Bitcoin is not used in organized crime and money laundering, says Hong Kong government

In its annual “Money Laundering and Terrorist Financing Risk Assessment Report”, the Hong Kong government and its financial authorities noted that Bitcoin is largely left out of organized crime and money laundering, and emphasized that Bitcoin is not used to finance criminal activities and that its risk is relatively low.

According to Hong Kong government, virtual currencies including Bitcoin and Ethereum have generally not been used to commit money laundering or terrorist financing. Within a 4-year period between 2013 and 2017, 167 bitcoin-related financial crime reports were made to the Hong Kong Police Force. The vast majority of these reports were related to ransomware attacks like WannaCry, and were not necessarily related to financial crime, money laundering, or terrorist financing.

“Most of the reports involved blackmail using ransomware (such as the recent ‘WannaCry’ attack), and the figure is comparatively low compared with that in other jurisdictions. Investigations and intelligence do not suggest VCs were used or intended to be used in other prevalent predicate offenses (e.g. drugs, dutiable goods smuggling) or TF. The threat level is low,” reads the report.

Over the past 9 years, the go-to argument of Bitcoin critics against the widespread adoption and usage of digital currencies has been the applicability of virtual assets in financial crimes. Banks, financial institutions, politicians, and economists have claimed that the main use case of Bitcoin is to finance terrorism and commit money laundering, leading the media to develop uneducated speculations around the market.

Earlier this year, in April, Quebec Government chief scientist publicly stated that Bitcoin is wrongly linked to mass money laundering. Francis Pouliot, a French bitcoin researcher, said, “Quebec Government Chief Scientist declares that Bitcoin is not used for money-laundering unlike cash and has almost no impact on criminal activity.”

The official publication of the Quebec Government chief scientist’s office quoted attorney Erwan Jouncheres as saying:

“The anonymity of bitcoin is a myth. There is no more transparent money because you have to go through a platform where you have to give personal information. At the very least, [even if a name is fake] we always know the address of the transmitter and that of the receiver.”

Gradually, governments that oversee major cryptocurrency markets have started to understand the primary purpose of cryptocurrencies and their low threat in money laundering. The Hong Kong government, which oversees the fourth largest cryptocurrency market behind the United States, Japan, and South Korea, is the latest government to acknowledge the low threat of cryptocurrencies in money laundering and terrorist financing.

More importantly, the report of the Hong Kong government emphasized that virtual currencies are not legal tenders, stating that while the use of Bitcoin is negligible, it should not be misunderstood as a legal tender.

“VCs are not legal tenders and not accepted for payment in Hong Kong. The exchange of Bitcoin in person is not popular. The market for VCs, in particular for Bitcoin, has undergone notable fluctuations triggered by speculation, as well as the introduction of regulatory framework over Bitcoin in Japan. Domestically, the use of Bitcoin remains at a negligible level,” read the report.

The term legal tender is often misunderstood by investors, as it is confused as a legal form of money. Legal tender signifies a currency or an asset that is illegal not to accept. Hence, while it is certainly legal to accept Bitcoin, merchants are not punished for not accepting bitcoin.

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Reddit to bring Bitcoin payments back, along with Litecoin and Ethereum

Social media platform Reddit’s chief technology officer (CTO), Chris Slowe, suggested in a recent interview that cryptocurrencies will be reinstated as an option for member payments after bitcoin was dropped as an alternative currency earlier this year.

In an interview with Cheddar ,the CTO said that bitcoin was taken away as an option for the payment service firstly because of the spiking transaction fees attached. Slowe explained it would be “really hard to proposition to users” to use a virtual currency where the transfer fee is more costly than the service. Another reason to drop bitcoin was that there was an issue with the integration with Coinbase – its cryptocurrency payments processor. With Coinbase receiving a new design soon, Bitcoin payments are probably going to make a comeback to the platform.

Slowe said that once the redesign is finished landing, and they are able to readdress the method, he believes the company will see cryptopayments return.

When asked whether it would bitcoin would be the exclusive cryptocurrency payment offered, Slowe offered exciting news, saying that they had “been looking at other cryptocurrencies. As a matter of fact, that was part of the issue with the high fees on the bitcoin network. We are looking at ethereum and litecoin that are both provided by Coinbase.

Many users on Reddit’s platform are enthusiastic about cryptocurrency and it would be only natural that the site would offer cryptopayments for services such as gold memberships.

Twitter users have appeared to respond positively to the news, and the proposition to include Litecoin seems particularly exciting for some.

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Short seller Citron Research says Square’s Bitcoin strategy is nonsense, market disagrees

During an interview with CNBC this week, the team behind Citron Research – a well known short seller – has weighed on multi-billion dollar payments company Square’s new Bitcoin strategy; calling the move ‘nonsense’.

What nonsense?

Andrew Left, a researcher at Citron, appeared on CNBC after the company released a statement that read, “Square is a ‘collection of yawn businesses. WallSt. drunk on Bitcoin nonsense. SQ-Cash to BTC trading has been insignificant. Even w/ hyper growth still 40% too rich.”

Investors understood the statement as Citron opining that Square’s decision to integrate Bitcoin and cryptocurrency payment methods were nonsensical – however, according to Left, the Citron Research team rather wanted to emphasize that new market interest in Square due to its Bitcoin strategy itself is illogical.

Left explained that Square’s Bitcoin integration was a smart move, as it enabled the market valuation of the payments company to increase by more than 50% since 2017. From less than $10 billion USD, the valuation of the company increased to nearly $20 billion USD within an 8-month timespan.

However, Left noted that Square’s entrance into the Bitcoin market is merely a distraction for investors that has left traders blinded from both the core business of the company as well as the firm’s stiff competition.

Left explained that Bitcoin integration was a desperate attempt by Square to remain relevant in the finance sector and the main motivation of the team to adopt Bitcoin in the first place was to deviate investors away from its core business.

The core business of companies can alter and it often does change in the long-term, even for large-scale conglomerates. Especially in an industry like fintech, companies attempt to adopt newly emerging asset classes and alternative payment methods to facilitate growing demand for rapidly growing markets.

Truthfully, Square may have deviated from its main business model and investors may also have started to perceive Square as a Bitcoin company rather than a fintech and a payments firm. However, Citron Research evaluated the company’s long-term approach by acknowledging its Bitcoin venture as a minor project – and disregarded the possibility of its Bitcoin strategy merging with the firm’s core business.

During the first quarter of 2018, the world’s biggest cryptocurrency exchange, Binance, generated a profit of $200 million USD – which was substantially higher than that of Deutsche Bank, Germany’s biggest bank. At $150 million, Japan’s Coincheck also recorded a higher profit margin that Deutsche Bank in the fourth quarter of 2017, prior to its hack.

Bitcoin service providers have started to gain multi-billion dollar valuations by generating profits larger than major financial institutions – and if Square can remain relevant in both the cryptocurrency sector and the fintech industry, it could allow the company to become larger than a payments company in the fintech sector in the US could ever be by simply targeting a global market.

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Goldman Sachs intends to launch Bitcoin futures trading

Goldman Sachs has announced that it will be diving into its own pocket to trade bitcoin futures on its client’s behalf.

The New York Times reported that the new trading operation initiative has been officially signed off by the bank’s board of directors, although the exact time in which the launch of the project is to take place is yet to be confirmed.

According to the report, the bank will also aim to “create its own, more flexible version of a future, known as a non-deliverable forward, which it will offer to clients”.

The company, who is not afraid to express interest in cryptocurrency, has referred to virtual currencies as “real money” in the past.

Goldman Sachs’ decision to take the risk and dip its toes into cryptocurrency stemmed from a number of clients expressing interest in bitcoin and cryptocurrencies as alternative assets, according to Rana Yared, Goldman’s executive.

She explained that it “resonates with [them] when a client says, ‘I want to hold bitcoin or bitcoin futures because I think it is an alternate store of value‘”.

Justin Schmidt, Goldman Sachs’ first “digital asset trader”, was hired two weeks’ prior in order to handle day-to-day operations. The hiring of Schmidt, who has a history in trading cryptocurrency, was first reported by Tearsheet and the creation of the position marks a big step in the direction Goldman is looking to go.

Yared said, with regards to the new hire, that Schmidt “will initially be placed on Goldman’s foreign currency desk because Bitcoin trading has the most similarity to movements in emerging market currencies” and is has been noted that Schmidt will be moving to trading actual Bitcoin if the bank is able to lock in the necessary regulatory approval from the Federal Reserve and New York authorities.

Goldman Sachs is aware that this move is not one made with any sort of guarantee of success and Yared has acknowledged that the business might be risky, saying that it “is not a new risk that we don’t understand… It is just a heightened risk that we need to be extra aware of here.”

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A war of faith: Will Bitcoin or Bitcoin Cash succeed?

Although many new investors may be unaware, there exists a battle for the heart and title of ‘the one true Bitcoin’ – a war between developers over ideology and progress, over technology and its potential, and – ultimately – for hearts and minds.

The differences between what we’ll term ‘Bitcoin Core’ and ‘Bitcoin Cash’, for reference, encapsulate a wider struggle in the cryptocurrency ecosystem – wherein developers have each made arguments as to how cryptocurrency projects and blockchain initiatives should scale to reach and serve a global audience.

The history of Bitcoin and Bitcoin Cash

The story first began in 2009 with the emergence of Satoshi Nakamoto’s Bitcoin white paper, which first outlined a peer to peer money that is not controlled by any central authority. Rather than have a middleman verify the legitimacy of transactions, Bitcoin relies on a blockchain – a distributed and decentralized ledger in which transactions are recorded and verified through cryptography.

The advent of Bitcoin remains a remarkable one, and is historic for the fact that it is, in principle, the very first monetary system that might reach a global audience and function effectively without the need of a financial intermediary.

While Satoshi Nakamoto has been revered for their work on the white paper and network that birthed the wider cryptocurrency market, the concept behind Bitcoin is not without flaw. The Bitcoin network is capable of processing a maximum of seven transactions per second, which – while this is an amazing achievement given the novelty of blockchain technology – sets up an early problem.

Firms such as Visa or Mastercard can process some 1700 transactions per second – meaning that developers need to find a method to ‘scale’ Bitcoin to ensure it can be used as a means of transaction by participants all over the world.

Fundamentally, this is a major key in ensuring that Bitcoin can fulfill its vision as a worldwide peer-to-peer payment network.

While Bitcoin itself was first detailed in Satoshi Nakamoto’s white paper, the cryptocurrency’s development community are in charge of building on the concept that first outlined the Bitcoin network. Such tweaking can not only comprise smaller adjustments or bug fixes – similarly to other software products – but can also involve principle changes that make new solutions possible.

For years, the development of the Bitcoin network has been under the stewardship of Bitcoin Core; a foundation of developers and programmers committed to making Satoshi Nakamoto’s dream a reality. Over time, however, key disagreements in Bitcoin Core’s community have prompted frictions and intense debates over which direction the cryptocurrency should head in.

A key roster of Bitcoin Core developers became concerned over time that Bitcoin Core’s leadership had not taken active steps to rapidly scale the cryptocurrency, and had become frustrated with the project’s apparent pace of development. These frictions were compounded by proposals that would introduce ‘second layer’ mechanics – put simply, networks that would run atop the Bitcoin network itself – that could potentially distance Bitcoin from Satoshi Nakamoto’s initial proposal and lead to the ‘centralization’ of Bitcoin.

Two of these proposals have drawn ire. SegWit2x – named Segregated Witness – would be a planned network upgrade that would restructure the composition of a block and reposition ‘signature’ data within a block to accommodate more room for transactions. The proposal draws the ‘2x’ in its name from its intent to double Bitcoin’s block size from one to two megabytes.

Secondly, development of the Lightning Network – a channelized peer-to-peer payments network built atop the Bitcoin network – would seek to create a distributed web of payment channels between users.

Angered developers argued that neither of these proposals meaningfully remedied the scaling difficulties experienced by the Bitcoin network, and did not inherently resolve the network’s limitations without resorting to third-party improvements or modifications that fell outside the scope of Satoshi Nakamoto’s white paper.

Further, fears arose that the development of SegWit2x and the introduction of the Lightning Network may render the ‘centralization’ of the Bitcoin network possible.

On August 1st of 2017, these tensions came to fruition as Bitcoin underwent a hard fork – a process wherein its blockchain split into two variants. While Bitcoin Core’s blockchain remained unmodified, a new blockchain for a network called Bitcoin Cash was created.

What are the technical differences between Bitcoin and Bitcoin Cash?

Bitcoin Cash’s blockchain adopted new rules which made it incompatible with Bitcoin Core. Chiefly, Bitcoin Cash proponents moved to adopt an 8-megabyte block size that could rapidly scale to accommodate more transactions per block, and further implemented an adjustable mining difficulty that could lessen or harden depending on the number of miners active on a network. Both of these moves would theoretically ensure that the Bitcoin Cash network would accommodate a greater volume of transaction throughput than its forebear, and would hence be able to serve a global economy with far greater readiness.

While the continuing development of both projects might have resolved itself, community tensions have only increased since the debut of Bitcoin Cash.

Principally, disagreements between Bitcoin Core and Bitcoin Cash developers have stoked arguments over which project is the ‘true’ Bitcoin as outlined by Satoshi Nakamoto. Proponents of Bitcoin Core have argued that Bitcoin Core is the logical answer given the fact that the underlying Bitcoin network would be largely unchanged – especially when using a second-layer solution to scale – and that Bitcoin Core enjoys a far greater market dominance on online exchanges.

Bitcoin Cash proponents have conversely argued that the Bitcoin Cash network is a logical expansion of Satoshi Nakamoto’s vision that does without the necessity of a second-layer solution, and would effectively proliferate the idea of a decentralized, peer-to-peer payments network to global users far more quickly effectively than Bitcoin Core would.

What are the ideological differences between Bitcoin and Bitcoin Cash?

In principle, the debate between both Bitcoin Core and Bitcoin Cash is a simple one. While it is accepted that good money by necessity needs to be a store of value (where it holds worth for a long period of time), means of exchange (where it can be used to pay for goods and services rendered), and unit of account (where goods can easily be valued and priced), both projects bear differing ideologies in how this paradigm should be achieved.

Bitcoin Core developers have argued that the correct process in developing ‘good’ money is to first achieve a store of value, which can then become a means of exchange and finally a unit of account. Given that gold has enjoyed similar properties, it has been argued that Bitcoin Core correctly emphasizes the technical ‘soundness’ of its product first, and deals with transaction mechanics as a secondary priority.

Bitcoin Cash developers have argued that ‘good’ money first needs to be accepted as an effective means of exchange before it can hold long-term value. Citing the fact that gold might hold market value but isn’t readily used in market transactions, Bitcoin Cash developers have argued that Bitcoin, by necessity, must be able to serve as many users as possible before accruing significant value.

So, which is the ‘real’ Bitcoin?

To put it simply, online communities have been divided. While Bitcoin Core developers have retained control of, Bitcoin Cash developers have taken control of both the ‘official’ Bitcoin news channel – – as well as the former Bitcoin Core Twitter handle, @Bitcoin.

Reddit communities have further taken the brunt of community disagreements, as Bitcoin Cash supporters have, on occasion, flooded Bitcoin Core channels with Bitcoin Cash news.

The disagreements between both parties – as well as the ideological debate as to which Bitcoin network is the ‘true’ heir to Satoshi Nakamoto’s white paper – have created a confusing and potentially misleading avenue for first-time investors to tread. Both Bitcoin Core and Cash development parties stand to gain should new money flow into their respective projects – while Bitcoin Core remains adamant to retain its leading position in the market space, Bitcoin Cash remains determined to capture greater and greater portions of capital, increasing its market capacity.

Chiefly, this is where the battle will be decided – as many online exchanges, peer-to-peer services, and marketplaces will simply provide whichever project has the largest market capacity with the designation ‘Bitcoin’ or ‘BTC’. Ultimately, while both cryptocurrencies offer a unique and exciting investment option for interested parties, it is important to note that Bitcoin and Bitcoin Cash are mutually exclusive of one another and, essentially, do not represent the same end product.

Which ‘Bitcoin’ will succeed?

For the most part, Bitcoin Core has continued to retain its market dominance and the enthusiasm of new investors. Criticisms have been levied against Bitcoin Core developers for the project’s reliance on third-party scaling mechanics, and the fact that the project’s initial SegWit2x proposal was ultimately not implemented in its entirety. While Bitcoin Core remains the world’s leading cryptocurrency, the project has noted decreasing transaction volumes – signaling that investors may be more willing to hold on to the digital asset as a store of value rather than use it in everyday transactions.

Bitcoin Cash has succeeded in capturing its fair share of the market, and at the time of writing trades above the $1,300 USD mark. While the project’s pace and ambition in securing both new users, use cases, and technological advancements have been met with commendation, the initiative has also been the subject of criticism due to its adjustable mining difficulty and the fact that it has arguably misled several eager investors by marketing itself as ‘Bitcoin’.

Into the future, Bitcoin Core might well succeed in its vision thanks to the fact that it has been adopted as a commonly-used trading pair on online exchanges, that it already enjoys support from a wide pool of investors, users, and developers, and that the Bitcoin Core network is estimated to possess around 10x the number of network nodes that Bitcoin Cash employs.

However, Bitcoin Cash poses a strong threat to this narrative. When the Bitcoin network is saturated with an overwhelming flood of transactions, wait times can be longer and transaction fees can cost its users more – Bitcoin Cash instead accommodates users with faster transactions and cheaper fees. Miners, too, might be incentivized to move to Bitcoin Cash during periods where its adjustable difficulty has been lowered and profits may be higher.

Although Bitcoin and Bitcoin Cash are neither mutually exclusive ideas nor currencies, it remains unlikely that both will succeed side-by-side. Ultimately, if Bitcoin is poised to become a worldwide peer-to-peer money system, one ideology will take root and prove the path to reach the goal outlined by Satoshi Nakamoto – likely dooming the other to an existence spent in the shadow of the ‘true’ Bitcoin. The golden thumbs up – or down – sits in the confidence of worldwide investors.

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South Korean gaming giant Nexon wants to buy Bitstamp -the oldest Bitcoin exchange

Nexon, a $10 billion USD conglomerate headquartered in Japan, is one of the most influential companies in the global gaming industry – with its parent organization NXC based in Jeju Island, South Korea. Last year, NXC acquired a majority stake in Korbit, the country’s 2nd largest cryptocurrency exchange at a $150 million valuation. This year, Nexon is planning to acquire Bitstamp, according to Business Insider.

Bitstamp is the cryptocurrency industry’s oldest Bitcoin exchange that has provided trading services to users since 2011. With capital raised from cryptocurrency-focused investment firm Pantera Capital in 2013, Bitstamp has continued to operate as a leading exchange in the cryptocurrency sector.

However, as the market started to evolve and grow at an exponential rate, Bitstamp fell out of favor amongst cryptocurrency investors, primarily because trading has shifted from fiat-to-cryptocurrency trading to cryptocurrency-only trading. At the time of writing, Bitstamp remains as the 13th largest exchange in the world, behind major cryptocurrency trading platforms like Bitfinex, Bithumb, Upbit, Binance, and Huobi.

Nexon’s acquisition

The potential acquisition of BItstamp by Nexon is particularly captivating because according to the sources of Business Insider, this deal is being directly led by the Nexon team and not its parent company NXC.

In September 2017, NXC paid $80 million to acquire a 70 percent stake in Korbit. At the time, local analysts suggested that the acquisition signified the intent of the South Korean conglomerate to branch out to the cryptocurrency market after having seen success in the gaming industry for more than two decades.

The acquisition of Bitstamp at a $350 million valuation is said to be conducted directly by Nexon – the subsidiary company of NXC – which would lead to the direct involvement of Nexon in the management and operation of Bitstamp.

Both Nexon and Bitstamp representatives declined to provide any additional information on the matter and requested investors to seek out for official statements that may be released by the two companies in the future. Business Insider’s sources said that the deal is still formative and could fail to solidify.

Significance of the deal

If the acquisition of Bitstamp by Nexon goes through, the deal could potentially lead to the gaming giant expanding the Luxembourg-based exchange to South Korea, leveraging its connections with local banks and financial institutions.

Previously, even some of the biggest exchanges in the cryptocurrency industry including Binance, the largest cryptocurrency trading platform as of current, turned down several investment deals to partner with venture capital firms that could provide assistance in securing deals with governments and financial service providers.

During an interview with Bloomberg, Binance CEO Changpeng Zhao said that the company is not in need of external capital and additional funds but are in search for investors and venture capitals that can help the exchange to secure operating licenses with governments.

Due to the rapidly growing demand for cryptocurrencies, digital currency exchanges are in an ideal position financially. Exchanges are raking in more profits than major banks, as seen in the case of Binance and Coincheck, prior to its hack. Binance generated more than $200 million in quarterly profits this year, which is a higher profit margin that Germany’s biggest bank Deutsche Bank.

Nexon, with the backing of South Korea’s major investors and corporations, could easily launch a cryptocurrency exchange and aggressively expand it throughout the country. The intent of the company to acquire an exchange with a strong reputation and a long history demonstrates the firm’s cautious approach in entering the cryptocurrency sector, to ensure the exchange is compliant in terms of regulations and security measures.

Premiums are back

Cryptocurrency premiums in South Korea have returned in April, after a month of trading in March with lower rates than the global trading prices of cryptocurrencies like bitcoin and Ethereum.

Throughout the past year, cryptocurrency investors in South Korea traded both major cryptocurrencies and tokens with a premium in the range of 5 to 30 percent, due to the lack of supply in the South Korean market. In December 2017, when the bitcoin price surpassed $20,000 in the global cryptocurrency exchange market, in South Korea, bitcoin was being traded at over $25,000.

Premiums have returned in South Korea at last and bitcoin is being traded at over $9,600 on Bithumb, while the dominant cryptocurrency is being traded $9,400 globally.

Current premiums in the South Korean market are not as significant as before, but it is important to acknowledge the reappearance of the premiums because it demonstrates the increase in demand for cryptocurrencies and the entire market.

In October 2017, during an interview with Nathaniel Poppers from the New York Times, Korbit founder and CEO Tony Lyu said that the South Korea market tends to move strongly through word of mouth.

“Word just spreads really fast in Korea. Once people are invested, they want everyone else to join the party. There’s been this huge, almost a community movement around this,” said Lyu.

Local investors often describe the South Korean financial market as a copper pan, as it heats up and cools down extremely fast. The local cryptocurrency exchange market moves similarly and when investors begin to invest in the market again, it will likely heat up and the demand will increase at an exponential rate.


Last week, South Korea’s deputy minister of strategy and finance said that the cryptocurrency market is growing rapidly and that he would like to see some competition within the space.

This year, two of the biggest cryptocurrency exchanges in the market Huobi Pro and OKEx expanded into South Korea. Upbit and Bithumb have evolved into two of the largest exchanges in the world as well, competing against the likes of Binance, OKEx, Huobi Pro, and Bitfinex.

If Nexon successfully acquires Bitstamp and enters the cryptocurrency market, it will create more competition within the local market – therefore increasing the stability and liquidity of the global cryptocurrency market.

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600 Bitcoin mining rigs seized in China over power theft

Police in the city of Tianjin, situated in northern China, have seized 600 computers and eight high-power fans dedicated to bitcoin mining after reports received from the local power grid show unusually high electricity consumption.

According to local news agency Xinhua, the seizure of the mining rigs owes to the allegation that their users were engaging in the criminal activity of electricity theft – using excessive amounts of electricity with power taken illegally from the power grid and subsequently bypassing the electricity meter.

Police have detained six individuals, and news at press time is that five of the suspects are under investigation.

The investigation was launched after the local power company detected sudden surges in loss of electricity with a peak of almost 28%, according to Xinhua. This kind of surge is usually related to an increased load current – such as using mammoth amounts of electricity to power electricity-hungry machines. Following the detected change, the discovery was that the junction box of the user’s electricity had been short-circuited, which is a common way that electricity-theft occurs.

Cryptocurrency – especially bitcoin – mining is a notoriously power-hungry process which is typically dependent on high-performance computers. Xinhua reports that the monthly “electric charge of 600 such computers is estimated at hundreds of thousands of yuan” and with $1 USD to ¥6,3 CNY, a huge amount of money for a municipality to be losing.

Another case in Wuhan, central China, has made news of two suspects who have been arrested for renting a vacant house arranged for demolition, seizing power lines set up to supply the demolition and stealing the “free electricity” to power bitcoin mining computers. The men apparently managed to steal ¥49,100 CNY (approximately $7704,52 USD) worth of electricity before authorities stepped in.

Bitcoin mining is known to be extremely expensive to fuel the process, which might lead one to try and find a way to minimize the costs. Through theft, albeit one way to try this, is not the way to go about it.

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What is Bitcoin’s ‘Lightning Network’?

While many investors who have made the bold decision to buy Bitcoin have been rewarded thanks to the cryptocurrency’s volatile price movements, a key ingredient missing to establish Bitcoin as a global peer-to-peer currency is that of scale.

At present, Bitcoin – despite its remarkable technological foundation in blockchain technology – is only capable of processing some seven transactions per second; a far cry from the likes of Visa or Mastercard, which process an estimate 1700 transactions a second!

The challenge of scaling the Bitcoin network to (potentially) millions of users has brought with it several interesting concepts. While some projects – such as Bitcoin Cash – have sought to expand the amount of information stored within an individual ‘block’ on the Bitcoin network, others have sought to develop new networks that can act ‘on top’ of Bitcoin’s blockchain and avoid directly interfering with the technology pioneered by Satoshi Nakamoto.

The Lightning Network is one such idea, and has rapidly gained prevalence as the solution that could expand Bitcoin to millions of consumers, merchants, and institutions.

While Bitcoin works by broadcasting all transactions on its publicly distributed ledger, the central idea behind the Lightning Network is that not all money issued on digital transactions necessarily need to be broadcasted – and by broadcasting fewer transactions, the Bitcoin blockchain is essentially ‘freed up’ wherein processing seven transactions per second can feasibly serve greater amounts of people.

Essentially, this would see the Bitcoin blockchain move to handle ‘macro’ transactions (large scale, conclusive transfers), with the Lightning Network would instead cater for ‘micro’ transactions.

Micro-transactions are created on the Lightning Network by way of ‘channels’ – direct lines of transfer between two parties. Each transacting party would place a deposit of Bitcoin to open a channel, and could feasibly transact in denominations of Bitcoin – for example, a user could open a channel with their favorite coffee shop, and pay in Bitcoin through that channel for each cup of coffee. Once the channel has been expended – or the agreement behind its creation fulfilled – all microtransactions in one channel in the Lightning Network are written to the Bitcoin blockchain as a macro-transaction.

Through the Lightning Network, experts and researchers estimate that parties transacting in Bitcoin would add just two transactions a year to the Bitcoin blockchain – slashing present fees to just a few millionths of a cent.

The Lightning Network offers some interesting solutions that are presently beyond the scope of the Bitcoin network – for example, users establishing channels on the Lightning Network can create smart contracts (agreements that conclude once completed) and can even ‘stream’ money.

By using a smart contract, a passenger in a taxi cab could effectively create a smart contract that pays a taxi driver a set amount of money per kilometer or mile, rather than paying a predetermined amount at the inception or conclusion of a journey.

While Bitcoin’s Lightning Network is yet far from perfect – opponents have cited concerns that entities could simply create numerous ‘nodes’ from which to operate the network and effectively ‘centralize’ it – the technology might be the key in maintaining Bitcoin’s early dominance over wider cryptocurrency markets.

In time, and should users, merchants, and institutions decide to adopt it, Bitcoin’s Lightning Network could effectively become a new standard in global transaction – harnessing both the incredible potential of Bitcoin and blockchain technology, and the speedy efficiency of fiat currency when used at scale.

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