1. Bitcoin – Currency of the Future?
Rutgers University New Brunswick, NJ 08901, USA
Niraj Dholakia
MS in Computer Science
Abstract:
The Bitcoin cryptocurrency has been around since 2010 and while many of its early adopters believed it
to be the next big thing and predicted it to soon become a main stream digital currency others mainly
perceived it as a behind-the-scenes technology that would never be a currency that the average person will
use to pay for goods online or in a physical store. All these years later, bitcoin is certainly not a
mainstream digital currency. Despite big promises from early adopters, bitcoin is still plagued by tax and
regulatory issues. And the bitcoin community is still fighting over its core technology—a fracas that
could significantly hamper bitcoin’s ability to expand in the near future [22]. In this paper, I present
various factors that prevent Bitcoin and other Crypto-currencies (Altcoins) from replacing existing
payment schemes and becoming the currency of the future.
Introduction:
Bitcoin is a popular digital currency with over 168,210,443 transactions and 15,967,188 Bitcoins in
circulation as of 3rd
November 2016[10]. Today, one Bitcoin has a market value of around $700 with total
market capitalization of astonishing 100 billion US dollars as of September 2016[1]. The Bitcoin protocol
proposed by Satoshi Nakamoto is described as a peer-to-peer electronic cash system [2]. It is a
decentralized payment system with no trusted third party, such as a bank or a broker, as used in traditional
payment systems to guard against double spending. In this online payment system, anyone can make a
payment to any other individual on network directly in peer-to-peer manner just like physical cash. Each
purchase and transfer is verified by one of thousands of computers on a volunteer network and bundled
into a digital “block”. Each block of transactions is then recorded on a central ledger called the
blockchain. Hence, very peer knows about every other peer’s transactions; this is unlike a centralized
system (like Bank) where only the central authority knows about all transactions [3].
Background-
Each individual in the Bitcoin network can be a payer (customer) or payee (vendor) or both. To start
using the Bitcoin protocol, the user needs a Bitcoin account and a wallet. A prerequisite for a user is to
have a private and a public key pair, first of all because the account is identified by the public key
(Bitcoin wallet address). Also, a payer needs to know the public key of the payee to make a payment.
If a user wants to make a payment, that user has to create a transaction with all relevant information, i.e.,
the address of the payee, the amount of Bitcoins and a challenge. This transaction is then broadcasted to
all nodes in the network. Each node places this transaction into a block and tries to solve the proof-of-
work (cryptographic puzzle) for this block. Once a node finds a solution to the challenge, it broadcasts it
to all other nodes. This process is called mining and is performed by mining software. Mining yields
Bitcoins for the miner as a reward.
If all transactions are valid and not spent before, then the other nodes accept the block and start working
on the next block in the chain. At certain times, the chain may have forks because two blocks were mined
and broadcasted at the same time. Nodes always consider the longest block-chain to be the correct one.

2. Bitcoin Value and Mining:
The Bitcoin protocol came into existence in 2008 and first block or the genesis block was mined in
January 2009 by Satoshi Nakamoto yielding 50 Bitcoins as a reward. The currency that started with a
value of zero dollars is today valued at $700 and reached its peak price of $1242 on 29th
November 2013.
The figure [10] below shows how the price of Bitcoins varied between the years 2014 to 2016.
Like any other commodity in the world, Bitcoin gained value because people were willing to trade in it.
Bitcoin is often compared to Gold because like Gold it is rare and it has no intrinsic value. We say Bitcoin
is rare because the algorithm limits the total number of Bitcoins that can be ever produced to 21 million. It
is predicted that all Bitcoins will be produced by the year 2140[16].
Generation of Bitcoins require solving of cryptographic puzzles (obtaining hash less than a target value)
that require lots of computational power thus involving lots of cost in terms of machine and electricity.
The miners mine the transaction blocks and continue the building the block chain because of the incentive
received after successful mining of a block. This reward was of 50 Bitcoins initially but it gets halved
every 4 years. The current reward is 25 Bitcoins but will soon become 12.5 and so on till it would become
zero and all the 21 million Bitcoins will be mined. All the estimations made above are made by assuming
that one block will be mined by the miners in approximately 10 minutes. As more and more miners try to
solve the cryptographic puzzle with powerful machines, GPUs and using mining pools, the difficulty of
the cryptographic puzzle is also dynamically varied after generation of every 2016 blocks, to make sure
that block generation takes approximately 10 minutes. The difficulty that started at level 1 for mining a
block is today at 254,620,187,304, with Hash rate of 1,847,956,772 GH/sec [10].
Advantages of Bitcoin-
Peer-to-peer transfer –
The Bitcoin protocol introduced the concept of peer-to-peer transfer of Bitcoins between individuals
without requirement of any third party or financial institution like banks. Thus eliminating the transaction
cost involved in transfer of money that traditional institutions charge for acting as middle man. This made
sure that any individual/ organization in any part of the world can transfer any amount of money to any
individual/organization practically free of charge. Bitcoin users do pay some transaction fees to the
miners who mine their blocks just out of good will but that transaction fees is really very small/ almost
negligible.

3. The use of wallet address (string of alphanumeric character) instead of Names and identities in Bitcoins
gave a sense of privacy and security to the users involved in the trade. This privacy was seen as an
attractive feature of Bitcoin by many individuals who did not want Government / banks to know about
every purchase/transfer that they made. Unfortunately this pseudo anonymity of Bitcoin transactions also
made it very popular in black market activities, deep web and illegal money transfers.
The initial boost to Bitcoin was received mainly due the Euro zone financial crisis of 2009 and infamous
Cyprus bailout of year 2012-13. The financial losses and difficulties faced by the citizens during this
period caused people to lose faith in traditional financial systems like Banks [17]. The concept of
currency without any central authority thus attracted attention of everyone. The Bitcoin was thus no
longer a concept, it was seen as an alternative to the traditional currency and people started investing in
Bitcoins. This was also the time when Bitcoin peaked in its value.
Global Currency-
Bitcoin is not bound by any political boundary or controlled by a single Government body. The Bitcoin
can be accepted and used in the same form all over the world. There is no foreign exchange or conversion
required. Plus it has the added advantage of low transaction fees. The individuals and organizations that
were restricted to trade within their own countries now have an opportunity to freely trade all over the
world. In this sense, Bitcoin is the only truly global currency available in the world.
Security –
The Bitcoin protocol is designed in such a way that the blockchain prevents individuals from double
spending (using the same coin for different transactions).Everything is visible to everyone and each
Bitcoin ever generated in the Bitcoin economy can be traced and can be accounted for. Any attacker
cannot just simply generate Bitcoins out of thin air. If an attacker wants to add his malicious/fake Bitcoin
transaction block to the blockchain he need to get it verified by all the other miners of the community. If
the attacker manages to fork the blockchain with his malicious block than he needs to make sure that the
fork that he created keeps building longer than the current blockchain for it to be accepted by the other
miners. As described before, in Bitcoin community, the miners only follow the longest chain. Thus for a
attacker to make his fake chain longer than the existing honest chain, he has to generate a mining power
greater than mining power of all the nodes of the Bitcoin community added together [21]. Or the attacker
has to gain a trust of at least 51% of miners in the Bitcoin community (to have 51% mining power) so as
to make sure that his fake forked block chain gets accepted [21]. In order to successfully 51% attack
Bitcoin network, all that's needed is a combined hashrate higher than the genuine hashrate. Suppose
overall hash-rate is around 2,000,000 TH/s (current hashrate is 835,299,534 Giga Hash per sec[10]). The
most powerful miner, Antminer S9, has 14 TH/s. Each S9 costs $3,000. So money required to own the
same amount of hashrate is: 2,000,000 / 14 * 3,000 = $428,571,429. That's less than half a billion dollars.
Hence the idea of an individual investing around half a billion dollars just to attack and fork the Bitcoin
blockchain seems unreal. Although a State sponsored adversary or large mining pools are capable of
performing such an attack.
Bitcoin is a speculative currency. Its value is good only as long as people trust in the system. If the
peoples trust is more than value of Bitcoin is more. And if Bitcoin gets hacked/ if Bitcoin blockchain is
forked by an attacker than people lose faith in the economy and thus the value of Bitcoin can become zero
overnight. Thus if a attacker forks the blockchain by influencing and gaining 51% mining power than the
currency would lose its credibility and thus its value will become zero. The attacker thus will have any
number of Bitcoins that he wants but all of them would be of $0 market value. The Bitcoin protocol thus
encourages its participants to remain honest. This provides an intrinsic security to the Bitcoin economy.

4. Arguments against Bitcoins:
In spite of all its advantages and arguments provided by Nakamoto and the Bitcoin community, there are
lots of factors that prevent Bitcoins from being accepted as an alternative to the existing payment systems.
A Pure decentralized system?
The Bitcoin protocol was proposed as a truly decentralized economy because Nakamoto assumed that no
single individual/ organization would ever be able to control the Bitcoin economy. The thought of
someone controlling 51% of total mining power seems impossible but in June, 2014, Ghash.io, one of the
mining pools of the Bitcoin network, came close to obtaining 51% of the Bitcoin network’s hash-rate
[14]. This could have led to double-spending if the pool would have behaved maliciously. Many of the
miners in Ghash.io decided to join other mining pools to prevent this majority from occurring. Ghash.io
closed in October, 2016. But the top five mining pools operating today still control well over 51% of total
mining power of the Bitcoin economy. These mining pools have monopoly and have the entire blockchain
to their mercy. The data for top mining pools and their contribution in generation of blocks can be seen in
the figure [13] below.
The entire decisions of which block to be added to the blockchain is controlled by these mining pools and
it has led to great fear among the developers of the Bitcoin community. The people who consider to invest
all their life savings in Bitcoin economy instead of traditional banks are thus at a risk of losing it all if few
of these mining pools collude to destroy the blockchain. These mining pools belong mostly to few
countries like China and US. A scenario in which people of European Union decide to leave the
traditional economy and start operating on Bitcoin and due to international tensions if all mining pools of
China/ US decide to destroy the blockchain than entire Euro Zone can be brought to their knees with a
financial disaster. The risk of control of Blockchain in hands of few is dangerous.
This has been speculated by researchers who have proposed use of “Proof of Stake” and “Proof of Space”
instead of “Proof of Work” in Digital Currencies, but Proof of Stake currencies have their own short
comings and the Digital Currencies like PeerCoin, Nxt Coin, that made use of Proof of Stake are a seen as
replacement for Bitcoins Proof of Work but they still have a long way to go in terms of public acceptance
and market capitalization if they want to compete with Bitcoin [20][19].

5. Moreover, any Digital currencies that start competing with Bitcoin are forked and destroyed by use of
massive computational power by Bitcoin miners and mining pools. As of 5th
November, 2016, the value
of Bitcoin is $704.27 where as value of next best Digital Currency by market capitalization Ethereum is
just $11.23 [19]. Thus the difference is huge.
Decreasing Incentives-
As more and more mining power is being invested in generation of blocks, the chances of individual
miners to mine the block and earn incentives is getting low. The incentives earned are halved every 4
years in Bitcoin and thus not very far in future, the cost of generating a block will exceed the value of
incentive. At that stage there would be no incentive left for individual miners to invest their resources for
block generation and only the rich and powerful mining pools will get all the benefits of mining. This
would again tilt entire control of the Bitcoins in favor of handful of powerful miners.
Government Intervention-
The traditional payment schemes offer security to an individual’s transactions and protect them from
malicious traders. The transactions and money can be returned back to an individual if the trader is found
to have cheated in providing the service to the user. There are laws to protect the individual and banks and
financial institutions to act as mediators. As there is no central authority backing Bitcoins and Digital
currencies any cheating in trade cannot be mediated. The transactions once included in blockchain are
irreversible and require the trader to resend the money back to user if the services are not provided. This
leaves the consumer completely at the mercy of the seller.
The anonymous nature of transactions of Bitcoin has made them popular in Deep-web, black markets and
for illegal money laundering schemes. Strict actions have been taken by US government to stop online
gambling using Bitcoins that is used mostly to make dirty Bitcoins clean. The dirty Bitcoins are inserted
in slot machines and then after playing for small amounts withdrawn as clean Bitcoins[8]( "dirty" bitcoins
are bitcoins from stolen wallets or bitcoins that have passed through a wallet of a known criminal, etc).
This has made countries and Government of the world a little skeptical about legalizing use of Bitcoins
and other Digital currencies. The framework needed to implement Digital currencies as alternative to
actual currency is difficult and not been proposed by any country of the world till date [7]. The US
Commodity Futures Trading Commission, CFTC, has classified Bitcoin as a commodity in September
2015 and US treasury has accepted Bitcoin as Virtual currency in 2013 but a recent ruling of a Miami
judge in July, 2016 deemed Bitcoin as not real money [12]. The illegal case of money laundering was thus
tossed. 95% of the countries of the world have either made use of Digital Currencies illegal or have
deemed it unregulated. Thus people investing in Bitcoins have no Government protection for their
investment.
Energy consumption by Mining pools –
The current hash-rate of the Bitcoin network is 1,835,299,534 Giga Hash per sec[10]. Out of all the
hashing done only one hash gives correct result and thus results in mining of a block. Hence billions and
billions of computations made by using high power GPU’s and ASIC (Application Specific Integrated
Chips) are for nothing. And for doing this computations and cooling the machines, tremendous amount of
power is consumed. This is a pure waste of energy and adds to wastage of precious resources. Generating
a single block in the Bitcoin blockchain requires a number of hashing operations exceeding 260
, which
means that significant energy needs to be expended in order for the protocol to run. Calculations made by
[18] suggest that miners currently consume 350 megawatts of electricity which is roughly equivalent to
electricity demand of 280,000 American households. Early calculations placed the energy requirements of
the protocol in the order of magnitude of a country, see e.g.,[14]. This puts a serious question on use of
Digital currencies.

6. Security breaches-
Bitcoin protocol makes use of best cryptographic techniques and are more protected than the traditional
payment systems like credit cards and ATMs but this does not mean that they are unshakable. Bitcoin has
its own vulnerabilities and has faced disasters when it comes to getting hacked [9]. During its initial days,
on August, 6th
2010 an unknown hacker exploited an vulnerability and produced 1 billion Bitcoins out of
thin air. This was later fixed by renewing of Blockchain. But if similar attack happens today, it would
result in complete destruction of 100 billion dollars worth of Bitcoin economy. Mt. Gox used to be one of
the leading Bitcoin exchanges until 2014, but the attack on Mt. Gox in 2011 and 2014 has caused the
value of Bitcoin to go from $1000 to $700 that it is today. In a speculative economy like Bitcoin, any
information about a smallest vulnerability can cause entire economy to collapse. The lack of backing by
financial organizations and Government makes this a big risk to the people dependent on this economy.
If a credit card or a bank account is hacked than at least it can be insured and investigated to return the
money back to the individual but this is not the case for Digital Currencies. Even Barry Silbert, founder
and CEO of Digital Currency Group and supporter of Bitcoin technology has famously said, “it’s very
easy to come up with a calculation to show that the price of Bitcoin is going to go to $10,000, and with
some tweaks, I could get that back down to $100.”
Comparison of Digital currencies to existing payment systems-
The anonymous nature Bitcoins, no central control and possibility of a parallel Digital economy have
always been strong arguments in favor of Bitcoin, but as rightly pointed out by ConvergEx chief market
strategist Nicholas Colas in an interview to CNBC [6], "The dollar is likely to remain a global reserve
currency as long as it's the way global markets price gold and oil and guns. The $100 bill is the world's
Bitcoin, It's anonymous. It's easy to use. It's actually easier than Bitcoin, because you don't need a
computer or even power." Most of the money today is already in electronic form. The Bank is not
holding a lot of money in form of cash. The money is in our account data. It is set of zeros and ones.
There is digitalization of money in work around us and it has nothing to do with digital currencies.
The clearing of transactions by verification of block in Bitcoin currently takes around 40 minutes,
compare it with processing time required to approve the transaction when you swipe your visa card at a
Grocery store. The difference in ease of use is huge!
Conclusion:
Bitcoin and Digital currencies may never replace the existing payment systems but the technology behind
it is genius. The concept of Blockchain by Satoshi Nakamoto is unique and has opened new avenues of
research in the field of distributed systems. The technology behind Bitcoins is now finding its application
in various fields like internet of things, etc[15]. Thinking of shifting to Digital Currency and abandoning
traditional payment schemes is not the answer. The high transfer fee that the users used to pay to Western
Union has been reduced considerably by use of Paypal. The concept of payment through facebook that
allows transfer of funds at much lower rates than banks, plus many other newer applications are forcing
the banks to reduce their transaction costs and this will continue with more innovations that would come
in future.
The future of money will really be on finding ways to transact in a lower-cost way, and that's a societal
trend, not just Bitcoin. The status quo of existing currencies is way stronger than that of Digital
Currencies.

7. References:
[1] http://www.newsbtc.com/2016/11/05/total-Bitcoin-transaction-volume-surpassed-us100bn-september.
[2]Satoshi Nakamoto. Bitcoin: A Peer-to-Peer Electronic Cash System
[3] Kaylash Chaudhary.Modeling and Verification of the Bitcoin Protocol
s[4] Roman Oliynykov. A Provably Secure Proof-of-Stake Blockchain Protocol
[5]Should You Invest In Bitcoin? 10 Arguments In Favor As Of December 2015
(http://www.forbes.com/sites/laurashin/2015/12/11/should-you-invest-in-bitcoin-10-arguments-in-favor-
as-of-december-2015/#258b6cda540e)
[6]The US dollar to reign supreme for decades to come (http://www.cnbc.com/2014/04/24/future-of-
money-what-currencies-will-look-like-in-25-years.html)
[7]Legality of bitcoin by country (en.wikipedia.org)
[8]Using Bitcoin Casinos To Launder Bitcoin (https://www.deepdotweb.com/2016/04/13/using-bitcoin-
casinos-launder-bitcoin/)
[9]The Biggest Bitcoin Hacks and Thefts of time(https://hacked.com/biggest-bitcoin-hacks-thefts-time/)
[10]https://blockchain.info/stats
[11]Crypto-Currency Market Capitalizations (https://coinmarketcap.com/)
[12]Bitcoin 'not real money' says Miami judge in closely watched ruling
(https://www.theguardian.com/technology/2016/jul/26/bitcoin-not-real-money-miami-judge)
[13] https://bitcoinchain.com/pools
[14] Karl J. O’Dwyer and David Malone. Bitcoin mining and its energy footprint.
[15] Arvind Narayanan. SoK: Research Perspectives and Challenges for Bitcoin and Cryptocurrencies.
[16] Controlled Supply. https://en.bitcoin.it/wiki/Controlled_supply
[17] European debt crisis. https://en.wikipedia.org/wiki/European_debt_crisis
[18] Bitcoin could consume as much electricity as Denmark by 2020. (http://motherboard.vice.com/read/
bitcoin-could-consume-as-much-electricity-as-denmark-by-2020)
[19] Crypto-Currency Market Capitalizations. (http://coinmarketcap.com/currencies/views/all/)
[20] The Inevitable Failure of Proof-of-Stake Blockchains and Why a New Algorithm is Needed.
(https://cointelegraph.com/news/the-inevitable-failure-of-proof-of-stake-blockchains-and-why-a-new-
algorithm-is-needed)
[21] Majority Attack. (https://en.bitcoin.it/wiki/Majority_attack)
[22] The Schism Over Bitcoin Is How Bitcoin Is Supposed to Work. (https://www.wired.com/2016/02/
the-schism-over-bitcoin-is-how-bitcoin-is-supposed-to-work/)