The Simpler Guide to Bitcoin

2017-11-20 | Sam Shames

What is Bitcoin?

Bitcoin is both a digital currency — similar to U.S. Dollars, Euros, or Yen — and a digital store of value similar to gold. It is created and backed by the Blockchain.

What is the Blockchain?

The Blockchain is the technology that Bitcoin and all other cryptocurrencies are built on. The Blockchain works as the “backbone” of the network and allows users from all over the world to share a common ledger on which to record transactions. When you buy, sell, or transfer Bitcoin, a ledger entry is made that is confirmed by all other users on the network. All Bitcoin that have been mined or transacted have an entry in the common ledger.

Who created Bitcoin?

Satoshi Nakamoto proposed the idea for Bitcoin in 2008. As of today, Satoshi remains anonymous, and his original balance of 1 million Bitcoin remains unspent. Bitcoin has tried to stay as true as possible to Nakamoto’s original view of Bitcoin, as stated in his 2008 whitepaper.

Where does new Bitcoin come from?

New Bitcoin is created by “mining.” A new block is mined about every ten minutes. As new blocks are mined, the miners receive an award in Bitcoin and new Bitcoin are created. The maximum number of Bitcoin will be 21 million total. As of right now, about 17 million Bitcoin have been mined.

What is Bitcoin “mining”?

Mining works as a mathematical “race” between miners. About every ten minutes, miners will have the opportunity to “mine” a new block. They accomplish this by solving very complex math problems as quickly as possible. Whoever can provide the correct answer first wins the right to mine the block and receives Bitcoin as a reward.

Most computers can solve math problems faster than you or I could blink. Bitcoin works around this by reversing the process. In a simplified example, a computer could very easily solve 2 + 2 = 4. However, if we provide 4 as the input and ask the computer how can we get to 4 the task becomes much more time intensive and difficult. We could get to four by 5-1, or by 3+1, or by 1+1+1+1, etc.… the possibilities are vast and it takes the entire processing power of the Bitcoin network to mine new blocks.

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Can more Bitcoin be made?

The original concept for Bitcoin limits the total supply that can ever be mined at 21 million. Currently, there are about 17 million Bitcoin that have been mined and are in circulation. The last Bitcoin is expected to be mined by the year 2140.

Can I mine my own Bitcoin?

It is no longer profitable for most people to mine their own Bitcoin. The math problems that are solved in order to mine have increased exponentially in difficulty as more and more Bitcoin are mined. As the difficulty of mining has gone up, so have the costs of entry.

How do I get Bitcoin?

You can receive Bitcoin directly from another party or it can be bought on an exchange.

How can I pay with Bitcoin?

You can pay with Bitcoin in an increasing number of ways. You can send money peer-to-peer from a wallet to a wallet. You can send via Bitpay which is backed by Visa and, most recently, Square has begun implementing Bitcoin payment over their network. We expect the options for using Bitcoin as a payment system to continue increasing.

What is Bitcoin/Blockchain backed by?

Bitcoin is backed by the Bitcoin network itself, the Blockchain. It seems redundant to say, however, the very thing that gives Bitcoin its value is the entirety of the network or Blockchain underlying it. Each block on the Blockchain, by its very design, has been confirmed by every Bitcoin ledger in the world. Each transaction is public and can be mathematically tested (if you’re inclined to test yourself) to ensure that no one is gaming the system.

Who controls Bitcoin?

No one person or group controls Bitcoin. By its design, Bitcoin is controlled by all participants in the network. The common ledger of all Bitcoin transactions is public and all new transactions are written there. Because it is decentralized, Bitcoin transactions are confirmed by miners and then written to everyone else’s copy of the ledger. In order for a group to “control” Bitcoin, they would need 51%, or a majority vote, of the mining power on the network. As of right now, this is impossible to reach for one group.

What gives it value?

Bitcoin gets its value from the same natural forces that act on stocks—supply and demand. Limited supply and increased demand have resulted in a staggering price increase for Bitcoin. Bitcoin is also being used as a store of value, so it shares similarities with both currencies and precious metals.

Is it safe?

The Bitcoin Blockchain has never seen a successful, direct attack. The network is designed so that 51% of the computing power of the network must agree on the next transaction, this works as a safeguard against fraudulent spending or theft.

But weren’t millions in Bitcoin stolen?

Yes. However, they were stolen directly from the Mt. Gox exchange, not the Bitcoin Blockchain itself. This is similar to a bank robbery where the robbers get all the cash in a bank but are limited to the money in the bank vault. Users who had moved their Bitcoin from the exchange to their own personal wallets were not affected.

Be cautious with having large amounts of cryptocurrency on one exchange. The Bitcoin network is extremely secure, but each individual exchange is subject to its own security measures. Wallets are made for your protection!

What are Bitcoin wallets?

A wallet is a place to store your Bitcoin. There are software wallets which store your Bitcoin online and only you have the keys to unlock. There are also hardware wallets which store your Bitcoin offline so only you have access.

A wallet for crypto essentially works like a safety deposit box that only you have the keys to.

What is the difference between exchanges and wallets?

An exchange will store your Bitcoin for you in a wallet designed for you. This is similar to depositing money in a bank and having a checking account that gives you access to funds.

Hot and cold wallets?

There are two types of Bitcoin wallets, hot and cold. A hot wallet is connected to the internet and is typically accessed via software such as Copay or Mycelium. As the owner, you retain the private keys to your account. You can receive or send Bitcoin to your public address using these wallets.

A cold wallet is not connected to the internet and is most often a hardware device that you have moved your private keys to. A cold wallet is much more secure as it is offline, however, transferring from cold wallets to other users requires additional steps.

What is Bitcoin Cash?

Bitcoin Cash is a recent “fork” from the original Bitcoin Blockchain. The major difference between the two is Bitcoin Cash (BCH) has a larger block size which allows more transactions to process in the same amount of time as traditional Bitcoin (BTC).

Creating Bitcoin Cash did not create more Bitcoin. Cash is its own coin with its own Blockchain that begins where it forked from the original Bitcoin. The market will decide which coin, and technology underpinning the coin is better by buying it.

What is a “fork”?

A fork is when a cryptocurrency splits and two assets are created. A fork can occur if enough people using a cryptocurrency disagree on its future direction or on the technology that underpins it. The result of a fork is the miners that believe the “new” coin is the better one will move their resources to that Blockchain and build out from there. The miners that preferred the previous modality will stay on the current Blockchain and continue to provide their resources there.

What is an alt-coin?

An alt-coin is any cryptocurrency that is not Bitcoin. Examples include: Ethereum, Litecoin, Neo, Bitcoin Cash, and many more.

How big could the Bitcoin market be?

This is the most important question to us as traders. Valuing the market for Bitcoin is similar to asking what’s the total value of the internet? Not individual companies, but actually valuing the internet. It’s close to impossible to value but we can guess it would be more than the value of the individual companies that build their services on top of that framework.

Bitcoin has similar properties to the internet in that it is a way ‘in’ to the network. As enticing as Bitcoin can be as a currency or store of value, it also serves as the entry point to the Blockchain network that underpins it.

We see many similarities between Blockchain technology and the early stages of the internet. The cryptocurrency market will continue to grow as individuals move away from chaotic centralized bank and government control and adopt the new asset class based on decentralized control and common trust built on the Blockchain.

cryptocurrency chart from coinbase.com(Image courtesy of www.coinbase.com)

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