Bitcoin

Bitcoin is a peer-to-peer payment system that uses the unit of the same name to account for transactions. Cryptographic methods are used to ensure the functioning and protection of the system, but at the same time, all information about transactions between the addresses of the system is available in clear form.

The minimum transferable value (the smallest amount of crushing) - 10-8 bitcoins - was called "Satoshi" - in honor of the creator Satoshi Nakamoto, although he himself used the word "cent" in such cases.

An electronic payment between two parties takes place without intermediaries and is irreversible – there is no mechanism for canceling a confirmed transaction (including cases where the payment was sent to an erroneous or non-existent address, or when the transaction was signed with a private key that became known to other persons). No one can block (arrest) funds, even temporarily, except for the owner of the private key (or the person to whom it became known). But the provided multi-signature technology allows you to attract a third party (arbitrator) and implement "reversible transactions". With the help of a special scripting language, it is possible to implement other variants of smart contracts, but it is not accessible from the graphical interface and is not complete according to Turing, unlike later blockchain systems (see Ethereum).

Different authors classify bitcoins in different ways. The most common options are: cryptocurrency, virtual currency, digital currency, electronic cash.

Bitcoins can be used to exchange for goods or services from merchants who agree to accept them. Exchange for conventional currencies takes place through online digital currency exchange services, other payment systems, exchange offices or directly between interested parties. The price of bitcoin depends solely on the balance of supply and demand, it is not regulated or restrained by anyone. At the same time, no one is obliged to accept bitcoins, that is, there is no mechanism to get anything for them if, for some reason, they refuse to buy or accept them as payment.

The commission for transactions is appointed by the sender voluntarily. The size of the fee affects the priority when processing the transaction. Usually, the client program suggests the recommended amount of commission. Commission-free transactions are possible and are also processed, however, they are not recommended as their processing time is unknown and can be quite long.

One of the main features of the system is complete decentralization: there is no central administrator or any of its analogues. A necessary and sufficient element of this payment system is the basic client program (has an open source code). Client programs running on multiple computers are connected to each other in a peer-to-peer network, each node of which is equal and self-sufficient. It is impossible to manage the system publicly or privately, including changing the total number of bitcoins. The volume and time of the release of new bitcoins are known in advance, but they are distributed relatively randomly among those who use their equipment for calculations, the results of which are a mechanism for regulating and confirming the legitimacy of operations in the Bitcoin system (see the proof-of-work method).

One of the consequences of decentralization is the potential for "double spending", that is, the transfer of the same bitcoins to different recipients. Under normal conditions, this is protected by the inclusion of a transaction in the blockchain. But if you control more than 50% of the total computing power of the bitcoin network, then there is a theoretical possibility of "replacing" one chain of transactions with another.

Historically, the first solution to the problem of paying a remote seller was only the direct transfer of cash. At the same time, the parties to the transaction were not obliged to trust each other if the seller could verify the authenticity of the money received, and the buyer had confirmation of the transfer of money so that the seller could be required to fulfill obligations. Over time, intermediaries appeared, who were trusted by both parties to the transaction. The buyer gave the money to the intermediary, and the seller received it elsewhere from the intermediary or his representative. Physically, the money did not always have to be transported, since intermediaries could use the local stock of funds. The rejection of the mass physical transportation of money made it possible to speed up and reduce the cost of payments, to make them safer. One of the additional features of such payment systems is the ability to block or cancel payments. With the development of computer technology, bank non-cash payments have been significantly simplified and accelerated. But their use requires mandatory disclosure of part of confidential information to banks, which makes it available to regulatory authorities. The objective convenience of using intermediaries instead of physical transportation of money made it possible to significantly simplify the system of state control over payments - it was enough to establish control over intermediaries or oblige them to control "suspicious" transactions. It was also necessary to reduce transaction costs, which in some cases took up to half of the profit from the transaction.

Repeated attempts have been made to create a remote payment system that would be cheaper, less dependent on intermediaries, but no less reliable and secure. However, attempts to create "electronic money" that could be transferred between counterparties as easily and reliably as cash did not lead to success. The problem was the ability of computers to make an exact copy of any digital information, which made it possible to repeatedly use the same electronic "coin" for different payments - the buyer can pay for the goods, and then send an exact copy of the used electronic "coin" to another seller. Because of this, in any electronic payment systems, except cryptocurrencies, only a third-party trusted intermediary guarantees the seller that he has not received a copy of the money previously paid to someone.

Mark Andreessen notes that the Bitcoin system is the first practical solution to a long-standing information problem - how to ensure trust between the parties to the information received in a situation where neither side has confidence in both the actions of the other party and the open unprotected communication channel through which this information is transmitted. "Bitcoin" was the first to provide the possibility of direct transfer of ownership to another person via the Internet without the involvement of external guarantors, while no one can challenge the transfer, there is no mandatory commission for transactions, any transactions can be carried out for each of the parties free of charge. Bill Gates said in an interview with Bloomberg that "Bitcoin" shows how cheap remittances can be.

Bitcoins exist only in the form of records in a replicated distributed database (see blockchain), in which all transactions are stored in a publicly available open (unencrypted) form, indicating the bitcoin addresses of senders / recipients, but without information about the real owner of these addresses. There are no separate records in the database about the current number of bitcoins held by any owner. Only on the basis of chains of transactions does the current number of bitcoins associated with a particular bitcoin address become clear. That is, you can see that 1 bitcoin was received at the address, and 2 bitcoins were received at the same address for another transaction, the third transaction sent 1 bitcoin from this address. But the database does not store a separate record of how many bitcoins are now listed for this address - it is simply possible to easily calculate it at any time. Such calculations are automatically made by client programs, the user may not notice the fragmentation of information.

Keys

Each user of the system can generate an unlimited number of key pairs (ECDSA algorithm with the secp256k1 parameter). The size of the private key is 256 bits, and the corresponding public key is 512 bits.

The main use of keys is the creation of a bitcoin address and confirmation of the legitimacy of the formation of transactions. But they can also be used for digital signature or encryption in correspondence.

Creating a new key pair is offline and does not require a network or Internet connection. The created keys are usually stored in a special encrypted wallet.dat file. The user comes up with a password only to access the information from the "wallet.dat" file, that is, to access their key pairs. To manage bitcoins, the presence of this file is not necessary - in most cases, it will be enough to obtain the private key in some way.

You can store keys on any medium, not only on a memory card, but also in paper form. There are online wallets, such as Blockchain, Circle Snapcard or Coinbase, which are quite easy to use. However, such a tool reduces the degree of security of the keys, since problems with the site of such a service, including its hacking, can lead to interruptions in the use of their bitcoins or even their loss.

The traditional model of privacy is achieved by a system of restricting access to information: only two parties and the bank will know about the transaction. In the Bitcoin system, all transactions are public, stored in an open unencrypted form with free access to any block, and privacy is achieved by the complete absence of personal data of bitcoin address owners in the system. Satoshi Nakamoto recommended creating separate addresses for each transaction to increase privacy. This makes it difficult to map addresses to a specific owner.

According to a number of authors, from the point of view of privacy, bitcoin addresses are pseudonyms of users of the system. If it is possible to associate a bitcoin address with a specific person, then this personalization will be valid for all transactions using this address. In July 2011, it was shown that on the basis of publicly available information, it is possible to link many bitcoin addresses both to each other and to certain external identifying information. Exchangers, stores and wallet vaults, relying on e-mail, IP addresses, credit card numbers, etc., are able to identify and personalize a significant part of bitcoin transactions.

The use of "bitcoin mixers" significantly increases privacy. In this case, the amount of the real payment is divided into several standard portions (for example, one payment for 35,000 Satoshi can be sent in three standard portions of 10,000 Satoshi and one for 5000). But at the same time, in one mixer transaction, there are standard and non-standard bitcoins of a large number of different users at the input, and the same transaction sends payments to many different addresses at once. This makes it difficult to match senders and payees.

Transactions

Bitcoins can be transferred to anyone who provides a valid Bitcoin address or public key. To transfer bitcoins, the current owner creates a new transaction, which, in addition to indicating the number of bitcoins transferred, contains a hash signed by the initiator of the previous transaction through which the bitcoins were received. The previous transaction becomes the "input" of the current transaction. The public key or bitcoin address of the new recipient ("exit") is also indicated (see the schematic structure in the figure). A transaction is sent to the network by a broadcast request over open channels without encryption. The rest of the network nodes check the signatures before accepting the transaction for processing. The correctness of the signature indicates that the initiator is indeed the owner of the secret key for the "exit" address.

Transactions support an arbitrary number of "inputs" (links to previous transactions, including in favor of different addresses) and "outputs" (instructions about recipients). The values from all "inputs" are summed up, and the sum is distributed among the "outputs".

A feature of the protocol is the inability to take only some of the bitcoins from the "input". If 2 bitcoins were transferred to the address in one transaction, then the next transaction with this transaction as an "input" will automatically mean the transfer of 2 bitcoins. However, they can be divided into several "outputs", one of which can point to the same address, that is, part of the bitcoins will be transferred to itself ("change"). But the remainder does not have to be sent to the address from the input list. For example, "Bitcoin-qt" sends each balance to a new bitcoin address from a reserve of pre-created addresses.

It is impossible to cancel a standard transaction even with a clear error or fraud. However, the use of multi-signatures is provided, including for transactions involving an arbitrator, which can ensure the return of bitcoins if counterparties fail to comply with the agreed conditions.

The transfer of bitcoins comes down to specifying the conditions for their further disposal. Conditions are formed using public keys. For the next operation with these bitcoins, an appropriate electronic signature using secret keys (see the public-key cryptosystem) will be required, which will be the fulfillment of the conditions. The network verifies signatures with paired public keys. Thus, only the owner of the private key will be able to dispose of bitcoins. The most typical condition is the simple indication of a bitcoin address, which is formed on the basis of a public key. The conditions may be different. For example, you can require the use of several digital signatures in succession (that is, to obtain the consent of several parties) or specify a public key and IP address - then the digital signature will need to be performed on a computer with a specified IP address.

Fees
There is no mandatory commission in the Bitcoin system. Users can voluntarily set any size of it. If the sum of the "inputs" of the transaction is greater than the sum of the "outputs", then the difference is considered a commission, and it will go to the creator of the block with this transaction. Different client programs have their own rules and settings regarding the commission, and most often they calculate the recommended commission amount automatically.

Whoever generates a new block can add transactions from the queue to it at their discretion. For example, it can select only transactions with commission. As of the beginning of 2015, usually 50,000 bytes in a block are reserved for priority transactions, regardless of the commission. Due to transactions with a commission, the block size can reach 750,000 bytes. Between the computers of the Bitcoin network, a speed limit of 15 kilobytes per minute is set for relaying information about transactions without commission, which are not yet included in any block. Thus, there is no guarantee that a fee-free transaction will be included in the nearest block.

Individual transactions are combined together with other transactions into a special structure called a block. The information in the blocks is open, not encrypted, it can be quickly double-checked.

Each block always contains its own serial number and hash of the previous block. All blocks can be built into one chain, which contains information about all transactions ever made with bitcoins. They can be consulted, for example, on specialized sites - browsers of blockchains (English Blockchain explorer).

The first transaction in a block is always generated automatically and transfers the reward for creating a block. The rest of the block content is taken from the queue of transactions that have not yet been recorded in previous blocks. The participant who creates the block can select the transactions included in the block himself, for example, not to take transactions without commission into the block.

Not every formed bloc will be accepted by the rest of the participants. It is required that the numeric value of the header hash does not exceed the specified value (the "complexity" parameter). The lower the value, the less likely the condition is to be met. In the service area of the block, space is allocated for arbitrary values. If the header hash is unsatisfactory, arbitrary values are replaced with new ones and the hash calculation is repeated. The result of hashing (SHA-256 functions) is unpredictable, so there is no algorithm for purposefully changing an arbitrary region to achieve the desired result. Usually, a large number of recalculations are required. The "difficulty" parameter every 2016 blocks (approximately once every two weeks) is automatically set so as to maintain a constant average block creation rate (approximately 1 block per 10 minutes). If the blocks are formed faster, then after recalculating the "difficulty" it becomes more difficult to achieve the goal, and vice versa. Therefore, the change in the total computing power of the network only slightly changes the number of blocks created.

When a suitable hash variant is found, the node sends the received block to other connected nodes for verification. If there are no errors, then each node of the network that received the block writes it to its own instance of the database.

When forming blocks, situations may arise when several new blocks consider the same block to be the previous one. This phenomenon is called branching and occurs due to the simultaneous formation of blocks by "miners".

Prior to the inclusion of a transaction in the block, it is technically possible to execute several different transactions for the transfer of the same bitcoins from the same address to different recipients. As soon as the transaction is included in the block, the system will ignore the rest of the transactions with the same bitcoins, that is, only one transaction will remain in the block chain. But if you control more than 50% of the total computing power of the network, then there is a theoretical possibility at any confirmation threshold to form a parallel longer chain of blocks in which the same bitcoins will be transferred to another recipient (the problem of "double spending", often called the "51% Attack"»). When the network receives information about the second chain of blocks, it will become the main one, and the transaction in it will be confirmed, the first transaction will lose confirmation and will be considered erroneous. As a result, there will be no doubling of bitcoins, but their current owner will change, while the first recipient will lose bitcoins without any compensation.

Mining

The issuance of new bitcoins is decentralized, does not depend on any regulatory body, the volume of emission is known in advance (see the graph of the number of bitcoins until 2033). A standard portion of new bitcoins is added to the amount of commissions from transactions included in the next block. The total amount as a reward is received by the one who added the next block to the transaction database.

The activity of creating new blocks for the sake of being able to receive rewards in the form of issued bitcoins and commission fees is called "mining" (from the English mining - mining).

In the first versions of the client program, there was a button "generate new bitcoins". The computer's CPU was used to find the header hash of the new block. The probability of successful creation of a block by a miner is approximately equal to the ratio of its computing power to the computing power of the entire network, and if this ratio is very small, then the probability of receiving a reward even for a long period of time will be negligible. Those who want to increase the likelihood of receiving a reward tend to use as much computing power as possible. The peculiarity of the hash enumeration problem made it possible to apply maximum parallelization of calculations. Multi-threaded graphics processing units (GPUs) were well suited for this after the appearance of a small additional program (hundreds of times more productive than CPUs) and boards with FPGAs (performance similar to video cards, but superior to them in energy efficiency). After that, mining using the CPU turned out to be impractical due to the too low probability of receiving a reward, and the button in the client program was removed. Later, specialized processors (ASICs) were released, focused on calculating hashes for the Bitcoin network, even more powerful than GPUs and FPGAs. Since 2013, mining without specialized processors (on video cards or CPU) has become unprofitable: the cost of electricity consumed exceeded the average result.

Since 2013, there have been reports about "bitcoin factories" - specialized unmanned enterprises that "work" thousands of ASIC processors . The monthly income of the factory can exceed one million dollars (several thousand bitcoins). At the beginning of 2015, even assuming that all miners use the most energy-efficient ASIC processors, the total electricity consumption for mining was estimated at 1.46 terawatt-hours per year, which is equivalent to the annual consumption of 135,000 American home (an average of about 10.8 MWh per year). In 2017, a cloud mining service using leased power appeared. Maintenance of equipment, configuration and connection to the Internet is undertaken by the company providing this service. In most cases, the tenant can choose a cryptocurrency to mine and a mining pool to join.

Cloud mining can take the form of:

lease of a physical farm;
A virtual farm lease (can be part of a large physical farm)
lease of computing power (can be located on several physical farms);
Companies such as Cisco, BitDeer, ECOS have also created their own cloud mining platforms.

After the formation of every 210,000 blocks (approximately once every 4 years), the size of the reward with new bitcoins is programmed to be halved, that is, this value is a decreasing geometric progression (the amount of the reward is 50 → 25 → 12.5 → ...) The total supply of bitcoins is limited, as it is the sum of the terms of decreasing geometric progression, and will not exceed 21 million. As of May 2014, there were 12.7 million bitcoins in circulation.

Initially, the size of the issue when creating a block was 50 bitcoins. On November 28, 2012, the first reduction in the issue award from 50 to 25 bitcoins took place. On July 9, 2016, there was a second decrease in the issue reward from 25 to 12.5 bitcoins. May 11, 2020 — third to 6.25. In 2031, the size of the issue when creating a block will be less than one bitcoin and will continue to strive for zero. It is assumed that the issue will stop in 2140, since the reward for the block will not exceed 10−8 BTC, but long before that, commission fees will gradually become the main source of remuneration for the formation of new blocks.

Pools
To reduce randomness and more uniformly receive bitcoins, miners use specialized web services - pools (from the English pool - a common fund). Each participant is looking for his own version of the block and the results are sent to the pool.

The pool is rewarded as a kind of powerful solo miner. The pool distributes the received bitcoins among the participants in accordance with the rules set by the owner of the pool.

As of 2016, most of the large pools are located in the PRC: as of March 2016, more than half of the network capacity is divided between three large Chinese pools, the fourth place is occupied by the pool of BitFury, one of the first manufacturers of mining chips and founded by immigrants from the post-Soviet space.

Amount of data
Standard client programs are focused on working with a complete database of transactions. The client program is able to work completely autonomously, as a full-fledged network. This mechanism ensures the operability of the network without a dedicated server and a central agent, but forces you to store a huge archive of all transactions. As of February 2019, the size of the database was more than 250 GB. It can take more than a day to obtain, analyze and save the transaction database at the first launch. In the case of an increase in the number of transactions to levels comparable to the currently popular payment systems, the problem of storing and transmitting data may make it impossible to use standard software clients on most home computers.

For this reason, "thin clients" have been developed that store only block headers (about 80 bytes) on the hard disk, and download the full contents of the blocks as needed. This saves disk space, but is not suitable for mining.

Scalability

The block size on the Bitcoin blockchain is limited to 1 megabyte. When there were not too many transactions, such a restriction had almost no effect, but significantly limited the possibilities of a DDoS attack. With the growing popularity of Bitcoin, the number of transactions increased, but due to the limitation of the maximum block size, not all transactions were "placed" at once, there was a queue periodically. In May 2017, the situation deteriorated greatly. Some users complained that they had to wait several days for confirmation. To speed up processing, the user can assign an increased commission. But this makes the use of bitcoins quite expensive, especially for small payments - it makes no sense to use them, for example, in cafes and bars.

One of the first solutions to the problem of processing the increased number of transactions and reducing commissions was proposed by one of the leading developers, Gavin Andresen, - it was supposed to increase the maximum block size from 1 megabyte to 20. However, this idea has been criticized by many other developers, the largest miners and pool owners (concentrated in the PRC), as well as the owner of the largest bitcoin forum bitcointalk and the moderator of the bitcoin section on Reddit, as it would greatly increase the size of the database and reduce decentralization.

Another solution to the scalability problem is to use some types of sidechains and in general higher-level protocols deployed on top of the Bitcoin protocol. This is done by Blockstream, as well as the projects Lightning Network, Rootstock, Segregated Witness, Amiko Pay.

Gradually, the Segregated Witness (SegWit) solution was developed - some of the information is stored not in the blockchain, but in separate files outside the blockchain. The developers believe that as a result, a lot of space will be freed up, more transactions will fit in the block and the speed of confirmations will increase.

As a result, a compromise protocol SegWit2x was developed - some of the information should be stored outside the blockchain and the block size should be gradually increased to 2 MB.

A group of developers led by ex-Facebook engineer Amaury Szechet announced the abandonment of SegWit2x and the preservation of the previous structure of the blockchain (without storing information outside of it), but increasing the block size to 8 MB. They called their branch "Bitcoin Cash".

On August 1, 2017, a "forced branching" took place. Both cryptocurrencies share a common initial history, but block 478,559 was formed twice in different formats. One of them corresponds to the SegWit2x protocol, the other is Bitcoin Cash, which actually became the first block of the new cryptocurrency. All subsequent transactions are separated - they fall into different branches of the blockchain. Thus, those who had bitcoins before August 1, after the separation, retained all their bitcoins, but automatically became the owners of a similar amount of Bitcoin Cash. In fact, the separation of branches has created the possibility of double spending from the same wallet using the same access keys, although these are already two different cryptocurrencies that use different software to work with, although the differences are minimal.

On December 18, 2017, it became known about the resumption of active work on the launch of the suspended Segwit2x project. The idea of the development team is to resume and refine the suspended Segwit2x project and create a "truly anonymous and instant Bitcoin". At the same time, it is argued that the purpose of the work is not to replace the original network, but to effectively coexist between two networks with different purposes.

Software

The software of the Bitcoin network node exists in two forms: a GUI application and a background application (daemon in Unix, service in Windows). Programs can be remotely controlled via the JSON-RPC protocol (RFC 4627), and appropriate classes for PHP5 have been developed. This allows you to connect several miners to one node, create your own pool; Pair the site with a Web site.

Bitcoind is a daemon program that implements the Bitcoin protocol, controlled via the command line.
Bitcoin Core (formerly Bitcoin-qt) is a client based on the first program with a graphical interface Qt, the format for storing the secret key is compatible with bitcoind.
BitcoinJ is a node of the Bitcoin network in the Java language, developed by Google employee Mike Hearn (Mike Hearn) as part of the program "20% of employee working time". It has only user-defined functions - cannot validate transactions and blocks, create blocks, but can create new transactions. It can be used in mobile applications for bitcoin transactions.
Armory, a client with various features to improve security, is an add-on that runs on top of bitcoind, but uses its own private key storage format. As of early 2016, the lead developer has stopped working on improving the project, but since the source code is open, work on the project can be continued by anyone. The official website of the project continues to work.

On August 6, 2010, even before the widespread use of the system, a bug was noticed that allowed you to bypass verification, and it was possible to form a transaction with any amount of bitcoins at the output. On August 15, 184 billion bitcoins were created in this way. Within a few hours, the transaction was noticed, the network was stopped, erroneous blocks were removed from the transaction database, and a corrected version of the program was released.

In 2011, American computer security expert Dan Kaminsky tried to hack Bitcoin, but could not find vulnerabilities in the system. According to Dan Kaminsky, the resistance to hacking of the Bitcoin system is due to the fact that the development initially provided for the possibility of various attacks, "there are signs in the code that the audit was conducted by people like us."

On March 11, 2013, after the release of version 0.8 of the client program, the incompatibility of the block format with the previous version of the program was revealed. Such incompatibility of formats is regularly encountered in the development of other programs and is usually solved by the method of backward compatibility. But in the Bitcoin system, the software module version 0.7 rejected blocks of the new format, which led to the division of the blockchain into two parallel ones, which continued to build up different versions of the program. There was a de facto split into two parallel payment systems. It was decided to urgently abandon version 0.8. After about seven hours, the version of the "0.7 chain" began to consistently exceed the "0.8 chain", which was rejected in accordance with the protocol.

In the Bitcoin system, it is impossible to appeal and/or cancel transactions, even if it is proved that the owner did not know about them and did not want to conduct them. If the user's access password is stolen and the bitcoins are transferred to another address, the victim will not be able to find out who did it, since the recipient's address does not contain identification information. There is also no mechanism to guarantee a refund in the event that payment is made, but the service or product is not received. Scammers take advantage of this.

There are numerous reports of bugs and vulnerabilities in third-party systems being used to steal bitcoins. The previously known problem of the random number generator in the Android OS allows in some cases to pick up electronic keys, including for the Bitcoin system. In 2011, an error was identified in the processing of unconfirmed transactions in the accounting systems of many exchange services, which made it possible to transfer funds without transferring bitcoins. Ignoring this problem led to the bankruptcy of Mt.Gox. Other hacks of exchange sites and pools of joint production were also recorded. At the end of 2013, 96,000 bitcoins belonging to users were stolen from the transit accounts of the underground Sheep Marketplace.

In April 2014, Kaspersky Lab reported an increase in virus attacks aimed at stealing bitcoins, including through the theft of files with keys (wallet.dat).

The means of safe storage of bitcoins are:

To protect against failures: paper and/or digital backups (with the ability to encrypt them and/or store several parts in different places).
For theft protection: "cold storage" or hardware protection. At the same time, wallet encryption in itself is not a reliable protection against Trojans, since the password can be read through a keylogger.
Cold storage
The method consists in storing the private key on a computer that is not connected to the Internet, and with the ability to carry out operations on a computer that has an Internet connection. This method is implemented, for example, in the Bitcoin client Armory.

Also, cold storage includes hardware wallets Ledger, Trezor, CoolWallet, KeepKey. Hardware wallets generate and store a private key inside the device. When a transaction is required, the operation is carried out inside the equipment. At the end, the device displays only the electronic signature of the transaction.

Physical Bitcoins.

On August 6, 2010, even before the widespread use of the system, a bug was noticed that allowed you to bypass verification, and it was possible to form a transaction with any amount of bitcoins at the output. On August 15, 184 billion bitcoins were created in this way. Within a few hours, the transaction was noticed, the network was stopped, erroneous blocks were removed from the transaction database, and a corrected version of the program was released.

In 2011, American computer security expert Dan Kaminsky tried to hack Bitcoin, but could not find vulnerabilities in the system. According to Dan Kaminsky, the resistance to hacking of the Bitcoin system is due to the fact that the development initially provided for the possibility of various attacks, "there are signs in the code that the audit was conducted by people like us."

On March 11, 2013, after the release of version 0.8 of the client program, the incompatibility of the block format with the previous version of the program was revealed. Such incompatibility of formats is regularly encountered in the development of other programs and is usually solved by the method of backward compatibility. But in the Bitcoin system, the software module version 0.7 rejected blocks of the new format, which led to the division of the blockchain into two parallel ones, which continued to build up different versions of the program. There was a de facto split into two parallel payment systems. It was decided to urgently abandon version 0.8. After about seven hours, the version of the "0.7 chain" began to consistently exceed the "0.8 chain", which was rejected in accordance with the protocol.

In the Bitcoin system, it is impossible to appeal and/or cancel transactions, even if it is proved that the owner did not know about them and did not want to conduct them. If the user's access password is stolen and the bitcoins are transferred to another address, the victim will not be able to find out who did it, since the recipient's address does not contain identification information. There is also no mechanism to guarantee a refund in the event that payment is made, but the service or product is not received. Scammers take advantage of this.

There are numerous reports of bugs and vulnerabilities in third-party systems being used to steal bitcoins. The previously known problem of the random number generator in the Android OS allows in some cases to pick up electronic keys, including for the Bitcoin system. In 2011, an error was identified in the processing of unconfirmed transactions in the accounting systems of many exchange services, which made it possible to transfer funds without transferring bitcoins. Ignoring this problem led to the bankruptcy of Mt.Gox. Other hacks of exchange sites and pools of joint production were also recorded. At the end of 2013, 96,000 bitcoins belonging to users were stolen from the transit accounts of the underground Sheep Marketplace.

In April 2014, Kaspersky Lab reported an increase in virus attacks aimed at stealing bitcoins, including through the theft of files with keys (wallet.dat).

The means of safe storage of bitcoins are:

To protect against failures: paper and/or digital backups (with the ability to encrypt them and/or store several parts in different places).
For theft protection: "cold storage" or hardware protection. At the same time, wallet encryption in itself is not a reliable protection against Trojans, since the password can be read through a keylogger.
Cold storage
The method consists in storing the private key on a computer that is not connected to the Internet, and with the ability to carry out operations on a computer that has an Internet connection. This method is implemented, for example, in the Bitcoin client Armory.

Also, cold storage includes hardware wallets Ledger, Trezor, CoolWallet, KeepKey. Hardware wallets generate and store a private key inside the device. When a transaction is required, the operation is carried out inside the equipment. At the end, the device displays only the electronic signature of the transaction.

In different countries, the attitude towards the Bitcoin system varies greatly. In a number of countries, bitcoin transactions are officially allowed. They are usually treated as a commodity or an investment asset and are subject to the relevant legislation for tax purposes. Sometimes bitcoins are recognized as a unit of account, in other countries (for example, in Japan), bitcoin is legal tender with a tax on their purchase. In Germany, from March 2018, when paying for goods with cryptocurrencies, a tax on capital outflow will not be levied - transactions with cryptocurrencies have become the same as transactions with other means of payment. In other countries (e.g., China), bitcoin transactions are prohibited for banks, but allowed for individuals.

In many countries, the status is still undefined or changing. Initially, the Bank of Thailand stated that bitcoin transactions require a license for the right to conduct currency exchange transactions. Later, an explanation was published that, due to the lack of legal grounds in Thailand, bitcoin exchange does not fall under Thai currency law, since foreign currencies are not involved in transactions. After some time, the Bank of Thailand further clarified that bitcoins can be exchanged for foreign currency, through the exchange they are still connected and a license is needed.

Even in the same country, different government agencies, ministries, courts can treat bitcoins differently. In the U.S., bitcoins are considered property. In March 2013, FinCEN announced that the exchange of any cryptocurrency for fiat money should be regulated in the same way as the exchange of fiat money among themselves. Exchange offices must register as financial service providers and report suspicious transactions to law enforcement. In November 2013, the U.S. Senate held hearings on virtual currencies. Although the final decision was not made, but cryptocurrencies were not banned, they expressed their desire to control and study them, to work on the regulation of this business. In August 2013, the accused of fraud justified himself by saying that bitcoins are not money and he does not have any financial obligations to investors. A judge for the Eastern District of Texas ruled that when bitcoins were transferred to an investment fund, they were a currency or a form of money, that is, investors transferred money to the fund and the fund now bears the corresponding obligations. On March 25, 2014, the U.S. Internal Revenue Service issued guidance on taxing transactions involving bitcoin and other virtual currencies that are treated as property.

On October 22, 2015, the European Court of Justice ruled that bitcoin-to-fiat currency exchange transactions are exempt from VAT. The court's decision clarifies that the VAT law applies to the supply of goods and the provision of services. Transactions in bitcoins have been classified as payment transactions with currencies, coins and banknotes, and therefore are not subject to VAT. The court recommended that all EU member states exclude cryptocurrencies from the list of assets subject to taxation.

In June 2021, El Salvador became the first country to recognize bitcoin as an official means of payment: on September 7, the law came into force and all businesses and organizations are required to accept cryptocurrency to pay for goods and services along with the US dollar. El Salvador does not have its own currency.

In 2022, the Central African Republic became the second country in the world to make bitcoin an official means of payment.

Bitcoins are not a debt obligation of the issuer, which distinguishes them from electronic money and non-cash payments. The bitcoin quote is formed solely by the balance of supply and demand, not tied to any currency or other asset. Unlike fiduciary money, the Bitcoin system does not belong to an administrative body (central bank or state) that would seek to provide liquidity at a given level, commit itself and/or oblige others to accept payment in bitcoins, or could change its purchasing power by voluntarily changing the total number of bitcoins.

It is often argued that limiting the issue is a hedge against inflation, since it is assumed that a limited supply will provide an upward trend in quotations. This stimulates the speculative accumulation of bitcoins. A number of authors believe that a limited number of bitcoins is not a sufficient condition for guaranteeing the growth trend of the exchange rate, since another necessary condition for this is an increase in the supply of goods and services for bitcoins and services related to it. That is, the non-speculative value of bitcoins directly depends on the volume of only those goods and services that can be purchased for them, and not the global commodity mass.

Bitcoins are accepted in exchange for network services and real goods. Many organizations accept donations in Bitcoin. At a U.S. University League game, a poster of one of the students "Mom, Money Come!" with a bitcoin sign and a QR code of the student's bitcoin address was caught on television. During the day, the student received donations for 20 thousand dollars. In the case of WikiLeaks, the acceptance of bitcoins became a necessary measure after Visa, Mastercard, Bank of America stopped accepting donations to WikiLeaks, and PayPal and some other payment systems froze accounts. Providing the ability to pay through bitcoins can serve as additional advertising, even if such payment has never been made

A number of brokers offer non-deliverable CFDs on the Bitcoin – US Dollar (BTC/USD) exchange rate on margin trading.

Speculative bubble
Many economists consider the Bitcoin system to be a speculative bubble. Former head of the US Federal Reserve, Alan Greenspan, said in an interview with Bloomberg on December 5, 2013 that he considers Bitcoin to be a "bubble", since, in his opinion, bitcoins have no real value .

Australian economist John Quiggin considers bitcoins an acceptable settlement tool instead of barter, but unsuitable for the role of a financial asset The underlying value of assets should either be formed by their alternative use (as the opportunity value of gold or silver) or their yield (as the discounted value of stocks or bonds). But bitcoin has no such sources of value. If merchants refuse to accept bitcoins as payment for goods and services, their value will become zero. It is the lack of options for the productive use of bitcoin or the revenue stream that makes their price purely speculative. Quiggin believes that sooner or later the price of bitcoin will reach its true value - zero, but it is impossible to say exactly when this will happen.

Robert Shiller, winner of the Nobel Prize in Economics (2013), believes that bitcoin "exhibits many of the characteristics of a speculative bubble".

David Andolfatto, vice president of the Federal Reserve Bank of St. Louis, believes that the price of bitcoin "consists solely of a bubble," although he acknowledges that many other assets have prices higher than their intrinsic value.

Timothy Lee of the Washington Post observed in November 2013 that the observed cycles of rising and falling the price of bitcoin are not characteristic of a speculative bubble. He points out that a bubble is characterized by a fall in price after its speculative overvaluation becomes apparent and there is no subsequent return. For bitcoins, periods of decline were replaced by new growth even after the release of negative news.

James Surowiecki, an economic columnist for The New Yorker, believes that due to the rapid rise in price, and at the same time popularity, the Bitcoin system looks like a classic bubble.

But most importantly, people have decided that buying and holding bitcoins is an easy way to make money. As a result, many – probably even most – users purchase bitcoins not to buy goods and services, but to speculate. This is a bad investment decision, which also has a bad effect on the prospects of bitcoin.

Nassim Nicholas Taleb, an American researcher of the impact of random events on the global economy and stock trading, criticized the value of cryptocurrencies as such at the Visa Informal Cashless Forum 2021, and predicted that they would eventually have zero value. In his opinion, a significant increase in price is not good luck for the currency. "The currency must be stable. If you pay rent in bitcoins, you can go bankrupt if it goes up a lot, and your income is tied to fiat money. He also noted: "It's a bubble. And if it is blown away, it can cause some harm to the economy..."

Discussion about the financial pyramid
Nouriel Roubini, a former senior adviser to the U.S. Treasury and the International Monetary Fund, said in March 2014 that Bitcoin is a variant of a pyramid scheme. Jonathan Trugman of the New York Post is also convinced of this .

In 2012, the European Central Bank noted in a report that it is not yet possible to assess whether the operation of the Bitcoin system is a pyramid scheme. In 2014, the head of the Bank of Estonia was careful to note the lack of evidence that Bitcoin is not a pyramid scheme.

A 2014 World Bank report states that "contrary to popular belief, Bitcoin is not a deliberate pyramid scheme." According to Eric Posner, a law professor at the University of Chicago, a pyramid scheme usually has signs of fraud, and the situation with Bitcoin is more like a collective illusion. Economist Jeffrey Tucker argues that "there are several key differences between a pyramid scheme and Bitcoin." A 2014 report by the Federation Council (Switzerland), in response to the repeatedly raised question of whether Bitcoin is a pyramid scheme, concludes that the Bitcoin system does not make typical promises of profit, so Bitcoin is not a pyramid scheme.

It is necessary to separate the question of whether the Bitcoin system is a financial pyramid from the facts of using bitcoins and other cryptocurrencies to create and operate financial pyramids - an example is the "MMM Global" organized by Sergei Mavrodi.