Bitcoin Wallets: What are the differences between them?

Satoshi Nakamoto first published their paper on Bitcoin back in 2009, but it didn’t reach real mainstream popularity until recently. Only the users who understand the highly technical mechanics of Bitcoin invested their time in the technology during 2009-13 intermission period. In February of 2013 Bitcoin, and soon cryptocurrencies in general, finally entered the public consciousness. Despite being a four year old technology, many of the core features of the Bitcoin protocol were not polished in any capacity, let alone ready for mass public consumption. The Bitcoin wallet is an excellent example of one such component. Since that first popularity explosion, much expertise has gone into designing and refining the Bitcoin wallet. Today we will be taking a look at the differences in functionality of the three types of wallets as well as comparing their security and usefulness. These types of wallets suit users depending on the way people wish to access their funds, as well as who they want to entrust the long-term security of their accounts.

What is a Bitcoin wallet?

For a majority of Bitcoin users, the first cryptocoin interface they encounter is the wallet. Much like the physical wallet you keep in your back pocket, your Bitcoin wallet serves to store currency that you mine, purchase, or receive from others. Your digital wallet functions in a very similar way to its real life counterpart – however,there is one key difference: Cryptocurrencies are exchanged using addresses not unlike email, with the exception that your Bitcoin addresses are generated randomly on your behalf. Your wallet can hold more Bitcoin addresses then you could ever use, and each address functions as a separate place for you to send and receive money. Think of each address as a separate compartment in your wallet, or as the various different bank cards you own that each have their own individual balances. These addresses are where all transactions are directed, whether they’re yours, or run by the companies you use to collectively hold your money.

Offline Wallets

In the beginning of Bitcoin, there were offline wallets. These wallets operate in the “traditional” wallet style – that is, with all of your wallet data stored only locally on your own personal machine and not in need of a constant internet connection. You do need to be on the internet to receive and send your currency, but you don’t always have to be online. Initial Bitcoin commerce wasn’t possible without at least a basic wallet, and the offline wallet was the simplest solution for early adopters to code up and release to the public, including the one Nakamoto published. As such, offline wallet apps are readily available on both the desktop and mobile platforms. It should also be noted that any damage to your wallet data can quickly render it corrupted, which means your keys (and your cash) are unrecoverable without a backup. This limitation drives fear into the heart of many Bitcoin enthusiasts, some of which can barely keep track of their physical keys, let alone their digital ones. As a result, it’s important to keep many copies of your wallet information secure and safely stored away, even if just on a USB drive behind a safe.

Online Wallets

When hosted, or online, wallets entered the scene, they changed the entire Bitcoin wallet paradigm. Instead of keeping all your wallet information stored locally, a sensible online wallet stores an encrypted copy of your wallet data on their servers with a password you choose. When you want to access your wallet, your data is downloaded and decrypted locally. After you have completed your transactions, the hosted wallet uploads your encrypted wallet to back servers the hosted wallet controls. This relieves the user of the responsibility of backing up their wallet as well as “syncing” their wallet across their devices — all while keeping the users keys protected from abuse on the company’s servers by only doing encryption and decryption operations on the “client side”, aka locally on your machine. Online wallets are most popular on web browser centric and mobile devices, but the nature of this type of wallet makes easy access possible on any networked system. IT also ensure you don’t have to run your computer all day as a node to keep up with transaction activity on the Bitcoin network, and can let your provider handle all the trouble. However, if anything were to happen to the company you use to store your currency, then you’d be out of luck unless they offer a backup service to store copies of your wallet offline.

Deterministic Wallets

A third type of wallet exists exclusive of the other two: The deterministic wallet. The previous two types of wallet operate as variations of each other, where the online and offline wallets manage the same wallet data that is located either on your machine or is shifted to someone else’s. On the other hand, the deterministic wallet generates master root key (consumable by humans in the form of a twelve word passphrase) and hands it to the user. The root key is the only information the user is required to keep track of. Once the root key in input, the deterministic wallet uses advanced cryptographic algorithms to derive new private keys, or addresses, from the original root key. Because the wallet is creating new addresses using the same formula with the same initial conditions each time, all addresses are said to be predetermined from the root key. This handy fact allows you the option to store your wallet backup securely in your brain (via memorization) without the need for the key to exist digitally anywhere — all while still being able to access funds in any of the derived addresses. The portability of this system grants deterministic wallets secure interfaces on your desktop, your mobile phone, and your web browser. This of course still depends on you remembering  a very unique kind of password that may be difficult to recall, or if written down can pose a security threat.

Which should you choose?

Since the invention of the Bitcoin protocol users and developers alike have worked to shape the function and feel of cryptocoin wallets. Today wallets are more robust, packed full of features, and offer security that we couldn’t imagine during the infancy of Bitcoin. Wallets come in many forms and serve many purposes. We’ll share with you next how most popular wallets available compare, and what you can do to pick the one that suits you.

How do you perform arbitrage with Bitcoins?

What is Arbitrage?

Put simply, arbitrage is buying something at a low price and selling more or less immediately at a higher price through a different market. There are many kinds of arbitrage, but all of them boil more or less to the same goal: Capitalizing on a price difference for economic gain.

Arbitrage is everywhere in our global economy and lots of commercial transactions depend upon it and utilize it. Goods are produced at a reduced cost in one place and are sold at a higher cost someplace else. The important thing is that the differences in price allows us to recoup the costs of the transaction; i.e. packaging, transportation, management, etc. For our discussion we will be referring to the arbitrage between cryptocurrencies between exchanges and other markets.

Why does it happen?

The reasons for arbitrage are many and opportunities are created every day. Globally, it can be said that these profit windows open due to market inefficiencies and perhaps that’s the best way to put it since the work of many arbitrageurs decreases the profitability of arbitraging, benefiting the market as a whole.

Remember that Arbitrage depends on opportunities and these are not a plentiful resource; it is safe to say that arbitrageurs compete for these opportunities to capitalize on them when possible.

Is it hard?

Arbitrage requires both skill and strategic thought. While “simple” arbitrage situations, like buying goods at a farm to sell them at a market may not be the most shining examples, they still require some skill to manage them profitably. Also – remember that an arbitrageur’s worst enemy is another arbitrageur.

This is a game that begins with observation and measurement of the market as the arbitrageur must, at all times, be observant of the price difference in the goods he intends to acquire and sell. The markets move and what was an opportunity before can become quite the opposite in the future; an arbitrageur must hedge the risks he or she takes while doing their business.

Arbitrage in the Bitcoin Economy

Certainly there’s room for arbitrage with Bitcoin, but hold your enthusiasm; the golden age of bitcoin arbitrage has ended long ago. In 2014, there are no 30 percent ROI opportunities like in the Gox days. The essence of current arbitrage remains the same, but the opportunities however are different.

A quick scan of currency arbitrage in the Cryptsy and Poloniex exchanges, as of  September 17 at 02:03 GMT yields three potential opportunities. Let’s analyze them.

Opportunity 1: Buy a Hunter Coin (HUC) at Cryptsy and sell it for BTC at Poloniex. Profit: 0.00000065 BTC. Margin: 3.96%.

Yes, that’s it – 65 satoshis. That’s 0.0003010475 of a dollar. At this rate you would need 3321 opportunities like this to earn a single dollar.

Opportunity 2: Buy a ProtoShare (PTS) on Poloniex and sell it for BTC at Cryptsy. Profit: 0.00000001 BTC.

In this scenario you would need 215 thousand “opportunities” to make a single dollar.

Opportunity 3: Buy an Execoin (EXE) on Poloniex and sell it on Cryptsy. Profit: 0.02293949 BTC. Margin: 11.32%.

This is a fine opportunity indeed; at current exchange rates this is 10.64 USD of money earned in a supposedly risk-free transaction.

However, in the strict academic sense, there’s no arbitrage here. Why? Well, for one, there’s risk. You might not have the coins needed to trade in Poloniex and while you send them over the opportunity might disappear. Every cryptocoin movement between wallets takes time and good opportunities won’t last long. This is the first risk of cryptocurrency arbitrage.

Good arbitrageurs know this and use faster coins to move funds from exchange to exchange. The risk might be less, but it’s a risk nonetheless; while the world of Wall Street’s arbitrage happens in the miliseconds,  in the world of cryptocurrencies it happens over minutes of waiting for transaction verification.

Now stop and think about how poor this is. Cryptsy is one of the exchanges with the most trading combinations – otherwise known as pairs – available, it has 298; placing it fifth overall. In addition it handles a very large transaction volume of 1117 BTC daily. This makes it one of the most attractive places to be conducting crypto-arbitrage, as there are hundreds of users trading the numerous alt-coins it supports. Still, there is over half a million dollars in trades going on, but only one true opportunity available – measuring in at just $10

Almost two hours later, at 05:45, the opportunity is still intact. What happened? Why not just go and take it? Now we come to the second risk of bitcoin arbitrage: Exchange withdrawal issues.

This is another layer of danger which inexperienced users usually overlook when thinking about arbitrage. Simply put, the exchanges withhold the right – at least Cryptsy does – of doing whatever they want with their withdrawal services. Let’s travel back in time to March 18 2014, where a young curious would-be arbitrageur scanned an opportunity and was willing to try it.

The scenario: Buy InfiniteCoin at Cryptsy, then sell it.

The wannabe did as the program said, and sent his precious bitcoin to the exchange; where he bought the InfiniteCoin he needed, with every fee already taken care of in his calculations. He wrote a destination address, then he clicked on “Withdraw”.

IFC had a block time of 30 seconds – that meant the transaction is supposed to take that amount of time to be confirmed. The amateur arbitrageur waited 30 seconds, and he began thinking that it must be some administrative issue.

60 seconds passed, and he kept thinking the same; two hours passed, and he emailed support.

“Oh, hello Cryptsy? InfiniteCoin withdrawals are taking infinite time. ”

Three hours later they replied saying the withdrawal was at last being processed.

By then though the arbitrage opportunity was lost. However, the story doesn’t end here. Twelve days later, and after several support tickets, the coins were at last transferred. Not only did the opportunity of profit pass,  but the coins were more or less worthless by the time they were traded.

Experienced arbitrageurs already know this, in these cases the arbitrage opportunity is inexistent. How do they know? Well, to shed some light on it, sometimes the price is low not because the sellers are mis-pricing it, but because the exchange is broken, and they want their money out.

How do you do bitcoin arbitrage?

There are many ways to do arbitrage with bitcoin, and other crypto-currencies, and they depend on several questions:

  1. Will I have to move my currency between exchanges or are they already there?
  2. Will I trade a single pair or several?
  3. Which currency will I end up with? Dollars? Bitcoins? Something else?

Let’s take a look at the first question. While it is easy to imagine buying at a discount on one place and selling at a premium on another, it is not as intuitive to think about already having your funds there. This is our first arbitraging method.

Method 1: Waiting with coins

This method requires you to have the same amount of the coin you’re buying in the market you’re selling, and performing the trade as simultaneously as possible; back in the example above, it would’ve meant having enough Execoin ready to sell, while having enough Bitcoins to buy it too. Since it is difficult to reliably predict which currencies will have arbitrage opportunities in the often volatile markets, you would need to study the currencies for trends of potential arbitrage.

As it is, this method suffers no transaction risk whatsoever; your coins operate in the exchanges’ systems and are as instant as the exchange allows them to. The biggest drawback this method has is that the volatility risk might eliminate your gains from arbitrage. Requiring 2x the money involved in the transaction is not as big a disadvantage as it may seem, since current arbitrage opportunities are small.

Pros:

  • No transaction risk.
  • No transaction fees.

Cons:

  • The Volatility risk.
  • Requires much more money on hands.
  • Idle coins waiting for opportunity earn no return for you.

If you are keen on taking transaction risks, you might as well perform the second arbitraging method.

Method 2: Moving coins

This is what everybody thinks when they first learn about crypto currency arbitrage. You buy cheaply on Exchange A and then you sell it at a higher price on Exchange B. There’s not much more than that, and that is why the barrier of entry is so low for this method; which means more arbitrageurs, and less opportunities for everyone.

Transaction risk is the biggest here, as explained above there’s no guarantee that certain exchanges will allow you to make use of your funds as readily as you would like to. Also, this does not mitigate the volatility risk you will incur by holding cryptocurrencies. This may change though in the future with cryptocurrencies as they stabilize.

Pros:

  • It’s easy to do.
  • No transaction fees.
  • No idle coins waiting for opportunity.

Cons:

  • It’s easy for everyone to do.
  • Transaction risk.
  • Volatility risk.
  • Transaction fees.

Method 3: Triple Arbitrage

Sometimes it is not a matter of buying apples at a low price and selling them at a premium elsewhere. Sometimes you buy apples to exchange for oranges and then exchange those oranges for bananas, which you then trade for apples again. Triple arbitrage takes advantage of price discrepancies amongst different trade-able objects. In this case it’s with the many currencies on major exchanges.

It is unlikely (and much riskier) that anyone performs triple arbitrage without automated means, the barrier of entry is also much higher than the two previous methods with a single trading pair.

Pros:

  • You can combine it with the two previous methods.
  • Less likely for common arbitrageurs to exploit these methods mean more opportunities.
  • If an exchange is particularly inefficient you might be able to do everything in one place.

Cons:

  • Unfeasible without automated means.
  • Doing this with the “moving coins” method increases transaction risks & fees.
  • Doing this with the “waiting coins” method requires more capital.
  • More trading fees.

While you might be able to use more than three pairs to trade, the possibilities of doing so diminish due to trading fees. We should carry on to the next question, which mitigates a risk that every method above has.

Method 4: Staying in stable currency

You might have read the term “going long”, which is trader jargon for staying in a currency or investment no matter the short-term performance. If you believe bitcoin will continue to acquire value in the future, you are thinking in this same mindset – your investment is its own holdings, rather than taking advantage of a market discrepancy.

But in the volatile world of crypto currency arbitrage, you might not necessarily want to go long with Bitcoin depending on your feelings of the market. The volatility for the five year old currency is high and any gains that you acquire from arbitrage are not stable. A mere ten percent gain or loss on the value of Bitcoin could double or destroy your gains from the arbitrage methods listed earlier in this article.

By staying in a stable, government-backed currency such as the US dollar, you can meanwhile get into an exchange, trade for your profit, and get out. Although you’ll be leaving the cryptocurrency market and entering charted, safer waters, there will be much more scrutiny on fees, waiting periods and other financial regulations

Pros:

  • You can incorporate this philosophy into every method.
  • Much more stable than playing the market.

Cons:

  • No opportunity for short selling and gains.
  • Fees from exchanges to and from fiat currencies

There surely are variations and increasingly complex ways of conducting arbitrage, for instance instead of triple-arbitrage, quadruple and quintuple-arbitrage. These ways exposed here, and their resulting combinations, should be enough to describe what’s accessible to most bitcoin traders worldwide.

Conclusions

These methods listed above are, at a glance, how to approach arbitrage with Bitcoin and other cryptocurrencies on the market. In my opinion, the landscape for arbitraging is not easy – Take it from someone who thought it would be profitable and went through the effort of developing software exactly for arbitrage. I could be proven wrong, but I would need to see data to believe it; just as I needed data to conclude the great risk of arbitrage at this time.

Bitcoin Wallet: The Grandfather of Android Bitcoin Wallets

bitcoin-wallet-play-store

With Bitcoin and it’s fellow cryptocurrencies becoming more mainstream everyday, it is only natural that our digital wallets are accessible on both our desktops and our phones. Here at Coin Manual we are doing our research to find which Android wallets are the best of the best (and which are the worst of the worst). Today we will be looking at the first Bitcoin wallet  created for Android — aptly name Bitcoin Wallet by Andreas Schildbach.

 

First Impression

bitcoin-wallet-main

Users looking to download this app are greeted on the download by 4.1/5 star rating and over 500 thousand app downloads as well as a recent (September 11, 2014) changelog entry, which means someone has and still is putting a lot of work into this app. Once installed and open, the main interface of the app exposes most of the main facets of Bitcoin commerce from one interface. A message in the center of the screen explains that the user will have to deposit Bitcoins into their wallet before they can start using the app. Tapping the on screen address pops open the address book, with a plus button in the corner to generate new addresses.

One of the more convenient features of this app is the ability to maintain an offline wallet while avoiding the tedious (and storage-hungry) download of the entire blockchain. What this translates to is complete control of your wallet’s private keys (vs. your keys stored on someone else’s server) and a lightweight storage footprint. Warnings cautioning users to frequently back up their wallet can are refreshingly displayed on multiple different screens in this app.

Bitcoin Wallet supports transactions initiated manually, via Bitcoin URL or QR code, and, uniquely, NFC. This app also allows for transactions to occur with no internet connection via Bluetooth as well.

 

Summary

This app does exactly what it says on the tin — and that’s it. It’s simple to use interface lets you operate efficiently and effectively. Overall, I’d give this app a 5/5 for newcomers and old hats alike looking for a basic-yet-fully-functional Android Bitcoin wallet.

How will financial firms like JP Morgan soon challenge Bitcoin?

Bitcoin has endured many challenges since emerging back in 2009. Still, the currency is more alive than ever with ever-growing adoption between new consumers and merchants alike. It’s uniqueness as a (mostly) decentralized currency against all odds has attracted the attention of media all over the world. As the currency populi of the world, are the big financial firms and authorities of the world planning to take on the cryptocurrency, challenge it, or even destroy it?

Do financial firms even care about Bitcoin?

Yes. Early this year we saw a number of provocative headlines ranging from JP Morgan’s potential patents for a digital currency to the Goldman Sachs assessment of Bitcoin. Both have spurred volumes of discussion about the topic, though it all boils down to a single fact: They care.

The extent to which they care, however, varies. None of them have, as far as we know, gone out and bought Bitcoins as part of a portfolio or made direct investments in the firms that fuel the currency’s day-to-day operations. Still there is a clear interest in the currency that ranges from distrust to interest, depending on what element of the currency you’re referring to. Based on what most firms are saying though, the true value in Bitcoin is its ability to be a unique identifier without the need for a central server or organization to manage that identification.

What are they doing right now?

Not much. Financial firms have been more or less quiet, and even those like PayPal have bare touched the water in approaching Bitcoin directly or demonstrating a proof-of-concept toward a cryptocurrency or other digital asset system. They are likely monitoring and reviewing the currency’s value as both a currency, as well as learning what Bitcoin had to do the hard ware in recent months. As a currency with no authority to regulate or control the economics within it, Bitcoin has spurred both interest, speculation and criticism by financial firms by the lack of rules that guide it.

What will they do?

It depends. While Bitcoin is a decentralized currency in the hands of the masses with no central “authority” beyond what its developers try to promote for implmentation, financial firms are companies, with specific financial goals and a diverse tool set utilize. As companies with a duty to maximize returns for their returns, firms like JP Morgan, Goldman Sachs and others are watching the Bitcoin community closely for an interpretation of its potential value as a currency, or in more simple terms a “token” system.

Bitcoin is the first demonstration of a system that can identify itself without any specific hardware or a central server or repository to confirm the identity. While this makes it inherently a great currency, many discussions among both the Bitcoin community and financial firms speculate over the many uses as a basis for monitoring rewards, stocks, ownership and other assets. While this influences the “Bitcoin way of life” many community members push onto newcomers, financial firms instead see the value through its potential to be appropriated.

Simply put, financial firms will out-innovate Bitcoin, not destroy it.

Bitcoin isn’t this “super currency” that will bring about world peace and end all economic conflict. The economic status quo is a very bank-dependent system to control inflation alongside financial firms that know the rules of the economic playing field and do their best to utilize and manipulate those rules to maximize returns. Bitcoin however has no rules. Much of its usage cannot be even monitored or tracked against identities, even though the blockchain is public for everyone to see. This creates an environment far too chaotic that financial firms would feel comfortable interacting with.

Still, these firms will challenge Bitcoin. The attractive factors behind Bitcoin are easy to replicate without the chaotic elements. Currencies like Ripple, in a way, do this. Having a currency that is independently verifiable can be implemented in a number of ways pertinent to a financial firm like JP Morgan, including asset management, digital rewards systems and other financial resources to clients. Even if these firms were to use Bitcoin’s foundation as a currency to help make international currency transfers easier (and cheaper) to verify, the ability to merely use the technology behind Bitcoin interchangeable at any scale is much more fruitful than to try and destroy or manipulate Bitcoin. Simply put, financial firms will out-innovate Bitcoin, not destroy it.  With the money and central focus of these firms, accomplishing this task is certainly possible.

How can Bitcoin effectively handle these challenges?

This doesn’t mean Bitcoin is necessarily doomed. There are numerous ways Bitcoin can remain attractive and competitive with the right mindset of its users and core development to support it.

Remain spendable. At its core Bitcoin is a currency that is inherently deflationary and treated by many less as a currency and more as a asset. This mindset is not necessarily a wrong interpretation, but it is one that ultimately hurts Bitcoin’s ability to compete and attract adoption. At the same time the complex and chaotic “pump and dump” activity prevalent from large stakeholders in the currency hurts Bitcoin’s spendability. The very founder of Bitcoin – an unknown individual – likely holds an eighth of all Bitcoins. While it is ideal that Bitcoin ultimately gravitates away from a few key stakeholders and into the hands of the masses, this overall issue of spendability is one Bitcoin users – especially firms and exchanges –  must bear in mind for the currency to fare better and remain attractive to newcomers.

Remain attractive to merchants. Merchant adoption goes hand in hand with the spendability of Bitcoin. As individual mining continues to become a unlikely case for just about anyone without a major financial investment, Bitcoin firms need to continue promoting the grassroots usage of Bitcoin as a day-to-day currency for seamless, safe and secure transactions. Bitcoin cannot be successfully marketed as a miracle drug for the economy, nor can it be marketed as a safe investment opportunity. It can however be marketed as a safe and reliable currency for transactions worldwide without reliance on a central bank or authority. Merchants need to know of Bitcoin’s benefits and cost-savings, especially as other digital fiat payment methods become more and more popular.

Promote Transparency. Being a currency powered by the masses will always keep Bitcoin ahead of the creations of other financial firms. At the same time though, these masses remain relatively unknown, with far too many stakeholders with assets great enough to dangerously manipulate the currency. Bitcoin’s best bet in competing with the financial firms is to develop ways to combat these stakeholders and their ability to manipulate Bitcoin on the market. Financial firms can replicate a Bitcoin-like currency with complete control of its assets and distribution, giving it a far greater advantage in stability. Bitcoin gains a lot from being a currency without a core agency in control, but it also must find a way to shake off the unofficial manipulators to remain viable as it finds competition not from fellow blockchain-based cryptocurrencies, but from a currency structure designed and endorsed by major financial agencies.

How will the Satoshi Nakamoto Dox affect the market?

On September 8, the administrator and owner of Bitcointalk.org, theymos, announced that satoshin@gmx.net “had been compromised.” We’re still not quite sure what the true extent of the compromise has been and whether one or several hackers have gained access to the account. There are however some important things to say about what affect this will have on the Bitcoin market both in the short term and long term, and what vigilance is necessary for the coming months.

What we know so far

Theymos received an e-mail from the account once maintained by Satoshi Nakamoto, the pseudonym for the creator(s) of Bitcoin, that more or less sounded nothing like what Nakamoto would say. The e-mail was also the first sent to him in nearly four years, since Nakamoto’s departure from the Bitcoin community in 2010.

From there, the rest gets hazy. Depending on whether you ask Forbes, WIRED or VICE, a hacker (or potentially several hackers, or even Satoshi Nakamoto himself) got in contact with the press. One hacker claims that his goal was at first to do it because he could, but that he later realized he could also blackmail Satoshi for Bitcoins.  The hacker wanted 25 Bitcoins in order to release the information he had about Satoshi Nakamoto, but the entire ordeal seems to have evaporated over the last two days.

Right now, things have grown quiet once more. The gmx.net and P2P foundation accounts remain compromised, but no updates from the press have yet come from the hacker. We have no idea whether or not the hacker released any information about Satoshi Nakamoto’s real identity, or whether any of his other personal accounts have also been compromised.

What are the risks to Bitcoin?

This doxxing of Satoshi Nakamoto’s e-mail account has had several immediate consequences. For one, the integrity of the (mostly deprecated) Bitcoin Sourceforge project had been compromised. The project had since been restored and Satoshi’s account removed, but it nonetheless created a bit of a frenzy alongside the chaos of hacker e-mails, interviews with VICE and other mayhem.

However, since Satoshi exited the world of Bitcoin about four years ago, it’s unlikely that Bitcoin’s core development has been affected much at all. The Bitcoin Foundation hires and maintains the people who develop it, and since being brought onto Github Satoshi’s accounts have had no control or access to the code. The only assets compromised have also since been fixed.

While not directly related to Bitcoin financial security, there is a possibility that Satoshi Nakamoto’s identity can be revealed (known as doxed) from the e-mails and account information within the gmx.net account he owned. With thousands of e-mails, some of which dating to the origins of Bitcoin in 2009, it’s easy to belief enough information is within the account to identify in some sense who Satoshi was. The hacker who gained access to Satoshi’s account claims to have his identity now, though there’s no telling what that hacker will now do with that information, such as sell it anonymously for a profit. Satoshi’s identity however plays no direct threat to Bitcoin, especially given the lack of any relationship between the Bitcoin Foundation and Satoshi Nakamoto. If a hacker were to compromise the Bitcoin Foundation’s team members, that would be a much greater risk than an e-mail dox. However, since his e-mail account is compromised, most of his other accounts (including the P2P Foundation, where he posted “I am not Dorian Nakamoto” back in March) are at worst also compromised or at best assumed as such. This leaves only Satoshi’s PGP public key as the only way to verify his identity in the future. The Bitcoin community is also equally chaotic in response to this identity crisis, with a number of fake images claiming to be Satoshi accounts and fake “donate to Satoshi” Bitcoin addresses circulating the Internet alike.

A more direct factor on the safety of Bitcoin financially meanwhile stems from Satoshi Nakamoto’s “fortune” of Bitcoins, and whether their control has been compromised too. When Nakamoto first developed and mined Bitcoin, he, like many others, mined the currency and drew a large amount of Bitcoins that he has since owned. There are some good estimates out there of just how many Bitcoins Satoshi owned, several of which coming in around 1 million Bitcoins. Needless to say, a million Bitcoins in today’s value, let alone last year’s peak Bitcoin price, is a whole lot of cash.

But if any amount of these Bitcoins were to be compromised, their introduction into the market is by far a great risk to its stability and integrity. Since Satoshi’s assets equate to nearly one eighth of all Bitcoins in existence, it’s needless to say anyone in control with but a fraction of those coins has not just a great fortune, but a great opportunity to control the prices of Bitcoins on the market.

What happens now?

For now, there’s little the Bitcoin community can do but speculate. At the very least, there’s no way to know for sure how deep this compromise goes and what it will do to the value or stability of Bitcoin in the months to come. It’s important to ground these hypotheticals though with the fact that there are too many unknowns currently at play, and any conclusion about the viability of the currency because of this remains ungrounded.

In reality however, it’s worth noting that Bitcoin has remained a very resilient currency despite rather extensive market manipulation. A consequence of the nearly laissez faire trading environment of Bitcoin has been the aggressive trading (some called “pump and dumps”) across many exchanges in the last few years, not to mention the rapid price changes that came after the Bitcoin media blitz last year. Bitcoin has been a currency very capable of surviving dramatic prices shifts and chaotic activity on the market – including the entire debacle with Mt. Gox. The currency has many more unknowns on the table regarding its usage for malicious goods and services, the nature of BTC-E as an exchange and so on. And yet despite all the unknowns, billions of dollars in fiat currency remain entrusted through Bitcoin’s value.

Still, this doesn’t mean Litecoin and other altcoins could gain attention from the weeks that follow. The core reality is that we now know far less about the core stability of Bitcoin because of this incident. Until we know more about the security of Satoshi Nakamoto’s identity or his assets, these floating concerns can, at any moment, hurt the value and potential of Bitcoin as a currency. Litecoin’s origins, meanwhile, are as clear as day to the masses, its founder a contributor to development even today.

These issues remain long-term concerns for the currency. In the short term it’s likely we’ve seen the worst of this ordeal come and go in a matter of hours. The longstanding effects, will instead join a host of others, likely to be forgotten by the community at large until the chaos unfolds once more. Until then though, worrying about the Satoshi dox is about as useful as worrying about the impending heat death of the Universe. It’s a real threat, but one that little can be done about and is essentially now a part of the core reality of Bitcoin.

Australian Tax Office (ATO) Releases Draft Ruling and Guidance Paper on Bitcoin

The Australian Tax office (ATO) has released a draft ruling and guidance paper to the Australian public in time for the 2013-2014 end of financial year and is seeking feedback.

The ATO Correspondence We Received

A copy of the correspondence that we received (a mass mailing) can be found below:

From: Bitcoin@ato.gov.au
Subject: ATO releases guidance on the taxation treatment of bitcoin [SEC=UNCLASSIFIED]
Date: Wed, 20 Aug 2014 04:39:10 +0000

Hello everyone,

The ATO has just released the guidance paper on the taxation treatment of bitcoin, and a series of draft public rulings. The guidance paper is a simple explanation of the taxation treatment for most common transactions while the public rulings give more involved legal analysis. We are accepting comment on the public rulings. The guidance paper will be updated, if required, once we publish finalised versions of the rulings.

Enclosed is a copy of the guidance paper for your reference. It can also be found athttp://ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia—specifically-bitcoin/ and the draft public rulings can be located using the following links:

Income tax:  is Bitcoin a ‘foreign currency’ for the purposes of Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997)?

http://law.ato.gov.au/view.htm?DocID=DXT/TD2014D11/NAT/ATO/00001

Income tax:  is Bitcoin a CGT asset for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

http://law.ato.gov.au/view.htm?DocID=DXT/TD2014D12/NAT/ATO/00001

Income tax:  is Bitcoin trading stock for the purposes of subsection 70-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

http://law.ato.gov.au/view.htm?DocID=DXT/TD2014D13/NAT/ATO/00001

Fringe benefits tax:  is the provision of Bitcoin by an employer to an employee in respect of their employment a property fringe benefit for the purposes of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

http://law.ato.gov.au/view.htm?DocID=DXT/TD2014D14/NAT/ATO/00001

Goods and services tax: the GST implications of transactions involving bitcoin

http://law.ato.gov.au/view.htm?DocID=DGS/GSTR2014D3/NAT/ATO/00001

We have also advised the community via facebook and twitter, with the hashtag #atobitcoin

Thank you for your interest in the taxation treatment of crypto-currencies and, for many of you, the contributions that you made in developing the guidance paper and draft rulings. Your expert knowledge and legal analysis, and your willingness to share your knowledge as well as other general information, has helped to produce good advice within the existing legal framework.

If you have comments on the draft rulings, please take time to provide the feedback.

Regards,

ATO Bitcoin Taskforce

Comments and Feedback

Comments are due by the 3rd of October and should be referred to:

Contact officer: Andrea Wood
Email address: andrea.wood@ato.gov.au
Telephone: (02) 6216 1486
Facsimile: (02) 6216 1250
Address:
Australian Taxation Office
PO Box 9977
CIVIC SQUARE ACT 2608

What are colored coins? A quick summary.

If you’re familiar with Bitcoin at all, then you know of the technology that is arguably more important than the coin itself, known as the blockchain.

Originally used for keeping records of every transaction made, the blockchain also supports protocols that are built on top of it, theoretically allowing anyone to make their own coin.

An example of a coin that takes advantage of the blockchain for uses besides transactions is Namecoin. Namecoin uses the blockchain to make a decentralized DNS system, making censorship difficult.

Since it’s on the Bitcoin blockchain, it would be secured by the biggest hash rate, as well as have similar characteristics such as 10 minutes confirms and low transaction fees. You are still sending Bitcoins after all.

What you are doing when making a colored coin is you are “coloring” them with specific attributes. This allows you to substitute them for anything, common examples being shares in a company, gold certificates, to even houses and cars.

This opens up Bitcoins usability in many situations, instead of just being used as a payment system. Want to trade gold but across the world? Issue a colored coin as a certificate. It’s possible to make a colored coin for anything you want, you just have to make it.

Colored coin is more of a theoretical thing right, with very few wallets now supporting colored coins. Coinprism is one of the bigger names in colored coins, and is the first wallet to support them.

Colored coins are not a perfect solution however. One of the biggest concerns is that colored coin transactions require trust, at least for credit-based coins or the like. An example of a credit-based coin is like a colored coin to represent gold, or stocks.

That can easily be fixed with third party rating agencies, but it still makes some people uneasy that have gotten used to the decentralized and trustless implementations that accompany cryptocurencies.

Another possible concern is not with the coin itself or the concept, but legality issues. Bitcoin is having enough trouble being regulated, and it’s just a payment system. What will happen when Bitcoin is used to exchange assets, commodities, goods?

As colored coin is still a concept, there are no examples of working and used coins. But just like Bitcoin, I fully expect them to shake up the world once implemented.