BITCOIN TECHNOLOGY 2022-23

Chapter-1
INTRODUCTION
Bitcoin uses peer-to-peer technology to operate with no central authority or
banks for managing transactions and the issuing of bitcoins is carried out collectively by the
network. Bitcoin is open-source, its design is public, nobody owns or controls bitcoins and
everybody can take part into it. Bitcoin is a network that enables a new payment system and a
completely digital money.

1.1 Introduction

Bitcoin is a peer-to-peer payment system introduced as open source software in 2009 by

developer Satoshi Nakamoto. The digital currency created and used in the system is also
called bitcoin and is alternatively referred to as a virtual currency, electronic money, or
crypto currency. The bitcoin system is not controlled by a single entity, like a central bank,
which has led the US Treasury to call bitcoin a decentralized currency. Economists generally
agree that it does not meet the definition of money.

Bitcoins are created as a reward for payment processing work in which users who
offer their computing power verify and record payments into a public ledger. Called mining.
individuals engage in this activity in exchange for transaction fees and newly minted bitcoins.
Besides mining. bitcoins can be obtained in exchange for other currencies. products, and
services. Users can buy, send, and receive bitcoins electronically for a nominal fee using
wallet software on a personal computer, mobile device. or a web application.

1.2 History

Bitcoin was first mentioned in a 2008 paper published under the name Satoshi Nakamoto. In
2009, an exploit in an early bitcoin client was found that allowed large numbers of bitcoins to
be created.

The price of bitcoins has fluctuated wildly since its inception, going through various
cycles of appreciation and depreciation, which have been referred to by some as bubbles and
busts. In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before
returning to US$2. In the latter half of 2012 and during the 2012-2013 Cypriot Financial
Crisis, the bitcoin price began to rise, reaching a peak of US$266 on 10 April 2013. before
crashing to around US$50.

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In the end of 2013. the cost of one bitcoin rose to the all-round peak of US$1135, but fell to
the price of US$693 three days later. Some mainstream websites began

accepting bitcoins c. 2013. WordPress started in November 2012 followed by OK Cupid in

April 2013. TigerDirect in January 2014, and Overstock.com that same month.

1.3 Creation of Bitcoins

The question of who created bitcoin is a fascinating one, because a decade after inventing the
technology—and despite a lot of digging by journalists and members of the crypto
community—its creator remains anonymous.

The principles behind Bitcoin first appeared in a white paper published online in late
2008 by a person or group going by the name Satoshi Nakamoto. This paper wasn't the first
idea for digital money drawing on the fields of cryptography and computer science-in fact,
the paper referred to earlier concepts -but it was a uniquely elegant solution to the problem of
establishing trust between different online entities, where people may be hidden (like
bitcoin's own creator) by pseudonyms, or physically located on the other side of the planet .
Nakamoto devised a pair of intertwined concepts: the bitcoin private key and the blockchain
ledger. When you hold bitcoin, you control it through a private key -a string of randomized
numbers and letters that unlocks a virtual vault containing your purchase. Each private key is
tracked on the virtual ledger called the blockchain.

When Bitcoin first appeared, it marked a major advance in computer science, because
it solved a fundamental problem of commerce on the internet: how do you transfer value
between two people without a trusted intermediary (like a bank) in the middle? By solving
that problem, the invention of bitcoin has wide-ranging ramifications: As a currency designed
for the internet, it allows for financial transactions that range across borders and around the
globe without the involvement of banks, credit-card companies, lenders, or even
governments. When any two people-wherever they might live-can send payments to each
other without encountering those gatekeepers, it creates the potential for an open financial
system that is more efficient, more free, and more innovative.

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Chapter-2

LITERATURE SURVEY
Here we review existing literature available on Bitcoin Technology and will find challenges
and technological barriers in Bitcoin Technology.

2.1 Research Perspectives and Challenges for Bitcoin and Cryptocurrencies

2015 IEEE Symposium on Security and Privacy by Joseph Bonneau, Andrew Miller, Jeremy
Clark
On the whole, we simply don’t have a scientific model with sufficient predictive
power to answer questions about how Bitcoin or related systems might fare with different
parameters or in different circumstances. Despite occasional misgivings about academic
computer science research in the Bitcoin community, however, we advocate an important role
for research in place of simply “letting the market decide.” It is difficult today to assess the
extent to which Bitcoin’s success compared to altcoins is due to its specific design choices as
opposed to its first-mover advantage. Bitcoin is a rare case where practice seems to be ahead
of theory. We consider that a tremendous opportunity for the research community to tackle
the many open questions about Bitcoin which we have laid out.

2.2 Bitcoin: A Peer-to-Peer Electronic Cash System

By Satoshi Nakamoto, (developer who introduced the bit coin currency)

A purely peer-to-peer version of electronic cash would allow online payments to be sent
directly from one party to another without going through a financial institution. Digital
signatures provide part of the solution, but the main benefits are lost if a trusted third party is
still required to prevent double-spending.

We have proposed a system for electronic transactions without relying on trust. We started
with the usual framework of coins made from digital signatures, which provides strong
control of ownership, but is incomplete without a way to prevent double-spending. To solve
this, we proposed a peer-to-peer network using proof-of-work to record a public history of
transactions that quickly becomes computationally impractical for an attacker to change if
honest nodes control a majority of CPU power. The network is robust in its unstructured
simplicity.

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Chapter-3
BITCOIN MINING
3.1 Introduction

Bitcoin mining is the processing of transactions in the digital currency system, in which the
records of current Bitcoin transactions, known as a blocks, are added to the record of past
transactions, known as the block chain.

A Bitcoin is defined by the digitally signed record of its transactions, starting with its
creation. The block is an encrypted hash proof of work, created in a compute-intensive
process. Miners use software that accesses their processing capacity to solve transaction-
related algorithms. In return, they are awarded a certain number of Bitcoins per block. The
block chain prevents attempts to spend a Bitcoin more than once--otherwise the digital
currency could be counterfeited by copy and paste.

Originally, Bitcoin mining was conducted on the CPUs of individual computers, with
more cores and greater speed resulting in more profitability. After that, the system became
dominated by multi- graphics card systems, then field-programmable gate arrays (FPGAs)
and finally application-specific integrated circuits (ASICS), in the attempt to find more
hashes with less electrical power usage.

Due to this constant escalation, it has become hard for prospective new miners to start.
This adjustable difficulty is an intentional mechanism created to prevent inflation. To get
around that problem, individuals often work in mining pools.

Bitcoin generally started with individuals and small organizations mining. At that time, start-
up could be enabled by a single high-end gaming system. Now, however, larger mining
organizations might spend tens of thousands on one high-performance, specialized computer.

In the malware world, one of the more prevalent current threats is mining botnet infections, in
which user systems mine for Bitcoin without the owners' knowledge and funds are channelled
to the botnet master.

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3.2 Requirements to Mine Bitcoin

In past, users of the system used to mine bitcoins using their home computers but as the
technology has improved, this is no longer the case. The general time a bitcoin network
takes to verify a new transaction is 10min. Within that time, there are more than one million
miners competing with each other to find the hash value. When there is more computing
power working together to mine for bitcoins, the difficulty level of mining increases.
Therefore, in order to mine bitcoins, the user must possess-

 Specialized mining hardware is called “application-specific integrated circuits,”

or ASICs.
 A Bitcoin mining software to join the Blockchain network.
 Powerful GPU (graphics processing unit).

3.3 Need of Bitcoin Miners

Bitcoin Mining is the process of verifying bitcoin transactions and storing them in a
blockchain(ledger). It is a process similar to gold mining but instead, it is a computer
process that creates new bitcoin in addition to tracking Bitcoin transactions .

Bitcoin mining is a computation-intensive process that uses complicated computer code to

generate a secure cryptographic system. The bitcoin miner is the person who solves
mathematical puzzles(also called proof of work) to validate the transaction. Anyone with
mining hardware and computing power can take part in this. Numerous miners take part
simultaneously to solve the complex mathematical puzzle, the one who solves it first, wins
6.25 bitcoin as a part of the reward. Miner verifies the transactions(after solving the puzzle)
and then adds the block to the blockchain when confirmed. The blockchain contains the
history of every transaction that has taken place in the blockchain network. Once the minor
adds the block to the blockchain, bitcoins are then transferred which were associated with
the transaction.

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For the miners to earn rewards from verifying the bitcoin Transactions, two things must
be ensured:
1 The miners must verify the one-megabyte size of the transaction.
2 For the addition of a new block of transaction in the blockchain, miners must have the
ability to solve complex computational maths problems called proof for work by
finding a 64-bit hexadecimal hash value.

Bitcoin miners are very essential for the smooth functioning of the bitcoin network for the
following reasons:

 Miners’ job is just like auditors i.e. to verify the legitimacy of the bitcoin
transactions. 
 Miners help to prevent the problem of double spending.
 Miners are minting the currency. In the absence of miners, Bitcoin as the
network would still exist and be usable but there would be no additional bitcoin.
There are several pros of mining a bitcoin:

 Mining bitcoin helps support the Bitcoin ecosystem.

 Bitcoin mining helps miners to earn rewards in form of bitcoins.
 It is the only way to release new cryptocurrencies into circulation.
 It is used to check counterfeiting and  double spending.

3.4 Working of Bitcoin Mining

The nodes of the blockchain network are based on the concept that no one in the network
can be trusted. Proof of work is accepted by nodes to validate any transaction. Proof of
work involves doing hefty calculations to find a 32-bit hash value called nonce to solve the
mathematical puzzle. The miners create new blocks by abiding by the fact that the
transaction volume must be less than 21 million. 21 million is the total number of bitcoins
that can be generated. The verified transaction gets a unique identification code and is
linked with the previous verified transaction.

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Let’s understand this with the help of an example-

 Suppose Alice wants to transfer 10 BTC to Bob.

 Now the transaction data of A is shared with the miners from the memory pool. A
memory pool is a place where an unconfirmed or unverified transaction waits for its
confirmation.
 Miners start competing with themselves to solve the mathematical riddle in order to
validate and verify the transaction using proof of work.
 The miner who solves the problem first shares his result with other nodes(miners).
 Once maximum nodes agree with the solution, the transaction block is verified and
is then added to the blockchain.
 At the same time, the miner who solved the puzzle gets a reward of 6.25 bitcoins.
 Now, after the addition of the transaction block, the 10 BTC associated with the
transaction data is transferred to Bob from Alice.

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Chapter-4
BITCOIN TRANSACTIONS

4.1 Introduction

Bitcoin transaction means sending bitcoin from one person to the other in the secured
blockchain network. These are messages that are digitally signed using cryptography and
are verified by the miners that are present in the blockchain network .  Every bitcoin is
stored in a virtual wallet and transaction involves the transfer of bitcoin from one wallet to
another. Bitcoins can be sent from peer to peer irrespective of geographical location
without any intermediator in between(for example bank), it works in a decentralized way,
meaning nobody can interfere with your digital money, only you are responsible for your
bitcoins.

The block chain is a shared public ledger on which the entire Bitcoin network
relies. All confirmed transactions are included in the block chain. This way, Bitcoin wallets
can calculate their spendable balance and new transactions can be verified to be spending
bitcoins that are actually owned by the spender. The integrity and the chronological order of
the block chain are enforced with cryptography.

4.2 Transaction Fees

The transaction rate or speed is dependent on the amount the user pays for it. If a user pays
a small amount, the transaction rate will be slow, the transaction will take more time to
happen, vice versa is applicable here. Due to limited space, only a limited number of
transactions are possible at one point in time. Consider a case where heavy network traffic
occurs, then the miners prioritize those transactions that have the highest fees so that even
in the hectic congestion the highest-paid transaction gets executed. Many bitcoin wallets
allow users to set transaction fees manually. The fees are directly sent to the miners. When
the bitcoin hits a bull run, the transaction fees shoot up to an all-time high. there is no such
minimum transaction fee a user must pay, but the highest transaction fees mainly lie
between $24 to $31. as the highest-paid transaction gets confirmed first, therefore the fees
tend to fluctuate based on the demand of the user.

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4.3 Transaction Speed

Some Bitcoin Transaction Confirmations Take So Long, Time is taken for transaction
confirmation mainly depends on two factors:

 Transaction fees: As discussed above, if the user pays minimal transaction fees,
then the time taken for confirmation of a particular transaction would take a
longer time. the mining process needs significant technology and efforts,
therefore the importance of transaction fees comes into play.
 Network load: Every transaction gets stored temporarily in the memory pool till
the miners confirm it. When the transaction activities reach a certain high
threshold, the memory pool gets jammed thereby slowing the confirmation time
of the transaction even more. Due to this, all the subsequent transactions become
susceptible to delay

4.4 Working of Bitcoin Transactions

Sending or exchanging bitcoins undergoes lots of procedures underneath. The bitcoin

wallet and the network ensures that the digital currency reaches the receiver properly. There
are two basic terminologies related to this-

 Public key: Also known as a bitcoin address, these are publicly known to all
like your username in social media handles. In order to receive bitcoins, the user
must share his public key with the other user.
 Private key: These are kept secret and must not be shared with anyone, similar
to the user’s password of social media accounts. Private keys are the most
important thing in the whole cryptocurrency concept. The private key allows the
user to have access to bitcoins, if the user forgets the private keys, there’s no
way to recover the bitcoins or the private key. Therefore, it is advised to make a
proper backup of the private key in a safe place.
Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to
sign transactions, providing a mathematical proof that they have come from the owner of

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the wallet. The signature also prevdats the transaction from being altered by anybody once
it has been issued. All transactions are broadcast between users and usually begin to be
confirmed by the network in the following 10 minutes, through a process called mining.

We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to
the next by digitally signing a hash of the previous transaction and the public key of the next
owner and adding these to the end of the coin. A payee can verify the signatures to verify the
chain of ownership.
The problem of course is the payee can't verify that one of the owners did not double-
spend the coin. A common solution is to introduce a trusted central authority, or mint, that
checks every transaction for double spending. After each transaction, the coin must be
returned to the mint to issue a new coin, and only coins issued directly from the mint are
trusted not to be double-spent. The problem with this solution is that the fate of the entire
money system depends on the company running the mint, with every transaction having to go
through them, just like a bank.
We need a way for the payee to know that the previous owners did not sign any earlier
transactions. For our purposes, the earliest transaction is the one that counts, so we don't care
about later attempts to double-spend. The only way to confirm the absence of a transaction is
to be aware of all transactions. In the mint based model, the mint was aware of all
transactions and decided which arrived first. To accomplish this without a trusted party,
transactions must be publicly announced [1], and we need a system for participants to agree

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on a single history of the order in which they were received. The payee needs proof that at the
time of each transaction, the majority of nodes agreed it was the first received.
4.5 Timestamp Server
The solution we propose begins with a timestamp server. A timestamp server works by taking
a hash of a block of items to be timestamped and widely publishing the hash, such as in a
newspaper or Usenet post [2-5]. The timestamp proves that the data must have existed at the
time, obviously, in order to get into the hash. Each timestamp includes the previous
timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones
before it.

4.6 Proof-of-Work
To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a
proof-of-work system similar to Adam Back's Hashcash , rather than newspaper or Usenet
posts. The proof-of-work involves scanning for a value that when hashed, such as with SHA-
256, the hash begins with a number of zero bits. The average work required is exponential in
the number of zero bits required and can be verified by executing a single hash.
For our timestamp network, we implement the proof-of-work by incrementing a
nonce in the block until a value is found that gives the block's hash the required zero bits.
Once the CPU effort has been expended to make it satisfy the proof-of-work, the block
cannot be changed without redoing the work. As later blocks are chained after it, the work to
change the block would include redoing all the blocks after it.
The proof-of-work also solves the problem of determining representation in
majority decision making. If the majority were based on one-IP-address-one-vote, it could be
subverted by anyone able to allocate many IPs. Proof-of-work is essentially one-CPU-one-
vote. The majority decision is represented by the longest chain, which has the greatest proof-
of-work effort invested in it. If a majority of CPU power is controlled by honest nodes, the
honest chain will grow the fastest and outpace any competing chains. To modify a past block,
an attacker would have to redo the proof-of-work of the block and all blocks after it and then

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catch up with and surpass the work of the honest nodes. We will show later that the
probability of a slower attacker catching up diminishes exponentially as subsequent blocks
are added.
To compensate for increasing hardware speed and varying interest in running nodes over
time, the proof-of-work difficulty is determined by a moving average targeting an average
number of blocks per hour. If they're generated too fast, the difficulty increases.

4.7 Network

The steps to run the network are as follows:

1. New transactions are broadcast to all nodes.
2. Each node collects new transactions into a block.
3. Each node works on finding a difficult proof-of-work for its block.
4. When a node finds a proof-of-work, it broadcasts the block to all nodes.
5. Nodes accept the block only if all transactions in it are valid and not already
spent.
6. Nodes express their acceptance of the block by working on creating the next
block in the chain, using the hash of the accepted block as the previous hash.

Nodes always consider the longest chain to be the correct one and will keep working on
extending it. If two nodes broadcast different versions of the next block simultaneously, some
nodes may receive one or the other first. In that case, they work on the first one they received,
but save the other branch in case it becomes longer. The tie will be broken when the next
proof-of-work is found and one branch becomes longer; the nodes that were working on the
other branch will then switch to the longer one.
New transaction broadcasts do not necessarily need to reach all nodes. As long as they reach
many nodes, they will get into a block before long. Block broadcasts are also tolerant of

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dropped messages. If a node does not receive a block, it will request it when it receives the
next block and realizes it missed one.

Chapter-5
BITCOIN INVESTMENT

Invest in Bitcoin in 5 Steps

1. Join a Bitcoin Exchange

2. Get some Bitcoin

3. Get a Bitcoin Wallet

4. Connect Your Wallet to a Bank Account

5. Place Your Bitcoin Order

6. Manage Your Bitcoin Investments

Join a Bitcoin Exchange :

First, you’ll need to determine where you want to make a Bitcoin purchase. Most Bitcoin
investors use cryptocurrency exchanges. There’s no official “Bitcoin” company because it’s
an open-source technology, but there are several different exchanges that facilitate Bitcoin
transactions. These exchanges are the middlemen of cryptocurrency investing, like a stock
brokerage.

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Get some Bitcoin :

You can earn Bitcoin in several ways.

To purchase Bitcoin, it's helpful to visit a database of Bitcoin marketplaces, like this one.
You'll simply complete a transaction at most marketplaces, in which your currency in
converted into Bitcoin. You can also convert cash into Bitcoin using a similar process.

To mine Bitcoin you can download and run a miner like CGMiner on a custom CPU that can
theoretically turn a profit without doing much of anything at all. While you used to be able to
do this on your home desktop, it's not much of a practical possibility anymore. You'll spend
more on electricity keeping the computer running than you will turning a profit.

To trade Bitcoin, look for other people participating in Bitcoin interested in transactions. You
can find them at trading sites. In addition, if you sell goods or services, consider offering
Bitcoin as a method for accepting payment.

Get a Bitcoin Wallet :

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When you purchase a coin, it’s stored in a “wallet,” which is where all your cryptocurrency is
stored. There are two types of wallets you can get: a “hot wallet” or a “cold wallet.”

A hot wallet is a wallet that’s operated by either your cryptocurrency exchange or by a

provider. Some exchanges will automatically provide you with a hot wallet when you open
your account. In any case, hot wallets are convenient because you’ll be able to access your
coins through the internet or a software program. A cold wallet is the safest storage method
for your coins. A cold wallet is an actual piece of hardware that stores your coins, usually, a
portable device that’s similar to a flash drive.

Connect Your Wallet to a Bank Account

When you’ve obtained your wallet, you’ll need to link it to your bank account. This enables
you to purchase coins and sell coins. Alternatively, your bank account may be linked to your
cryptocurrency exchange account.

Place Your Bitcoin Order :

Now you’re ready to purchase Bitcoin. Your cryptocurrency exchange will have everything
you need to buy. Some coins cost thousands of dollars, but exchanges often allow you to buy
fractions of a single coin—your initial investment could be as low as $25. Investing in
Bitcoin is very risky, and it’s important that you carefully determine your risk tolerance and
review your investment strategy before you purchase any Bitcoin.

Manage Your Bitcoin Investments :

After you’ve purchased bitcoin, you can:

 Use your coins to make online transactions

 Hold your coins for a long period in the hopes it’ll appreciate in value

 Perform day trading with your coins—that is, buying and selling coins with other
Bitcoin owners, which can be facilitated on the cryptocurrency exchange.

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To Send Bitcoin

In order to send or receive bitcoins, one must possess a bitcoin wallet application.

 After installing the bitcoin wallet app, select the type of currency you want to
send. For example ethereum, bitcoin, etc.
 Write in the receiver’s address.
 Type the amount of bitcoin you wish to send.
 Pay the required transaction fee.
 Press the “send bitcoin” button and the cryptocurrency will be transferred.

To Receive Bitcoin

In order to receive bitcoins, do the following steps:

 Open the wallet and click receive.

 Share the public key address. It can be a QR code or a combination of numbers
and letters.
 Anyone with a public address can send the cryptocurrency .

Chapter-6
ADVANTAGES AND DISADVANTAGES

6.1 Advantages of Bitcoin Technology

 Payment freedom : It is possible to send and receive any amount of money instantly
anywhere in the world at any time. No bank holidays. No borders. No imposed limits.
Bitcoin allows its users to be in full control of their money.

 Very low fees : Bitcoin payments are currently processed with either no fees or
extremely small fees. Users may include fees with transactions to receive priority
processing, which results in faster confirmation of transactions by the network.
Additionally, merchant processors exist to assist merchants in processing transactions,
converting bitcoins to fiat currency and depositing funds directly into merchants' bank

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accounts daily. As these services are based on Bitcoin, they can be offered for much
lower fees than with PayPal or credit card networks.

 Fewer risks for merchants : Bitcoin transactions are secure, irreversible, and do not
contain customers' sensitive or personal information. This protects merchants from
losses caused by fraud or fraudulent chargebacks, and there is no need for PCI
compliance. Merchants can easily expand to new markets where either credit cards
are not available or fraud rates are unacceptably high. The net results are lower fees,
larger markets, and fewer administrative costs.

 Security and control : Bitcoin users are in full control of their transactions; it is
impossible for merchants to force unwanted or unnoticed charges as can happen with
other payment methods. Bitcoin payments can be made without personal information
tied to the transaction. This offers strong protection against identity theft. Bitcoin
users can also protect their money with backup and encryption.

 Transparent and neutral : All information concerning the Bitcoin money supply
itself is readily available on the block chain for anybody to verify and use in real-time.
No individual or organization can control or manipulate the Bitcoin protocol because
it is cryptographically secure. This allows the core of Bitcoin to be trusted for being
completely neutral, transparent and predictable.

6.2 Disadvantages of Bitcoin Technology

Degree of acceptance : Many people are still unaware of Bitcoin. Every day, more
businesses accept bitcoins because they want the advantages of doing so, but the list remains
small and still needs to grow in order to benefit from network effects.

Volatility : The total value of bitcoins in circulation and the number of businesses using
Bitcoin are still very small compared to what they could be. Therefore, relatively small

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events, trades, or business activities can significantly affect the price. In theory, this volatility
will decrease as Bitcoin markets and the technology matures. Never before has the world
seen a start-up currency, so it is truly difficult (and exciting) to imagine how it will play out.

Ongoing development : Bitcoin software is still in beta with many incomplete features in
active development. New tools, features, and services are being developed to make Bitcoin
more secure and accessible to the masses. Some of these are still not ready for everyone.
Most Bitcoin businesses are new and still offer no insurance. In general, Bitcoin is still in the
process of maturing.

Chapter-7
ECONOMY OF BITCOINS

Classification as money : Bitcoin is often referred to as a currency, but it does not conform
to the definition of money. Economists agree that to qualify as money, something must be a
store of value, a medium of exchange, and a unit of account. Bitcoin conforms to only one of
these three criteria. It is used as a medium of exchange. (About 1,000 brick and mortar
businesses were willing to accept payment in bitcoins as of November 2013 in addition to
more than 35,000 online merchants.) The bitcoin market currently suffers from volatility,
limiting the ability of bitcoins to act as a stable store of value and it is not commonly used as
a unit of account. Where people are allowed to buy with bitcoins, prices are not denominated
in bitcoins. The People's Bank of China has stated that bitcoin "is fundamentally not a

currency". Cryptocurrencies are unregulated in India but in Budget 2022, the government

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announced a flat 30 per cent tax on gains from cryptocurrency transactions as well as a tax
deducted source (TDS) of 1 per cent.

Price volatility : Bitcoin has an extremely volatile exchange rate. According to Mark T.
Williams of Boston University, its volatility is over seven times that of gold and over eight
times that of the S&P 500. The Bitcoin Foundation contends that high volatility is due to
insufficient liquidity while a Forbes journalist claims that it is related to the uncertainty of its
long-term value. Volatility has little effect on the utility of bitcoin as a payment processing
system.

Alternative to national currencies : Some in countries with problem plagued national

currencies may use bitcoins to protect their savings against inflation or the possibility that
governments could confiscate savings accounts. Bitcoins are used by some Argentineans as
an alternative to the official currency. which is stymied by inflation and strict capital controls.
It's been suggested that during the 2012-2013 Cypriot financial crisis bitcoin purchases rose
due to fears that savings accounts would be confiscated or taxed.

Speculative bubble : Bitcoin has been labeled a speculative bubble by many including
Former Federal Reserve Chairman Alan Greenspan and economist John Quiggin. Two lead
software developers of bitcoin, Gavin Andresen and Mike Hearn, have warned that bubbles
may occur.

As investment : One way of investing in bitcoins is to buy and hold them as a long-term,
high-risk investment. FINRA, a United States self-regulatory organization, warns that
investing in bitcoins carries significant risks. The European Banking Authority warns that the
risks of investment go beyond a potential fall in the value of bitcoins. Bitcoins may be of
limited value to unsophisticated investors. Risk hasn't deterred some such as the Winklevoss
twins, who made a US$1.5 million personal investment and attempted to launch a bitcoin
ETF.[13] Other investors, like Peter Thiel's Founders Fund, which invested US$3 million,
don't purchase bitcoins themselves instead funding bitcoin infrastructure like companies that

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provide payment systems to merchants, exchanges, and wallet services, etc. Investors also
invest in bitcoin mining .

Money supply : Growth of the bitcoin money supply is predefined by the bitcoin protocol,
and in this way inflation is kept in check. Currently there are over twelve million bitcoins in
circulation with an approximate creation rate of 25 every ten minutes. The total supply is
capped at an arbitrary limit of 21 million, and every four years the creation rate is halved.
This means new bitcoins will continue to be released for more than a hundred years.

Value forecasts : Financial journalists and analysts, economists, and investors have
attempted to predict the possible future value of bitcoin. Economist John Quiggin stated,
"bitcoins will attain their true value of zero sooner or later, but it is impossible to say when."
In 2013, Bank of America FX and Rate Strategist David Woo forecast a maximum fair value
per bitcoin of $1,300. Bitcoin investor Cameron Winklevoss stated in 2013 that the "[s]mall
bull case scenario for bitcoin is... 40,000 USD a coin". In late 2013, finance professor Mark
Williams forecast a bitcoin would be worth less than ten US dollars by July 2014.

Chapter-8

SECURITY
There are two main ways the blockchain ledger can be corrupted to steal bitcoins: by
fraudulently adding to or modifying it. The bitcoin system protects the blockchain against
both using a combination of digital signatures and cryptographic hashes.

The Addition Attack and digital signatures :

Payers and payees are identified in the block chain by their public cryptographic keys: most
bitcoin transfers are from one public key to a different public key. (Actually, hashes of these
keys are used in the block chain, and are called "bitcoin addresses".) In principle, an attacker

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Eve could steal money from Alice and Bob by simply adding transactions to the block chain
ledger like Alice pays Eve 100 bitcoins, Bob pays Eve 100 bitcoins, and so on, using of
course these people's bitcoin addresses instead of their names. The bitcoin protocol prevents
this kind of theft by requiring every transfer to be digitally signed with the payer's private
key; only signed transfers can be added to the block chain ledger. Since Eve cannot forge
Alice's signature, Eve cannot defraud Alice by adding an entry to the block chain equivalent
to Alice pays Eve 100 bitcoins. At the same time, anyone can verify Alice's signature using
her public key, and therefore that she has authorized any transaction in the block chain where
she is the payer.

The Modification Attack and mining :

The other principal way to steal bitcoins would be to modify block chain ledger entries. Eve
could buy something from Alice, like a sofa, by adding a signed entry to the block chain
ledger equivalent to Eve pays Alice 100 bitcoins. Later, after receiving the sofa, Eve could
modify that block chain ledger entry to read instead: Eve pays Alice 1 bitcoin, or even delete
the entry. Digital signatures cannot prevent against this attack: Eve can simply sign her entry
again after modifying it!

To prevent against modification attacks, the bitcoin system first requires entries be added to
the blockchain not one at a time, but in groups or blocks. More importantly, each block must
be accompanied by a cryptographic hash of three things: the hash of the previous block, the
block itself, and a number called a nonce. A hash of only the first two items will, like any
cryptographic hash, always have a fixed number of bits (e.g. 256 for SHA-256). The nonce is
a number which, when included, yields a hash with a specified number of leading zero bits.
Because cryptographic hashes are essentially random, in the sense that their output cannot be
predicted from their inputs, there is only one known way to find the nonce: to try out integers
one after the other, e.g. 1. then 2, then 3, and so on. This process is called mining.
The larger the number of leading zeros, the longer on average it will take to
find a requisite nonce. The bitcoin system constantly adjusts the number of leading zeros so
that the average time to find a nonce is about ten minutes. That way, as computer hardware

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gets faster over the years, the bitcoin protocol will simply require more leading zero bits to
make mining always last about ten minutes.

Double spending :

Bitcoin system is based on an innovative solution of a problem common to all digital

currency and payment schemes: that of so-called double-spending. With paper money or
physical coins, when the payer transfers money to the payee, the payer cannot keep a copy of
that dollar bill or coin. With digital money, which is just a computer file, this is not the case,
and the payer could in principle spend the same money again and again, copying the file over
and over. With bitcoin, when Eve offers to pay Alice some bitcoins, Alice can always first
check the block chain ledger to verify that Eve actually owns that many bitcoins. Of course,
Eve could try to pay many people simultaneously; but bitcoin can defend against that. If Eve
offers to pay Alice some bitcoins in exchange for goods. Alice can stipulate that she will not
deliver the goods until Eve's payment to Alice appears in the block chain, which typically
involves waiting about ten minutes.

Chapter-9

CONCLUSION

Bitcoin Technology is a system for electronic transactions without relying on trust. We

started with the usual framework of coins made from digital signatures, which provides
strong control of ownership, but is incomplete without a way to prevent double-spending. To
solve this, we proposed a peer-to-peer network using proof-of-work to record a public history
of transactions that quickly becomes computationally impractical for an attacker to change if
honest nodes control a majority of CPU power. The network is robust in its unstructured
simplicity. Nodes work all at once with little coordination. They do not need to be identified,
since messages are not routed to any particular place and only need to be delivered on a best

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effort basis. Nodes can leave and rejoin the network at will, accepting the proof-of-work
chain as proof of what happened while they were gone. They vote with their CPU power,
expressing their acceptance of valid blocks by working on extending them and rejecting
invalid blocks by refusing to work on them. Any needed rules and incentives can be enforced
with this consensus mechanism.

Chapter-10

REFERENCES

1. 2015, Joseph Bonneau. Under license to IEEE. DOI 10.1109/SP.2015.14,

2015 IEEE Symposium on Security and Privacy. Research Perspectives and
Challenges for Bitcoin and Cryptocurrencies.

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2.Research Paper By Satoshi Nakamoto (2009), Bitcoin: A Peer-to-Peer

Electronic Cash System (www.bitcoin.org)

2. https://www.geeksforgeeks.org/how-bitcoin-transaction-works/

3. https://bitcoin.org/en/bitcoin-for-individuals

4. https://www.investopedia.com/terms/b/bitcoin.asp

5. https://www.tutorialspoint.com/bitcoin/bitcoin_introduction.htm

6. https://www.cmegroup.com/education/courses/introduction-to-bitcoin/what-

is-bitcoin.html

7. https://www.newscientist.com/definition/bitcoin/

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Bitcoin is a peer-to-peer payment system introduced as open source software in 2009 by

developer Satoshi Nakamoto. The digital currency created and used in the system is also
called bitcoin and is alternatively referred to as a virtual currency, electronic money, or
crypto currency. The bitcoin system is not controlled by a single entity, like a central
bank, which has led the US Treasury to call bitcoin a decentralized currency. Economists
generally agree that it does not meet the definition of money
Bitcoins are created as a reward for payment processing work in which users who offer
their computing power verify and record payments into a public ledger. Called mining,
individuals engage in this activity in exchange for transaction fees and newly minted
bitcoins. Besides mining, bitcoins can be obtained in exchange for other
currencies,
products, and services. Users can buy, send, and receive bitcoins electronically for a
nominal fee using wallet software on a personal computer, mobile device, or a web
application.
Bitcoin is a peer-to-peer payment system introduced as open source software in 2009 by
developer Satoshi Nakamoto.
Bitcoin is a peer-to-peer payment system introduced as open source software in 2009 by
developer Satoshi Nakamoto.
Bitcoin is a peer-to-peer payment system introduced as open source software in 2009 by
developer Satoshi Nakamoto.
Bitcoin is a peer-to-peer payment system introduced as open source software in 2009 by
developer Satoshi Nakamoto.
Bitcoin is a peer-to-peer payment system introduced as open source software in 2009 by
developer Satoshi Nakamoto.
Bitcoin is a peer-to-peer payment system introduced as open source software in 2009 by
developer Satoshi Nakamoto.
Bitcoin is a peer-to-peer payment system introduced as open source software in 2009 by
developer Satoshi Nakamoto.

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