MBA Master Thesis

1. 0
Cryptocurrencies
and blockchains-
the outlook for Bitcoin
into this constellation
April 2016 Coburg, Germany

2. 1
Cryptocurrencies and blockchains - the outlook for
Bitcoin into this constellation
MASTER THESIS
Kristian Rosenov Hristov
Master of Business Administration
Financial Management (FM)
Prof. Victor J Randall
MBA – FM Department
Finance and Economics Faculty
University of Applied Sciences - Coburg

3. 2
Contents
Abstract............................................................................................................................3
I. Introduction ...................................................................................................................4
Chapter One: Literature review ........................................................................................7
1. Definitions and terms....................................................................................................7
1.1 Cryptocurrencies ........................................................................................................7
1.2 Bitcoins.......................................................................................................................7
1.3 Block chains .............................................................................................................10
2. Technology behind cryptocurrencies and bitcoins......................................................12
2.1 Cryptography and encryption ...................................................................................12
3. The Bitcoin transaction process .................................................................................14
Chapter two: Economic theory and Monetary history.....................................................19
4. Theoretical analysis of money and Bitcoin .................................................................19
4.1 The main functions of money ...................................................................................19
4.2 Classification of money ............................................................................................20
5. The evolution of money..............................................................................................24
6. The acceptance of crypto currencies..........................................................................28
6.1 Governmental acceptance .......................................................................................28
6.2 Economic acceptance ..............................................................................................30
7. Financial Security, legality and the underworld ..........................................................36
7.1. Financial Security....................................................................................................36
7.2. Legality of Bitcoin ....................................................................................................39
7.3. Anonymity and the underworld................................................................................42
Chapter three: Empirical testing – the Bitcoin concept and acceptance.........................47
8. Primary data collection and analysis – Methodology and methods ............................47
8.1. Semi-structured interviews ......................................................................................47
8.1.1 Sampling procedure ..............................................................................................48
8.1.2 Response rate.......................................................................................................48
8.1.3 Interview issues.....................................................................................................48
8.2 Primary research results ..........................................................................................48
8.3 Analysis and hypotheses..........................................................................................56
9. Conclusion .................................................................................................................58
Literature review.............................................................................................................60
Appendix A.....................................................................................................................63

4. 3
Abstract
The following paper will concentrate on a relatively new phenomenon –
cryptocurrencies and bitcoin.
Research will be separated into two sections – theoretical framework (main
definitions, history of the phenomenon, previous research and information on the
crypto-economy); and empirical part (primary and secondary data collection and
analysis) – for testing several hypotheses on the functionality and efficiency of both
conventional and cryptocurrencies.
This paper will aim on answering the following question: How does the Bitcoin
system work, and are bitcoins ‘money enough’ to cover the perception of trust and
stability to be legal money substitutes?
A potential sub-question is: How do decentralization, legality and anonymity
affect the total vision for Bitcoin in the money constellation, and how people perceive
its PROs and CONs, compared to the conventional money?
The following work will aim on checking the following hypotheses:
H1. Centralization does not provide security for money owners /
Decentralization of the money system provides security for money owners
H2. Mining incentives generate better growth, stability and transparency than
the conventional currencies have through the central banks and financial institutions
H3. Conventional currencies cannot provide the same value for two users
(over time), like bitcoins can, (especially if these are placed in different continents)

5. 4
I. Introduction
Ever since the birth of the trade relationship between people, items of different
shape and material began spreading as main mean of transaction payment. It all
began back in the old ages with bartering goods, manufactured or cultivated by
individuals of different culture, social status and profession. Due to human population
growth, the new lands discovery, the distribution of wealth (in terms of lands, slavery,
trade among other lands and nations/cultures) and the growing unification of people
under certain social-economic and patriarchal circumstances, the need of using
certain sort of money, emerged. Thus, the social structure became more
complicated, and the first “states” needed to place several rules and taxes to be able
to fund its own national businesses (like warfare, communication systems, housing,
religion-related structure building, etc.). Different kind of coins of precious metals,
steel, and other materials were issued and these became the main mean of
exchange.
Through the centuries, the issue of coins and money, their later bound to gold,
silver or oil, along with the emergence of money-lending institutions, the banking
systems and the National Treasuries, marked the tremendous political and economic
importance of money for the very existence of every individual. For the past two
centuries the monetary system evolved in an international and global sense,
bounding the leading world economies to the poor nations, rich in natural resources,
raw materials and energy goods.
The 20th
century marked the creation of trade agreements, multinational
political and economic structures, mega-economies and international currencies.
Stock exchanges began ruling the world of international trade, dictating prices of raw
materials, steel, gold, petrol, and governing the currencies worldwide.
Globalization and the modern fast-developing high technologies allowed the
spread of the World Wide Web and the birth of big independent online communities,
new parallel social realities and the generation of knowledge of a new kind – the
cyber space, advanced computer science and the new international PC languages.
The era of growing interdependence of all industries, nations, systems and markets
of the Internet began. Information, knowledge, know-how, science, politics and
economics, mixed altogether, helped for the creation of a hyper-active, well-
educated, strong and enthusiast new society of people, with individual, democratic

6. 5
behavior and desire to change and work against the mal-functioning “natural” laws of
the contemporary world.
The growing power of the financial institutions, the global games of the G-20,
the political, economic, social crisis of the past several years, drove the beforehand
mentioned people to action and led to the birth of a new type of monetary revolution
– the cryptocurrencies. The contemporary high technology allows the creation of any
kind of intangible items, with no material equivalent, but carrying enough added
value to be exchanged against other non-tangible or tangible goods, services and
currencies.
Programming the new monetary systems – enthusiast from all around the world
unite, under different circumstances, around the main idea of creating a paying
system free of taxes, outside governance, high interest and exchange rates.
Launching this new decentralized monetary system, regulated by the simple laws of
demand and supply, which growth is driven and assured by the very owners of these
currencies, leads to the birth of the quasi-currency phenomenon. As the new system
is more trustworthy than the traditional one, guarantees anonymous transactions,
saves additional expenses, as it does not pass through mediators, and is fast (in
terms of time consumption per transaction) – the crypto-economy grows
considerably fast.
Nowadays, after a short existence of only six years, cryptocurrencies are
widespread and most commonly used for online transactions as a mean of exchange
for goods, services, intellectual property, etc. Cryptocurrencies, such as Bitcoin, are
used for paying meals, clothes and concert tickets, to buying and selling real estate
and vehicles. In fact, the Bitcoin community is one of the fastest growing, as
popularity, usage and amount of “money” in rotation.
The following paper will aim on adding another pattern to the vast amount of
information and analysis of this recent phenomenon. Although most of the
information, currently available, is mainly based on “how does it work” and
“technology behind cryptocurrencies”, there are some theoretical and empirical
discourses, adding considerable knowledge to the pros and cons, threads and
possibilities of this new online monetary system. The author will aim, using data from
previous research, and some new-generated data of open sources within the Bitcoin

7. 6
community, to provide an explanation of the potential results and future trends in the
development of the crypto-economy.

8. 7
Chapter One: Literature review
1. Definitions and terms
1.1 Cryptocurrencies
Cryptocurrency is a digital or virtual currency that uses cryptography for security. A
cryptocurrency is difficult to counterfeit because of this security feature. A defining
feature of a cryptocurrency is that it is not issued by any central authority, rendering
it theoretically immune to government interference or manipulation. The anonymous
nature of cryptocurrency transactions makes them well-suited for a host of nefarious
activities such as money laundering and tax evasion.1
These types of currencies make it easier to transfer funds between two parties in
transactions. The transfers use public and private keys for security purposes. The
fund transitions are done with minimal or none processing fees, allowing users to
avoid the steep fees charged by most banks and financial mediators for wire
transfers.
Since most of the scripted currencies are based on supply and demand, the rate at
which a cryptocurrency can be exchanged for another currency can fluctuate widely.
The first cryptocurrency to capture the public attention was Bitcoin (BTC), which was
launched in January 2009. BTC's success led to the creation of a number of
competing cryptocurrencies such as Litecoin, Namecoin and PPCoin.
1.2 Bitcoins
Bitcoins are digital coins which are not issued by any government, bank, or
organization, and rely on cryptographic protocols and a distributed network of users
to mint, store, and transfer.
Bitcoin is a decentralized electronic cash system using peer-to-peer networking to
enable payments between parties without relying on mutual trust.2
A scheme of how the Bitcoin system works can be found below (scheme 1):
1
www.Investopedia.com. - Cryptocurrency definition. Available on:
http://www.investopedia.com/terms/c/cryptocurrency.asp [27/12/2015]
2
Dorit, R, Shamir, A. (2012) Quantitative Analysis of the Full Bitcoin Transaction Graph. Available at:
http://eprint.iacr.org/2012/584.pdf [28/12/2015]

9. 8
Scheme 1: How bitcoins work:
Bitcoin is a protocol for exchanging value over the Internet without an intermediary. It
is based on a public ledger system, known as the block chain that uses cryptography
to validate transactions. Bitcoin users gain access to their balance through a
password known as a private key. Transactions are validated by a network of users
called miners, who donate their computer power in exchange for the chance to gain
additional bitcoins.3
There is no monetary authority that creates bitcoins. That means
that there is no government or central entity to make discretionary decisions about
how much currency to be created or attempt to defend it via monetary actions.4
3
Wan, T. Hobitzell, M (2014) Bitcoin. Fact. Fiction. Future. Deloitte University Press. Available at:
http://dupress.com/articles/bitcoin-fact-fiction-future/ [29/12/2015]
4
Warden, C (2014) “Bitcoins: Currency of the future?” The impact lab, Georgetown University Centre.

10. 9
Bitcoin is a collection of concepts and technologies that form the basis of a digital
money ecosystem. Units of currency called bitcoins are used to store and transmit
value among participants in the bitcoin network. Bitcoin users communicate with
each other using the bitcoin protocol primarily via the Internet, although other
transport networks can also be used. The bitcoin protocol stack, available as open
source software, can be run on a wide range of computing devices, including laptops
and smartphones, making the technology easily accessible.
Bitcoin was invented in 2008 with the publication of a paper titled "Bitcoin: A Peer-to-
Peer Electronic Cash System," written under the alias of Satoshi Nakamoto. The
author combined several prior inventions such as b-money and HashCash to create
a completely decentralized electronic cash system that does not rely on a central
authority for currency issuance or settlement and validation of transactions.5
Payments are made in bitcoins (BTC’s), which are digital coins issued and
transferred by the Bitcoin network. The data of all these transactions, after being
validated with a proof-of-work system, is collected into what is called the block
chain.6
Bitcoin is a scheme designed to facilitate the transfer of value between parties.
Unlike traditional payment systems, which transfer funds denominated in sovereign
currencies, Bitcoin has its own metric for value called bitcoin. Bitcoin is a complex
scheme, and its implementation involves a combination of cryptography, distributed
algorithms, and incentive driven behavior. Moreover, recent developments suggest
that Bitcoin operations may involve risks whose nature and proportion are little, if at
all, understood.7
Bitcoin is an electronic token without reference to any commodity or sovereign
currency, and is not a liability on any balance sheet, nor a legal tender status in any
jurisdiction. Owning bitcoins results only to the ability to move and use these bitcoins
in the Bitcoin ecosystem. The bitcoin's value is derived mainly from its use for
making payments in the Bitcoin system, and from the purpose of accruing gains from
bitcoins' possible appreciation.8
5
Antonopoulos, A. (2014) Mastering Bitcoin. Unlocking digital cryptocurrencies. Available at:
http://chimera.labs.oreilly.com/books/1234000001802/ch01.html#_what_is_bitcoin [28/12/2015]
6
Dorit, R, Shamir, A. (2012) Quantitative Analysis of the Full Bitcoin Transaction Graph. Available at:
http://eprint.iacr.org/2012/584.pdf [28/12/2015]
7
Badev, A, Chen, M. (2014) Bitcoin: Technical Background and Data Analysis, p 1. Available at:
http://www.federalreserve.gov/econresdata/feds/2014/files/2014104pap.pdf [2/2/2016]
8
IBID

11. 10
Bitcoin is a protocol for exchanging value over the Internet without an intermediary
(figure 1). It’s based on a public ledger system, known as the block chain that uses
cryptography to validate transactions. Bitcoin users gain access to their balance
through a password known as a private key. Transactions are validated by a network
of users called miners, who donate their computer power in exchange for the chance
to gain additional bitcoins.
Bitcoin has three qualities that differentiate it from other currencies and payment
systems.
First, Bitcoin is peer to peer, transferring value directly over the Internet through a
decentralized network without an intermediary. Current payment systems, like credit
cards and PayPal, require an intermediary to validate transactions; Bitcoin does not.
As a result, Bitcoin has been referred to as “Internet cash,” as it can be exchanged
from person to person much like paper currency today.
Second, Bitcoin is open, yet securely authenticated. Traditional payment systems
rely on the privacy of transaction information to maintain security. For example, the
compromise of a credit card transaction can result in the release of valuable
information that can be used to conduct future transactions. In comparison, Bitcoin
relies on cryptography. As every transaction is validated with cryptography by the
network of miners, Bitcoin functions because of its openness, not despite it.
Third, Bitcoin is self-propelling. Bitcoin uses its own product, bitcoins, to reward or
“pay” miners who are providing the computing power that serves as the engine of the
transaction verification system. As a result, the system does not require the same
type of overhead that traditional payment systems might require. In this sense,
Bitcoin functions because of those participating in the system.
These three aspects are part of what drives Bitcoin’s success, enabling a nearly
frictionless global payment system. However, these same factors have also created
challenges.9
1.3 Block chains
Because of the lack of a centralized body, or a bank, that deals with
transactions history and validity of the same, along with the validity of the bitcoins
9
Wan, T, Hobitzell, M. (2014) Bitcoin. Fact. Fiction. Future. Deloitte University Press. Available at
www.DUPress.com

12. 11
themselves, the creators of Bitcoin use a particularly decentralized mean of
governing the “money” flows. As already mentioned in the previous sub-section, the
Bitcoin system uses a method of validation of each unit transaction, popularizing and
registering all of the bitcoin operations on a public ledger. The ledger, available at
https://blockchain.info/ collects all the real-time data for transactions and payments
with bitcoins from all around the net/world.
Block chains are cryptographic lines of bitcoin addresses, along with their
history of transaction, validated by all users who worked in contact with the bitcoin
units from their moment of creation till their last transfer. That is to say – block chains
are a puzzle like validation chains, created through computing operations, build to
provide a proof-of-validity of every cryptographic currency unit being in transaction,
to assure it is not fraud and to decrease the possibility of double-spending.
A block chain or blockchain is a permissionless distributed database based on
the bitcoin protocol10
that maintains a continuously growing list of transactional data
records hardened against tampering and revision. The initial and most widely known
application of the block chain technology is the public ledger of transactions for
bitcoin.11
The block chain is primarily tamper resistant through time stamping the hash
of batches of recent valid transactions into "blocks", proving that the data must have
existed at the time. Each block includes the prior timestamp, forming a chain of
blocks, with each additional timestamp reinforcing the ones before it, thus giving the
database type its name. Each block chain record is enforced cryptographically and
hosted on machines working as data store nodes extending this validation to the
network as a whole.12
Thus, bitcoin block chains are using mining (user provided hardware
computer capacity for validation of nodes, or transactions, of each unit of currency)
to guarantee the security and eliminate fraud and undesirable losses of its users.
This semi-centralized public system (which the blockchain database provides)
10
Satoshi Nakamoto (2008). "Bitcoin: A Peer-to-Peer Electronic Cash System" Bitcoin.org., Available at:
https://bitcoin.org/bitcoin.pdf [27/12/2015]
11
Postscapes (2013) Block chains and the Internet of things. Available at: http://postscapes.com/blockchains-
and-the-internet-of-things#sidechains [28/12/2015]
12
Bitcoin Wiki. Block chain Definition. Available at: https://en.wikipedia.org/wiki/Block_chain_(database)
[28/12/2015]

13. 12
functions as a regulator for a transparent and enhanced (capacity reinforced) real-
time monitor of Internet transactions.
The maintenance (or mining) of the block chain database assures the issue of
currency, used to serve as payment for the voluntary computer owners to share their
hardware capacity for the validation of the system. That process is, in fact, the main
currency generator.
2. Technology behind cryptocurrencies and bitcoins
2.1. Cryptography and encryption
The technology behind all cryptocurrencies is called cryptography.
Cryptography is the discipline of writing a message in ciphertext with the aim or
protecting a secret from malicious or unauthorized parties. This is usually done by
translating from plaintext according to some key text. Professional cryptography
protects not only the plaintext, but also the key and tries to protect the whole
cryptosystem (Tilborg, 2005)13
.
The Bitcoin ecosystem uses three of the most important aspects of
cryptography: encryption and decryption; the hashing functions and the digital
signature schemes. Each one of those will be explored in the following paragraphs.
The process of “writing” is technically called encryption. An encryption is a
mapping of plaintext to ciphertext, based on some chosen keytext. It is performed by
a stepwise application of an encryption algorithm (Tilborg, 2005). Currently,
encryption has been used for a wide variety of functions and operations in everyday
life, such as security protocols over sending e-mails or other messages via Internet,
ensuring safety on personal computer’s data, securing personal and financial
information on servers, etc. practically, without the processes of encryption and
decryption (the process of reestablishment of the information to a readable
language) any data, transferred or stored on a memory device (server, hard drive,
etc.) would be easily readable and could be stolen and used in malicious ways.
13
Tilborg, H (2005) "Encyclopedia of Cryptography", ISBN-13: (HB) 978-0387-23473-1, USA, Springer
Science+Business Media, Inc.

14. 13
According to Tilborg’s book "Encyclopedia of Cryptography" (2005)
“cryptographic hash functions take input strings of arbitrary length and map these to
short fixed length output strings. In computer science, the term hash function refers
to a function that compresses a string of arbitrary length into a string of a fixed
length. Cryptographic hash functions are divided into keyed and unkeyed hash
functions, based on whether or not they use a secret parameter or a secret key”.
The hashing algorithms are mainly used as a form of validating data integrity.
To avoid malicious intent, in case of any attempt for intervention in the initially
generated code, the result is a hashing ciphertext that will not match the input data,
and in such a way – the new manipulated code will be considered as fraud and not
accepted for further “consideration” by the system, i.e. the hashing function allows
for building a security system against malicious actions.
Another function, provided by the hashing algorithms is the so called “free of
collision” principle, meaning that for any two different messages, used as an input of
the function, their digest should always be different. If the principle is not applied to
the algorithm it may be considered broken and opens a possibility of data
manipulation.
Digital signature schemes (DSS) are techniques that are used to assure that a
given entity has sent a certain message. Typically, an entity has a private key and a
corresponding public key which is tied to that entity's identity. The entity generates a
signature string which depends on the message to sign and their private key
(Tilborg, 2005). Digital Signature Algorithms (DSA) allow a user (seller or buyer) to
ensure that the data being sent does not contain errors, is not modified, and the
signer of the data is verifiable with appropriate information.
The main Digital Signature Schema used by Bitcoin is the Elliptic Curve
Digital Signature Algorithm (ECDSA), a variant of Digital Signature Algorithm (DSA)
which uses Elliptic Curve Cryptography (ECC).14
Elliptic curve cryptographic schemes were proposed independently in 1985 by
Neal Koblitz and Victor Miller. They are the elliptic curve analogues of schemes
based on the discrete logarithm problem where the underlying group is the group of
points on an elliptic curve defined over a finite field. The security of all elliptic curve
14
Piasecki, P (2012) Design and security analysis of Bitcoin infrastructure using application deployed on
Google Apps Engine”, p 11. Available at: https://bitcointalk.org/index.php?topic=88149.0 [03/02/2016)

15. 14
signature schemes are based on the apparent intractability of the elliptic curve
discrete logarithm problem (Tilborg, 2005).
The ECDSA algorithm relies on generating a random private key used for
signing messages and a corresponding public key used for checking the signature.
The security of ECC depends on the ability to compute a point multiplication and the
inability to compute the multiplicand given the original and product points.15
3. The Bitcoin transaction process
Prior to using the Bitcoin system any seller or buyer must install an
application, which handles all the cryptocurrency related operations. In the B-world it
is usually called “the Standard client”. Before explaining the entire process of
generation, transaction and processing of data around Bitcoins, we must introduce
some bitcoin-related terms (Appendix A).
The bitcoin transaction process encompasses a broad number of operations, starting
from the generation of simple ciphertext codes. Upon installation of the Standard
client, the user receives a set of ECDSA key pairs, called addresses.
In order to transfer Bitcoins from one Address to the other, the Client needs to sign a
specific message (called Transaction) with the private key of the user. The public key
is used by anyone wishing to check if the given user has rights to those Bitcoins.
A sample Bitcoin Address looks like this:
12tRLZvXjKnj78nNd0SDMsVDgNjUPeXQ
It contains information about what Network it is used for, a hash of the public key
owned by the user, and a checksum for ensuring data validity.16
15
Wikipedia, "Elliptic curve cryptography - Cryptographic premise", Available at:
http://en.wikipedia.org/wiki/Elliptic_curve_cryptography#Cryptographic_premise [02/02/2016]
16
Bitcoin Wiki, "Technical background of Bitcoin addresses", Available at:
https://en.bitcoin.it/wiki/Technical_background_of_Bitcoin_addresses [02/02/2016]

16. 15
A Transaction is a simple operation moving a set of Bitcoins between different
Bitcoin Addresses. To be able to start a new transaction, the user must first obtain a
transaction on his address, which will deliver a bitcoin unit.
Having an unspent Transaction, the user specifies the Address they want to send a
part of their money to, and how much they want to send. The Client then creates a
full Transaction containing all the necessary information. It states which Transaction
it is claiming the outputs of (by specifying the Transaction’s hash and index of the
output of the Transaction), and how many Bitcoins it is sending to which Address. In
order to claim an output of the Transaction, the Client needs to sign a correct
message with the private key stated in the output of the Transaction. This ensures
that only the user in possession of the appropriate private key associated with a
given Address is able to spend Bitcoins sent to them.
Most common Transactions consist of two outputs – one crediting the Address of the
desired recipient, and the other sending the remaining balance to an Address
possessed by the same user who issued the Transaction. A simple bitcoin
transaction visual can be found on figure 1.
Figure 1. Bitcoin transaction visual

17. 16
Source: https://commons.wikimedia.org/wiki/File:Bitcoin_Transaction_Visual.png
If the amount of Coins sent in a Transaction exceeds the amount of Coins claimed
by the Transaction, it is considered invalid and is disregarded by the Network. If the
amount of outgoing Coins is smaller than the number of incoming Coins, the
difference is recognized as a Fee for the Transaction and it is claimed by the Miner
that creates a Block containing that Transaction. (Piasecki, 2012).
A Block is a package of information containing all Transactions issued through the
Bitcoin Network. New transactions are constantly being processes by miners into
new blocks which are added to the end of the chain and can never be changed or
removed once accepted by the network.
Each block consists of a Block Header, containing all the meta-information, and the
list of the Transactions encoded in the package. Each block is referring to the block
that came before it. All the blocks in chronological order represent a block chain,
which links back to the Generic block, or the first one created since the Bitcoin
system began its function. Each consequent block contains information from the
previous one, which provides and ensures the validity of all the previous transactions
and the true value of bitcoin per private keys.
In order to approve the generation of a new block of transactions in the block chain,
the Bitcoin system uses the so called Proof of work. A proof of work is a piece of

18. 17
data which is difficult (costly, time-consuming) to produce but easy for others to
verify and which satisfies certain requirements. Bitcoin uses the Hashcash proof of
work system. Hashcash proofs of work are used in Bitcoin for block generation. In
order for a block to be accepted by network participants, miners must complete a
proof of work which covers all of the data in the block. The difficulty of this work is
adjusted so as to limit the rate at which new blocks can be generated by the network
to one every 10 minutes. Due to the very low probability of successful generation,
this makes it unpredictable which worker computer in the network will be able to
generate the next block.17
This fact allows for the block chain to be secured of
random or fraud blocks or of malicious intervention from third party hardware, and
produces a valid and reliable transaction information for the Bitcoin ecosystem. A
visual example for a block chain can be found on figure 2.
Figure 2: Block chain structure
Source: http://www.ybrikman.com/writing/2014/04/24/bitcoin-by-analogy/
The process of creating new Blocks is called Mining. As the process of Mining
requires a lot of technical resources, due to the vast amount of computing needed for
the verification of data in the process of “proof of work”, it is incentivized by design in
form of Block reward. Thus, along with helping the Bitcoin system to work properly
17
Wikipedia. “Proof of work” Available at: https://en.bitcoin.it/wiki/Proof_of_work [02/02/2016]

19. 18
and create transaction database, the mining process (and the block creation one)
are the main mechanism for issuing new Bitcoins.
In the first months of functioning of the Bitcoin system, the block reward was
responsible for the initial distribution of the cryptocurrency across users.
Now that the transaction process is explained it is important to note, that the
Bitcoin Infrastructure lies on three main pillars: the Bitcoin network, the miners and
all applications that use Bitcoins for transferring and storing value.
The core of the Bitcoin infrastructure is the Bitcoin Network, which is composed from
a number of active Bitcoin clients (nodes). Each Node is responsible for storing its
own copy of the Block Chain and a list of Transaction not yet included in a Block. It
also verifies every Message it receives in terms of validity, as well as replies to those
Messages, usually by sharing information about Transactions, Blocks and other
bitcoin clients it has information on.
The second most important part of the Bitcoin infrastructure is the Bitcoin Miners.
Those applications communicate directly with a client connected to the B-Network.
They do not store any information related to the Bitcoin Network. They rely on the
information provided by the single Node they are connected to, and are tasked with
creating new block. Most often Miners are connected to the Node through a web
application that optimizes work balancing and allows for a shared Block reward
distribution.
The third part of the Bitcoin infrastructure is all applications that use information
about Bitcoin. Those applications are not required for the Bitcoin Network to function,
but are essential for the users. Most notable of these applications are the Bitcoin
Exchanges and Stores. The Exchanges allow the users to exchange between Bitcoin
and other form of currencies, such as “traditional currencies” (such as the US dollar
and the Euro), or other cryptocurrencies (Piasecki, 2012).

20. 19
Chapter two: Economic theory and monetary history
4. Theoretical analysis of money and Bitcoin
4.1 The main functions of money
Historically, economists and scientists have aimed to propose a universal and
abstract definition for money, according to its main functions. Although many
theories exist, based on the different currents in academy and research, and the
unique perspective of the topic, some of the most valuable examples can be found in
the following sub-section. We will try to define the main functions of money, based
on theory, and test these functions through the bitcoin concept.
Classical economists define money through its functionality. According to
Krugman (1984) “money serves three functions: it is a medium of exchange, a unit of
account and a store of value”.
On the other hand, economists of the Austrian school, define money as the most
liquid good, emphasizing on it being the main function of money. Miles (1912) gives
a refined sense to the term, pointing out that after all goods, used as media of
exchange at some point in human history, must be one by one rejected, until “a
single commodity remains, which is universally employed as a medium of
exchange”.
Moreover, according to Menger (1971) “the functions of being a measure of value
and a store of value are of an accidental nature and are not essential part of the
concept of money”. “All other functions of money, are and must remain subsidiary to
money’s primary function as medium of exchange” (Salerno, 2010).
According to White (1984) there is a direct relation between the secondary functions
and liquidity:
“It should be readily apparent by extension to this perspective on the origin of money
that a unit of account emerges together with and wedded to a medium of exchange
(…) A non-exchange medium numeriare commodity would furthermore be subject to
greater bid-ask spreads in barter against other commodities as by hypothesis it is
less saleable than the medium of exchange”

21. 20
From that perspective, Bitcoin cannot be classified as money, according to most
researchers, as it is not the universal medium of exchange. However, cryptocurrency
does serve as a medium of exchange in a more narrow sense, as it proved its ability
to be defined as a valuable pseudo-commodity. Thus, Mises (1999), as part of the
Australian school, defines all non-universal medium of exchange as secondary (or
substitute) mediums of exchange:
“Consequently, there emerges a specific demand for such goods on the part of
people eager to keep them in order to reduce the cost of cash holding. The prices of
these goods are partly defined by this specific demand; they would be lower in its
absence. These goods are secondary media of exchange, as it where, and their
exchange value is the resultant of two kinds of demand: the demand, related to their
services as secondary media of exchange, and the demand, related to the other
services they render”
Yet another perspective is Rothbard’s research on money (2004), where he argues,
that:
“We have implicitly assumed that are one or two media that are fully marketable –
always saleable – and other commodities that are simply sold for money. We have
omitted mention of the degrees of marketability of these goods. Some goods are
more readily marketable than others. And some are so easily marketable that they
rise practically to the status of quasi moneys.”
Thus, Bitcoin can be classified as some sort of payment commodity, which does not
contain the main function of money, as not being a universal medium of exchange,
but has the secondary function of delivering liquidity and the status of quasi money.
4.2 Classification of money
The representative of the Austrian school, Mises (1912) introduced a
classification system for money (see Figure 3). According to the author, money “in
the broader sense” can be divided into “money in the narrower sense”

22. 21
(approximately corresponding to the terms “monetary base” or “outside money” used
by other economic schools) and “money substitute” (corresponding to the terms
“other forms of money” or “inside money”, used by other economic schools).18
Money in the narrower sense is further subdivided into “commodity money”,
“credit money” and “fiat money”.
“We can give the name commodity money to that sort of money that is at the same
time a commercial commodity; and the name fiat money to money that comprises
things with a special legal qualification”
Money substitutes are defined as:
“The special suitability for facilitating indirect exchanges possessed by absolutely
secure and immediately payable claims to money, which we may briefly refer to as
money substitutes, is further increased by their standing in law and commerce”
18
Surda, P (2012) Economics of Bitcoin: is bitcoin an alternative to fiat currencies and gold? VU, Thessis,
Vienna University of Economics and Business. P 23

23. 22
In his book, entitled “The Theory of Money and Credit”19
Mises proposes two
interchangeable definitions of money substitutes: (1) secure claims on money in the
narrower sense with zero maturity, and (2) things that act as substitutes to money in
the narrower sense from economic point of view.
According to the Austrian school money substitutes are further divided (as per
the presented Figure 3) into money certificates and fiduciary media. The difference
between these two categories is in the amount of reserves backing them. Money
certificates are 100% backed by reserves, and fiduciary media is covered on a lesser
extent. Currently, the new quasi-money (such as the bitcoins, litecoins and other
cryptocurrencies) allows for the existence of substitutes where the reserve can be
entirely absent
All fiat money begins as a money substitute. The US dollar for example, was
originally defined as a weight of gold. Legislative intervention then eliminates that
link, and the former money substitute becomes a new monetary base. Even the Euro
started originally with pegged exchange rates among several European currencies.
During a nationwide adoption of the Euro, the old currency and the Euro circulate
side by side, merchants being obliged to accept both. This obligation is only
temporary; it lasts several weeks for normal merchants. Commercial banks are
required to exchange the old currency for Euro for several months, while the deposit
accounts and other financial instruments are centrally re-denominated. The central
banks allow an even longer period for the exchange. During this time, from the
perspective of the citizens of the country, the Euro is gradually to a smaller and
smaller extent a money substitute and to a larger extent – money in the narrower
sense, until the old currency vanishes from use and the process is concluded.
(Surda, 2012, p 26).
According to the Austrian theory of money, presented by now, the Bitcoin is not
money yet. However, according to Surda, the process of accepting and developing
Bitcoin into money might present a problem and is a very controversial question.
Based on the previous conclusions and analyses of money, Bitcoin does not classify
in any of the categories as per the Austrian model, as is was never a money
substitute, nor had a legal status, or a claim again anybody, or a commercial
commodity.
19
https://mises.org/library/theory-money-and-credit

24. 23
As a possible classification, Selgin (2012), in his research, proposes for Bitcoin the
term “quasi-commodity money” for base money that does not have non-monetary
uses, but is absolutely scarce. However, according to Schlitcher we can find that
Bitcoin can actually be referred as potential commodity money, with the justification
that it has an inelastic supply:
“Equally it is commodity money because it is based on a cryptographic algorithm,
which requires time and considerable computing energy to create Bitcoins and which
is designed so that the overall supply of bitcoin is strictly limited” (Schlitcher, 2012 b)
Elasticity is important in the functions of the money in circulation as it allows
exchange and availability, based on the market dynamics itself. Schlitcher
emphasizes of the importance of the factor in one of his research:
“The most important difference between commodity money, such as a proper gold
standard, and ‘paper money’, such as our present fiat money system, is the elasticity
of the money supply” (Schitcher, 2011).
Thus, Bitcoin does have a potential to become money, however, with the several
needs of change in the way the same system operates and generates demand and
supply, based on the online performance of its own ecosystem.
Other economists, outside the Austrian school, classify money on the base of
different criteria. On the basis of legality, money can be classified as
A. Legal Tender Money – the money, which is accepted as a means of payment by
the government and the citizens of a country. Usually this type of money has a legal
sanction behind it.
B. Optional money.
We can define this category of money as such, ordinary accepted by the people, but
has no legal sanctions behind it. That is to say, no one is obliged to accept this type
of money, to be used as a way of payment, against his will. Examples of optional

25. 24
money are all types of credit instruments, like cheques, hundies and bills of
exchange.
As per this classification, we may propose that Bitcoin, to some extent, enters into
the optional group, as it does provide the freedom to be used, with no legal
sanctions.
Thus, Bitcoin, in the money constellation, can be defined as a quasi-commodity
money, accepted as existing by the market participants, and has no legal sanctions
behind it; it provides freedom to be used and might serve as a fiat money, in an
international community-based ‘nation’ – the modern on-liners. Although we cannot
classify Bitcoin as money in the narrower sense, nor a commodity money it is real
sense, the work, invested in the issue of Bitcoins in the virtual space does provide us
with a good basis to conclude that, maybe in other circumstances and in-depth
research for a better definition of the main functions and ‘items’ of the crypto-money
ecosystem, Bitcoin might actually be accepted as money. One of the main
considerations is that, due to the inelastic supply, based on reward system on a work
carried out (by technical means), the path towards equalizing bitcoins to money is
not well-trodden, if we proceed of the perception what money does mean as per our
traditional view.
5. The evolution of money
Ever since trade began, in its most common sense, people offering different
stock searched for the best mean of exchange to be able to secure his own efforts
and work on growing/manufacturing the ‘item in sale’. Bartering was first recorded in
Egypt in 9000 B.C., when farmers would go to market to exchange cows for sheep,
with grains passing through the hands of harvesters in exchange for oils.
As barter developed along ancient trade routes, articles of exchange became more
sophisticated. Egyptian papyrus, precious stones and chariots could now buy you
exotic animals, skins and minerals from Africa and Asia. Although hieroglyphics

26. 25
show us trade was not hassle-free, with arguments over price a common
occurrence.20
However, with the human development and the growing trade
migration, evolution of the monetary system was more than necessary in terms to
provide a sort of unified, or measurable, set of substitutes of the cattle and grains,
silk and other precious for these times stocks.
Some ancient nations began using precious metals for their main way of
payment when travelling long distances in the search of new customers, partners
and wealth. The first known currency was created by King Alyattes in Lydia, now part
of Turkey, in 600BC. Irregular in shape and size, the coins were made from electrum
– a naturally occurring mix of gold and silver – and minted according to weight, with
the lowest denomination weighing a meager 0.15 grams. For that reason, coins were
often weighed rather than counted (Daychopan, 2016). Following the same trend,
lots of nations, regions and territories, governed by a more organized and stable
political and economic system came out with their own currency, with the one
common thing in place – coins of all forms and shapes were made of precious
metals, which can be measured “internationally”. Most of the currencies, issued in
the 13th
and 14th
century were not stable enough to guarantee the international
existence of one stable coin system, but a need was defined to begin working on the
creation of an unified “currency” to serve as the overall accepted means of payment.
That partially was accomplished with the emergence of the Florian. It was issued in
Florence around 1250 A.D.; this gold coin kept a stable value for more than a
century. It was accepted across Europe and its stability played an important role in
encouraging international trade on the continent (Daychopan, 2016).
In the mid-13th
century, the beginning of the world-tour travelers and the
emergence of trans-continental shipping trade, gave birth to the adoption of the
paper money concept in the form that we now understand them as bank notes. The
paper money has a long history on its credit. China was the first country in the world
to make use of it in the 9th
century. This type of money was fully backed up by fold
and silver reserves. In the 13th century, travelers such as Marco Polo introduced the
concept of banknotes to Europe from China, where paper currency had been in
circulation. But Europe was not ready for banknotes; it took another 300 years for
them to take off, with Sweden the earliest adopter (Daychopan, 2016).
20
http://techcrunch.com/2016/01/21/barter-to-bitcoin-a-story-of-money-and-blockchain/

27. 26
The first monetary crisis was experienced in the end of 1400s due to the
discovery of America and the beginning of intensified trade and export of precious
metals outside of the European continent. This action caused a big inflation in the
national and international markets, and the European trade faced its first troubles
along the way. Thus, this event opened the path for the infiltration of paper money
into the new concepts of monetary systems across Europe, and allowed for the
emergence of the centralized bank money government system. The paper money,
which began circulation in several national economies, was bound with silver or gold
reserves and was strictly governed by the policy makers in the country. Thus, the
conventional money system was built somewhere around the 16th
-17th
century and
its concept began spreading across lots of nations as to test and introduce a more
relevant mean of payment system to encourage trade and national development. On
a later stage, intergovernmental credit agreements began spreading, for the
assurance of a better-operating national system, when industries does not work well
enough to supply the needs of money in the country’s banks, to assure the normal
function of the nation, itself. Thus, the evolution of the banking systems and the
emergence of the new paper money, its development and improvement over time,
provided for the birth of a complex interdependent transnational monetary system,
bound with bank reserves (in precious metals), international credits (leading to
interdependence on each-others buying power of currency) and a regulated money
system, often leading to collective issues in the slight change of one or another
leading in strength currency, taken as main mean of payment in international trade
(such as the dependence on the US Dollar).
The concept of e-money was born in the late 19th
century in the US, where the
first fund transfer was made via telegram. Ever since, thanks to the good bank
representation in all nation states across the economically well-developed world, and
the evolution of the communication technologies, the transfer of money ‘in written
guarantees’ launched with a great success, enabling the transfer of value across
country, without an actual physical movement. Although transportation costs were
saved, the new transfer system allowed for other fees and taxes to be added, for the
equipment maintenance, the human factor, involved in the transaction, and – most of
all – the bank fees for the ‘service’, being provided.

28. 27
However, money transfers involved cash deposit into one bank, financial
institution or intermediary and the note in another subsidiary for the “transfer” being
made. As the computing technologies and the ‘fast and reliable’ network of money
disposal was not yet well developed and introduced, often deposits and cash
requests lead do a certain point of imbalance in the institution account – such as,
places with better economic development and potential growth had bigger amount of
money in circulation of the ones the money are transferred to, which leads to the
need of additional transfer costs, to subside the office with smaller amount of money
availability. The concept of being able to re-organize the amount of money in the
entire financial entity led to the emergence of the ATM cards and the related deposit
bank accounts, which allowed the consumer and owner of a card to be able to use
his/her money anytime and anywhere, depending on his/her personal needs.
Historically the invention of the ATMs came in 1967 in the UK, where the
initial form of ‘cards’ was represented by cheques which paid out a maximum of £10
at a time. Ever since, the expanding ATM network then paved the way for the rise of
debit cards.
Globalization and the evolution of the computing, visual and phone
technologies, the new ‘interfaces’ and the possibilities of the World Wide Web, led to
the emergence of internet banking, phone banking, contactless fuel payments, and
other forms of modern payment via the latest technologies. Historically, in 1983, the
Bank of Scotland offered Nottingham Building Society customers the first Internet
banking service, named Homelink. Customers needed a television set and a
telephone to send transfers and pay the bills, building the foundations for Internet
banking as we know it. The beginning of the 90s marked the bloom of click-and-brick
euphoria, wherein businesses and banks alike sought to gain the loyalty of their
customers by expanding into the web. But this strategy proved trickier than
previously thought, as it took over 10 years for Bank of America to acquire 2 million
Internet banking users. In 1997, Mobil Oil Corp introduced Speedpass, an electronic
payment tag that let consumers pay for fuel at the pump. Speedpass was the first
example of contactless payment, a concept that has now spread across the globe
(Daychopan, 2016).
The Y generation, currently representing more than 75% of the active users of
money in the modern way (through mobile apps, the internet, POS terminals, etc)

29. 28
brought and developed the new concept of ‘free trade with no borders’, representing
the main idea of decentralization, transfers and payments fee removal, optimization
of the bank-ruled system, and especially – the ever growing creativity and
innovation, flourishing thanks to the emergence of the software industry. Mastering
the ‘language’ of computers and being able to visualize an idea with several simple
natural laws of demand and supply, a simple idea for fee-liberation and a self-
governing system, like the Bitcoin one, is, somehow, evolving as a natural
consequence of the global development.
Thus, the existence of the cryptographic currencies, their emergence and
evolution, development and fall, is actually a natural process, following the trend of
the global political and economic development, along with the creative growing
personal culture of the new tech-generation. In line with the simple economic rule of
barter, that “out of all the goods available at the market, the market actors voluntarily
choose media of exchange according to their own preferences and use them in
exchange” (Surda, 2012), we can conclude that, in the era of online currencies,
Bitcoin is playing a substantial role of being a mean of exchange on goods and
services, as a stock, carrying certain changing value, according to the system
conditions.
6. The acceptance of crypto currencies
6.1 Governmental acceptance
Crypto currencies, and in particular Bitcoin, is novel because it does not rely
on a central authority charged with creating currency units or verifying transactions.
Owing to its distributed architecture, it is the system users who implicitly and in a
democratic way take these global decisions. The owners and spenders themselves
take the decisions, normally taken by a central monetary authority. As a democratic
and decentralized currency, the evolution of the ecosystem is shaped by the demand
and desire of the population, involved in the system. Although democratic, the bitcoin
world changes disproportionately, meaning there is no ‘one user=one vote’ equation
in the decision of trend for development, but rather it depends on the computing
power the users dedicate to the network, e.g. “x% of computing power = x% of

30. 29
votes”. Thus, as long as more than 50% of the network’s computing power is in the
hands of honest users, the same will evolve in the direction that they decide
(Nakamoto, 2008). The principle here can be imagined as a “weighted democracy”,
determined by the scale of the users’ involvement in the system (Vico and Arago,
2015).
Understood this way, Bitcoin represents a totally new economic and social
scenario. The adoption of any cryptocurrency should mean that governments and
financial authorities would be unable to control the evolution of the currency directly.
Indirect legislative influence could be played, but not control over the systems’
behavior. An electronic currency has an international rather than national character,
which means that an effective control over it would be a complicated matter.
Moreover, these scenarios are without historic precedent in the economic theories
and practice. Thus, the effect of Bitcoin’s acceptance and use on a multinational
scale cannot be predicted.
In the business practice, the number of companies, and especially small and
medium enterprises, providing digital and online services of the modern type, who
accept Bitcoin as a means of payment, is constantly growing. Its rate of adoption can
be explained not only by its international reach, but also in part by the sense of
anonymity that it guarantees and generates, which has stimulated its use for
illegitimate purposes and in situations in which political pressures prohibit other
forms of virtual payment (Vico and Arago, 2015, p9).
The adoption of Bitcoin is not exempt from attempts to exert control over it on
the part of governments and regulatory bodies. For example, in mid-2013 the State
of California, USA, wrote to the Bitcoin Foundation, informing it that if it did not
register as a money transmitter it would not be able to operate in the state. In the
official letter the Department of Financial Institutions of California suggest that “the
BitCoin Foundation is engaged in the business of money transmission without having
obtained [a] license or proper authorization, required by the California Financial
code”. The letter continues “you are hereby wanted to cease and desist from
conducting the business of money transmission in the state. Failure to do so will
result in appropriate actions being taken.”21
The official representatives of the
financial department found a legal way to affect the BitCoin payment system in terms
21
http://www.cnet.com/news/bitcoin-foundation-ordered-to-cease-operations-in-california/

31. 30
of receiving remuneration for the items, being sent for real money. However, the only
legal action that can be taken is in this phase of realization of the Bitcoin business is
to cease the real-currencies transfer into bank accounts or cash transfers. The buy-
and-sell system, with takes place virtually, can not be affected directly, although it
expected a certain drop in the state for a small period of time.
Another example of government regulation over the Bitcoin system can be
found in China. Again in 2013 the Central Bank of China alerted all the financial
institutions in the country to seize the use and transfer of bitcoins, as the same
currency, although not affecting directly the country’s monetary system, carries a
high risk of uncertainty of its market. In an official statement, the state financial
representatives confirmed that actions will be taken to act against any “black market”
operations, involving bitcoin payments. They also stated that will closely monitor the
risks associated with bitcoin, as the possibility of using the “money” for illegal
activities and for speculation. In mid-2013 the use of bitcoins has grown a lot in the
country, especially in the transfer of value outside its borders. However, the
government did not put a ban on the bitcoin transactions and payments done by
citizens, although noted and alerted all bitcoin users that the currency carries out lots
of risks.22
6.2 Economic acceptance
In early 2014 Bitcoin received two important endorsements: from February
2014 eBay allows transactions in Bitcoin (UK only) and Google confirmed that is
working on integrating the e-currency in its mobile and PC applications and online
stores. In Spain lots of businesses accept bitcoin payments as a mean of exchange
for obtaining products and services.
Taking advantage of the repercussions that the use of Bitcoin is having on
international scale, adoption of the currency is seen newsworthy. Thus, given
increasing public awareness of the use of bitcoin in the world of commerce as an
alternative to traditional card payment methods, its acceptance has been used as
leverage in terms of publicity and visibility (Vico and Arago, 2015, p 10).
22
http://tecnologia.elpais.com/tecnologia/2013/12/05/actualidad/1386240024_458907.html

32. 31
The fact that Bitcoin is a “quasi-currency” that is outside of government control
makes it an object of controversy. On one hand, there are the organizations and
individuals that consider it a great tool to limit the control of the states over the
popular economy. On the other hand, it is seen as a source of illegal activities.
Moreover, the fast-growing Bitcoin ecosystem and the possible new scenario of
development of the online community and commerce, it is not clear what effects on
the global economy the massive adoption of Bitcoin, and cryptocurrencies as a
whole, would have.
From a pure economic point of view, the value of Bitcoin is determined like it
is done with the traditional ones. Bitcoin might be seen as fiat money, whose value is
based on the trust that society deposits in it. Nevertheless, the fact that Bitcoin is
uncontrolled by any authority means that the basis of its trust is different. In the case
of official currencies, it is the trust of the state or authority which supports it what
determines its value and which provides it with mechanisms to prevent its value from
raising or falling beyond limits, considered inadvisable (Vico and Arago, 2015).
In the case of Bitcoin, the quasi-currency has value, according to
www.Investopedia.com for the following reasons:
 It is popular. In short, people accept and trade in Bitcoin because other people
accept and trade in Bitcoin. It is recognized and accepted as a currency by
many.
 Bitcoin is decentralized and limited. This is a major factor for many Bitcoin
users. Bitcoin is hard for governments to trace and tax. Also, unlike fiat money
produced by central banks, there is a cap set on total Bitcoins, limiting how
much the currency can devalue through inflation.
 Bitcoin acts like an equity investment. The market value of Bitcoins has had
wild swings in value and even a market cap.
 Bitcoin is a social network. The Bitcoin "community" is active and acts like
other online social networks.23
Due to the different and new character of the bitcoin “currency” its exchange value
fluctuates greatly owing to the fact that the level of trust invested in bitcoin id not as
great as that invested in other official currencies. In addition, due to the technical
character of the quasi-currency, its level of trust can be affected by technical factors.
23
http://www.investopedia.com/ask/answers/100314/why-do-bitcoins-have-value.asp

33. 32
Such technical factors, for example, might be an update of the Bitcoin software, a
glitch in the system , or any fraud attack by hackers in attempt to steal some bitcoin
amounts. As an example of technical issues might be linked the update of the
database used in the main miner software (bitcoind), which produced an
inconsistency between versions of the quasi-currency. This led to the appearance of
two parallel blockchains, called a ‘fork’. For a period of time, one set of bitcoin users
followed one chain, while the rest followed the other, generating a confusion which
led to a depreciation of the currency, illustrated in Figure 4. Nevertheless, owing to
the specific construction of bitcoin, such situations self-correct over time, through
annulling one of the chains, leaving only the valid one.
Figure 4. The depreciation of Bitcoin during the fork on March 2013
As already mentioned, the value of bitcoins can also be affected by theft, scams and
contingencies, which can introduce uncertainty and mistrust into the BitSystem. One
of the most significant events for the past several years, which had a significant

34. 33
effect on the bitcoin value are: the Linode hacks24
of March 2012, which saw the
theft of approximately 46,653 bitcoins and the first “closing down” of Silk Road25
on
2nd
of October 2013, when 144,336 bitcoins were confiscated from its founder and
transferred under the FBI control. The effects of these events can be seen on figure
5 and 6.
Figure 5.Effects of the Linote hacks on the price of Bitcoin
24
https://bitcointalk.org/index.php?topic=83794.0#post_linode_hacks
25
https://bitcointalk.org/index.php?topic=83794.0#post_silk_road_seizure

35. 34
Figure 6. Effects of the Silk Road closing down on the price of Bitcoin
Other problems, related with the electronically managed character of Bitcoin,
are in line with attacks of malicious software. An example is the 31st
of December
and 3th of January 2014 Yahoo security problems. At this period Yahoo experienced
a security problem with adverts on its homepage. Some of these were infected with
malware which allowed the hidden installation of Bitcoin mining software, creating
what was effectively a mining botnet.26
According to economic and cryptographic
specialists this kind of botnet is capable of generation around $100,000 a day.
Another problem that has currently being causing issues for some
organizations, institutions and individuals is the cryptographic malware, blocking all
the computer’s text data and documents, asking for remuneration in bitcoins for the
unlock of the information. For the past few years damages for around $5,000,000
have been caused worldwide by this sort of ransoms.
26
http://www.bbc.co.uk/news/technology-25653664

36. 35
6.3 Market acceptance
The current state of the Bitcoin market is considerably stable. Now that is has been
functioning for more than five years, the system has recovered and strengthened its
positions among businesses and individuals. More people invest in buying bitcoin
currency online to be able to consume services and goods internationally with no
transaction fees. The reasons for Bitcoin payments across the world to be rapidly
growing in popularity are the lower transaction costs and being cheaper for retailers
than credit cards: such reasons suggest the potential for considerable future growth
in the legitimate use of Bitcoin. In several big trading areas there are reports of
Bitcoin ATMs, which exchange conventional currencies for bitcoins, and of
companies paying their employees in Bitcoin, especially those in multinational
software companies, paying freelancers overseas in bitcoins to avoid the high
charges of PayPal (such as Expensify Ltd).
There are also various forms of physical Bitcoin – in essence physical tokens,
convertible into real (i.e. electronic) bitcoin, which can be used in hand-to-hand
exchange. These include physical bitcoin coins and Bitbills (plastic cards or ‘bitcoin
notes’). Both of these have hologram-protected sealed components, containing the
keys to access a Bitcoin. These can circulate as hand-to-hand currency, with value
assured by their convertibility into digital Bitcoin to be spent in the system. At any
time the seal can be broken and the key recovered to allow the digital Bitcoin to be
spent. Once the seal is broken it becomes obvious that the coin has been spent and
no longer valuable. Similar physical-to-digital innovations include PrintCoin, which is
similar to cheques or debit cards drawn on bitcoin accounts, and Firmcoin, which is
essentially a reloadable Bitbill. Thus, in five years of its existence, Bitcoin achieved
the remarkable distinction of being the first currency in history to go from digital to
physical, rather than the other way around. (Schurman, 2011)
For the past two years, economists and researchers observe on another trend
– the emergence of Bitcoin financial derivatives. These consist of futures, options
and Contracts of Difference. New accounts are also being offered by brokers and
exchanges to allow short selling and margin trading in Bitcoin, and Bitcoin hedge
funds and Exchange Traded Funds. These work to facilitate both risk management

37. 36
and speculation in Bitcoin markets and can and will deepen and increase the liquidity
of these markets.27
7. Financial Security, legality and the underworld
7.1. Financial Security
The 2002 report, named “The Future of money”, published by the
Organization for Economic Co-Operation and Development (OECD), claims
substantial changes regarding the monetary policies and their implementation, such
as the possible emergence of new currencies with a global significance. According to
the paper, globalization leads to the need of a worldwide currency to act as a mean
for direct payment despite the country of origin of the service/product and the payee
location. With the current need in mind, buyers and sellers are looking for an
international form of currency that provides the “greatest confidence and can perform
fully all of the money’s primary function” (Miller et all, 2002, p 12). Miller suggests
that a universal system should be established in order to provide access to a digital
money account.28
There are many obstacles to realizing this type of peer-to-peer digital money
that is network based, transparent, and easy to use and highly secure. The difficulty
most often rose when considering this trajectory is the contention that network
transactions will never be able to acquire the virtues of anonymity, accessibility and
security that characterize hard cash. (Miller et al, 2002, p. 18).
In this sense, although the concept of decentralization and free market value
generation and price formulation, it is based on high risks. Most risks come from the
absence of thrust in the Bitcoin system from the main financial institutions, as
money, invested in uncertain quasi-commodity money might easily be lost from the
purchaser, owner or dealer of Bitcoins in case of any ecosystem shock, caused by
technical issues or other threads and obstacles.
27
Schurman, K (2011) Bitcoin: Free money or fraud, HyperInk, USA
28
Hauschildt, H (2012) Bitcoin’s Potential to Become the World’s Currency, Bachelor thesis. University of
Paderborn, p 4. Available at: http://www.hauke-hauschildt.com/userfiles/downloads/Bachelor%20Thesis.pdf
[03/02/2016]

38. 37
However, the pros of owing and using Bitcoin as a mean of payment, through
its transnational characteristics, is the absence of need to pay transfer costs,
technical time waiting for inner and inter-bank transactions, the lack of business days
and working hours, and many more. Thus, the number of Bitcoin users continue to
grow in a very big pace, promising the development and strengthening of the
BitEconomy and rise in speed of liquidity of the quasi-currency.
The Bitcoin system has the chance of becoming a single world currency,
developed in a totally free market. That concept is well developed in an article on the
www.capitalistcreations.com website.29
According to Hoddinott (2013) the security system of illegal “bitcoin print” is
impossible, as “the client creates a random private key. The private key can be
expressed in hexadecimal. From this private key, a point is then chosen on the
elliptic curve based on the random number. The genius of this system is that the
random number that is generated can only has one unique public key, but that public
key could have many different numbers using the equation. Trying to calculate the
private key by knowing the public key is statistically improbable.” Thus, the actual
issue of additional bitcoins in the system can occur only through the official mining
process, discussed in Chapter one. Moreover, the value of a newly generated bitcoin
is actually “worked out” through the process of calculation and processing of
cryptographic data, as remuneration for the use of external services. The special
way of generating new coins in the Bitcoin system makes the same more than just
innovative – it allows the entire community to work together as being equal in a
democratic operational chain.
According to Hoddinott (2013) for the perfect market to exist, and maximum
opportunity for entrepreneurs to grow their customer base, a currency that is
available to everyone without favor or prejudice must be established without a
central authority (a one as Bitcoin). An ideal currency is one that can transcend
national borders, without political discrimination or non-market driven forces and is
not controlled or monitored by any one group, but instead by the entire network, and
that is truly transparent yet assures privacy.
The author’s arguments in favor of a single world currency are spot-on. Indeed the
most obvious of the reasoning is that it will result in increased global trade. Thus,
29
Hoddinott, A (2013) The Only True Free Market Currency in the World? Available at:
http://capitalistcreations.com/the-only-true-free-market-currency-in-the-world/#SWOT_Analysis

39. 38
with reduced barriers, global trade will see a massive increase and online startups
will grow at a rapid pace. This kind of opportunity would result in higher average
income levels as the velocity of money speeds up. If adopted on a massive scale
globally, Bitcoin’s velocity would be unprecedentedly high. With one global currency,
nations would be built on the strength of their innovation, not the ability to exploit
cheap labor. (Hoddinott, 2013)
Hoddinott (2013) suggests that a totally free market has no limitations on what is
bought or sold. In a free market, there must be no undue influence or power exerted
from one player over the next. To truly advance a global neutrality of commerce,
there must be a medium of exchange which is not managed or regulated by any one
country’s government. So far, only Bitcoin fits the definition.
In an attempt to summarize the concept of the paper (The Only True Free Market
Currency in the World?) we will present a SWOT analysis, explaining the driving
forces of the Bitcoin survival and potential.
S.W.O.T. Analysis
Bitcoin has its inherent strengths and weaknesses which need to be understood in
order to advance this currency on to the world stage and be adopted by
entrepreneurs like ourselves.
Strengths
 Non-discriminating
 Increasing popularity
 Available to be exchanged for conventional currencies
 Secured by intractable cryptology
 Limited number of coins to be produced (cap at 21 million)
Weaknesses
 Deflationary
 Hacker attacks and technical uncertainties and vulnerabilities
 The (still) limited use of Bitcoin in the economy

40. 39
Opportunities
 To replace global currencies or take a portion of the market
 Become a relevant currency for global online trade
Threats
 Possible copy-cat currencies
 Increased computer and networking power that could crash the system
(hackers)
 Governmental regulations for illegality
7.2. Legality of Bitcoin
Some discussion centers on whether, at some point in the future, some
governments will declare bitcoins illegal. Perhaps some countries could outlaw the
system of Bitcoin, calling it illegal currency. Other governments might launch
investigations into determining whether the Bitcoin system is being used by citizens
to illegal launder money. Such legal concerns caused the Electronic Frontier
Foundation to stop accepting donations of Bitcoins.
The anonymity of Bitcoin system could lead to an instance where federal
governments could prosecute users. In the U.S., for example, anyone involved in
transaction that has a value of $ 15,000 or more must report it to the IRS. If Bitcoin
users fail to make this report, they could be prosecuted. The IRS then would have to
figure out how to identify the anonymous user.
If the bitcoins are used to purchase goods, law enforcement authorities could
have the clue to break the anonymity. As soon as someone, for example, ships a
package, the police could find either the buyer or the seller, based on the physical
address they use. If this package contains illegal goods, the police could have a
chance to attempt to prosecute a bitcoin user.
Another potential option for law enforcement involves freezing assets, similar
to other types of currencies. Certainly, with the digital nature and encryption built into
the Bitcoin system, law enforcement officials would be unable to freeze accounts as

41. 40
they do with other types of currencies. Law enforcement would seize a user’s
computer during an investigation, however, thereby potentially seizing all of the
bitcoins the suspect owns.30
This kind of government action would be difficult to
enforce, however. Moreover, the Bitcoin system is built on anonymity. It is also a
worldwide system with no legal office or centralized headquarters, thus making it
difficult for a single governmental entity to police.
Another perspective is to claim Bitcoin legal for several type of transactions. In
case several provisions are included in the financial laws of the national
governments, allowing certain type of payments for services. Although the anonymity
is an aspect of the Bitcoin system that carries out risk for the actual observance of
money transfers and quasi-currency ownership, owning such a resource might carry
positive effects for the economy as well, especially in the service sector of a country.
For example, for startup companies in one of the fastest growing sectors – the
software development services, the Bitcoin payment might allow for users and
developers to not be obliged to own conventional currency for trade operations. The
international aspect of the software commerce might allow the developing sector to
gain foreign market share without actually being involved in transaction operations
involving the exchange of value in foreign currencies, which can provide an ease in
the commerce and will help the growth in net sales. Using Bitcoins as a mean of
payment for these organizations might help them gain a competitive advantage. In
such a way, governments can stimulate growth in the national export and allow
payments on such services to be allowed in bitcoins, as one way or another, the
financial results can be sensed in terms of growth in employment, growth in the
added value and positive overall effect on the national GDP.
In his work Omri Marian (2015)31
suggested that “cryptocurrencies (and
especially Bitcoins) are protocols that allow for the validation of transactions without
the need for a trusted third party (a bank, credit card company or recording agency).
As such, cryptocurrencies hold great innovative potential. They have been described
as a “generative”32
technology on which powerful applications can be built. For
example, cryptocurrencies may dramatically reduce transaction costs associated
30
http://www.economist.com/blogs/babbage/2011/06/virtual-currencies
31
Marian, Omri (2015) A Conceptual Framework for the Regulation of Cryptocurrencies. Available at:
https://lawreview.uchicago.edu/page/conceptual-framework-regulation-cryptocurrencies
32
Lee, T (2013) Here’s What Critics Miss about Bitcoin’s Long-Term Potential, The Switch Available at
http://www.washingtonpost.com/blogs/the-switch/wp/2013/12/03/heres-what-...

42. 41
with value transfers, engender access to financial transactions within sectors of the
population that do not have access to traditional financial institutions, avoid the
pitfalls of managed or commodity-based monetary systems, and allow for the
creation of self-enforcing smart contracts that do not rely on financial institutions,
lawyers, or accountants for their execution.”33
According to Marian (2015) “cryptocurrencies are also uniquely suited to
facilitate harmful behaviors for two reasons. First, the only truly public feature of the
ledger is the documentation of ownership and transfers. The owners themselves are
not identified by name on the ledger, but rather by a set of letters and numbers
representing their public cryptocurrency address (which, together with the private key
that proves ownership of that address, constitute the owner’s cryptocurrency
“wallet”). Anyone can freely create as many wallets as he or she desires, at
practically zero cost, without providing any identifying information. This relatively high
level of anonymity makes it difficult for regulators to identify individuals who use the
protocol for illicit value transfers.”
Mariam suggests that “the second reason that cryptocurrencies are suited for
criminal activity is that our financial-regulation system heavily relies on regulating
intermediaries that are uniquely positioned to disrupt misconduct. For example, we
subject financial institutions to “know-your-costumer rules” in order to prevent money
laundering, use banks as tax-withholding agents to prevent tax evasion, and regulate
securities exchanges to protect investors. Some commentators argue that the public
ledger has the potential to “eliminate intermediaries without eliminating the
underlying conduct.” If that is the case, then regulators would lose the ability to use
intermediaries as regulatory agents. In theory, this would necessitate the regulation
of dispersed crowds—meaning direct regulation of individuals who participate in
financial markets. Such regulation is immensely costly—a problem exacerbated by
the fact that the users, as explained above, are relatively anonymous. The
combination of anonymity and the decentralization of financial dealings present
governments with formidable regulatory challenges.34
”
33
Buterin, V (2014), DAOs Are Not Scary, Part 1: Self-Enforcing Contracts and Factum Law, Bitcoin
Magazine Available at http://bitcoinmagazine.com/10468/daos-scary-part-1-self-enforcing-contra...
34
Marian, Om. (2015) A Conceptual Framework for the Regulation of Cryptocurrencies. Available at:
https://lawreview.uchicago.edu/page/conceptual-framework-regulation-cryptocurrencies

43. 42
According to Mariam (2015) some “skepticism about the elimination of intermediaries
from cryptocurrency markets is warranted. Intermediaries are market-created, not
government-created, constructs. Intermediaries do not just serve as agents for
buyers and sellers but in fact add value to financial markets. The cryptocurrency
market demands the creation of new financial intermediaries to serve it. Such
intermediaries include exchanges of cryptocurrencies to fiat currencies,
cryptocurrency-wallet service providers, and clearinghouses for cryptocurrency
transactions. These new intermediaries can be subjected to traditional models of
intermediary regulation, and indeed they have been.”
7.3. Anonymity and the underworld
The abovementioned paper of professor Marian argues “that regulation
should not prevent cryptocurrencies from achieving their positive potential. On the
other hand, regulation should prevent cryptocurrencies from becoming a vehicle for
criminal activity. Therefore, regulation of cryptocurrencies should not treat any
cryptocurrency as a homogeneous instrument. Rather, the idea is to deconstruct
cryptocurrencies into their unique traits, dealing with their vices and virtues
separately. For example, decentralization is a positive trait that should not be
disrupted. Anonymity should be targeted only to the extent that it increases the
likelihood that individuals use cryptocurrencies to engage in criminal behavior.”
In his Essay, Marian works with the following assumptions and qualifications:
 First, the current level of criminal activity in the market is taken as a
benchmark. Regulating cryptocurrencies is not intended to reduce the current
level of criminal activity but rather to ensure that cryptocurrencies do not
increase criminal activity.
 Second, it is assumed that financial anonymity has an independent normative
appeal even though it may facilitate criminal behavior. The current status of
financial anonymity is taken as a benchmark—any regulatory framework
should not decrease the current level of financial anonymity. However,
regulation is also not aimed at increasing the level of anonymity.
 Third, the regulatory framework assumes that, if no new regulatory costs are
imposed on the legitimate use of cryptocurrencies, the market will allow the

44. 43
new technology to develop to the extent that it offers benefits (other than
anonymity) that fiat currencies do not.
Under the classic utility model of criminal behavior suggested by Professor Gary S.
Becker, a rational, profit-seeking individual will engage in criminal behavior if the
utility of doing so is greater than zero (that is, greater than not engaging in criminal
behavior).35
As it was already noted, the current level of criminal activity in the market is taken as
a benchmark. “This means that all individuals have already calculated their expected
utility from criminal behavior and are either engaged or not engaged in criminal
activity.” (Marian, 2015) After the assumption that cryptocurrencies are introduced,
an individual that previously calculated negative utility in engaging in criminal
behavior with traditional currencies is now presented with the option to use quasi-
currencies. “Using cryptocurrencies to facilitate the previously contemplated illicit
activity significantly reduces the probability of being sanctioned due to the anonymity
associated with cryptocurrencies. Thus, if an individual expects to extract the same
value from illicit behavior—meaning that the only difference is the denomination of
the illicit gain—the utility function produces a greater expected outcome.” (Marian,
2015).
Thus, “individuals who had previously calculated negative utility from engaging in
criminal behavior might now calculate positive utility solely because the illicit activity
is executed through the use of cryptocurrencies. Thus, in the absence of a regulatory
response, a simple utility model predicts that the introduction of cryptocurrencies
would increase the level of criminal activity, because more individuals would engage
in it.” (Marian, 2015)
The raise in the criminal behavior, after the introduction of Bitcoin into the world trade
of services and outputs, has led to the emergence of lots of illegal trade markets
(online), speculators and fraud dealers, along with allowing the birth of a new type of
criminal activity – terrorist donations and funding through anonymous organizations
and websites. In a research paper from 2013, named “The Rising of Gyges: Using
Smart Contracts for Crime”36
the authors suggest, that “cryptocurrencies such as
bitcoin remove the need for trusted third parties from basic monetary transactions
35
Becker, G (1968) Crime and Punishment: An economic approach. Univ. of Chicago. USA, Available at:
http://www.nber.org/chapters/c3625.pdf
36
http://www.arijuels.com/wp-content/uploads/2013/09/Gyges.pdf

45. 44
and offer anonymous (more accurately, pseudonymous) transactions between
individuals. While attractive to some, these features have a dark side. Bitcoin has
stimulated the growth of ransomware, money laundering, and illicit commerce, as
exemplified by the notorious Silk Road”.37
“Criminal activity committed under the guise of anonymity has posed a major
impediment to adoption for bitcoin. Yet there has been little discussion of criminal
contracts in public forums on cryptocurrency.” The authors also state that “as
decentralized smart contract systems typically inherit the anonymity (pseudonymity)
of bitcoin, they offer similar secrecy for criminal activities. Broadly speaking,
therefore, there is a risk that the capabilities enabled by decentralized smart contract
systems will enable new underground ecosystems and community.”
One of the most recent uses of Bitcoin in the underworld was detected within the
terrorist group ISIS. www.SecurityIntelligence.com created an article, named “ISIS.
Are they Using Bitcoins To Fund Criminal Activities?”38
, explaining the case of the
world’s richest terrorist group - The Islamic State of Iraq and Syria (ISIS). The article
states:
“Like most forms of technology, fraudsters, criminals and terror groups will find ways
to exploit them for nefarious uses — Bitcoin is no different. Due to its anonymity and
untraceability, it is used for criminal activities such as laundering money, buying and
selling illegal goods and services and transferring money to support criminal or terror
activities. Al-Khilafah Aridat: The Caliphate Has Returned, a pro-ISIS blog, discusses
how Bitcoins can be used to fund the caliphate. The post states that they are
untraceable by Western governments and, therefore, they will not be stopped by
regulatory screening processes. The blog then discusses the decentralized nature of
virtual currencies, specifically stating that they are able to access markets that cross
all borders and nation-state regulations to send money instantly and in a way that is
untraceable by “Kafir” governments.
In an additional step to keep the senders’ and receivers’ identities secret, the blog
post discusses the use of dark wallets. Dark wallets offer Bitcoin users more
protection in relation to privacy and identity. It is also widely known that dark wallets
may enable serious crimes such as murder, child pornography, drug and weapon
sales and terror group financing.
37
http://www.pymnts.com/exclusive-series/2015/bitcoins-criminal-contracts-and-the-batman-effect/
38
Satti, B (2014)

46. 45
According to the blog, Bitcoins are an entirely anonymous donation system that
could send millions of dollars instantly from the United States, United Kingdom,
South Africa, Ghana, Malaysia and Sri Lanka.
On Oct. 13, Reddit’s Bitcoin forum discussed how the ISIS blog site was accepting
Bitcoin as a form of payment on the Swedish/Latvian conversion site Yourserver.se.
The blog claims the payments are strictly for maintenance and hosting the website.
Reports indicate that Yourserver.se closed the account, claiming it has a strict terms
and conditions policy that prohibits using its service for illegal activities.
www.Yourserver.se lists its terms of service on its site and bans the following:
 Anything forbidden by Swedish law;
 Spamvertising websites;
 Malicious software such as mail and network bombers, spam, virus
operation software and control centers;
 Scam and phishing websites such as fake eBay, PayPal and bank
login forms;
 Network abuse (i.e., network scanning).
 Analyst Comments
It is not surprising that ISIS would begin to adapt to using cryptocurrencies as a way
to receive funds; the group has proven to be quite skillful with technology and social
media. ISIS has been known to spread propaganda, recruit individuals and seek
funds through tools such as Twitter, Facebook, YouTube and Ask.fm.
There are some challenges with how ISIS would turn Bitcoins into physical currency
in the states in which it operates. Many ISIS-controlled territories do not have the
technology to extract high amounts of Bitcoins for cash. However, nearby Turkey,
Israel and Dubai all have a small but flourishing Bitcoin community, with a few
Bitcoin ATMs available. Bitcoin ATMs work just like bank ATMS and are electric
communication devices that allow Bitcoins to be exchanged for cash without the
need for a cashier. It is important to note that some models only allow for the
purchasing of Bitcoins. When a Bitcoin ATM is not available, users can sell them
online; however, this type of sale often requires users to verify their identity.”39
39
https://securityintelligence.com/isis-are-they-using-bitcoins-to-fund-criminal-activities/

47. 46
Thus, “Digital currencies are increasingly serving as a money laundering platform for
"freelance criminal entrepreneurs operating on a crime-as-a-service business
model"”, according to a new Europol report.
The Europol Report40
, which identified the key driving factors affecting the EU's
criminal landscape, predicted that the role of freelance crime organizers is expected
to "become more prominent". Criminal actors, both groups and increasingly
individual criminal entrepreneurs, will adopt the crime-as-a-service business model,
which is facilitated by social networking online with its ability to provide a relatively
secure environment to easily and anonymously communicate. In the pursuit of new
clients, organized crime will invariably seek to change the commodities they trade
shifting from traditional goods to new commodities.
Almost all types of organized crime activities will rely on digital infrastructures. The
trade in illicit goods and the exchange of money will take place in the virtual realm
requiring little face-to-face interaction between trading partners and reducing risks of
discovery and interception. Virtual currencies will allow organized criminals to
anonymously exchange and use financial resources on an unprecedented scale
without the need for complex and cost-intensive money laundering schemes. Some
actors will provide highly specialized services catering to a relatively small group of
clients. These services may include the infiltration of control systems or the physical
infiltration of companies using sophisticated identity fraud scams with information
gathered from online intrusion and reconnaissance.
In the future, with the development of the crypto-technology and the evolution in the
computer sciences and hardware capabilities, it will become more difficult to trace
transactions and to police the identity of the sender and receiver of illegal services
and payments/funds for contiguous actions.
40
https://www.europol.europa.eu/newsletter/massive-changes-criminal-landscape

48. 47
Chapter three: Empirical testing – the Bitcoin concept and acceptance
8. Primary data collection and analysis – Methodology and methods
The qualitative approach was chosen by the author for understanding the trends of
the investigated problem. Although engaging a quantitative research might give
deeper insights on the scope and effects of the phenomena, it will not cover the
“human perception” and ambiguous characteristics of the subject, which plays an
important role in understanding the nature of Bitcoin and anonymity and the possible
directions of solving the Hypotheses posted.
The author has chosen a mixture of research techniques for the gathering of the
required amount of data for solving the problem and extraction of the possible
scenarios. The primary data will be collected via semi-structured interviews and
hypotheses testing. The interviews were conducted on a random principle on several
points: through Facebook, meetings in person and other media (corporative blogs
and corporate websites of businesses, using Bitcoin as mean of payment. Due to the
inclusion of some personal and company confidential information, in some cases,
within these dialogues, the personal and corporate names will remain blank.
The main research method, used in this paper, is the semi-structured interviews
(Gross et al. 2014, Hoehn-Saric et al. 1987), commonly used in qualitative research
as a tool for interpretative methodology instrument (HADDLE 2005). The
interpretative methodology approach (Cohen 1988, Curtin 2013, Maguire at al. 2014,
Malone at al 2014, Riley and Love 2000) was chosen for conducting the analysis of
the primary data. The author will base the main conclusions of the research on his
personal perception of the problem and the possible scenarios and hypotheses
following the results.
8.1. Semi-structured interviews
The interview incorporated thirteen questions, divided in two sections.
The first section contains questions concerning the understanding of Bitcoin
functionality and the pros and cons of the new system, along with an evaluation of
the ‘debth of involvement’ of the interviewees.

49. 48
The second section of the interview contains questions, regarding the economic,
governmental and other threads and obstacles the participants face in their C2C,
C2B and B2B transactions.
8.1.1 Sampling procedure
The participants were chosen on the following requirement: being educated
individuals with a bachelor’s degree (or higher) in finance or engineering, from all
age groups which insured that versus type of people were included in the interviews.
8.1.2 Response rate
55 interviews were distributed with only 35 of the total responded, which puts the
percentage of completion at 63.4%. The average length of the questionnaire was
approximately 10 minutes.
8.1.3 Interview issues
Despite the high response rate and the relatively small duration of the questionnaire
the interviewees had some issues in understanding the main goal for conducting the
interview. Most of the people being asked to participate in the study, and
consequently gave up or refused on the way, stated their position in the need of
receiving incentives for their effort.
8.2 Primary research results
The first section of the interview tends on gathering the panelist’s perception on the
Bitcoin aspects and main characteristics. Question Q1 classifies the panelists as per
the main groups, contacted from the researcher during the interviewing period. As
can be seen, the author tried to get representation of all the types of users and
individuals/organizations, involved in the decentralized cryptocurrency system. The
biggest group of representatives (45%) is the Bitcoin users, purchasing services and
items online, followed by the group of business owners, using Bitcoins as a mean of
payment (18%) and the Miners (15%). Close to the Miners are also the business
representatives, planning to add Bitcoin as a mean of payment.
A positive result from the greater variety of users is the big possibility to be able to
draw a realistic picture of the Bitcoin system characteristic.

50. 49
The next question is Q2 “Do you consider Bitcoin as ‘the future of money?”
75% of the interviewees give a positive answer (75%) and the rest of the
respondents give negative answer. Q2 is a control question, to be able to distinguish
the PROs and CONs of the Bitcoin ecosystem through questions Q3 and Q4.
15%
45%
5%
18%
14%
3% 0%
Q1: Please choose one of the options that fits you perfectly
I am a bitcoin 'creator' (a miner)
I am a bitcoin user (purchases of services
and items online)
I am a bitcoin dealer (buyer and seller)
I represent a business organization, using
bitcoin as a mean of payment
I represent a business organization,
planning to add bitcoin as a mean of
payment
I represent a business organization,
dropped off using Bitcoin as a mean of
payment
Doesn't want to specify

51. 50
As per the respondents, the PROs, indicated by the author, and reflected from the
theoretical background and previous research, have almost equal distribution. As per
the CONs – 44% of the respondents indicate the possibility of illegal actions due to
anonymity as the major thread, along with (31%) the absence of possibility to get a
bitcoin back in terms of bad service or product. A small amount of panelists stated
“the lack of possibility to account the movement of money in the company” /or the
accountability of Bitcoin mobility (12%) and the thread of governmental actions
against any trader or individual (13%).
29%
17%
25%
29%
Q3: If yes, what is the biggest PRO of the system?
The absence of transaction
fees
The easy pay conditions and
the fast transactions
The anonimity of the Bitcoin
system
The Visibility and publicity of
the economic aspects of the
system (the ledger)
44%
31%
12%
13%
Q4: If NO, what Is the biggest CON of the system
The posibility for illegal
actions, due to anonimity
The absence of possibility to
get your bitcoin back in terms
of bad service or product
The lack of possibility to
account the 'movement of
money' in the company
the thread of governmental
actions against any trader or
individual