Blockchain, Bitcoin & Crypto Currency Basics from A to Z

Author: Mehmet Kamil Tarhan

 The subject of this study is our aim to inform our readers about virtual currencies (digital and crypto currencies), especially BITCOIN, and their technological infrastructure, Blockchain, which has occupied the agenda a lot in recent months. For this purpose, we will first briefly introduce Blockchain, then provide brief information about virtual currencies, and then make detailed explanations about Bitcoin. We have collected our article in 13 sections below. I would like to thank my beloved wife and daughter, who encouraged us at the beginning of our study, Alp Buluç, Partner of Teolupus Audit and Management Consultancy Company, and the owners of the resources mentioned in the directory of resources that we benefited from during our studies, which were very useful and shed light on us since the subject is entirely new. 

Table of Contents

• Blockchain
• Virtual Currencies
• Definition and Features of Bitcoin
• Bitcoin Design
• Owning Bitcoin
• Bitcoin Wallet
• Bitcoin Technology
• Bitcoin Transactions
• Bitcoin Network
• Differences of Bitcoin and the Traditional Monetary System
• Data on the Cryptocurrency World
• Strengths and Weaknesses (Risky) of Bitcoin and Other Virtual Currencies
• Overview and Legal Situation of Cryptocurrencies in Türkiye and the World

1. BLOCKCHAIN

1.1– Introduction of Blockchain Technology

Blockchain is a transaction infrastructure that creates precise and accurate records using complex mathematical functions of who owns what, when, and where transactions are defined in a decentralized infrastructure through distributed computer systems. Thanks to this infrastructure, there is no need for the transactions between parties to be controlled, approved, and agreed upon by a central authority. Blockchain provides independent verification of all types of information to protect business processes from both errors and fraudulent activities. Because this structure offers a recording system that everyone in the process can monitor but never change. (1)

1.2. Advantages of Blockchain Solutions

The advantages provided by the Blockchain system are stated below: (2)

• The simple nature of the data comparison and error-checking mechanism checks the integrity and consistency of the data maintained by distributed network participants.
• Decentralized storage of data without any points of failure; It increases the reliability of data storage and processing and ensures that information can be recovered even in the event of a large-scale error.
• No unauthorized changes can ever be made to the data, significantly reducing the risks of fraud and data alteration.
• It saves time and costs in terms of managing agreements and sharing documents with counterparts without the need for reliable third parties.
• Smart contracts include agreement enforcement logic to automatically/semi-automatically track whether obligations are fulfilled, especially with the Internet of Things Technologies (IoT).
• Blockchain technology: It significantly facilitates the creation of dispersed records of property rights, tangible assets and liabilities, the tracking of the supply chain, and the implementation of processes using information from sensors and equipment.

1.3.Blockchain Usage Areas

1.3.1. Keeping Records of Bitcoin and Other Cryptocurrencies

Today, Blockchain is mainly used in transactions involving cryptocurrencies such as Bitcoin.

One of the important opportunities provided by the blockchain platform is cryptocurrencies. We can also define the cryptocurrency economy as an “orphan economy.” Because this currency does not have an owner, regulator, or central bank, and since these coins are not printed, they do not even physically exist. (1)

Since Bitcoin is currently the most popular cryptocurrency, our article is mainly devoted to this subject.

Blockchain: It is a digital global ledger, a flat data file, a simple database containing public, transparent, distributed, sequential, and time-stamped Bitcoin transfer transactions. All transactions made since Bitcoin first appeared in 2009 are stored digitally. The Blockchain method, which emerged with Bitcoin and has different areas of use, is resistant to problems that may arise from any central error, as it is stored independently of each other in end computers in a decentralized network structure.

Anyone who wishes can download and check the data on their own computer by connecting to a decentralized Bitcoin network.

The nodes that keep the blockchain on their own computer are called full nodes. Blockchain can be accessed on all ends (computers) connected to Bitcoin. But only full edges hold all the data. (3)

1.3.2.Blockchain in Business Solutions

Blockchain: It is used in business systems to protect critical data, monitor whether the contract is complied with, whether obligations are fulfilled, and organize business relations without any intermediary or third parties. Detailed information on this subject is given below. (2)

Integrated information sharing environment: Blockchain can be used to create trusted communication networks between parties without the need for central control. These solutions are fast, resistant to DDoS attacks, and provide continuous data access control and availability of all information for real-time verification, including monitoring compliance with government and industry standards. Therefore, users can access highly reliable data instantly and effortlessly.

E-commerce sites: Bitcoin helps manufacturers, transportation companies, and retailers interact directly in a unified information environment. Check whether copyrights are respected and necessary licenses, certificates, etc. It uses a built-in mechanism that includes smart contracts that automatically verify availability and track agreement implementation at each supply chain link, providing controllers with all necessary reporting.

Financial platforms: Distributed ledgers are used to create large-scale solutions to track goods, cash flows, and service delivery in real-time and create any necessary transaction paperwork. In addition, reliable authentication systems control access, prevent fraud and information and personal data leaks and therefore reduce the operational risks of the business. Where necessary, secure access can be provided to all relevant parties, including public authorities, industry regulators, third-party contractors, and end consumers.

The blockchain system will change how business is done, especially commercially, and the services individuals receive. It seems that it will bring different perspectives and creative business models to every sector. (1)

In the report “Blockchain Opportunities for Every Industry” written by Jerimiah Owyang and Jaimy Szymanski, the following topics are mentioned on a sectoral basis: (1)

• Legislation: Thanks to “smart contracts” held on the blockchain, legal authorities will not need to intervene in the distribution or exchange of products and services.
• Supply Chain: With the use of Blockchain’s distributed ledger structure, the supply process will become transparent, and a reliable process will be created by shipping, and supplier notifications regarding the process will be made via Blockchain.
• Government: Blockchain will ensure that citizens’ identities, personal information, criminal records, and biometric information are stored safely in electronic environments without being corrupted.
• Energy: It will be possible to distribute energy in a decentralized structure, verify consumption by transmitting it via Blockchain with microtransactions, and guarantee payments in this way.
• Food: With the use of blockchain, the food chain will become traceable, and information such as product origin, processing, expiration date, and storage temperatures will be observed transparently from start to finish.

Using Bitcoin as a currency, money transfer tool, and digital payment system, “Bitcoin 1.0” It is defined as. Realization of all financial and economic applications such as bills, bills or loans in the near future using Blockchain technology“Bitcoin 2.0.” It is described as.“Bitcoin 3.0” By using Blockchain infrastructure in the future, It is planned to launch applications that create added value and make life easier in all areas such as health, culture, science, and art. (3)

In conclusion, Blockchain is a computer infrastructure that provides independent verification of information to protect business processes from errors and fraudulent activities. Bitcoin and other cryptocurrencies can be bought, sold, and stored in the Blockchain system. However, in Bitcoin 2, loans can be made, interest can be received, and rights related to various financial products can be purchased. In future versions; 

Blockchain technology can be used for every industry (food, energy, etc.). Virtual ID cards can be created. Democratic elections and referendums may be held regionally or throughout the country. The election and voting will be transparent, but the identities of those participating will remain anonymous. People will be able to vote at home, at work, or from their mobile phones. Additionally, title deeds, notaries, stock exchanges, etc. are made with a reliable intermediary. Any transaction such as this can be adapted to Blockchain. (3)

2. VIRTUAL CURRENCIES (SPB)

Since SPB is a new concept in financial markets and is not an asset issued by an official institution, different financial actors use this concept with different meanings. For this reason, the concept of SPB is involuntarily confused and compared with many entities. It should be underlined that although there are differences in meaning in the literature, there is no unity of name. In many academic study reports, official announcements, and news, the terms digital money and cryptocurrency can be used instead of SPB. (4)

The European Central Bank (ECB) defines virtual money as follows.

“It is a virtual representation of an asset that is not issued by any central bank, credit institution or e-money institution and can be used as an alternative to money in some cases.” (ECB, 2015, Page 6)

The asset type with which SPBs are most commonly confused is e-money. The differences between these two types of assets emerged naturally due to the financial and technical innovations introduced to the market for the first time with SPBs. E-money is in Law No. 6493 on Payment and Securities Settlement Systems, Payment Services, and Electronic Money Institutions.“Monetary value issued in return for funds accepted by the money issuer, stored electronically, used to carry out payment transactions, and accepted as a means of payment by genuine and legal persons other than the electronic money issuer. It is defined as “. Simply put, e-money is the electronic representation of fiat money. (4)

There are many different classifications regarding SPBs. According to the classification used in the report published by the International Monetary Fund (IMF) in 2016, assets that represent a value digitally are called digital currencies. (4)

In the late 1980s, in the Netherlands, the first application of electronic money was the ability to load money onto smart cards and buy fuel with it to protect truck drivers who buy diesel fuel late at night from increasing theft. Digital currencies are money that can be stored and transferred electronically. The transition to digital money has become possible with the development of information technologies. (3)

E-money and PayPal are examples of digital currencies defined in terms of fiat money. Those that are not defined as fiat currencies are called SPBs. Some types of SPBs can be converted depending on their connection with the outside world, and non-convertible types, such as online game currencies. Convertible currencies are divided into two centralized and decentralized. Those that are decentralized and use cryptography as a verification system are also called cryptocurrencies. (4)

The Financial Crimes Prevention Authority (FinCEN) defines centralized CMBs as schemes with a central custodian and a central administrator, similar to a central bank (FinCEN, 2013). These central managers control the system by issuing the SPB and keeping the ledger in which transactions are recorded. (4)

(FATF, 2014). In decentralized SPB schemes, there is no central custodian and no central administrator. Instead, there is a structure that allows SPB to be transferred between participants without any intermediary. The central bank has been replaced by internal protocols that manage the operation of the system and verify the transactions of system participants. The biggest example of decentralized SPB schemes is Bitcoin. (4)

There are three basic and technical issues that play a role in the differentiation of decentralized SPBs; It is a matter of approval mechanism, algorithm, and supply. These issues are mentioned in the relevant sections below. (4)

Trust in virtual cryptocurrencies stems from the belief in the virtual currency issuance and circulation system and that the majority of system users will do no wrong. In addition, the reason why these currencies gained such value can be attributed to the “subjective value” theory. Subjective Theory of Value: It means that no matter how scarce a good or service is, no matter how much work and effort it is obtained, if there is no demand, it will have no value. Gold and silver have no inherent value other than the extraction and printing costs of the Dollar or Euro. Their value is our demand for them and our belief that others will demand them. (3)

Research data regarding the cryptocurrency world was conducted in the first quarter of 2017 XI. It is explained in the section.

3. BITCOIN (BTC), DEFINITION AND FEATURES

3.1. Introduction

As can be clearly seen in the chart above, the encrypted electronic money Bitcoin (BTC), whose price was around 900 USD on January 10 last year and approached 20,000 USD in the second half of December 2017, with an increase of more than 20 times, reached this peak after this peak as stated below. It started to hover around 14,000 USD on January 12, 2018, with a loss of nearly 30%. The market value of 16,798,087 BTC offered in the market to date reached a total of 236,483,468,786 USD.

http://coinmarketcap.com, “Cryptocurrency Market Capitalizations” 11.01.2018 (5)

Bitcoin and cryptocurrencies such as Ethereum and Ripple suffered a sharp loss of value. Below is information about the prices, supply, and transaction volumes of the top 5 cryptocurrencies as of 12.01.2018. (5)

• Was Bitcoin a new tulip mania (6.7) ?

“What is happening in Bitcoin is likened to the “tulip mania” in the Netherlands in the 1630s, which was considered the first “financial bubble” in the world. In those years, we witnessed tulip bulbs soaring with wildly increasing demand, reaching extraordinary price levels, and then collapsing.”

Note: Those who want to get detailed information about Tulip Mania can read Erhan Afyoncu’s article titled “Tulip Mania” dated 17.12.2017 at www.sabah.com.tr

• Was Bitcoin a pyramid scheme mentioned in the Presidency of Religious Affairs fatwa? (8)

“………..Accordingly, it is not permissible to use digital cryptocurrencies, which carry serious uncertainties in their essence, have a high risk of deception and deception, therefore, do not have any assurance, and lead to unfair and unjustified enrichment of certain segments, such as practices known to the public as ‘Ponzi chains’..”

• Was Bitcoin a virtual investment tool, as one of our expert economists stated? (9)

“..So far, any securities or real estate price has not been expressed in Bitcoin. No investment project has been calculated with Bitcoin. The loan agreement has not been signed. No postdated check or draft was signed. States do not allow accounting and payment of taxes and penalties with Bitcoin. For the reasons stated, Bitcoin and other digital currencies are a virtual investment tool rather than a currency.”

Or was a new currency being born?

3.2. Bitcoin Definition

Bitcoin is an electronic money system that enables money transfer between peers without the need for any third-party service. (10) the set of concepts and issues that make up the digital money economy. Since cryptology (password) is used in Bitcoin transfer and production, it is also defined as crypto money.

3.3. Birth of Bitcoin

The BITCOIN system was announced in an article titled “Bitcoin: End-to-End Electronic Payment System” under the pseudonym Satoshi Nakamoto, in an environment where trust in intermediary institutions, banks, central banks, and governments decreased during the global financial crisis in 2008.(Mayıs 2009-Bitcoin: A Peer –to- Peer Electronik Cash Sistem). Although Satoshi Nakamoto disappeared in 2011, the system continues to operate entirely transparently and within the framework of mathematical principles. (3)

III.4 Features of Bitcoin (BTC)

Bitcoin features are outlined below. (3)

• The Bitcoin system consists of open-source software. The software runs on a wide range of processors, including laptops and smartphones.
• Bitcoin, abbreviated BTC, can be divided up to 8 digits, so 0.00000001 Bitcoin can be traded. The smallest unit is called Satoshi. 100 million Satoshi is 1 BTC.
• It is easy to use. You can install any of the wallet programs and start buying, selling, and transferring BTC immediately. An explanation of Bitcoin wallets will be made in the next section.
• BTC can be exchanged for TL, US Dollar, EURO, or other currencies at any time.
• Since cryptology (password) is used in BTC transfer and production, it is also defined as cryptocurrency.
• BTC transfers occur between BTC wallet addresses, which are similar to traditional bank account numbers.
• The BTC network has a decentralized and peer-to-peer structure. It has no central server or control point.
• BTC is not produced from a center; BTC supply is made with the processing power of volunteer computers in the decentralized global network. Anyone who joins the BTC network by running the open-source miner software can become a miner and produce BTC if they wish.
• BTCs are supplied through miners who compete with each other to solve a complex mathematical problem while processing transfer transactions, a process called mining.
• The BTC system is designed to produce a total of 21,000,000 BTC by 2140.
• As of January 11, 2018, the number of Bitcoins in use is 16,796,180 Bitcoins. Approximately 2,000 new Bitcoins are produced per day. However, this does not mean that 2,000 Bitcoins will always be produced. Because the number of Bitcoins is limited to 21,000,000, this number is distributed over the years, and it is aimed to be at a specific limit every year. For this reason, it cannot be expected that too many Bitcoins will be released in one day or within a certain period of time.
• All transfer transactions carried out since 2009 are kept in the global ledger called Blockchain. Blockchain enables value to be produced, transferred, and stored without a central recording and control mechanism.

4. BITCOIN Design (Mining)

The concept of blockchain and mining activities play an essential role in the design of Bitcoin.

4.1. Blockchain

Blockchain is a general ledger that keeps track of all Bitcoin transactions and grows as blocks containing transactions are added together. Blocks are added to the blockchain in a linear and chronological order. Each node participating in the Bitcoin network (A computer connected to the Bitcoin network through a client that verifies transactions) can automatically download an up-to-date copy of the blockchain to its computer. Nodes verify transactions, update their copy of the general ledger, and announce it to other nodes in the network through special software applications. 

It is essential for nodes to obtain their own copies so that they can verify the ownership lineage of each Bitcoin. Management of the blockchain is handled by a network of nodes that communicate with each other and run Bitcoin software, so no trusted third party is needed to record transactions. (4)

4.2. Mining

Bitcoin mining supplies new Bitcoins to the system, preventing fraudulent transactions, not wasting non-existent Bitcoins, and preventing double-spending. (3) In fact, mining is a transaction recording service. Miners ensure the blockchain’s consistency, completeness, and immutability by collecting newly published transactions, turning them into blocks, and continuously verifying them. Verification of transactions is carried out by many miners who provide the Bitcoin network’s computing power. (4)

As part of the verification process, miners ensure that each block contains the cryptographic inference of the previous block with the SHA-256 inference algorithm used to solve a cryptographic puzzle. Thus, blocks are connected to each other and form a chain called a blockchain. (4)

Using algorithms in mining transactions is not enough; miners must prove to the network that they have verified the transactions. Therefore, the verification process in the Bitcoin system is called proof of work. (4)

Each new block must contain proof of work in order to be accepted by the rest of the network. According to the proof of work system, when the block content is inferred with a unique number that miners will find, the result must be lower than the network’s difficulty target. Creating proof of work is a process that requires time rather than intelligence or experience. To achieve difficulty goals when creating a secure cryptographic inference function, miners must arrive at the correct value through trial and error. 

The network periodically updates this threshold number to increase the difficulty of finding the correct block. These updates are calculated according to the Bitcoins to be given as gifts and the previously determined supply plan. According to the Bitcoin protocol, new Bitcoins are created at the end of the verification process and are gifted to miners who verify the transactions. Miners in the network compete with each other to verify transactions, and miners who manage to verify transactions in the shortest time win gift currencies. (4)

The rewards earned by miners also become new Bitcoin supplies and are systematically processed as Bitcoin into their account wallets.

As mentioned above, extracting Bitcoin, that is, obtaining some Bitcoin by mining, is not the only purpose of mining. Bitcoin miners also keep the decentralized ledger called Blockchain, which is one of the features that make BTC BTC. (11)

4.2.1. Money Printing in the Bitcoin System

So, how is money printed in the Bitcoin system? It solves this problem by distributing the money printing power instead of centralizing it, that is, by creating a decentralized/distributed structure in which anyone who wants can participate in the money printing process.

To put it very crudely, a cryptological puzzle must be solved. You install ‘mining’ software on your computer to solve the riddle. The program allocates all the computer’s processing power to search for the solution to this riddle, and when you find the solution, you announce your solution to other miners. All bitcoin miners in the world are trying to solve the same riddle and there is a reward after solving the riddle.

12.5 bitcoins are given as a reward for each riddle you solve. The only way to solve the riddle is to go through all the possibilities and proceed by trial and error, and this is a process that you can speed up in direct proportion to your processing power. In addition, the amount of a reward decreases by half in an average of 4 years (210000 riddles). (It started with 50 Bitcoins and decreased to 12.5 Bitcoins)

The solution to each puzzle means adding a new block to the ledger. The accounting book is the name of the ledger where all money transfer transactions are kept and accessible to everyone. We’ll talk more about this later.

The system regulates the difficulty of the riddles so that an average of 6 riddles are solved per hour after the solution of every 2016 riddle. Additionally, according to the Bitcoin system, the maximum number of Bitcoins that can be printed is 21 million. Therefore, the riddles become more difficult as the processing power of the miners increases, new miners are added to the race, and after a while, Bitcoin production will completely cease.

Since the difficulty of the riddles has increased over the years and many miners have been added to the race, when you try to solve the riddles on your own, if your processing power is not very high, the probability that you will not be able to solve any riddles and as a result, you will not be able to mint any bitcoins is exceptionally high. In this case, mining pools come to our aid. What we call a mining pool is when miners come together to solve a puzzle together and share the reward equally. Since the total processing power of the pool will be equal to the total processing power of the miners, it will become more possible to solve riddles such as what is wrong with one hand and the sound of two hands.

We discussed the riddles everyone is trying to solve so that Bitcoin can be minted. So what are these riddles?

What we call a riddle is the process of finding a new block to be added to the ledger. The log contains all money transfer transactions waiting to be processed and a nonce value. There must be such a nonce value that, after that nonce value is added to the log, the cryptographic digest received with the SHA-256 algorithm will be a value less than the current difficulty level of the Bitcoin network.

To find the correct nonce value, all miners try all possible values, one by one, starting from 1 and increasing to infinity. The miner who finds the correct nonce value wins the Bitcoin reward.

The Bitcoin protocol recalculates the difficulty level every 2016 block to find 6 blocks per hour. So, to give an example, let the difficulty level (difficulty) be 10 for now. If an average of 12 logs were discovered per hour during the past 2016 logs, the new difficulty level is set to 20.

When Bitcoin production stops, miners will try to find a new token to earn transfer fees.

In the early days, since the difficulty level of the network was not high, it was possible to mine with CPUs and GPUs. However, we said that SHA-256 was chosen as the algorithm. This algorithm is based on arithmetic operations and does not require much memory. For this reason, specially developed devices that calculate the SHA-256 algorithm very quickly, which we call ASIC (Application-specific integrated circuit) miners, have been released. Since they are specialized according to this algorithm, which requires only processing power, they can perform calculations much faster than CPUs or GPUs.

For example, Litecoin, another virtual currency, has a cryptographic summary. script algorithm. Since this algorithm requires a significant amount of memory, producing hardware that can beat GPUs in computational performance is not very profitable in terms of cost compared to Bitcoin ASIC miners, at least for now.

Bitcoin supply: It operates within the framework of the protocol introduced by Satoshi Nakamoto, the founder of the system. The system necessitates competition among miners. Those who have Bitcoin as a gift can save them or trade them by selling them. This is the only money supply point of the system.

The first block of the Bitcoin system, produced on January 4, 2009, was called the “genesis block”. It is the first block initiated by transferring 50 Bitcoins to the Bitcoin address belonging to Satoshi Nakamoto. If you start looking backward from any block, you will eventually reach the Genesis block. (3)

Orphan Blocks

Normally, a block can only have one block in progress. In some cases, more than one miner performs proof of work at the same time, announces the block they found, and processes it into the Blockchain. Other nodes in the Bitcoin network accept the first new block they receive as correct. There is a bifurcation, as seen in the figure below. But in the long run, due to the protocol between the ends, the longest end of the fork is automatically considered correct, and the blocks at the other end of the fork are called stale or orphaned blocks. (3)

Figure: Example of a rare fork in Blockchain

In the Bitcoin system, a reward is given to the miner who proves the work and adds the block he finds to the Blockchain. The first transaction in the block is the reward given to the miner. However, the miner who wins the reward cannot spend the Bitcoin he earned for at least 100 blocks (approximately 10 minutes x 100 = 1000 minutes = 17 hours). Because another miner may have simultaneously produced the block produced by the miner. And there is a possibility that the block will become orphaned. Only the miner who adds his block to the Blockchain can earn rewards. (3)

After producing every 2016 block difficulty of proof of work was calculated again; if the last 2016 blocks took less than 1,209,600 seconds to generate, the difficulty of proof of work is increased by 300% (difficulty target figure is devalued). If it took longer, the difficulty of proof of work is reduced by 75%. (The value of the difficulty target figure is increased) (3)

Because the Bitcoin network is unregulated and dispersed, different blocks may arrive at different ends at different times. However, each edge accepts the chain with the most proof of work as correct, that is, the chain series that is generally the longest. In this way, Blockchains will eventually become compatible with each other. (3)

4.2.2. Who Can Become a Miner?

Anyone can become a miner if they bear the expense. At first, the central processing unit (CPU) of personal computers was sufficient for mining. Still, when production became difficult, these began to become insufficient, so graphics cards (GPU) with fast mathematical functions began to be used. Bitcoin mining was costly due to the high electricity consumption of GPUs. It started to happen. Nowadays, application-specific integrated circuits (ASIC, Application-Specific Integrated Circuit) are used. Their electricity consumption is high. They heat up quickly and run noisily, but their digestion capacity is about a million times that of an Intel-based home computer. For this reason, mining with home computers is not economical. (3)

The high cost of mining means that individual miners cannot afford to use their machines even if they have “ASIC” hardware. Mining pools cause integration. The reward earned is shared in proportion to the transactions made into the pool. (3)

BTC “cloud mining” is the rental of hardware and operation from a business that mines BTC. Contracting with a company that will mine for you at a fixed price, for a year or for life, is a tool for those who think Bitcoin will be very valuable in the coming years. (3)

After all, Mining can be thought of as a game of chance that you play on your computer or like searching for a needle made of numbers in a haystack made of numbers. Assume that each search move you make here is directly proportional to your processing power. In this case, the more processing power you invest in this task, the more likely you are to find a needle in the haystack. (11)

5. Owning BitCoin

5.1. Bitcoin Supply

All Bitcoin miners in the world are trying to solve the same riddle, and there is a reward after solving the riddle. The solution to each riddle actually means a new block to be added to the ledger (Blockchain).(13)

12.5 bitcoins are given as a reward for each riddle you solve. The only way to solve the riddle is to go through all the possibilities and proceed by trial and error, and this is a process that you can speed up in direct proportion to your processing power. In addition, the amount of a reward decreases by half in an average of 4 years (210000 riddles). (It started with 50 Bitcoins and decreased to 12.5 Bitcoins) (13)

Cryptocurrencies developed using Bitcoin technologies are called alt-coins. Alt coins are differentiated from each other by their money supply, proof of work and strong anonymity features. The Alt coins with the highest market capitalization after Bitcoin are Etherium, Ripple, Litecoin and Monero. (3)

In many SPB examples such as Bitcoin, Litecoin, Namecoin, the currency supply is fixed. For example, there are currently around 17 million Bitcoins in circulation. According to the Bitcoin protocol, the final total will be 21 million and this figure is expected to be reached in 2040. In some SPB examples, there is no supply limitation. For example, the Peercoin supply is designed to provide 1% annual inflation and have an unlimited supply. (4)

In Bitcoin, the money supply is halved every 210,000 blocks. The reward given to the successful miner in 2016 is 12.5 BTC. When the money supply ends in 2140, miners’ income will consist only of transaction costs and dividends. (3)

5.2. Owning Bitcoin Outside of Supply

Bitcoin is most easily obtained through purchase. Bitcoins can be purchased from Bitcoin exchanges (Purchasing Platforms) with national currencies. Bitcoin exchanges can be national or international. Bitcoin purchased with physical or digital fiat money goes to the Bitcoin wallet address previously defined by the buyer. The meaning of money arriving in the Bitcoin wallet is that the transfer of Bitcoin to the Bitcoin address is recorded in the global ledger (Blockchain). (3)

Bitcoin price can be monitored instantly compared to other currencies from various domestic and foreign internet addresses. For example, http://coinmarketcap.com/currencies abroad, www.btc.turk.com domestically. (3)

Due to legal problems, there is no Bitcoin exchange serving all over the world. There are different exchanges in different countries, transaction costs are different. Many stock exchanges operate a trading system that brings buyers and sellers together. (3)

Bitcoin exchanges are subject to regulations and inspections of the country in which they are established. It may ask for various identification information. They can store Bitcoins on behalf of the customer, but this is risky. In order for purchased Bitcoins to be transferred to individual wallets, Bitcoin addresses must be given to exchanges. A Bitcoin exchange that has both identity information and wallet addresses reduces the anonymity level of individuals. To avoid this, a second Bitcoin address can be defined and the Bitcoins in the first wallet can be transferred there. What are the liabilities when an account is stolen on the Bitcoin exchange is a controversial issue. (3)

Bitcoin also has a buying/selling rate, stock exchange and market. However, the amounts deposited into user accounts on these sites are not guaranteed by the state. There is no guarantee of these deposited amounts in case the relevant website is taken over by hackers or the company goes bankrupt. (1)

In summary, to own Bitcoin:

• First of all, you become a member of major websites.
• Then, the user needs to send money from his bank account to the account he opened on the website.
• After the transferred amounts are checked, the relevant amount is transferred to the user account on the website.
• Once these transactions are completed, Bitcoin can be bought and sold on these websites.
• The user who has Bitcoin can keep their crypto money in their account on this website or transfer it to their own wallet and store it safely.

Except this; It is possible to buy Bitcoin directly from the person who wants to sell it, from Bitcoin ATMs (https://coinatmradar.com)(14), through trade, and from donations. (3)

5.3. Physical Bitcoin

Bitcoins were produced in gold, silver and bronze for use in face-to-face transactions. It is generally interested in coin collectors. Behind physical Bitcoins, there is a Bitcoin address and secret key hologram. It is not possible to digitalize Bitcoin without the private key. To reach the secret key, the hologram must be broken. Physical Bitcoin can be used many times from hand to hand, but if it is desired to be digitalized, it is disposable. (3)

5.4. Bitcoin Interest Yield

Those who want to get interest income from their Bitcoins can send their Bitcoins to another Bitcoin address and get interest income, but this is an extremely risky situation. If the other party does not return it, there is no chance of receiving it. For example, the Bsave site, operated by Coinbase, the world’s largest and most trusted Bitcoin exchange, gives approximately 2.5% annual interest return on Bitcoin. (3) (https://www.bsave.io)(15)

6. Bitcoin Wallet

There are many different wallet alternatives to store Bitcoins. There are many Bitcoin wallet applications for both computers, tablets and mobile phones. These wallets can receive, store, send, and view balance and transactions of Bitcoin. Bitcoin wallets; It has many different options, including web-based, mobile, desktop, USB or multi-signature. As soon as these software are installed, they generate a private key, public key and Bitcoin address specific to the installer. Addresses can also be generated free of charge from the site  (16) 

Security in Bitcoin wallets is provided by a private key. The private key should be stored in a secure environment and should not be shared with anyone. Having a private key stolen is like stealing a bank account book. A private key is needed to both collect and spend Bitcoin.(3)

Web-based Bitcoin wallet services generate private/public keys on behalf of their users and are responsible for their security. However, they have been attacked by hackers in the past and had their customers’ Bitcoins stolen. (3) technological developments also bring technological risks. Although various studies are being carried out on this subject, one hundred percent assurance is never possible.

Wallet services connect with Bitcoin addresses on the global Blockchain in every transaction, monitor the movements and balance of the user’s Bitcoin registry, and update the information they keep accordingly.

While there are Bitcoin wallets produced as special hardware, you can also have a paper wallet by printing it on a piece of paper immediately after production. However, in order to spend the money in the wallet, it will be necessary to transfer the private key from paper to digital again. There are also specialized sites for producing paper wallets. However, these are open to theft. Even someone who takes a photo can seize the wallet. For this purpose, the private key can be encrypted by the wallet owner. (3)

Bitcoin wallets store only the private key, public key and Bitcoin address on the computers and mobile phones they are installed on. They show all the inputs and outputs of the Bitcoin address they represent. They can initiate a Bitcoin transfer transaction to another address when desired. Bitcoin wallets actually read the balance of the Bitcoin address from Blockchain databases. While it is possible to make all Bitcoin transactions from a single Bitcoin address, it is recommended that each new Bitcoin transaction be made with a new Bitcoin address to increase the level of security and anonymity. (3)

7. Bitcoin Technology

7.1. Approval mechanism (Proof-of-Work)

Validation mechanism: Early examples of decentralized SPBs such as Bitcoin, Litecoin, and Dogecoin adopted the proof-of-work system. Proof of work is a set of data that is both time-consuming and costly to produce but easy to verify by other participants of the system. Since the proof-of-work process involves confirming the transactions in the system by reaching an algorithmic solution through random trials, these trial processes contain many errors and cause high energy consumption. 

As an alternative to this, the proof of ownership method has been developed by Peercoin. In this system, transactions are approved according to the share the user has in the system. Proof of ownership is an SPB infrastructure algorithm. According to this algorithm, SPBs are produced when the system starts and the account wallets are loaded according to the amount of coins corresponding to everyone’s investment. (4)

Proof of Work is a method used to prove that a computer works for a job. SHA-256 hash function is generally used for proof of work. The SHA-256 hash function produces an output consisting of 256 consecutive, almost random 0s and 1s. The computer that wants to make a proof of work is asked to add an additional message to the fixed message, and after summarizing it with SHA, the numerical equivalent of the resulting summary is less than a predetermined number (difficulty target). 

Since the SHA-256 hash function is a cryptographically secure algorithm, it is impossible for the system to find the additional message sought without trying many times. Also, it is difficult to find the additional message, but it is very easy to check whether the additional message is found or not. The smaller the difficulty target, the harder the proof of work will be. (3)

The computer that proves that it is working sends the message and the additional message it finds to the server requesting proof. It is very easy for the presenter to check whether the proof is correct. It adds an additional message to the message, passes it through the summarization algorithm, and can easily check whether the proof of work has been done by checking whether the digit equivalent of the 256-bit digest it obtains is less than the difficulty target. Bitcoin miners create a block from transfer transactions and compete with each other while doing so, using the proof-of-work method. (3)

7.2. Algorithm

Algorithm: Algorithm is a set of rules that determine mathematical processes such as calculating the speed at which data outputs will be generated and the way new currencies will be issued. There are basically two algorithms. SHA-256 algorithm is used in SPBs such as Bitcoin, Peercoin, Namecoin and Mastercoin.

Litecoin, Dogecoin and Auroracoin use the Scrypt algorithm, which can be defined as an extension of SHA-256 but requires more physical memory. Scrypt allows mining users to perform their activities with average computers. Recently, there have also been attempts to use other algorithms such as X11 that provide high algorithm security and low cost. Therefore, it is highly likely that the algorithms behind SPBs will change over time. (4)

7.3. Digital Signature (Secret and Public Signature)

Digital signature; It is an encryption method that works with a secret (private) and public (mathematically proven) key pair. Everyone who wants to sign digitally must have their own private and public key. A message encrypted with a private key can only be decrypted with a public key. The private key is only available to the signer. It should not be shared with anyone. There is no harm in distributing the public key or even sending it to the relevant people. Encryption done with a private key is called signing. In order to be fast and not take up too much space, the message is first summarized. The digest is signed, that is, encrypted. (3)

The person sending the message sends the message and the signed message summary to the other party. The receiver decrypts the message digest with the sender’s public key. If the deciphered signed message digest is the same as the digest of the received message, it is proven that the message is definitely signed by the sender. Even if a slight change is made in the message, the decrypted message digest and the received message digest will not match each other. (3)

The private key is the basis of the Bitcoin system. It should never be lost or shared with anyone else. The public key is obtained from the private key by the elliptic multiplication method. This function is a one-way function. In other words, a public key can be generated from a private key, but a secret key cannot be generated from a public key. (3)

7.4. Message Digest Function (Hash Function)

Summary functions extract a fixed-length message summary from digital messages of different lengths. A hash function called SHA-256 is used in Bitcoin transactions. SHA-256 creates a 256-bit (32 byte) message digest, regardless of the length of the message entered. It is one of the most cryptographically reliable message functions. In other words, it is not possible to predict what the message is by looking at it. (3)

In SHA-256, regardless of the message input, the message digest is a string consisting of 256 consecutive 0s or 1s. For ease of reading, they are generally written in groups of four in hexadecimal. In this case, message digests are made using 64 consecutive letters (0,1,2,3,4,5,6,7,8,9, A, B, C, D, E, F). (3)

Theoretically, approximately 1.15x different digests can be obtained with 256 consecutive 0s or 1s. This is a big number. (3)

7.5. Bitcoin Addresses

Addresses free of chargecan be produced at the Bitcoin website. Or it can be obtained from a wallet provider site for a small fee. There are two address types currently in use. (12, 16)

“P2PKH” type, usually starting with 1

1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2.

Rarely the “P2SH” type starting with 3

3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy.

Just as it is not possible to obtain the public key from a Bitcoin address, it is also not possible to obtain the private key. The Bitcoin address is generated from the public key, and the public key is generated from the private key with one-way functions. It is case sensitive. (3)

Since it is difficult to memorize Bitcoin addresses consisting of letters and numbers, QR codes, known as two-dimensional Barcodes, are used in practice. (3)

8. Bitcoin Transactions

Transferring the Bitcoins belonging to one Bitcoin address to another Bitcoin address, that is, spending the owned Bitcoins, is called a transaction. A process has inputs and outputs. Inputs must equal outputs. In a transaction, the inputs are the unspent outputs of the previous transaction. (3)

Inputs are recorded as debits to the Bitcoin account and outputs are recorded as credits to the Bitcoin account subject to the transfer. In order to increase the level of security and anonymity, it is recommended to send the remaining Bitcoins to a different Bitcoin address belonging to the customer. (3)

Normally, there are no transaction fees for Bitcoin transfers, but some Bitcoin wallets may charge a small amount of transaction fees to speed up the confirmation of the transaction by miners. It may take an average of 10 minutes for a transaction to be confirmed.(3)

Bitcoin transfer takes place within seconds, but it takes time for the transaction to be confirmed. Bitcoin miners make a block from yet-to-be-confirmed transactions on the network and collaboratively confirm the block and the transactions it contains. Until the block containing the relevant transfer is confirmed, the transfer is not fully realized.

Confirmation of the block means that the transaction is recorded in the global transaction ledger and becomes irreversibly final. Every block and every transaction in the global transaction ledger is consistent within itself. No one can spend Bitcoin they do not own, each transaction is digitally signed by the person making the transaction. (3)

The Bitcoin network is a peer-to-peer network. Each Bitcoin peer communicates with several nodes when it starts transactions. Bitcoin transactions and blocks are shared between each other. Each peer that verifies a new Bitcoin transaction sends it to 3 or 4 neighboring nodes. In a few seconds, the new transaction reaches all ends.(3)

If a transaction is initiated and is used again by both the buyer and the seller when it has not yet received any confirmation, there is a risk of double spending. To reduce the risk of double spending, transaction confirmation is expected from at least 6 different ends connected to the Bitcoin network. (3)

9. Bitcoin Network

The Bitcoin network uses the internet network. Each computer that connects to the Bitcoin network is called a peer. Entry and exit to the network is free. The ends that implement the rules of the Bitcoin system and are the main pillars of the system are called full nodes, the other ends are called light weight nodes. Most of the edges in the Bitcoin network are light edges. (3)

Full nodes keep the global ledger, that is, the Blockchain, completely and completely. They check and store all blocks, from the first block to the last block, independently of each other. A tip that wants to become a full tip will need to download all blocks to itself, starting with the first block. As of December 2016, there are 5,500 complete nibs.(3)

Light edges are also known as Bitcoin wallets. They connect to full nodes as clients and only request data related to their own transactions. They use the Simplified Payment Verification system, which is based on downloading only a part of the Blockchain. (3)

10. DIFFERENCES OF BITCOIN FROM TRADITIONAL MONETARY SYSTEM

Money; It is a widely used tool for exchanging goods and services. For anything to become a currency, it must perform four functions; These; It is a means of shopping, a unit of measurement, a means of saving, and an instrument of economic policy. (3)

From the barter method used to exchange goods and services throughout history, to commodity money, then to gold/silver, then to valuable papers in exchange for gold, then to trust-based fiat money (banknotes) that do not have a gold equivalent, and then the evolution of money shifted to digital and virtual money. Bitcoin and other cryptocurrencies are the current stage of the evolution of money.(3)

The differences between Bitcoin and traditional money and financial systems are stated below. (3)

• The Bitcoin network is decentralized. It does not have any editor or controller. It consists of computers that voluntarily participate in an end-to-end connection.
• While a reliable intermediary is needed in the transactions of digital fiat currencies and intermediary costs are high, there is no need for an intermediary in Bitcoin.
• Banks and governments have no control over bank accounts in Bitcoin. Bitcoin represents value, not a liability (bank accounts are what the bank owes to its depositors).
• States can increase or decrease the value of fiat money through monetary and fiscal policies (inflationary and deflationary). However, states have no influence on the Bitcoin supply. No money is supplied to the system from outside. The money supply is in the form of rewards given to miners who create successful blocks. (12.5 Bitcoins in 2017)
• Transactions are anonymous. (Of course, 100% anonymity is not always possible.) Transactions are made pseudonymously between Bitcoin addresses, each of which is a digital pseudonym.
• Transactions are transparent, fast and global. Since the first Bitcoin offering in 2009, all transactions have been visible to anyone who wishes. Transactions are distributed to the entire Bitcoin network in a short time and confirmed in a reasonable time.
• Fiat physical money has no transaction memory. Bitcoin transaction memory is kept in Blockchain databases, which are the global ledger. It is decided by looking at these databases whether someone who will use Bitcoin owns Bitcoin or not.
• Transactions are irreversible, no authority, state, person, computer programmer or even those who designed the system can change or undo a transaction that has been approved by one of the miners, accepted by others, and recorded in the Blockchain. The transaction needs to be confirmed or accepted by at least 6 miners.
• It is not necessary to obtain permission from any organization or authority to carry out transactions. No one can prevent the transaction from being carried out.
• It is definitely stated by experts that the system is reliable. Security is achieved using mathematically proven cryptographic digital signing methods. It is not possible for malicious people to manipulate the data due to the use of secret/open encryption method.
• So far, the price of any securities or real estate has not been expressed in Bitcoin. No investment project has been calculated with Bitcoin. The loan agreement has not been signed. No postdated check or draft was signed. States do not allow accounting and payment of taxes and penalties with Bitcoin. For the reasons stated, Bitcoin and other digital currencies are a virtual investment tool rather than a currency. (9)

11. DATA ABOUT THE CRYPTO CURRENCY WORLD

According to the study titled “Global Crypocurrency Benchmarking Study”, which was prepared by the University of Cambridge with the contribution of Visa and published in 2017, in order to examine the data of the cryptocurrency world, and is stated to be the first detailed study on this subject; (17)

• While a significant portion of the companies operating in the sector focus on a single field, 31% work in many different fields, including encryption,
• While at least 1,876 people work in the encryption industry (720 in Asia Pacific, 676 in North America), at least twice as many people are employed in other areas of the industry.
• Bitfinex has the highest market share, with 16% of all cryptocurrency exchanges as of March 2017.
• In the cryptocurrency exchange, the most transactions are made with the US Dollar with 65%, followed by the Euro,
• When looking at the changes among cryptocurrencies, Bitcoin is mostly converted into Litecoin and Ethereum, followed by Ripple, Etherium Classic, Monero, Dogecoin and Dash.
• The number of active digital wallets is estimated to be between 5.8 million and 11.5 million,
• More than half of miners have the ability to influence protocol development at a high or very high level,
• China, which holds 58% of the major mining pools, is the leading country in Bitcoin mining and is also the key name in protocol updates. The mining share of the USA, which comes in second place, is around 16%.
• While 786 million US dollars were generated from mining in 2014, this amount decreased to 563 million dollars in 2016, and it was stated that Bitcoin, which is becoming increasingly difficult to mine, had a large share in this.

According to the data we received from http://coinmarketcap.com, “Cryptocurrency Market Capitalizations” site on 12.01.2018, the top 100 Cryptocurrencies in the ranking are; Trading volume, price, 24-hour trading volume and supply quantities are stated below. It was learned that the total transaction volume was $706,033,432,184.

Last updated: Jan 12, 2018 10:56 AM UTC

Cryptocurrency Market Capitalizations

* Not Mineable

Total Market Cap: $706.033.432.184

12. STRENGTHS AND WEAKNESSES (RISKY) OF BITCOIN AND OTHER VIRTUAL CURRENCIES

There are various opinions about the reliability of Bitcoin and other crypto virtual currencies.

12.1. Strengths

The following factors underlie Bitcoin’s confidence in its investors:

• It is decentralized, there is no central point of failure. Even if individual users are “hacked”, the entire system is not affected. (3)
• Cryptographically, the reliability and chronology of blocks and intra-block transactions are protected. (3)
• Each individual Bitcoin wallet is protected by a private key. It is not possible to make transactions through wallets without the private key. (3)
• Bitcoin supply is provided by consensus among distributed miners. Apart from this, no authority can supply additional Bitcoin. (3)

12.2. Risky Aspects

Bitcoin transactions are worrying and risky because:

• There is no proof of ownership if private keys are lost.(3)
• Since it can be used anonymously, it has become attractive for illegal activities, which worries both individuals and public authorities. (3)
• The confidentiality of identity information and the lack of supervision and regulation by an authority make the system vulnerable to all kinds of illegal financial transfer transactions. (3)
• Recently, concerns about trading platforms have been increasing and investors are asking, “Can we get our money if we realize our earnings?” thought prevails.
• Since Bitcoin is a digital currency and not a capital market instrument, there is no legal obstacle for a group to buy collectively in order to increase prices and convert it into cash by selling it in a short time. (22)
• It is stated that the top 100 Bitcoin addresses hold approximately 17% of the money, and in Ether, a competitor to Bitcoin, the top 100 people hold 40% of the money. (22)
• Like other high-tech information technologies and mechanisms that require network connectivity, SPBs involve many risks, from technical glitches to hacking, without the obligation to eliminate these risks. The risk mitigation obligation that applies to financial institutions and payment systems does not apply to SPBs. These problems or hacking attacks (loss or theft of private encryption keys or user information, etc.) can be at the individual level or on a larger scale. There is no central body to resolve the issue in case of loss of encryption keys, let alone repayment of lost SPBs. (4)
• Due to the potential for volatility in its value, the loss of value in SPBs can be much more dramatic and unpredictable. The algorithm, protocol and general ledger may also have been manipulated or not prepared in good faith.(4)
• Especially for smaller SPBs, the opportunity to obtain information is limited and there is no regulation regarding transparency (ECB, 2015). This situation reduces the power of users to evaluate the risks of SPBs or the losses they cause. Lack of transparency also increases the risk of fraud. (4)
• The absence of a central control point may lead to objections to transfers and the inability to reverse transactions, which may lead to various problems. (3)
• Since it is almost impossible to find the real identities of transaction parties in SPB systems, people committing fraud can take advantage of this situation by misleading users about the real beneficiary of payments. In addition, the impossibility of reversing transactions increases the risk of fraud. This situation will become more common in the process as the use of SPBs increases. (4)
• There are some consequences of SPBs not having fiat currency status. For example, no workplace is obliged to accept SPB in return for receivables. Since there are many types of SPB in the market, it is inevitable but risky for users to choose one SPB over another. Because workplaces may change their agreements regarding SPBs over time. Additionally, there is no guarantee that traders who accept SPB will be able to spend these SPB later. (4)

• For many reasons, continuity cannot be guaranteed for SPBs. Users face the risk of being left with worthless currencies due to a sudden and unexpected interruption in SPB operations. The acceptance of SPBs by retail sellers is entirely the sellers’ own choice. As exchange rate fluctuations lead to sudden losses and confidence in SPB decreases, sellers may stop accepting SPB and users may lose their desire to use SPB. (4)

• One of the most important disadvantages of SPBs for users is the high volatility in the values ​​of SPBs, especially those subject to bilateral transactions. Looking at the history of Bitcoin, it can be seen that its value can be quite volatile. This volatility is a big problem for users who will either want to convert their SPBs into cash or buy goods or services with SPBs in the future. (4)
• Some business models based on cryptocurrency are structured as entities that promise huge profits, exploiting people’s lack of knowledge and may cause significant financial losses. (24)
• The practices of startups that will issue cryptocurrencies to obtain initial capital are generally not carried out under any regulation or supervision, thus creating a suitable basis for fraud. (24)
• Since the market in which crypto money is in circulation does not have the possibility of being supervised by any official authority or guarantor institution, it should be taken into consideration that crypto money, which is seen as an investment tool by some people, can also be used in illegal activities. (24)

13

When we evaluate the situation of Bitcoin in terms of countries, the following application emerges. Many central banks or banking regulatory and supervisory bodies have not banned the use of Bitcoin but warned financial institutions and individuals about the risks they may face. The fact that a central authority does not control Bitcoin and that it is a relatively new concept and technology rightfully worries governments and regulatory authorities. (3) 

In fact, contradictory statements emerge in a short time, as in the Dimon example below. An expert in banking and central banking, such as the Basel Committee and Swedish Central Bank Governor Stefan Ingves, sees investments such as Bitcoin as dangerous for financial stability. He likens it to asset bubbles. A former Central Banker like Axel Weber also draws attention to the potential in this regard, taking into account possibilities such as terrorism and money laundering, and suggests that “central banks should try to understand cryptocurrencies and not fall behind this architecture for the future.” (6)

World-famous banker JP Morgan CEO Jamie Dimon also described Bitcoin as a fraud. (19) Dimon said that the virtual currency Bitcoin was a ‘scam’ and that it would explode, and that if any trader made a Bitcoin transaction, he would be fired within a minute, and said, “If you are stupid enough to invest in this currency, you will pay the price eventually.”

However, Dimon later took a step back on this issue. Saying that he regretted calling Bitcoin a fraud, Dimon announced that he now believes in the technology behind cryptocurrency chains. Speaking to Fox Business, Dimon stated that he regretted his statement about Bitcoin fraud and said, “The cryptocurrency chain is real.” (28)

13.1 – Overview of BITCOIN in World Countries

Looking around the world, we learn that a group of developed countries, including Australia, Canada, Estonia, France, Germany, Japan, and the USA, have started to regulate Bitcoin. Thus;

• The USA is a country that hosts cryptocurrency and is the leader in world Bitcoin volume. In January 2015, the first “regulated” US Bitcoin exchange system, “Coinbase” was opened. The clearing system is licensed to operate in 25 states, including New York and California. Futures trading on the Chicago Stock Exchange began last week. (18) With the tax package enacted in the USA, the way for arbitrages between cryptocurrencies to be subject to tax has been paved.
• The Japan Accounting Standards Board has started working to create an accounting structure that will enable the use of cryptocurrencies. Profits from Bitcoin trading will be counted as “income from business activity” or “miscellaneous income.” (18)
• Denmark plans to use Bitcoin and its fiat digital currency daily without completely giving up on its own Central Bank. The Central Bank of Denmark announced that Bitcoin is not money and, therefore, they will not regulate it. (3)
• The Swedish Financial Supervisory Authority has legalized Bitcoin as a payment method. (3)
• The Finnish Central Tax Board defined Bitcoin as a financial service and exempted Bitcoin transactions from value-added tax. (3)
• There are more than a hundred shops in Arnhem, Netherlands, where you can shop with Bitcoin. (3)
• In the United Kingdom, Bitcoin is treated as a special currency, and value-added tax is applied to purchases made with Bitcoin. (3)
• In Canada, Bitcoin is regulated within the scope of the fight against money laundering and terrorist financing. (3) Additionally, in Canada, the legal security regulators of the British Columbia province have given an operating permit to First Block, a capital company that offers a Bitcoin-based investment application. (19)
• After the German Ministry of Finance defined Bitcoin as a unit of account, it can now be used for tax and commercial purposes. (18)
• France defines Bitcoin as a “parallel money creation mechanism.” (18)
• Russia is preparing to launch Crypto-Ruble, the world’s first national cryptocurrency, after a while. After removing this, it will ban other cryptocurrencies.
• The Chinese Government has started preparations to launch its own cryptocurrency. The Chinese Cyberspace Administration stated in October 2015 that the world has entered the post-Bitcoin era and that no one can deny these revolutionary changes. However, China is planning to ban ICO “Initial Coin Offering”, a newly created market for digital currencies. ICOs were very successful projects in which entrepreneurs provided initial investments in projects involving blockchain and cryptocurrency technologies. (19)

On the other hand, countries such as Iceland, Bangladesh, Bolivia, Ecuador, and Thailand follow an attitude against Bitcoin. (3)

13.2. Overview and Legal Situation of Bitcoin and Other Cryptocurrencies in Turkey

In the definition of electronic money made in Law No. 6493 on “Payment and Securities Settlement Systems, Payment Services and Electronic Money Institutions,” Bitcoin is not considered electronic money with its current structure and operating system, it does not fall within the scope of activities of existing supervisory and regulatory institutions. (18)

In Turkish legislation, “electronic money” is defined as a monetary value issued in exchange for funds. Bitcoin cannot find a place in the current legislation because it is a monetary value signed with cryptographic techniques and prepared in a severe mathematical index. This mathematical sequence becomes more complex in direct proportion to the increase in demand and is verified by “miners” (“miner”) all over the world. (18)

Whether Bitcoin is legal in Turkey and whether it is inspected or not was announced in the press release made by BRSA on November 25, 2013. (3) According to the description:

“…………….Bitcoin, known as a virtual currency that is not issued by any official or private organization and whose return is not guaranteed, is not considered electronic money within the scope of the Law due to its current structure and operation. Therefore, its supervision and control is not considered possible within the framework of the said Law.

In order to avoid any victimization, it is considered beneficial to announce the above-mentioned issues and to remind the public of the possible risks of Bitcoin and similar virtual currencies.

It is announced to the public with respect.”

At the same time, BRSA informs users about the anonymous feature of Bitcoin transactions, its use in some illegal transactions, its volatile value, and the difficulties of storing Bitcoins (stolen, lost, etc.). (3)

CBRT President Murat Çetinkaya pointed out that cryptocurrencies can contribute to financial stability and stated that bank officials continue their research on cryptocurrencies within the scope of CBRT. He also added that a research group was formed, including digital asset market participants, government officials, and regulators. (20)

Borsa Istanbul President Himmet Karadağ stated that Blockchain technology should be followed closely and Bitcoin should be avoided.

Speaking to Bloomberg, Borsa Istanbul President Himmet Karadağ evaluated the cryptocurrency Bitcoin as gambling and stated that those who want to gamble should turn to another platform. He underlined that there is a system in which this currency is 3 lira today, 3 million lira tomorrow and that they may be victimized in case of a downward movement in the following days.

Stating that they are following Blockchain technology with interest, Karadağ said they will benefit greatly from it in the coming days. He stated that the central bank and other financial systems will start to benefit from this technology in money transfers and that institutions that do not invest in this system will be seriously left behind. (21)

The following statement regarding cryptocurrencies was made in the press release numbered 11 January 2018-01, published as a result of the 34th Meeting of the Undersecretariat of Treasury Financial Stability Committee, Deputy Prime Minister Meh. (24)

PRESS BRIEFING

The 34th Meeting of the Financial Stability Committee was held on January 10, 2018, under the chairmanship of Deputy Prime Minister Mr. Mehmet ŞİMŞEK.

At the meeting, the effects of global and local developments on our country’s financial markets and the outlook for the coming period were evaluated in detail.

We discussed the effects of the regulations made within the scope of compliance with international standards regarding the banking sector and the strengthening of the sector’s data infrastructure to support the policy-making process.

Evaluating the opportunities offered by new financial technologies, it was decided to establish a working group to develop regulations regarding cryptocurrencies, which do not have a legal basis in our country.

It has been decided to inform the public about the risks of cryptocurrencies:

– Cryptocurrencies do not have a legal basis in our country, and the transactions carried out in this context are not under the assurance of any official authority.

– Cryptocurrencies (Bitcoin, the most well-known example) have negative features. The market value can be extremely volatile; digital wallets can be stolen, lost, or used illegally without the owners’ knowledge. In addition, it is not possible to correct or cancel the damages arising from the operational errors of users and service providers or the abuses of malicious persons since the transactions are irreversible.

– Some business models based on cryptocurrency are structured as entities that promise huge profits, exploiting people’s lack of knowledge and may cause significant financial losses.

– The practices of startups that will issue cryptocurrencies to obtain initial capital are generally not carried out under any regulation or supervision, thus creating a suitable basis for fraud.

– Since the market in which crypto money is in circulation does not have the possibility of being supervised by any official authority or guarantor institution, it should be taken into consideration that crypto money, which is seen as an investment tool by some people, can also be used in illegal activities.

Within the framework of all these issues, people who transact with cryptocurrencies should be careful to avoid any losses and be aware that they may encounter the possible negativities mentioned above when transacting with cryptocurrencies.

It is announced to the public with respect.

13.3. View of Some Large Companies on Blockchain and Cryptocurrencies

Some large companies’ perspectives towards blockchain and bitcoin have recently started to follow a positive trend. As a matter of fact, some examples are given below.

• Samsung Signed a Mining Agreement with a Russian Company (23)

As the demand for cryptocurrency increases, the popularity of companies that offer both mining software and the necessary hardware is rapidly increasing. Earlier this month, Samsung announced that it had signed an agreement with Russia’s Bitcoin mining company Baikal for the supply of 14nm ASIC chips. Samsung stated that they tested the samples, and mass production will start in January 2018. Baikal will use chips produced by Samsung in its newly updated mining hardware.

• Blockchain Move from Pegasus Airlines (25)

Pegasus Airlines has achieved an essential integration in digitalizing its operational processes with Istanbul Sabiha Gökçen International Airport, where it operates most of its flights. According to the company statement, thanks to this integration work that will serve through the “Blockchain” infrastructure, which is one of the critical technology trends of this year and forms the basis of Bitcoin, flight descriptions and updates made through Pegasus’ Flight Control System will be instantly available at Istanbul Sabiha Gökçen International Airport. It will appear on the screens of the Operations Control Center (OCC) department employees. Operational information about the flight, such as gate, baggage carousel, and bellows usage, created in Istanbul Sabiha Gökçen Airport systems via the same Blockchain infrastructure, will also be instantly transferred to Pegasus systems.

• Bitcoin Is Slowly Entering Our Lives (26)

According to Cavit Yantaç, Deputy General Manager of Microsoft Software Development Technologies, Microsoft has been accepting Bitcoin for payments for a while now. Therefore, we can see here that the Bitcoin payment system is real and slowly entering our daily lives. Consumers or institutions have begun to accept Bitcoin within the legal framework of their relationships with Microsoft in various parts of the world.

Conclusion

So far, we have examined Blockchain and Bitcoin in detail.

Bitcoin is an electronic money system that enables money transfer between parties with Blockchain technology without the need for any third-party service. The set of concepts and issues make up the virtual digital money economy. Since cryptology (password) is used in Bitcoin transfer and production, it is also defined as crypto money. After Bitcoin, many sub-coins have been developed.

Blockchain technology, which is more popular with Bitcoin, is a transaction infrastructure that creates precise and accurate records using complex mathematical functions regarding who owns what when, and where transactions are defined in a decentralized infrastructure through distributed computer systems. Thanks to this infrastructure, there is no need for the transactions between parties to be controlled, approved, and agreed upon by a central authority.

Bitcoin (BTC), the encrypted electronic currency whose price was around 900 USD on January 10 last year and increased more than 20 times to approach 20,000 USD in the second half of December 2017, fell by nearly 30% after this peak, as stated below. With a depreciation, it started to hover around 14,000 USD on January 12, 2018. The market value of 16,798,087 BTC offered in the market to date has reached a total of 236,483,468,786 US Dollars. Bitcoin and cryptocurrencies such as Ethereum and Ripple suffered a sharp loss of value.

Interest in Bitcoin and Blockchain technology is increasing day by day, but the responsible state authorities are also doing their duty to warn their citizens against possible risks.

As a matter of fact, in the press release dated 12.01.2018 made as a result of the 34th Meeting of the Undersecretariat of Treasury Financial Stability Committee, which convened under the chairmanship of Deputy Prime Minister Mehmet ŞİMŞEK in our country, Evaluations were made regarding the opportunities offered by new financial technologies.

It has been decided to establish a working group to develop regulations regarding cryptocurrencies, which do not have a legal basis in our country. Additionally, the public has been warned about the risks of Cryptocurrencies.

In our country, there are two paths before public authorities: prohibiting these transactions or Local trading platforms may be banned, but I think preventing transactions from foreign platforms without imposing an internet ban is challenging. The second way is to set the rules from the beginning and set a regulation by evaluating all the risks since technological developments and humankind’s curiosity about technology cannot be prevented. (For example, Establishing a Cryptocurrency Exchange under state control and taxing transactions)

However, more importantly, although Bitcoin investors have a good command of technology and the virtual world, they may not have sufficient knowledge about financial markets. In addition, they are professionals in this field and act in the same investment world as the “whales (*).” 

The greed for profit sometimes overwhelms even ordinary citizens on the street. For this reason, I think that in order to prevent citizens from being victimized in the future, it would be useful to highlight “financial literacy” (27), which includes this issue in schools and through public service announcements, as well as warning citizens through press releases, as done by the Undersecretariat of Treasury and BRSA.

(*) People who own large amounts of Bitcoin are called “whales.” (22)