Specific risks

Having described the use of the Bitcoin Network as a CPS and its embeddedness into the EcoSystem we now want to touch upon risks that concern cryptocurrencies in general and Bitcoinspecifically.

Loss of access to bitcoins The access tobitcoinscan be lost, if the private keys of thetrans- action points are not available any more, for example by loss or destruction of the wallet file. This is hardly any different than losing the physical wallet with banknotes in it.

Bitcoin wallets, being simple files, deserve all protection a physical wallet deserves, for it is not in itself encrypted. All computational measures feasible to protecting the most sensible data is to be used to protect the wallet. If users do not choose to outsource this responsibility (e.g. by using web-wallets), the responsibility to protect thewalletsis entirely up to the users.

Rising transaction fees Looking at the chart of transaction fees onblockchain.info, we find

that overall fees fortransactionshave declined to the lowest levels in 12 months.67 Without going into the details, we can state that right now, at least on the surface, transaction fees are almost non-existent, if we compared them to fees for international remittances using theBPS. But this notion might be misleading, since the creation of newbitcoinsthrough miningis what currently accounts for the investments miners have made in mining hardware. As noted previously, the creation of bitcoin through mining will decline over time, but we can not assume that relative cost of mining hardware will in the same fashion. In fact it can’t, for bitcoin creation will at some point come to an end entirely. There are basically two possibilities:

• Mining declines

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For a chart of transaction fees seehttp://blockchain.info/charts/transaction-fees- accessed July 28th 2014.

7 BITCOIN 7.4 Bitcoin EcoSystem

The Bitcoin EcoSystem comprises more than the Network and the CPS

Accounts for the hierarchy of functional requirements «includes»

«includes»

Accounts for the need of a Money Meta Infrastructure and probably has much more significance for the overall success of cryptocurrencies than has been accounted for so far

Pay for assets, goods or services with money proper

Miner

Hoarder Adopter

Use case that takes into account that there is a predominantly used payment system already well established that we call BPS in this work For €, $, ¥ etc. bitcoin is a foreign currency to each. Seller Payee Payer Institutions, Companys, Corporations, Governments, ... Pricing in bitcoin Holding on to bitcoin Key operation in Mining is the 'Hashing of a Block' «includes» Mining A p2p network of nodes

that implements the cryptocurrency protocol

Buy or sell bitcoin with currency (€, $, ...)

The MMI as a secondary actor provides services for the EcoSystem that could include: - operating an exchange - operating a marketplace - providing escrow - providing liability - facilitating trading - market making - contract enforcement - operating arbitration - . . . Paying with bitcoin Trading in currencies Buyer

Money Meta Infrastructure EcoSystem

CPS

Network

7.4 Bitcoin EcoSystem 7 BITCOIN

• Transaction fees will rise to make up for lesser revenues frombitcoin creation

A decline in mining might make cryptocurrencies more vulnerable to history revision attacks, as noted in‘Incentive for mining’on page48. If transaction fees are significantly rising for users this might lower their willingness to use theCPS as theirpayment systemof choice.

Cryptocurrency competition Bitcoin certainly has the advantage of being the first-mover in

the field of cryptocurrencies, bringing innovations to public understanding and use that has basically founded thisdomainor at least set it on a completely new footing. However, there are no patents in place that would fortify this first-mover position per se. In fact, multiple other cryptocurrencies have sprung up, mainly as ‘forks’ of the open-source code of Bitcoin itself, which is thereby furtheringcryptocurrencycompetition one might say. So one potential risk for Bitcoin is to lose its standing of being recognized as a mathematically and cryptographically guaranteed cryptocurrency with an ever limited total supply. But if the findings of this work hold any merit, then the competition among cryptocurrency is probably not just fought on issues of implementation and the realization of functioning as a CPS, but of how the respective EcoSystem of thecryptocurrency is responding to user needs.

Technical risk Of course there is the risk that at some point a technical flaw might be discovered - say in the cryptographic protocol68 _{- that is not to easily fixed and could therefore destroy} trust in the CPS. So far this hasn’t happened in a way to destroy Bitcoin altogether, but certain movements in market prices can certainly be attributed to technical problems that made headlines, even though most of the time these issues did not concern the Network but parts of theEcoSystem.69

High fluctuations in currency prices Bitcoin prices have been volatile all along even in US

Dollars, which is the bitcoin market with the highest market liquidity. This is a problem for merchants that have costs in US Dollars (or any othercurrencyfor that matter) and would have revenue in bitcoin, if they’d tag their products with prices in bitcoin, thereby using it as their money of account. If they are paid in bitcoin for their products, they still have to cover their costs in US Dollars. With high volatility in prices the likeliness ofbitcoin being used as money of accountdecreases. Currently merchants tackle this problem by using supporting MMIactors that are part of theEcoSystem and that offer the taking of this form of foreign currency risk at premium that is - compared to foreign currency risk - easier calculable for merchants.

This is showing an interesting interconnection of the nation states that provide the MMI for the BPS and the cryptocurrency EcoSystem. This becomes visible by looking at the concrete example of a company that is involved in this business of risk taking, called ‘Bitpay’.70 This is a company located in the jurisdiction of the United States of America and is therefore trusted by its customers to be able to bear the risk they claim to be able to bear, for they do business according to US legal standards. If anything went wrong in contracts with Bitpay its users were able to hold this company accountable within the US jurisdiction.

So, even right now, for bitcointo be used as amoney of account, the adopters depend on the MMI that the nation state provides, which brings us back to the question of how much of the MMI requirements currently provided for by nation states for theBPS, the Network might be able to provide for theCPS.

68_{For an assessment on vulnerabilities of elliptic curve cryptography - as used inBitcoin, seeBos et al. (2013).} 69

One example are the problems the largestbitcoinexchange at the time, called ‘Mt. Gox’, had, before eventually filing for bankruptcy. For the problems with these type of middlemen in general (and in great anticipation!) seeMoore & Christin(2013).

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