Bitcoin and Its Security: Working, Benefits, and Pseudo Anonymity

This report discusses the concept of Bitcoin and its advantages for security. It explains the working of Bitcoin and its security features, including the use of hash algorithms and public key cryptography. The report also evaluates the pseudoanonymity advantage of Bitcoin due to enhanced security.

Running head: BITCOIN AND ITS SECURITY
BITCOIN AND ITS SECURITY
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Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
About Bitcoin.........................................................................................................................2
Benefits of using bitcoin for security.....................................................................................2
Working of a bitcoin..............................................................................................................3
Security..................................................................................................................................3
Pseudo anonymity..................................................................................................................4
Conclusion..................................................................................................................................4
References..................................................................................................................................6

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Introduction
Bitcoin and Blockchain are the technologies of the future. The systems have gained
traction from 2009 and is being implemented in several institutions because of the advantages
it provides. One of the benefits is enhanced security features that prevents anyone from
spying on user data.
In the following report, the concept of bitcoin has been explained in the initial
sections. The report discussed about the advantages that the crytpocurrency provides to
provide proper security. The working of the bitcoin has been explained to understand how the
cryptocurrency can provide enhanced security. Several security features of bitcoin has been
evaluated in the mentioned report. The pseudoanonymity advantage of the bitcoins due to
enhanced security has been assessed.
Discussion
About Bitcoin
Bitcoin is a crypto currency that was formed by a person going with the alias Satoshi
Nakamoto in 2009. The currency negated the importance of having a middle man between a
transactions. It can be downloaded by anyone and is an open source software (Yermack
2015). The currency is fully distributed and runs on a peer to peer network that is centralized.
Every node of a terminal is interlinked with each other. The node can even leave the network
and rejoin it at any time.
Benefits of using bitcoin for security
It is an open end software and is managed by trusted developers who check for
possible changes in the network. It is flexible and sophisticated ad can cater to all kinds of
markets, financial instruments and assets. It provides robust security as the proof if identity is
managed with the encryption. AML/TF also known as anti-money laundering and terrorist

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financing and KYC (Know Your Customer/Client) can be resolved with the help of this
technology (Popper 2015). Moreover, using bitcoin is secure as it is nonrepudiable and has
minimum settlement risk. For a large settlement team, the financial savings is potentially
huge. As the conformation time is short and the transaction speed is high it is difficult for
hackers to intercept the transaction (Yermack 2015). Moreover, it can integrate financial
department s and has no intermediaries that reduces the formation of sub networking pools.
The security systems are strong as the system has automated algorithms for contracts and
payment that are incorporated into the system. Due to the security of the bitcoin
infrastructure, the platform is potentially researched upon for incorporating mart contracts
and digital law into the system.
Working of a bitcoin
A transfer of value or transaction is carried out across bitcoin wallets. The bitcoin
wallets are included in the blockchain and the transactions are stored in the ledger. A private
seed or key is used in this to sign the transactions (Moore and Christin 2013). This acts as a
mathematical proof that the money has been transferred from the pocket of a particular
owner.
Security
Bitcoins are normally secured with hash algorithms that have a good record for
security. In respect to the consensus within the network users, the bitcoins are continuously
being evolved by developers due to its open source nature. The hash algorithm that is uses in
the mentioned cryptocurrency is known as SHA-256 (Antonopoulos 2014). This hash was
previously used by National security agency in the USA. The algorithm has been used in the
public domain extensively and has been used and analysed for its security. The algorithm has
been developed from SHA-1 series and is used in bitcoin nowadays. It is used for securing

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the transactions in bitcoin and is used to form the basis for mathematical problems It is even
used for digital signatures and securing the blockchain.
Moreover, the bitcoin technology uses the combination of public key cryptography as
well as SHA-256 to generate sign transactions, bitcoin addresses and check the payments
(Reid and Harrigan 2013). Through digital signatures, the reliability of the bitcoin transaction
can be determined with the help of public key cryptography. Two keys are generated
separately with the help of asymmetrical algorithm which are known as public key as well as
private key. The asymmetrical technique works in a way that allows a public key to form
itself from a private key but does not allow a private key to form from a public key as it is
computationally impossible (Androulaki et al. 2013). This public key is used in bitcoin
transactions and are used for producing digital signatures (Ron and Shamir 2013). The
accessible public key is then used by bitcoin to facilitate all types of transactions. The private
key in the other hand is kept secure and safe. The security of the system is robust as the
public keys are only provided for all the transactions without sharing the private keys that are
used for signing the transactions.
Pseudo anonymity
A number of alphanumeric characters are used for the address of bitcoins. There are
no possible methods by which the sender and receiver of the bitcoin can be tracked. Before
bitcoin came into the scenario, online transactions had to be carried out with third party
intermediary which was not completely secure (Eyal and Sirer 2014). To record the tarnation
instead of the intermediary the transaction is stored in the blockchain which maintains a
public ledger. A network of computers maintain the distributed ledger that have stored all the
transactions. This reduces the need or maintain a central database removing the power from a
single institutions

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Conclusion
To conclude the report, it can be stated that the research report has conclusively
discussed about bitcoins and has provided a conclusive analysis of its security mechanisms.
An introduction of bitcoin is proposed. The working of the crytpocurrency has been
explained and the advantages it provide to enhance security has explained. The processes that
are used by bitcoins to provide the user with security has been assessed and explained. Bit
coin along with blockchain technology are the technologies of the future. Unlike modern
financial systems, blockchain and bitcoin has never been tampered with which showcases the
robust security system that it incorporates.

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References
Reid, F. and Harrigan, M., 2013. An analysis of anonymity in the bitcoin system. In Security
and privacy in social networks(pp. 197-223). Springer, New York, NY.
Yermack, D., 2015. Is Bitcoin a real currency? An economic appraisal. In Handbook of
digital currency (pp. 31-43).
Androulaki, E., Karame, G.O., Roeschlin, M., Scherer, T. and Capkun, S., 2013, April.
Evaluating user privacy in bitcoin. In International Conference on Financial Cryptography
and Data Security (pp. 34-51). Springer, Berlin, Heidelberg.
Antonopoulos, A.M., 2014. Mastering Bitcoin: unlocking digital cryptocurrencies. " O'Reilly
Media, Inc.".
Popper, N., 2015. Digital gold: Bitcoin and the inside story of the misfits and millionaires
trying to reinvent money (pp. 156-197). New York: Harper.
Ron, D. and Shamir, A., 2013, April. Quantitative analysis of the full bitcoin transaction
graph. In International Conference on Financial Cryptography and Data Security (pp. 6-24).
Springer, Berlin, Heidelberg.
Moore, T. and Christin, N., 2013, April. Beware the middleman: Empirical analysis of
Bitcoin-exchange risk. In International Conference on Financial Cryptography and Data
Security (pp. 25-33). Springer, Berlin, Heidelberg.
Eyal, I. and Sirer, E.G., 2014, March. Majority is not enough: Bitcoin mining is vulnerable.
In International conference on financial cryptography and data security (pp. 436-454).
Springer, Berlin, Heidelberg.