Bitcoin Ecosystem

8/12/2019 Bitcoin Ecosystem

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Table of contentsIntroduction 1

Background description 1

Problem description 1

Research question and problem formulation 2

Contribution 2

Disposition 3

Ecosystems 4

Definition of an ecosystem 4

The ecosystem on different levels 5

The ecosystem on micro-level 5

Ecosystem and money: what is money 6

Ecosystem for currencies 8

Summary 9

Methodology 11

Research approach 11

Gathering data 12

Project boundary 17

What is Bitcoin 18

Technical structure of Bitcoin 18

Social and economic structure 24

Altcoins 25

Technical weaknesses of Bitcoin 27

How anonymous is Bitcoin? 28

Current regulation of Bitcoin 28

Summary 31Analysis of Bitcoin 32

Discourse analysis 32

Sentiment analysis 41

Analysis of Bitcoin through open data 43

Challenges and gaps in the Bitcoin ecosystem 48

Earlier ecosystem actors and heists 49

Summary 50

The Bitcoin ecosystem 51


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Network analysis: two-sided network 51

Network effects 51

Current status of Bitcoins and overview of the full ecosystem 54

Vertical integrations 68

Ecosystem analysis 68

Summary 75

Discussion and summary 76

Comparison to expectation 79

Summary 79

Future works 81

References 81Appendix 85

Appendix A - Discourse analysis data 85

Appendix B - Negative tween analysis 90

Appendix C - interview table 91

Appendix D - interview questions 92

Appendix E - conference speakers 93

Appendix F - sentiment analysis 94

Appendix G - average amount of transactions 95


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An exploration of the Bitcoin ecosystemAuthor: Lars Holdgaard from www.Bitcoin-Expert.net

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IntroductionIn this chapter the background of the thesis will be explained, and then followed up by a problem

description. The research question will be covered and discussed, including a perspective about

how this is a contribution. Furthermore, the overall expectations will be covered.

Background description

The 2. November 2008 someone with the pseudonym Satoshi Nakamoto sent the following e-mail

to a cryptography newsletter [Mail-Archive, 2008]:

>> I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third

party.

>> The paper is available at:

>> http://www.bitcoin.org/bitcoin.pdf

Two months later, the third of January, a beta implementation of the Bitcoin concept was released

on the website www.bitcoin.org, and since then Bitcoin network has been running. It has evolvedfrom an interesting theoretical concept, to what has been called one of the most important and

influential innovations since the Internet. At the same time it has also been called anything from

the biggest modern pyramid scheme, tulip mania 2.0 and a scheme just waiting to close again.

Since the arrival of Bitcoins in 2009, Bitcoin has been through a long process. Bitcoin has gone

from a paper, to an implementation which had a market cap above 13 billion USD in start

December 2013. Since, a growing ecosystem has emerged, with actors in many different layers.

Bitcoin as a technology opens up for innovation. The current financial system has its caveats which

are easy to see on a global level. In some African countries less than 20% of the population has

access to a bank [Gallup, 2010], billions are paid in fees for making financial transactions and thefastest way to transfer money across borders is not sending them using banks, but travelling there

by yourself with the money in a suitcase! Bitcoin and cryptocurrencies in general, offers an

alternative.

Problem description

Bitcoin might open for innovation, but as a new technology a lot of problems and challenges arise. A

question worth asking is the following: Is Bitcoin a serious contender for changing anything in the

financial system?

The introduction of Bitcoin was also an introduction to cryptocurrencies, which in general brings

new properties to the concept of currencies and digital cash. Wikipedia defines cryptocurrencies as

follows:

A cryptocurrency is a peer-to-peer, decentralized, digital currency whose implementation relies on

the principles of cryptography to validate the transactions and generation of the currency itself

Bitcoin bring something new to the table. It is the first decentralized payment system which solves

the double spending problem. It gives a new paradigm of near free transactions without significant

delays, a safe storage of value and programmable money. However, the whole world is based on an

existing financial system, with roots thousands of years back. The question is how a new system

such as Bitcoin will fit into the equation. PayPal proved a century back that new technologies in the


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financial sector can work, but a main difference is that PayPal is centralized, while Bitcoin is

decentralized.

Bitcoin also creates a question of regulation. As the transactions can be sent anonymously, it is

theoretically possible to fund any person or group around the world, without anyone knowing whosent the money. That is clearly a problem when considering the international money laundering

laws. Will that cause Bitcoin to bloom or wither?

No matter what, Bitcoin relies on many elements. It does not only rely on regulation or some few

companies working with Bitcoin, it relies on a whole ecosystem which has factors both internally

and externally.

Research question and problem formulation

Bitcoin in itself is indeed very interesting, but I want analyze Bitcoin from a more holistic

perspective. I find the ecosystem surrounding it very exciting, because it tells the real story of

Bitcoin, as the ecosystem defines what Bitcoin can be used for now. Without the ecosystem, thereis no new financial system which Bitcoin might offer.

Therefore, Ive decided the overall research question to be the following:

What is the Bitcoin phenomenon, and how has the ecosystem surrounding Bitcoin evolved?

This is an explorative research question, which will cover both Bitcoin and the ecosystem. Bitcoin

will be analyzed in depth, by analyzing the current state of Bitcoin and its potential. The ecosystem

will be analyzed by looking at all internal and external factors, both historically, currently and by

making a fair assumption about the future.

ContributionSo far there has been written papers about the mathematical foundation behind Bitcoin, technical

weaknesses, the properties and the stability of Bitcoin. To my knowledge, this is the first thesis

analyzing the Bitcoin ecosystem in depth.

An analysis of the Bitcoin ecosystem tells a story about the current state of Bitcoin. Furthermore, it

tells a story about the journey Bitcoin has to participate in during the next couple of years and even

decades. Bitcoin is a new technology, potentially disruptive in a lot of industries, and therefore is

this thesis an important contribution. My assumption is that in order to understand Bitcoin, one

have to understand the ecosystem, which is why the ecosystem is a key part of the thesis.

The analysis leads to a model of the ecosystem, describing how it has evolved. This is acontribution, as it explains how the Bitcoin ecosystem is structured and should be treated. It also

gives a useful model for people who want to understand Bitcoin.


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Disposition

In chapter two the theoretical foundation of ecosystems will be covered. This will cover the frame of

ecosystems in general, and the frame of digital industries. It will also cover the current financial

system and money in general.

In chapter three the methodology of the report will be covered. The exact data sources will be

discussed and summarized. The chapter will also answer how the research question will be

answered, by describing the selected data sources and method.

In chapter four an explanation of Bitcoin will be given. This will cover anything from the basic

question of what is Bitcoin, to the properties of Bitcoin. After the introduction, a short analysis of

the anonymity and weaknesses will also be covered as well. The current regulation will be covered

shortly.

In chapter five an analysis of Bitcoin will be made. A discourse analysis will be made in order to

categorize what Bitcoins can be used for and find critiques of Bitcoin, a sentiment analysis has

been made in order to make some assumptions about the current state of the ecosystem and at last

an analysis of how big Bitcoin really is at the moment.

In chapter six the ecosystem is covered and analyzed. This is done from covering most of the

interesting players in the Bitcoin space, and then analyzing it from a system theory perspective

using data sources described in the methodology.

In chapter seven a discussion which binds everything together will be made.


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EcosystemsIn this chapter theory about ecosystems

will be covered. We will look into

ecosystem theory, and see if there is a

knowledge gap for currencies, and more

specifically digital currencies. In addition,

a model for financial ecosystems will be

made, which will be populated during the

thesis to describe the overall ecosystem.

Definition of an ecosystem

The term ecosystem originally comes from

biology [Tansley, 1935]. The term

ecosystem is relevant, as its seldom

enough to observe the single unit, to gain

knowledge of a phenomenon. Therefore, by

using the term ecosystem in a scientific

domain, we look at a system more broadly.

Moore (1996 p. 26) initially defined the business ecosystem as:

An economic community supported by a foundation of interacting organizations and individuals

the organisms of the business world. The economic community produces goods and services of

value to customers, who are themselves members of the ecosystem. The member organisms also

include suppliers, lead producers, competitors, and other stakeholders. Over time, they coevolve

their capabilities and roles, and tend to align themselves with the directions set by one or more

central companies.

Ecosystems are important, especially when discussing Bitcoin. It is expected to be a coopetitive

environment with companies forming symbiotic relationships, to create value for all parties. It is

likely that if someone in the ecosystem creates value, its mutually beneficially for everyone in the

ecosystem.

According to [Shapiro, 1999], the following is true:

The performance of one company is marginally dependent on the individual actor, and mainly on

the performance of the ecosystem.The global health of the ecosystem reflects any individual success of the company. Looking at the

evolutionary stage of the Business ecosystem, its definitely in its birth face. As described by

Shapiro, the cooperative challenges are Work with customers and suppliers to define the new value

proposition around a seed innovation, which is the exact situation in the Bitcoin ecosystem. As we

will cover in this chapter, the ecosystem is very small and unstable, which shows the current state is

an early birth.

The dynamics of digital industries are characterized by tension between competition and

collaboration among actors [Ghazawneh and Henfridsson 2012; Selander et al. 2010]. That means

that even though the actors are competitors inside the ecosystem, they depend on the ecosystem in


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general. That promotes collaboration with each other and social entities across both the industry

and outside the industry. It is therefore proposed that the organization of digital industries is more

appropriately conceived as digital ecosystems [Basole and Karla 2011].

In digital industries, the use of application programming interfaces (APIs) has become a standardstrategy to increase customer value of an offering by complementarities [Hawkins and Ballon 2007;

Tanriverdi and Lee 2008].

The ecosystem on different levels

An ecosystem can a whole can be seen on three levels: Micro-level, meso-level and macro-level

[Hedman and Henningsson, 2013].

On the micro-level, the business units are seen as individual units that compete. This is the view

used in the daily operations, where competitive companies are seen as competitors.

On the meso-level, the business units are seen as social entities with alliances and strategic

networks. This is the strategic view, which sees partnerships and opportunities in collaborating in

the ecosystem.

On the macro-level, all business units are seen as a whole, and the ecosystem compete with other

ecosystems.

When relating this to Bitcoin, it seems clear all three levels have to be used in an analysis. In the

daily operations, the companies compete and try to compete for a bigger market share. As Bitcoin

has a new ecosystem, it is also expected new players enter regularly to become a part of it, which

means the daily operation also have to deal with new players and business models. On the strategic

level, the companies work with partnerships. In order to get a stronger position or get a bigger

market share outside the current ecosystem, partnerships have to be formed. On the macro-level,there is an ongoing battle with technologies such as PayPal, iZettle, Square and credit cards in

general.

The ecosystem on micro-level

A company's competitive advantage relies on creating more value than its competitors [Porter,

1985; Brandenburger and Stuart, 1996]. However, creating more value requires innovation, and

therefore the value creation of the individual companies depends on its ability to innovate

successfully. However, innovations often require its environment to fit. Ron Adner and Rahul Kapoor

describe an excellent example with the Airbus A380 ecosystem, where both materials for the

airplanes, the airports and education of the crew and many other areas had to innovate as well[Adner and Kapoor, 2009]. External changes are therefore a requirement as well. External changes,

which require innovation from other actors in the ecosystem, embed the focal firm within an

ecosystem of interdependent innovations [Adner, 2006].

As Bitcoin is a digital industry, and a recent innovation, most innovations in the system could be

expected to require the ecosystem as a whole grows and innovate before it fulfills the whole

potential. As the analysis will show, there are no or few very big international companies in the

Bitcoin ecosystem at the moment. That means that even though vertical integration of key

components in the ecosystem would make sense, both in a contractual and technological sense, it

would seem unrealistic because of the size of the actors. In the long run, that could impact the


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ecosystem with many contractual challenges. As a technology matures, its challenges tend to

decrease. However, its contractual challenges do not disappear over time [Adner and Kapoor,

2009].

Ecosystem and money: what is moneyIt is important to cover the concept of money

and the current financial ecosystem, to be able

to understand Bitcoin. In todays society, it is

very difficult to imagine how the world would

work without money. We rely on the supermarket

to accept our credit card or cash, and our wealth

stays approximately the same year after year.

Despite communists and anarchists, such as

Karl Marx and Friedrich Engels, has argued the

society dont need money, its the de facto

standard. Niall Ferguson writes in his book The

Ascent of money [Ferguson, 2008, p. 18]:

[...] Yet no Communist state - not even North

Korea - has found it practical to dispense with money"

Therefore, all modern societies rely on money in some sort. However, money as a concept relies on a

basic concept which Niall Ferguson describes in the following way:

Money is worth only what someone else is willing to give you for it. An increase in supply will not

make a society richer, though it may enrich the government that monopolizes the production ofmoney.

Paper notes and digital money isnt backed by any real value like gold previously did. Money is trust

in the next person to accept it.

Money historically

Historically money has developed from a barter system, to the system we know today. In a barter

system, there is no medium of exchange. In a barter system, there has to be a double coincidence

of wants, which is extremely inefficient. By using a medium of exchange, it becomes easier to

store wealth, standardize the value of objects and trade makes trade much easier. Because of that,

a medium of exchange has been introduced in any modern society today.

There has been many mediums of exchange historically, starting from goods like cattle, slowly

progressing into metal. The first coins date back to 600 BC, found in the Temple of Artemis at

Ephesus [Ferguson, 2008, p. 24]. In 221 BC the first standardized bronze coin was introduced by

Qin Shihuangdi in China. The Roman Empire used coins as well, where prices were quoted in terms

of silver denarii.

As the medium of exchange grow more and more common, the mediums grew more advanced.

However, several more concepts arose in the ascent of money: credit, bonds, stocks and hedging.


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Credit and banking

Neil Ferguson writes the following [Ferguson 2008, p. 31]:

Without the foundation of borrowing and lending, the economic history of our world would scarcely

have got off the ground. And without the ever-growing network of relationships between creditorsand debtors, todays global economy would grind to a halt.

Providing someone with a loan with interest is an old concept and date back many thousands years.

Some of the best maintained proofs are the clay tablets from Mesopotamian dating soon five

thousand years [Ferguson, 2008, p. 29-33]. Until the 14thcentury lenders was often associated

with the term loan sharks, which could involve violence and very high interest rates if a lender failed

to pay. Banks, however, developed from being semi-criminal loan sharks, to more respectable

branches of banks. This happened gradually, and in the end of the 14 thcentury banking became a

legitimate [Ferguson, 2008, p. 40-43].

Bonds, stocks and hedgingBonds started in the 13th century in north Italy [Ferguson, 2008, p. 66]. Bonds had a huge

influence on the economy, as it made it possible for states to rent money from its own citizens

providing an interest, which could make it a fine investment. Since then the concept has evolved

much, and is a cornerstone of modern finance with more than $18 trillion internationally traded

bonds and $50 trillion domestically traded bonds [Ferguson, 2008, p. 67].

The concept of several investors owning a part of a company or corporation seems to have old trails,

but the first stocks as we know it today started with the United Dutch Chartered East India

Company around the start of the 17th century [Ferguson, 2008, p 128-134]. Since stocks has been

a popular way to fund companies, creating several finance bubbles along its way.

Hedging is a concept used to inject trust. With concepts such as futures, CFDs and others, they

can be used to inject trust for one party, and provide an investment vehicle for others. Some of the

first forms of hedging was future contracts for farmers very early in history [Ferguson, 2008, p.

226].

Financial institutions

The society needs financial services. For instance, in order to maintain a medium of exchange, an

institution has to maintain it. Therefore, several types of financial institutions have arisen in modern

society.

Financial institutions can be categorized into the following three areas [Wright, Robert E.; Quadrini,Vincenzo, 2009]:

Depositary institutions

Contractual institutions

Investment institutions

The depositary institutions are those who manage peoples economies. These include banks, credit

unions, trust companies and so forth. As it lies in the word depositary, they take a deposit, and

store the value and keep it safe. Another function is providing loans.


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Contractual institutions cover insurance companies, pension funds and similar companies managing

risk. These institutions come down to reducing the overall risk, both unexpected and expected risk.

With insurance companies, users pay a fee for being covered, and if the unlikely event of something

bad happens, the payee is covered. In pension companies, it is the expectation of growing old,

which is being covered by the contractual institution.

Investment institutions exist in order to assist both companies and individuals with investments.

These institutions help both giving advice, performing the investments and supervising the

investments. However, these institutions also cover more macro sized operations, such as the

investments of a bank, pension funds and the government itself.

Financial institutions are very important for a society. As Ferguson writes [Ferguson, 2008, p. 13]:

The first is that poverty is not the result of rapacious financiers exploiting the poor. It has much

more to do with the lack of financial institutions, with the absence of banks, not their presence.

In a society without banks, loan sharks can dominate. That makes it very difficult to take loans,which has proved to be a necessity for a successful society. The same goes it people doesn't have

access to a bank account, any insurance or other basic financial services: it exploits the poor.

Ecosystem for currencies

There are different categories of currencies. One is the typical modern currency we know from the

dollar or euro, but there is also a category of digital currencies, also called cryptocurrencies such as

Bitcoin. To my knowledge there is a gap of knowledge in the ecosystems of digital currencies.

Michael Koetter and Tigran Poghosyan made a paper about the technology regimes in banking,

which described how banking has become an industry with innovation [Koetter and Poghosyan,

2009]. This paper described how technology in the banking sectors is moving forward. However, foranalyzing the digital financial ecosystems, there is a lack of knowledge. Therefore, the theory

described about ecosystems, will be used to analyze the Bitcoin ecosystem, which can be seen as a

digital currency. This fills a knowledge gap, where there currently is a lack of literature. However, in

order to analyze the Bitcoin ecosystem, the theory covered so far will be used. If we assume a

normal ecosystem, there are external and internal factors impacting the system. At the same time

there are companies and users inside the ecosystem: companies creating services, and users using

these services.

External factors in an ecosystem are all the elements that have an influence on the ecosystem.

There is no subjectivity on these factors, as these factors both can be beneficial and harmful.External factors can be anything from competitors, regulation, trends or any other factor playing a

role. Internal factors are a bit different, as they are not controlled by the ecosystem themselves.

They are a result of the ecosystem processes, and can both be caused by and result in feedback

loops. Internal factors can be caused by some company performing really well, which could lead to

a positive feedback loop, where that provider for instance could buy from a potential subcontractor

inside the same ecosystem. There can also be negative feedback loops, if for instance an important

company goes bankrupt.

This basic model has been covered in figure 1. The model will be used in the rest of the report,

where the model will be populated with elements discovered when analyzing the ecosystem.


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Figure 1: A classic ecosystem

A financial ecosystem then has to fill the role described in the previous chapter about financialinstitutions. In order for Bitcoin to be a financial ecosystem, it needs to have depositary, contractual

and investment institutions. Therefore, the situation is as shown in figure 2:

Figure 2: Financial ecosystems and types of institutions

Therefore, Bitcoin will be compared and see if it fulfills these institutions in the last chapter.

Summary

In a new financial ecosystem, the performance of one company is marginally dependent on the

individual actor, and mainly on the performance of the ecosystem. That promotes collaboration

between the entities inside a digital ecosystem. There are three levels in an ecosystem: micro-level,

meso-level and macro-level. These levels will be used in the thesis, as the micro-level can be used


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to understand the individual actors, the meso-level to understand the collaboration between them

and the macro-level to see how the external factors influence.

A financial ecosystem has three important institutions: depositary, contractual and investment

institutions. These are important to understand Bitcoin as a financial ecosystem, as Bitcoin needthese institutions as well.


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Methodology

The purpose of this chapter is to address the choice of method for data collection and analysis, and

the perspective on the gathering of knowledge. It is a link between the research question and the

findings. There is also an explanation of how the research question will be answered.

Research approach

The research approach is an exploratory field research study. This means the field will be explored

using different data sources. The overall research question is to analyze the Bitcoin ecosystem, and

to do that, it will be analyzed from a systems approach. The approach described in [Marshall, 2003]

will be used. That approach defines eight stages of an analyzing ecosystem which will be used.

The eight stages are:

Define the problem

Done by finding the key issues expressed in the ecosystem, found in the data sources

Identity the Key variables

Done by finding the variables to the problems found in the first step

Describe how the key variables behave over time

Look at historical data about how the variables has behaved previously

Identity casual links between variables

Done by analyzing if there is any correlations between the variables historically and now

Identity the gaps in the systems

Done by analyzing what is holding the variables back from growing

Identifying the leverage points

Done by analyzing what pressure points there are for changing the variables

Determining actions steps

Done by making an educated guess about how the variables are going to change in the future

Test systems model through simulation, prototypes or other methods

Skipped in this analysis

The paper uses the model on a very specific issue. However, in this thesis, it is used on a whole

ecosystem. The only change in the use is that step 8 wont be performed because we are not

focusing on a single issue. The system approach comes in as the ecosystem is analyzed from a

holistic perspective. The whole ecosystem will be seen as a working system, where the individual

players impact each other.

This research approach is very useful for answering the research question because of several

reasons: first it forces me to obtain several data sources in order to define the problem, secondly it

provides a framework for both understand how the Bitcoin ecosystem work, and how it will continue


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to work in the future. Furthermore, it enables me to make some predictions about where the

ecosystem is heading by determining the action steps.

To answer the research question, What is the Bitcoin phenomenon, and how is the ecosystem

around it?using ecosystem theory, the following approach will be used:Describe what is Bitcoin. This is essential to understand how Bitcoin works, and the properties

around it.

Analyze the current situation of Bitcoin. This is essential to understanding how much Bitcoin has

progressed

Find the most significant players in the ecosystem

Analyze of the ecosystem, and populate the ecosystem model described in the ecosystem chapter

Suggest the next action steps for the players in the Bitcoin ecosystem

This will solve the research question, as the Bitcoin phenomenon will be covered in depth both by

describing and analyzing the system, and then by applying theory on the ecosystem. During the

thesis, the ecosystem model described in chapter 2 will be populated in order to understand the

ecosystem and its relationships.

Gathering data

In order to get an understanding of Bitcoin and the ecosystem, several data sources has been used

such as literature review, data analysis and interviews. An overview of the data sources can be seen

in table 1.

Type of data Purpose of data source

Sentiment analysis Understand the Bitcoin community. Full overview in

appendix F.

Discourse analysis Analyze internal and external factors in the ecosystem.

Full source in appendix A and B.

Danish Bitcoin conference Provide inside of the internal and external factors,combined with understanding possible applications of

Bitcoin. Full overview in appendix E.

Interviews Understand individual actors in the ecosystem. Full

overview in Appendix C.

Open data about Bitcoin Understand the current size of Bitcoin. Example

source in appendix G.

Table 1: Data sources used


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Sentiment analysis

In order to understand the size of the current Bitcoin phenomenon and how the overall sentiment is,

a sentiment analysis has been performed. The sentiment analysis gives an indication of how big the

core following is, because the change in sentiment when the amount of publicity rises is shown. The

sentiment is based on tweets from Twitter with the hashtag Bitcoin. The data goes back to January2010 to mid-November 2013.

Four separate sources of data for the sentiment analysis have been used:

Sentiment score on tweets: Topsy.com is social monitoring tool, which collects and stores all tweets

from Twitter ever made. When searching for tweets with the hashtag Bitcoin, approximately 2

million tweets have been made since 2010. Topsy categorizes them by date, and adds a sentiment

score. The sentiment score determines whether a tweet was positive, neutral or negative.

Bitcoin USD price: Blockchain.info provides the average Bitcoin price on a daily basis from the

exchange MtGox. The price data dates back to 2009.

Google trend score: Google provides a trend score, which is a score showing how popular a given

search is. The trend score is an exponential value between 0 and 100.

Total amount of tweets. The total amount of tweets ever made about Bitcoin is taken into account.

This number is found by looking at tweets with the hashtag Bitcoin.

The input can be seen as public data combined with calculations made on Topsys algorithms. The

output is an overview of how the sentiment evolves over time, which gives a way to make

estimations about how the core Bitcoin community work and evolve over time.

Discourse analysis

To get an overall idea about what Bitcoin is, a discourse analysis has been used. In the discourse

analysis a wide range of Bitcoin articles has been read and categorized. This is important to get the

broad perspective on the properties of Bitcoin. Instead of making up these assumptions, it is based

on data.

The expected outcome of the discourse analysis was:

An overview of the different applications of Bitcoins

The general expectation and sentiment about Bitcoin

All the critical points about Bitcoin

However, the term Bitcoin alone results in 35 million search results in Google, with approximately

20 million results when specifying Blogs. Because of the huge amount of articles, some tools and

tactics has to be used to find the most important articles, blog posts and opinions.

To get a broad overview of the different articles written about Bitcoin, an analysis of the two

websites BitcoinTalk.org1and Reddit.com/r/Bitcoin2, has been used. BitcoinTalk.org is mostly for

1The biggest Bitcoin forum in the world


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hardcore Bitcoin followers. The Bitcoin section on Reddit has a more diverse crowd, as it is a part of

a big social website Reddit. When retrieving all of these data, Ive manually categorized them. If an

article referred to a specific feature or application, they were placed in the same category. By doing

that categorization process, it was possible to get a range of categories as an output of the discourse

analysis.

BitcoinTalk.org:

On BitcoinTalk there is a Press section. In the press section, links from articles, videos and posts

about Bitcoin are shared. The press section can be filtered by most viewed and most commented.

To find the most relevant articles an assumption was made:

If some news was big or had a lot of influence, it would attract a lot of views

If some news was negative, it would have a lot of discussion, and get a lot of comments

To get a substantial amount of relevant articles, the 400 most viewed articles was put into an Excel

sheet, and the 400 most commented articles as well. Then the duplicates were filtered out, and any

irrelevant topic was removed as well3.

Reddit.org:

On Reddit, articles, press releases and discussions are posted. If people like a post, it is up-voted

and it gets more readers. On Reddit there is a Top scoring links during all history which provides

the most influential postings about Bitcoin. Here it was possible to find the top 300 most popular

submissions. These were added in the previously mentioned Excel sheet and then categorized and

filtered.

The compiled list can be seen at appendix A.

Negative tweets

To get a broader view of especially the negative Bitcoin opinions, a semantic analysis of all negative

tweets from Twitter was made. This was done by using the Topsy. The total negative sentiment can

be seen in figure 3.

2Reddit is one of the biggest social news websites in the world, and is one of the biggest Bitcoin

discussion forums in the world

3Most articles was filtered out. These articles was such as promotional items or what is Bitcoin

articles


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Figure 3: Negative sentiment about Bitcoin from Topsy

On all the tops (June 2011, July 2011, may 2012, September 2012, January 2013, April 2013,

July 2013, August 2013 and October 2013), a list of all the most shared negative tweets was

retrieved. The top 5 most negative shared links was added to the same Excel document and then

filtered. The data on negative sentiment found using Topsy is attached in appendix B.

Interviews and speakers

Despite being a discourse analysis, some additional non-text-based sources have introduced in the

analysis as well, in order to cover applications about Bitcoin not written about. Therefore a

combination of interviews and speakers from the Bitcoin conference is a part of the analysis as well,despite not being a discourse.

The input of this is big amount of articles found on the Internet combined with interviews, and the

output is a way to understand the Bitcoin ecosystem. It provides an in depth view of how the actors

inside the ecosystem interfere with each other, and how the external factors interfere with the

ecosystem.

Open data about the Bitcoin network

In order to make an analysis about how big Bitcoin is, several open data sources about Bitcoin has

been used:

Transaction volume: Open data from Blockchain.info

Monetary value: Open data from Blockchain.info

Miners hashing power: Open data from Blockchain.info

Amount of downloads of the official Bitcoin-qt client: Open data from SourceForge

The input of these data is simply open data, and the output is a way to show how Bitcoin has

evolved over time.


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Interviews

Interviews with people playing a significant part of the ecosystem have been conducted. This data

source is used for getting a human perspective about how the companies and organizations in the

ecosystem operate. A full interview table can be seen as appendix C.

All the interviews have been collected in a big table, describing all the interviews. The table

contains the variables actor name, person, position, date, where and keywords. The interviews have

been conducted on a mix of physical interviews, Skype interviews and email interviews which can

be seen in detail in appendix C.

As a general structure for the interviews, the same questions have been used. For some interviews,

the focus has been more specifically on the company side of it, but the general structure is the one

shown in appendix D. The input of these data is simply interviews conducted, and the output is a

way to understand the whole ecosystem.

Bitcoin conference in CopenhagenAs a source to get an understanding of both Bitcoin, and especially the ecosystem around it, the

speakers from the Copenhagen Bitcoin conference has been used as a data source. The 28th of

November 2013 CFIR hosted a Danish Bitcoin conference [CFIR, 2013]. A wide range of speakers

came, which was categorized in the following categories:

What is Bitcoins series with speakers providing an understanding of Bitcoin and its protocol

Financial sector series with speakers from the current financial sector (bank, Danish tax

authorities SKAT)

Bitcoin, people and companies series with a macro level perspective about Bitcoin

An overview of all speakers can be found as appendix E. The output of this conference is a way to

understand the whole ecosystem, both the internal factors and external factors.


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Project boundary

Bitcoin has a lot of properties, which could be both interesting and relevant to cover in depth. This

includes the anonymity, new black market, political changes, smart properties, anonymous

gambling and many others. However, this wont be covered in the thesis. Several sub stories ofBitcoin will shortly be explored but, the purpose is to understand the different actors in the

ecosystem, and not explaining several different areas in depth.

In the regulatory space, there has been a lot of interesting cases and guidelines. These wont be

covered in depth, as that is a thesis in itself. The only cryptocurrency which will be analyzed is

Bitcoin. None other altcoins will be analyzed in depth.

Notice on actuality

Bitcoin is an area with a lot of development. What is right one day has with a very high probability

changed after one month. This thesis covers data, regulations and companies up till November the

30th

.Since writing, price has experienced a big bubble, many countries including China, South Korea

and Denmark has made clearer regulation and new and interesting companies has been founded.

CoinBase received a $25 mio. investment in December, which also was expected from the results in

the report. However, these new changes wont be discussed in the thesis, and it should therefore be

seen as a work from the start of Bitcoin to November 2013.


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What is BitcoinIn this chapter, the basic concept of money will be covered. After understanding money, the classic

financial ecosystem can be covered shortly. Then Bitcoins will be covered from a technical and

social perspective, and then we will look into many of the different properties and use scenarios of

Bitcoins. A short overview of some of the most popular altcoins will be given as well. At last, the

current regulation will be covered from a holistic perspective, with some of the most important and

clear decisions.

Technical structure of Bitcoin

The whole ecosystem perspective, and analysis of the system, relies on understanding both Bitcoin

from a technical and a social perspective. This helps discussing what companies there is, what

potential they have and how they might evolve during the next years. Furthermore, in order to

provide an educated idea about where Bitcoin is headed in general (with regulation and technology),

we need to understand the whole space of possibilities. The algorithms of how Bitcoin work, is

central to Bitcoin and its ecosystem. Without the algorithms described in this chapter, there is no

Bitcoin or cryptocurrencies in general. If there is a flaw in them, Bitcoin will fail. Therefore, no

matter how the ecosystem is perceived, the algorithms must be a central part of this. Therefore,

algorithms are populated in the center of the model of Bitcoin, as it can be seen in figure 4.

Figure 4: The basic Bitcoin ecosystem model

What is Bitcoins?

Bitcoin is an electronic payment system, which is decentralized and distributed throughout a big

network [Nakamoto, 2008]. Bitcoin is a peer-to-peer network, where anyone with a Bitcoin client4,

can access the network. When a user is connected to the Bitcoin network, the user is connected to

a set of other users called nodes. This works similar to BitTorrent. When a user is connected to the

network, the user downloads the blockchain, which is an open ledger of all transactions ever made

4Anyone with a computer and an Internet connection can download a Bitcoin client


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in the network. The blockchain contains information about every transaction ever made with a

timestamp.

When a user creates a transaction, the transaction is broadcasted to all its peers, which then

broadcast it to all their peers. Not far after the transaction has been broadcasted, the whole networkknows of the transaction. Every ten minute, on average, all transactions are stored into a permanent

block which is appended to the blockchain.

Private and public keys

Bitcoin addresses are based on the cryptographic concept of public and private keys. Public keys

can be shared without any problems. One could see the public key as an alias, with an underlying

user. However, the private key, which always should be kept secret, can then be used to make a

valid digital signature for the public key. A Bitcoin address is a public key, which easily can be

shared to anyone. However, to allow Bitcoin to be spent, transactions have to be signed by a private

key. As any user have their own private key, it is impossible for anyone else to spend the Bitcoin on

a specific address. The private key is created so the public key always can be calculated from it, but

not in reverse. The irreversibility comes from the discrete logarithm problem5. A private key can

therefore be seen as a ticket to allow spending Bitcoins.

The blockchain

The blockchain is a central part of the Bitcoin system. As the blockchain is the public ledger, it is

also the ledger all peers in the network rely on. When a user owns Bitcoins, it is determined by

looking at blockchain. By iterating all transactions made, it is possible to see which addresses that

have access to spend Bitcoins and not. The blockchain contains of blocks. A block contains several

transactions, which is Bitcoins sent from one address to another. A block in itself only has a

reference to the previous and the next block. Therefore, if one start by the first block ever createdon the blockchain6, and traverse the next blocks, they will visit every block in the Bitcoin network.

This is visualized in figure 5:

Figure 5: Visualization of blocks in the blockchain

The blockchain is essentially a decentralized timestamp server. As every transaction is broadcasted

to all nodes, and then added to a block, a timestamp of every transaction is stored.

5 The public key is generated from the private key multiplied a variable G. The variable G is

calculated by adding hours to an ellipsis formed watch which has to give a specific result

6This block is called the genesis block. The hash of this block is hardcoded into the system, in

order to have a starting block. The first reward cannot be spent.


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Distribution of Bitcoins and blocks

The network is designed to have a maximum of 21.000.000 Bitcoins. However, all 21.000.000

Bitcoins wasnt released from the birth of the system, but in a predictable manner. The blocks are

created by computers solving a difficult mathematical question7. Thousands of computers, run by

miners, are competing to solve the mathematical question. The question is increasing anddecreasing in difficulty depending on total hashing power in the system trying to solve it8, so it is

solved approximately every tenth minute. When the question is solved, a new block is created. When

the block is created, a reward is awarded to the miner. The reward was 50 Bitcoins the first four

years Bitcoin was running. However, the reward halves every 4 years, so the distribution of new

Bitcoins follows negative geometric series, with all Bitcoins released in the year 2140. At the

moment of writing, 25 Bitcoins is released when a new block is added to the blockchain.

Bitcoins are divisible down to eight decimals. That means that the smallest unit is 0.00000001,

which is called a Satoshi. As a single Bitcoin in the moment of writing is above 1000$, it is

possible the default unit wont be Bitcoins, but something else such as Satoshis or milli Bitcoins.

Bitcoin transactions

A Bitcoin transaction is basically the following:

A list of Bitcoin addresses, sending a number of Bitcoins, to a list of Bitcoin addresses

What really happens in a transaction is that a user sends or

receives a script. By making the script valid, it is possible to

withdraw Bitcoins. Bitcoin transactions are not necessarily a

single transaction between two addresses. There is

technically no limit to the amount of senders and receivers.

This is interesting, because it provides interesting properties.For instance, a threshold value can be required, for a

transaction to be sent. As described in [Dourado, 2013]:

"[...] Baked into the Bitcoin protocol, there is support for

what are known as m-of-n or multisignature transactions,

transactions that require some number m out of some higher

number n parties to sign off.

That makes it possible for a third party to supervise a

transaction, which can carry a role of the credit card company which avoids fraud. The only

difference is these services can be offered on a marketplace without counterparty risk. A transactionis not encrypted in any way, but is pseudonymous. As the senders and receivers are public keys, the

senders and receivers dont make any sense for outside spectators. When submitting transactions to

the network, an optional fee can be added to transactions. This speeds up transactions, which will

be covered in the next section.

7This is done by guessing a hashing function by the software, where the difficult of the question

easily can be adjusted by the network

8The difficulty adjusts every 2016 block, which gives an adjustment about every second week


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When submitting a transaction it is almost instantly submitted to the whole network. It takes

seconds for a transaction to be recognized by the nodes, but takes longer before the transaction are

confirmed. If a hacker has control of several nodes, a double spending attack can be performed

against a single party. Therefore, if a bigger transaction is made, it is necessary to wait for several

confirmations. The first confirmation means that the transaction is inside a block, and additionalconfirmations mean that blocks has been added in prolonging of the block. After 6 confirmations

its said that a transaction is so secure anyone can trust it.

Bitcoin mining and fees

Without miners the Bitcoin network wouldnt work, because transactions wouldnt be cleared.

Therefore, it is very important the miners have an incentive to keep running their mining equipment,

despite the distribution of new Bitcoins fall. When creating a transaction, a user can decide to add

a fee or not. When a miner solves the block question and a new block is created, the miner gets

both the reward and the fees from all the transactions in the block. Henceforth, the overall rewards

to miners will grow proportionally with the monetary value of Bitcoin and amount of transactions. Asfees can be added to a transaction, it makes it interesting for the miners to include the transaction

in a block. The bigger the fee, the faster it happens. If no fee is added, a transaction isnt

guaranteed to become a part of the blockchain.

As a single miner gets all the rewards when mining, mining pools are created. Mining pools is a

collection of several miners getting together mining on the blocks. This improves the chance of

clearing a block, and therefore getting its reward and the fees. Then the payouts are shared with its

participants. Mining pools charge a smaller percentage fee for their service.

Bitcoin clients

As described, in order to run the Bitcoin network, the user has to have downloaded the wholeblockchain and be connected to nodes. This is done using Bitcoin clients. Bitcoin clients have an

implementation of the Bitcoin protocol. The official Bitcoin client is Bitcoin-qt9. Bitcoin-qt

downloads the whole blockchain from its peers, and connects to several other nodes automatically.

However, alternatives to hosting a node have been made. Alternatives such as web wallets create an

intermediary between the Bitcoin network and its clients. When an intermediary is made, the users

dont necessarily represent a node. That lowers the potential amount of nodes, and makes Bitcoin

less decentralized.

BIP 70 - ecommerce add-on

In the Bitcoin system, there is limited support for commerce. However in an upcoming updatecalled BIP 70, several new features to the Bitcoin protocol are being implemented. This is

interesting because of two reasons:

A) The features are interesting and useful for merchants

B) It shows the Bitcoin protocol can get updates, if the user base finds it reasonable and positive

Overview of the most important new features [BitcoinWiki A, 2013]:

It is possible to provide human readable payment destinations, similar to a web address

9Bitcoin-qt can be downloaded at Bitcoin.org


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The payee is provided with a proof of payment

Extra security against in man in the middle attacks

Payment received messages is provided for merchants, so shops can integrate easier with the

Bitcoin server

The merchant receives a return address, in case a refund is needed

Forks - master branch of Bitcoin

In the moment of writing, the Bitcoin network is running smoothly. All significant players in the

network run the same client without problems. However, in the future, forks can happen. A fork is

basically another version of Bitcoin, which runs at the same time. Forks can happen both by

breaking off Bitcoin, which has happened in the past, but altcoins can also be seen as a type of

fork.

Back in march a bug in the software

resulted in new blocks not being

accepted by the old clients. This

results in a temporary fork, where

miners mined on two different versions

of Bitcoin. However, this was fixed by

all miners agreed to return to the old

client versions10.

Hard forks

Usually forks get solved. However a

hard fork is a situation where the fork

doesnt get solved. In this case,

different users use different versions of

the Bitcoin client. This could lead to a break out with Bitcoin 1 and Bitcoin 2, with different

ideologies and features. This could be solved politically by agreeing on a specific version of Bitcoin,

and if that didnt happen, two versions would coexist.

Properties of Bitcoin

As a technology, Bitcoin has several unique properties. Not only can it be used as a payment

system, it can also be used as storage of value. At the same time, introduces Bitcoin new

properties, such as programmable money and a proof of ownership system. As covered in thesection about money, money is a way to distribute wealth. Instead of trusting a centralized medium

of value, such as gold in the old days or todays dollar or euro, Bitcoin can be used as storage of

value. Bitcoin has a monetary value, because of the social structure. People have agreed that a

single Bitcoin have value, and therefore is accepted as a medium of storage.When Bitcoins is sent

to an address, they will stay there. There is no social trust needed, only trust to the algorithms. If

one believe and trust in the Bitcoin system, the finite amount of Bitcoins will make sure the value

stays the same or with a deflationary growth.

10http://bitcoin.org/en/alert/2013-03-11-chain-fork


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The payment system of Bitcoin is a flexible one with unique properties. It is possible to transfer

money globally, which is accepted permanently into the blockchain after ten minutes with a very

low transaction fee. It is a decentralized payment system, which means there is no central point of

failure, unlike todays systems.

Bitcoin has a programmable interface built into it. When using the current financial institutions,

users have to interact through a third-party to make automatic transactions. This is usually done by

uploading files to the bank, which can consolidates the transactions, and then perform them.

With Bitcoins, the institution holding the Bitcoins owns them and has full control. That opens for a

new paradigm of programmable money. That means Bitcoin payments easily can be integrated into

software-systems, without any third-party integrations and agreements.


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Social and economic structureMoney is a social constellation, and therefore Bitcoin also has to be viewed from a social

perspective. The current financial system is based by trust. People trust the backing by countries,

and more specifically, central banks11. This is a social trust. Bitcoins as a technology changes that

focus. Instead of trusting people, Bitcoin ask to trust the nature laws of mathematics. However, it

still has to be seen from the social perspective because of our nature.

Currencies are inheritable locally based, as their foundation arises from origin countries. The Danish

krone has its history from Denmark, the Swedish krona has its history from Sweden and the US

dollar has its origin from USA. The dollar was approved by the congress in 1786, and has been the

currency of USA since then. Bitcoin is global. A Bitcoin transaction doesnt care whether it is send

to someone right next to you, or to someone on the other side of the planet. From a social structure,

that is radically different than the currencies and payment systems seen today. Even modern and

international centralized system like PayPal, has a unique structures and rules depending on

countries.

Political

Another property in Bitcoin is its assumed anonymity. Depending on how Bitcoin develop, that

could be challenge the political situation. Today, in the current financial system, it is possible to

track most financial transactions. Using money laundering laws and know your customer policies,

there is a control over transactions. Inside EU, it is illegal to travel with more than 10.000 [EU,

2013].

With Bitcoins this could be difficult. As Bitcoins is pseudo anonymous and impossible to track in

the same way as normal transactions, the political system can be challenged. If the government

isnt in full control over its money and currency - what happens? Another political aspect is after theNSA revealing in 2013 and whistleblowers such as Edward Snowden coming forth, there has been a

worldwide debate about privacy. As Bitcoin is pseudo anonymous, it provides a layer of privacy that

credit cards and bank transfers dont provide. Seen from a social construct, Bitcoin is an answer to

that, which gives a layer of privacy.

Economic

From an economic perspective, Bitcoin can be seen as a tool for minimizing transaction costs. The

term transaction costs would cover anything from:

The actual fee for making the transaction

The trouble spent for creating and receiving the transaction

Getting access to a bank account or payment system

Therefore, from an economic view, one could argue that the only thing Bitcoin does is lowering

transaction costs. The impact of Bitcoin from a classic economic perspective can be discussed from

figure 6. On the Y-axis there is the price of a product (P), and on the X-axis there is the quantity

11In some countries this isnt the case. However, in these countries the economic climate usually

suffers. Some countries in the southern american region battle with this problem, such as Argentina


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(Q). The lower the price of a product, the higher the quantity would be sold. When there are no tax

or transaction costs, there is an optimal customer and supplier surplus. If dotted square seen in

figure 6 didnt exist, this would be the optimal case, and would lead to the maximum economical

surplus.

However, in the real world, there are transaction costs. Those transaction costs lower both the

customer and the supplier surplus. This results in revenue to a third party, such as credit card

companies and banks. However, this also adds a deadweight loss, which is lost trade. The lower the

transaction fee, the lower the deadweight loss. Therefore, Bitcoin might do two things from an

economic perspective: Move bigger revenue from previous transaction fees to customers and

merchants, but also create more trade in general. This is done by lowering transaction costs, and

thereby lowering the deadweight loss.

Figure 6: Supply and demand curve

AltcoinsBitcoin is one cryptocurrency, but other implementations can be made. These are essential to cover

because it shows Bitcoin isnt necessarily the cryptocurrency to win. Bitcoin bring along a new

realm of concepts which can be used in a broader sense, and if Bitcoin died, alternatives could rise.

Furthermore, it is a parameter companies inside the ecosystem have to exploit; as it might or might

not be beneficial to be altcoin ready. However, no matter how these altcoins are viewed, altcoins

are competitive technologies competing with Bitcoin at the same time. Successes of similar

ecosystems will most likely be shared with Bitcoin, but its still a competitor. Therefore, competitive

technologies are populated on the ecosystem graphics shown in figure 7 as an external factor.

Figure 7: Competitive technologies are populated on the ecosystem model


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Other implementations are called altcoins, which is short for alternative cryptocurrencies. As anyone

can download a copy of the Bitcoin source code, make a change, and then have a new

cryptocurrency, many new currencies has been created.

According to [BitcoinWiki, B], the three biggest altcoins are:Namecoin

Litecoin

PPCoin

Namecoin is a decentralized DNS system. Instead of relying on central DNS systems such as today,

the idea is to use namecoin instead. The TLD of namecoin is .bit, and approximately 100.000

domains have been registered. [Namecoin, 2013].

Litecoin is basically Bitcoin, with changed parameters. There are 84 million Litecoins, and theblocks close faster. A single Litecoin is at the moment of writing approximately 30 USD. Litecoin is

mentioned because it has a high market cap, and is the second biggest crypto currency [Litecoin,

2013].

PPCoin is just like Litecoin, a variation of Bitcoin, with other properties.


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Technical weaknesses of Bitcoin

Bitcoin have several technical weaknesses. The official Wiki of Bitcoin has listed them here 12. Most

of the weaknesses revolves issues around user safety issues. However, an assumption is these will

improve, and instead the potential problems with the Bitcoin network will be discussed. At themoment of writing, there are no serious threats to the Bitcoin network itself. However there are

several possible attacks which can make the network useless for either a single node or the whole

network:

50% Attack

When connected to the Bitcoin network, the users run a client. However, if someone creates their

own client and gain more than 50% of the total computing power, they can exclude and modify

the ordering of transactions.. This basically means the network can become useless, as long as the

attacking client has more than 50% of the total computing power. This is a vulnerability to the

network if a huge part of the computing power becomes centralized. Therefore, it is a weakness

which requires several actors to participate in running the system. It is also important several

mining guilds exist at the same time, and make sure they dont get a dominating percentage of the

network.

Cancer node concept

As a user running a node is connected to a set of nodes, it is important these nodes keep

transmitting data back and forth to verify nodes. However, an attacker can create several clients.

Imagine an attacker creating tens of thousands of clients, there is a chance a user might be

connected only with the attackers clients. Then the attacker can basically disconnect a user from

the network by rejecting the nodes transaction.

Bitcoin mining might be vulnerable

In October 2013, a new paper came out about

Bitcoin mining might be vulnerable [Eyal, 2013].

For Bitcoin to work, its required the majority of

the miners is following the protocol. This is

essentially the 50% attack; if a group of miners

gain more than 50% of the hashing power they

can modify the rules. This paper shows that if a

group of miners gain 33% of the hashing power,

they can hide their work, and make the otherminers spend their hashing power on blocks which

isnt going to be part of the blockchain. Then, by

having 33% of the hashing power, they can cheat

the network. Gavin Andresen, lead developer of

Bitcoin, responded indirectly this is true, but it

currently isnt a problem because of how the

Bitcoin mining market works [Boase, 2013].

12https://en.bitcoin.it/wiki/Weaknesses


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How anonymous is Bitcoin?

As described, addresses make Bitcoin pseudo anonymous. Transactions are a chain of signatures,

which publically can be tracked. By looking at these signatures separately, it is impossible to guess

what persons are behind them. However, this might not be the case when looking at it holistically.

As all transactions are publicly available, it is possible to investigate the flow of transactions and

make sense from it [Androulaki, 2011]. Depending on the merchants implementation on accepting

Bitcoins13, it is possible to identify a physical identity to the Bitcoin address. The paper makes an

analysis of the anonymity in the Bitcoin network. It is shown that if the merchants do not generate a

new Bitcoin address for every transaction, it is possible to link transactions to a physical identity.

Combined with the big data analogy, where big computers constantly analyze the network for

patterns, it seems unlikely Bitcoin is fully anonymous. However, two things have to be taken into

account:

The Tor networkis a peer-to-peer system, where users share their Internet connection with othersthrough virtual tunnels [Tor Project, 2013]. If a user uses Tor, it becomes impractical, if not

impossible, to track where the user comes from.

Bitcoin mixersare services, where a user sends Bitcoins to a specific address. Then the Bitcoins

will be sent around inside a huge network of addresses around the world. The purpose is to make it

impossible to track the Bitcoins. The user gets back their Bitcoins, after it has touched a lot of

foreign addresses around the world.

However, if a user starts to use both the Tor network and Bitcoin mixers, it becomes really difficult

to track the user. Another argument, however, would be it is possible to track the user when a

purchase is made on a webshop, as the physical identity is connected to the purchase. In thisthesis, I would argue it is pseudo anonymous. Everyday people using the system will not be

anonymous, depending on the future implementations of the Bitcoin protocol. Depending on future

regulation, it might or might not be anonymous.

Current regulation of Bitcoin

The success of the ecosystem requires the regulation of Bitcoin is clear and makes sense. As of

right now, there isnt any very clear regulation towards Bitcoin anywhere in the world 14. There have

been some legal decisions, such as in Germany, but a global and clear regulation is missing.

Regulation is another factor in the ecosystem, which is an external factor influencing Bitcoin. An

updated populated ecosystem can be seen in figure 8.

13Whether they will generate a new Bitcoin address on every sale or not has a big influence on the

ability to track

14It is arguable there is some exceptions to this, such as in Germany


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Figure 8: Regulation populated on the ecosystem model

Below some example countries are included. Not all countries are included, and is picked from the

cases with the most clear results.

United States

Trendon Shavers of Bitcoin Savings & Trust (BTCST) was accused of scamming customers of

approximately $4.5 million worth of Bitcoins, through an online hedge fund. In the court, the

representatives tried to argue that Bitcoin wasnt money, and therefore wasnt something they could

be punished for scamming for. However, in this case, the court argued the following [District Court,

2013]:

It is clear that Bitcoin can be used as money. It can be used to purchase goods or services, and as

Shavers stated, used to pay for individual living expenses. The only limitation of Bitcoin is that it is

limited to those places that accept it as currency. However, it can also be exchanged for

conventional currencies, such as the US dollar, Euro, Yen and Yuan. Therefore, Bitcoin is a

currency or form of money, and investors wishing to invest in BTCST provided an investment of

money.

Therefore, this declared Bitcoin as money, and therefore should be regulated as money.

The Financial Crimes Enforcement Network (FinCEN), the American institution looking at financial

transactions in order to combat money laundering and such, provided a guideline to virtual

currencies [FinCEN, 2013].

The guidelines states:

Virtual currency is a medium of exchange that operates like a currency in some environments,

but does not have all the attributes of real currency. In particular, virtual currency does not have

legal tender status in any jurisdiction.

It further concludes:


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A person must exchange the currency of two or more countries to be considered a dealer in foreign

exchange. Virtual currency does not meet the criteria to be considered currency under the BSA,

because it is not legal tender.

Therefore, in the eyes of FinCEN, Bitcoin is not considered a real currency. However, it stillrecognizes that it has the properties of a currency. However, it still goes in and regulates Bitcoin

users. It differs between three different types of actors: users, administrators and exchangers.

The users are not regulated, as quoted here:

[..] user of the convertible virtual currency and not subject to regulation as a money transmitter

However, there is a discussion whether administrators and exchangers are regulated. First the

guidelines write:

An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2)

buys or sells convertible virtual currency for any reason is a money transmitter under FinCENs

regulations, unless a limitation to or exemption from the definition applies to the person

But in the summary, they conclude:

A person must exchange the currency of two or more countries to be considered a dealer in foreign

exchange. [...] Therefore, a person who accepts real currency in exchange for virtual currency, or

vice versa, is not a dealer in foreign exchange under FinCENs regulations.

This means that users and people, who use exchanges, are not regulated by FinCEN. However,

exchanges and administrator are regulated by the FinCEN guidelines.

Germany

In Germany, the finance ministry declared Bitcoin as private money and a unit of account[Spiegel, 2013]. Therefore Bitcoin will be regulated, treated and taxed like private money.

China

Currently there is no official regulation on Bitcoin in China. The closest thing is some

documentaries on public television, and a reporter calling the Chinese banking regulatory

commission who responded: "Weve no plans to introduce regulatory policies for Bitcoin."15

[http://finance.sina.com.cn/money/lczx/20131017/071917018288.shtml ].

Sweden

In Sweden, the Skatterttsnmnden authority, gave an answer to a forhndsbesked (a bindingresponse to a question) about Bitcoin. The question was about if VAT should be added on sales of

Bitcoin. The full response can be seen at [Skatterttsnmnden, 2013]. However, the conclusion is

that it is exempt from VAT:

Slutsatsen r frenlig med syftet bakom undantagen i artikel 135.1.b g, nmligen att undvika de

svrigheter som finns med att belgga finansiella tjnster med mervrdesskatt (se t.ex. a.a., s. 88

f.).

15Later this turned out to be wrong, and Bitcoin has been regulated aggressively in China


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Omsttning av den tjnst som anskan avser r drmed undantagen frn skatteplikt enligt 3 kap. 9

ML tolkad mot EU-rtten.

This is not useful in regard whether to see Bitcoin as a currency or not. However, the response

refers the European Central Bank report back in 2012 (Virtual Currency Schemeas) that it isnt acurrency because its not legal tender.

Norway

In Norway, a similar question to the Swedish one was asked. Here the answer was the exact

opposite according to an interview to the Norwegian newspaper E24 [Lorentzen, 2013]:

Skattedirektoratet mener bitcoins er et formuesobjekt, og skatteloven bestemmer at gevinst ved salg

av formuesobjekter er skattepliktig inntekt, sier Heidi Lindsbjrn, seksjonssjef i Skattedirektoratet, i

en uttalelse til E24.

This means that tax has to be paid on profits. The article continues:

Skattedirektoratets vurdering er at bitcoins ikke kan anses som gyldige betalingsmidler og derfor

heller ikke kan anses som en unntatt finansiell tjeneste. bitcoins klassifiseres som tjeneste,

nrmere bestemt elektronisk tjeneste, sier seksjonssjefen.

This means that Bitcoin isnt treated as private money or a currency in Norway, but simply a

product, which means both tax and VAT, has to be paid.

Summary

Bitcoin is a decentralized system, which works as both a payment system, as a storage of value and

programmable money. It is built from blocks which is added to a blockchain, which is a public

ledger of all transactions every made in the Bitcoin network. Bitcoin is pseudo anonymous, whichmeans it as anonymous as the public keys users use. However, it is also showed that Bitcoin might

not be anonymous, unless the users try to make it so. At last, it is shown that the current regulation

towards Bitcoin is quite positive, and it is primarily treated as a type currency and private money,

but lacks being a legal tender.

It was also showed that the Bitcoin algorithm is the center of the Bitcoin ecosystem, as it is the one

core the whole system is built upon. The same goes for regulation and competitive technologies

being external factors influencing Bitcoin.


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Analysis of BitcoinThis chapter describes the current status of Bitcoin. As described in the methodology, analyzing

Bitcoin is important to understand the size and state of the ecosystem. The following analyses have

been used: a discourse analysis which leads to possible features of Bitcoin combined with the

critics of Bitcoin, a sentiment analysis and an analysis of the usage.

Discourse analysis

Most of the articles found on the social media sites, BitcoinTalk and Reddit, were very positive

about Bitcoin. These articles wasnt very diversified, and mainly resulted in a wide range of

categories where Bitcoin is useful. However, the most debated articles on Bitcointalk gave some

neutral and negative views, and especially the negative tweets gave a more diversified view. Below

the different applications of Bitcoin will be covered. The categories were compiled manually into a

list of useful categories. Here there were 13 different applications, and 4 negative types of critiques

against Bitcoin.

A full list of applications:

Investment

Anonymity

Currency

Gambling and illegal activities

Remittance

Global asset register

Protocol

Third world

Safe havens

Disrupting states / countries

Micro payments

Proof of payments

Corporate finance

However, looking at the negative ones, four categories arrived:

Bitcoin as a concept wont work

Regulation will kill Bitcoin

There is no need for Bitcoin

Technical problems will kill Bitcoin


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Possible applications and ideologies of Bitcoin

In order to understand the applications found, they will be covered one by one. As these

applications make up the use cases of Bitcoin, they are essential to understand the ecosystem of

Bitcoin. In this part the internal factors are analyzed from a Bitcoin usage and application potential.

This is shown in figure 9, which shows the ecosystem which is being populated.

Figure 9: The ecosystem as it has been populated till now

Investment

Only by looking at the investment of Bitcoin in 2013, it would seem like an extremely good idea to

invest money in Bitcoin. Back in January 2013, the price of a single Bitcoin was 13.2 USD and atthe 29th of November the price was 1132 USD16. Because of Bitcoins finite amount, the price of a

single Bitcoin will rise if the Bitcoin system becomes more popular. In one of the articles, Michael

Novogratz from Fortress (FIG) Investment Group LLCs wrote Put a little money in Bitcoin. Come

back in a few years and its going to be worth a lot.. Zerohedge, a finance news site, made a report

about Bitcoin as an investment where there conclusion was Now thats what I call a tail-risk

option. Its either worth zero or its worth a truly outstanding amount of money.

Therefore, investment is definitely one application of Bitcoin. This will influence the ecosystem,

which exposes both a risk and an opportunity. The risk is some people only have an interest in

Bitcoin because of the investment, which can make the price shaky if the investment turns out tobe slow, and some investors might start selling out, which can shake the overall economy. It is an

opportunity, especially if Bitcoin grows, because founders in the ecosystem are expected to own a

significant amount of Bitcoins. As Bitcoin grow in value, the founders become wealthy, and can

support their companies financially without taking unnecessary seed funding.

16Open data about BitStamps exchange price can be found at www.bitstamp.net


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Illegal activities and gambling

Because of the anonymity built into Bitcoin, pseudo anonymous or fully anonymous, illegal activities

are possible. This is possible because of three reasons:

The TOR network makes it possible to host hidden websites, which doesnt reveal its IP and networkposition. That makes it very difficult to shut the websites down

Shops doesnt have to apply to anyone for accepting Bitcoins, as anyone can do it

Sending Bitcoins is only signing a transfer using a private key, which means its pseudo anonymous

Those reasons open for illegal services. Back in October 2013 there was a lot of attention on the

now closed website Silk Road, which was a marketplace with illegal drugs.

Gambling can be argued to be a gray area, and Bitcoin helps growing that market. It is possible to

gamble without revealing ones identity through a payment method, which opens for new gambling

services. An example mentioned is the betting website SatoshiDice, which was sold for 11.5 million

USD back in July 2013 to a big gambling company [Spaven, 2013].

Remittance

As more and more people from the third world travel outside their own country, the remittance

economy has been on the rise [Pryke, 2013]. Worldwide the remittance economy is approximately

514 billion USD according to the World Bank [Anjaiah, 2013].

When doing money transfers, there is the following categories [Wikipedia, A]: Wire transfer,

Electronic funds transfer, Giro, Money order and PayPal like businesses. All of these methods have

fees, and most require both parties have a bank account. PayPal is one option, with a fee on 3.9%

on international orders20. Western Union is approximately 10%21 but doesnt require any of the

transferring parties to have a bank account. With Bitcoin, transactions can be sent worldwide,

without any mentionable fees22and delay. Because of those properties, it is argued that Bitcoin will

have a huge influence on this market, as it is significantly more effective than the current system.

Global asset register

In an interview with the IBM Executive Architect for Banking and Financial Markets Industry

Innovation, Richard Brown discussed Bitcoin as a global asset register [Brown, 2013]. As any entry

in the blockchain can be seen by anyone, it is possible to use it to register assets. It could for

instance be used for stocks: the owner of a specific Satoshi would own the stock and automatically

get paid dividends. According to Richard Brown, this is still merely an idea. However, the whole

idea of distributing assets on the blockchain rather than the current method of signatures on paper

is one application which can be developed much further.

20Found on the international fee table at PayPals website

21Calculated on Westerns Union website, with a transfer of 2.000 DKK to the Philippines from

Denmark

22As of right now. Depending on how Bitcoin develop and scale, this might change


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Protocol

Andreas Antonopoulos from O'reilly describes Bitcoin in the following way:

Bitcoin is much more than just a digital currency. It is a protocol, a network, a currency and a

transaction language. Most of all, though, it is an application programming interface (API) formoney. Nowadays, bathroom scales and fridges have APIs, so why not money?

As described in the chapter about Bitcoins, the nodes use a Bitcoin client. At the moment, Bitcoin-

qt is the leading one, with no real successors23. Bitcoin-qt implements the overall Bitcoin protocol,

and it is open for anyone to create a new and better client which implements the protocol. Bitcoin

can be seen more broad than a single implementation. It is a protocol, just as HTTP is a protocol,

and then there are different implementations on top of it.

Third world

Seeing Bitcoin with the third world in mind could tell two interesting stories:

Anyone can get bank account as long as they can visit an Internet caf and create a Bitcoin wallet

Micropayments which makes utility revenue model easy to use

In Africa it is more common not having a bank account, than having one. In South Africa (country

with the highest percentage), 49% of the population have a bank account. In Kenya it is 29%,

Cameroon 8% and in Niger 1% [Gallup, 2010]. Assuming people want a bank account, Bitcoin

wallets could technically work as a bank account for these users.

In the poorest segment of the world, Prahalad proposes that the utility business model [Prahalad,

2006]. With Bitcoins micropayments can easily be made, which could open for new business

models in the third world. Leon Kaye from Triplepundit wrote the following, which also provides a

view on this application:

But not everyone trusts his or her countrys local currency, an

Documents

Bitcoin Ecosystem