along with the block, at the end of the block chain.
Hashes have some interesting properties. It’s easy to produce a hash from a collection of data like a bitcoin block, but it’s practically impossible to work out what the data was just by looking at the hash. And while it is very easy to produce a hash from a large amount of data, each hash is unique. If you change just one character in a bitcoin block, its hash will change completely.
Miners don’t just use the transactions in a block to generate a hash. Some other pieces of data are used too. One of these pieces of data is the hash of the last block stored in the block chain.
Because each block’s hash is produced using the hash of the block before it, it becomes a digital version of a wax seal. It confirms that this block – and every block after it – is legitimate, because if you tampered with it, everyone would know.
If you tried to fake a transaction by changing a block that had already been stored in the block chain, this would change that block’s hash. If someone checked the block’s authenticity by running the hashing function on it, they’d find that the hash was different from the one already stored along with that block in the block chain. The block would be instantly spotted as a fake.
Because each block’s hash is used to help produce the hash of the next block in the chain, tampering with a block would also change the next block’s hash. So tampering with a block would make the subsequent block’s hash wrong, too. That would continue all the way down the chain, throwing everything out of whack.
Competing for coins
Butterfly Labs Bitforce mining rigSo, that’s how miners ‘seal off’ a block. They all compete with each other to do this, using software written specifically to mine blocks. Every time someone successfully creates a hash, they get a reward of 25 bitcoins, the block chain is updated, and everyone on the network hears about it. That’s the incentive to keep mining, and keep the transactions working.
The problem is that it’s very easy to produce a hash from a collection of data. Computers are really good at this. The bitcoin network has to make it more difficult, otherwise everyone would be hashing hundreds of transaction blocks each second, and all of the bitcoins would be mined in minutes. The Bitcoin protocol deliberately makes it more difficult, by introducing something called a ‘proof of work’.
The Bitcoin protocol won’t just accept any old hash. It demands that a block’s hash has to look a certain way; it must have a certain number of zeroes at the start. There’s no way of telling what a hash is going to look like before you produce it, and as soon as you include a new piece of data in the mix, the hash will be totally different.
Miners aren’t supposed to meddle with the transaction data in a block, but they must change the data they’re using to create a different hash. They do this using another, random piece of data called a ‘nonce’. This is used with the transaction data to create a hash. If the hash doesn’t fit the required format, the nonce is changed, and the whole thing is hashed again. It can take many attempts to find a nonce that works, and all the miners in the network are trying to do it at the same time. That’s how miners earn their bitcoins.
How to sell bitcoin
Selling bitcoin isn’t quite as straightforward as buying bitcoin, but fortunately CoinDesk is here to help. This guide will give you all the information you need to cash out your digital currency.
When deciding how to sell your bitcoin, you first need to consider which method best suits your situation: selling bitcoin online or selling bitcoin in person. Each option has its own advantages and disadvantages.
Selling bitcoin online
Selling bitcoin online is by far the more common way of trading your bitcoin. There are two ways to go about selling bitcoin online.
1. The first way involves a direct trade with another person, an intermediary facilitating the connection.
2. The second way is through an online exchange, where your trade is with the exchange rather than another individual.
Direct trades: Websites that offer this type of selling structure include Coinbase and LocalBitcoins in the US and BitBargain UK and Bittylicious in the UK.
On these sites, you will usually have to register as a seller. This involves verifying your identity, which we will discuss again later. Once you have registered, you can post an offer, signalling that you want to sell, and the website will alert you when a buyer wants to trade with you. From there, your interaction is solely with the buyer, but you use the website to complete your trade.
The process of selling on Bitbargain UK and (more so) Bittylicious can be quite involved and requires some patience. However, support at the former site has been great in our experience. Bitcoin users with bank accounts in the United States should consider using Coinbase, which has won many fans with its simplicity.
Sell Bitcoin for Other Crypto currencies
Exchange trades: The other way to sell bitcoins is to register with an online exchange. You will still have to verify your identity, but in this case you won’t have to do as much work when it comes to organizing the sale.
Exchanges act as an intermediary who holds everyone’s funds. You place a ‘sell order’ (just as you would place a buy order), stating the volume (amount) and type of currency you wish to sell (eg: bitcoin), and the price per unit you wish to sell for.
As soon as someone places a matching buy order, the exchange will complete the transaction. The currency will then be credited to your account.
The downside that accompanies this ease of use is that, if you are selling bitcoin for fiat currencies, you will need to withdraw those funds to your bank. If the exchange is facing liquidity problems or issues with its banks, it can take an inordinate amount of time to receive your funds.
Mt. Gox became infamous for this problem before it went bankrupt, and BTC-e has recently been plagued with reports of similar difficulties. Therefore, you should carefully research the exchange you intend to use before committing funds.
Examples of other crypto-to-fiat currency exchanges include Kraken, Virtex and Bitstamp.
Alternatively, you could use a pure cryptocurrency exchange to change bitcoin for another cryptocurrency. It’s less likely that anyone would want to do this, but there are reasons such as arbitrage, or the rare occasion if a shop accepts something other than bitcoin (for example, The Oxford Blue pub sometimes accepts feathercoin).
Examples of these types of sites are: BTER and Cryptsy.
In addition, you’ll have to pay a fee to use some exchanges. BTC-e charges a flat 0.2%. For overviews of what fees are charged by the various cyrptocurrency markets and what volumes are being traded, see CoinCompare and Bitcoin Charts for up-to-date information.
Another consideration is that there will be some limit to the amount of money you are allowed to store (subject to change over time) on an exchange. Regardless, it is not wise to use exchanges to store your entire pot of coins, even though it can appear to be the easy option if all you are doing is speculating. You should take responsibility for your own funds, and store any unneeded amounts on your own devices or offline, rather than trusting an exchange that might one day be hacked.
Concerns with withdrawing funds
The universal way to move money around the world is international wire transfers. Most (if not all) online bitcoin markets support this method of transferral.
Withdrawing Funds from Bitcoin Exchanges
Another way to transfer money to your bank after selling bitcoin is via the “Single European Payments Area” (SEPA) system. SEPA was designed to make international transfers between member states of the European Union more efficient. Some exchanges (such as Kraken and BTC-e) support these payments.
However, transfers take a very long time (around four days), and can incur large charges – potentially making trading prohibitively expensive. HSBC, for example, charges £4 per SEPA payment made via online banking and £9 per WorldPay transaction. Barclays charges £15 per SEPA payment and £25 for other international transactions.
If you are opening an account with the specific purpose of receiving funds from bitcoin trading, you may find high street banks refuse to do business with you. HSBC has explicitly refused the author of this guide accounts for bitcoin trading.
You can also use third-party payment processors to withdraw and receive fiat funds. The numbers of these services is dwindling, however. OKpay recently stopped engaging with bitcoin businesses, and PayPal has never officially dealt with bitcoin businesses. Note, though, that LocalBitcoins does show PayPal as a payment option.
Identity Verification for Bitcoin SellersWhile many of the bitcoin markets mentioned here require very little identification from buyers, they require a lot of proof of identity from sellers. There are few legal requirements from bitcoin markets to record who their users are, but most (if not all) are pre-emptively collecting identity data in anticipation of forthcoming regulations. To make becoming a seller easier, it is worth at least considering completing the identity verification process when you first join the site. Getting this step out of the way can remove barriers to selling if and when you’re ready to make the move.
Expect markets to ask you to upload scans of two utility bills displaying your name and address, along with a photo ID (such as a passport or driving licence). Some (such as BitBargain UK) may even ask you to take a selfie including your photo ID and the name of the market on a piece of paper! If you are not comfortable uploading such personal documents to an (effectively) untrusted business, then you will have a difficult time finding somewhere to sell bitcoin online.
Selling bitcoin in person
How to Sell Bitcoin in Person
Selling bitcoin in person can, in many ways, be the easiest way to pass on your digital currency. Simply scanning a QR code on another person’s phone and accepting cash-in-hand is about as easy as a bitcoin transaction can get.
If you have friends or family who want to buy bitcoin, the process is simple. Set them up with a bitcoin wallet, send them the bitcoins and collect your cash.
There are several things to be aware of when selling bitcoin in person.
Agree a price: Decide on a rate works for you.
Many use a price from a prominent bitcoin exchange, or the CoinDesk Bitcoin Price Index.
Some sellers apply a percentage on top of these rates to cover costs and as a convenience/anonymity premium.
You could use a mobile app to calculate prices. Popular apps include Zeroblock and BTCreport.
It helps to be aware of local fluctuations in price. Price can vary from country to country, often due to difficulties in obtaining bitcoin with the local national currency.
There are many bitcoin meetups around the world where people are happy to trade bitcoin and other cryptocurrencies.
It is always wise when carrying a large amount of cash to meet in a public place and/or go with a friend.
Alternatively, you could advertise yourself as a bitcoin seller to a wider audience. The definitive site for this is LocalBitcoins. This website allows users to rate each other, so one may assess the trustworthiness of a potential trade partner. You may be able to sell with a premium attached once you have a reliable reputation.
You do not need to verify your identity as on other sites.
Again, if you are setting yourself up for an in-person meeting using LocalBitcoins, you must always think about the general safety rules for meeting a stranger from the Internet.
LocalBitcoins also supports escrow transactions, however, these are for online transactions, not face-to-face deals. Therefore, do not comply with requests for someone who asks for escrow for a face-to-face transaction.
How does cloud mining bitcoin work?
If you want to invest in bitcoin mining without the hassle of managing your own hardware, there is an alternative. You can use the cloud to earn your coins.
Put very simply, cloud mining means using (generally) shared processing power run from remote data centres. One only needs a home computer for communications, optional local bitcoin wallets and so on.
Here’s why you might want to consider cloud mining:
A quiet, cooler home – no constantly humming fans
No added electricity costs
No equipment to sell when mining ceases to be profitable
No ventilation problems with hot equipment
No worry of hardware failures
Practically instant setup: no system building or software configuration
Reduced chance of being let down by mining equipment suppliers.