13 February 2014
A1 The History of Bitcoin
Bitcoin was developed as a method of providing digital currency. It allows peers to pay one another through a system they can set up and utilized for many different purposes. It is called a cryptocurrency, which is a term related to the use of cryptography to control the transfer of money, as well as the creation of it A2 (Lee). Cryptocurrency is a relatively new phenomenon, with Bitcoin not even becoming a viable and useable option until 2009 (Wyher). The network and technology is called "Bitcoin," but the currency itself are called "bitcoins." Note that the currency is not actually capitalized, while the technology and network are. This is an important distinction to make when writing about the company, because proper capitalization can help avoid misunderstandings. Mining is the name of the process used to create bitcoins (Lee). This is actually people recording and verifying payments in exchange for receiving transaction fees and bitcoins that are newly minted (Lee).
Wallet software is used to send and receive bitcoins, and that can be used on a personal computer, a web application, or a mobile device (Mick). People can get bitcoins by mining, but they can also get them through exchanging services, products, or other currencies (Mick). There has been scrutiny of Bitcoin recently, and there have also been some alleged ties to illegal activity. Bitcoins have been seized when it was believed they were being used in the black market, and more than $28 million of them were seized in 2013 (Pagliery). There are many governments throughout the world that are not friendly to bitcoins, but the United States is not one of them. China has restricted exchanging local currency for bitcoins, and the European Banking Authority is warning people that there are not any good consumer protections when it comes to using bitcoins (Mick). Chargebacks cannot be used at all, and bitcoins can also be stolen (Lee, Mick). Little recourse is available to people who have problems with the system (Mick).
The Bitcoin idea was first mentioned in a paper in 2008 (Wyher). This was published under the name Satoshi Nakamoto, which was a pseudonym (Raskin). In early 2009, Bitcoin actually became officially operational (Raskin). The first open-source client was released then, and the first bitcoins were also made available. There were technical problems early on, including a glitch that allowed a person to create bitcoins in unlimited amounts (Raskin). Naturally, that was a serious issue, because bitcoins are currency and they have to be "paid for" in some way. Otherwise it is like the government minting money for free and without end. The value of the money becomes much less for everyone, but it is valuable early on for the person who receives the "extra" money – or bitcoins. There was a lot of interest in Bitcoin by 2011, but there were also growing concerns that something could go wrong with the system or that it was actually dangerous for people to use (Raskin).
The level of risk did not stop users of the site, though, or people who wanted to purchase or mine more bitcoins. Another thing that has not stopped purchasers is the wild fluctuation that bitcoin prices have gone through over the years. They've been as low as 30 cents each and as high as $32 in 2011, all within just a few months (Raskin). In late 2012 and early 2013, the price of bitcoins started to rise again until it got all the way up to $266 (Raskin). Eventually it went back down to $50 (Raskin). Another serious glitch in 2013 caused the network to effectively split in two (Wyher). That required that all transactions be halted until the issue was fixed, and created a very sharp sell-off that would not have taken place otherwise. Despite that, there were companies that started accepting bitcoins as currency in 2013, and so did some advocacy and non-profit groups (Lee). That year was not only about growth, though. Law enforcement started to explore Bitcoin's dealings, and the company struggled with issues.
Late 2013 and early 2014 brought significant developments for Bitcoin (Pagliery). While some milestones were hit, like $10 billion in bitcoins, there were also increasing problems (Pagliery; Raskin). Chinese financial institutions were prohibited from using bitcoins by the People's Bank of China, and that caused the value of Bitcoin to drop (Raskin). It also made things less convenient for people who were used to using bitcoins for all sorts of transactions. Baidu, a giant in the Chinese internet market, also decided it was no longer going to accept bitcoins for payment for specific kinds of services (Raskin). Since 2009, it has been illegal in China to buy any real-world goods with digital currency (Raskin). Baidu was allowing people who wanted website security services to use bitcoins to pay, which was legal because that was a service and not a good, such as a product (Raskin). However, the issues with Bitcoin made many companies more concerned about security and value, so they were no longer comfortable with taking bitcoins.
Arrests of many of the higher-ups in Bitcoin soon followed the other problems the company was developing. These began in 2014, although the money problems with the company had started the year before. Most of the recent developments that have been seen with Bitcoin have been negative, but yet there are still plenty of people using the service. It is possible that will change in the future, depending on what happens within the next few months. With Bitcoin being linked to financial crimes and other types of criminal activity, much of the widespread use that was originally expected has not been seen. Regulators in many countries have also been very interested in the currency in an effort to determine if it is being used for legitimate activities or whether its main use is illegal purchases.
A3 Arrest of an Exchange CEO
One of the Bitcoin exchanges is called BitInstant, and its CEO is Charlie Shrem (Pagliery). US government agents arrested Shrem in January and charged him with laundering money. This laundering took place for customer of the Silk Road, which is an online drug bazaar (Pagliery). Shrem chose to help a man he had never met sell over $1 million worth of bitcoins to customers of the Silk Road (Pagliery). That man ran a bitcoin exchange that was actually an underground operation. He was also arrested at his home in Florida (Pagliery). Shrem and the other man have been charged with conspiracy to launder money and for operating a money transmitting business that was not licensed (Pagliery). Shrem is also charged because he knew what was going on with the other man and did not provide that information to the federal government. There are more than 700,000 locations in the US, as well as many other countries, where BitInstant allowed people to buy bitcoins (Pagliery).
That made Shrem a major player in the Bitcoin world. Investors in the BitInstant company are very concerned about the arrest of Shrem (Pagliery). Over $1 million in bitcoins changed hands between the two men in less than 10 months, and there were many email exchanges (Pagliery). The biggest problem was that Shrem learned where the money was going but did nothing about it, making him effectively just as guilty as the other man. The partnership eventually ended, but the damage was done. Agents had been posing as Silk Road buyers, and they followed the trail of money and bitcoins back to Shrem (Pagliery). Once they discovered that was who the bitcoins were coming from, they were able to determine that Shrem knew what was going on and that he had become a willing participant instead of turning in the other man for the money laundering and drug offenses (Pagliery). Private messages through email and housed on a server were used to determine what was said between Shrem and his accomplice, allowing the federal government to seek the arrest of both men (Pagliery).
A4 The Future of the Company
The future of the Bitcoins company is questionable, and there are two main issues that may end the company (Pagliery). These are the concerns with illegal activity that seem to be becoming more prevalent, and the overall viability of a digital currency (Raskin). While there are other cryptocurrencies and many people love the convenience they provide, there are also large numbers of people who have not heard of Bitcoin, do not understand how it works, or would not use it because they do not trust what it has to offer (Lee, Mick). The idea of paying for a digital currency – essentially, virtual money – with money they can already see and touch is difficult for some people to feel comfortable with. This is not surprising, since the idea is still relatively new and most people have not had the opportunity to get comfortable with it yet. Since there are not that many companies that take bitcoins or can accept them as currency, buying and using them may not be completely practical, either.
The practicality of bitcoins may change over time, especially if more companies start to accept them and there are more places where they can be purchased (Raskin). A better understanding of them is also needed, so people will feel more comfortable. That is something Bitcoin may want to focus on if the company is going to have a future of any kind. However, the issues with illegal usage and money laundering are the most important for the company to address in order to determine whether Bitcoin has a future. If the company fails to curb these kinds of problems, there will be a loss of confidence in the safety and viability of bitcoins, which will reduce the number of people who use them. When that occurs, it is very possible that the number of people who use bitcoins will continue to drop, and the value of the bitcoins themselves will also drop. If there is no value to the bitcoins, they are not going to be purchased. There would be no point, and the company would not remain viable.
Overall, one has to ask oneself whether bitcoins are really necessary, and whether they provide enough value and benefit for people to keep using them. They are starting to get a reputation as the currency of choice for illegal activities, so that opinion may hurt them. If they cannot find a way to show that they are working to stop illegal activity on their network, they may not have much of a chance of being a viable option for much longer. When one looks at the theft and money laundering problems, along with the lack of places where they can be used and other problems, it is quite possible that the majority of people will simply see bitcoins as too much trouble for them. While they can be easy and convenient for certain types of transactions, there are many times when they would not have to be used and there are a number of other payment methods.
People who do continue to use bitcoins should also be aware that there is very little protection for them. When they buy something with bitcoins, the transaction is done. There are no chargebacks, even if what they bought is not delivered correctly or is not as promised. Additionally, there are risks of bitcoins being stolen, and if the network is hacked a person's money could be wiped out quickly. Add the glitches to that and it is actually a recipe for disaster on a large scale. Of course, Bitcoin may be able to make enough adjustments in order to become a good option as time goes on. If the company is able to do that, there could be a place for it in the digital currency market. If all it becomes (and remains) known for is money laundering and illegal transactions, then there is very little chance that bitcoins will become a popular payment options for legal products and services.
A5 Works Cited
Lee, Cyrus. "China no plans yet to legalize use of Bitcoins". ZDNet. 2013. Web.
Mick, Jason. "Cracking the Bitcoin: Digging Into a $131M USD Virtual Currency". Daily Tech. 2011. Web.
Pagliery, Jose. Bitcoin exchange CEO arrested for money laundering. CNNMoney. 2014. Web.
Raskin, Max. "U.S. Agencies to Say Bitcoins Offer Legitimate Benefits". Bloomberg. 2013. Web.
Wyher, Tommy. "The Rise and Rise of Bitcoin". The Huffington Post. 2013. Web.