Understanding Bitcoin
What is Bitcoin?
Bitcoin is a software-based payment system described by
Satoshi Nakamoto in 2008, and introduced as open-source
software in 2009. Payments are recorded in a public ledger
using its own unit of account, which is also called bitcoin.
Payments work peer-to-peer without a central repository or
single administrator, which has led the US Treasury to call
bitcoin a decentralized virtual currency. Although its status as a
currency is disputed, media reports often refer to bitcoin as a
cryptocurrency or digital currency.
-Wikipedia
Why Bitcoins?
• Bitcoin can be used to buy merchandise anonymously
• Bitcoin is not tied to any country or subject to regulation
• Small businesses like bitcoin because there are no credit card fees
or chargebacks
• Some people buy bitcoins as an investment, hoping that they’ll go
up in value.
• This is one of the reasons for it’s price instability
How does it work?
There are no bitcoins, only records of bitcoin
transactions
Here’s the funny thing about bitcoins: they don’t exist anywhere, even
on a hard drive. We talk about someone having bitcoins, but when you
look at a particular bitcoin address, there are no digital bitcoins held in
it, in the same way that you might hold pounds or dollars in a bank
account. You cannot point to a physical object, or even a digital file, and
say “this is a bitcoin”.
Instead, there are only records of transactions between different
addresses, with balances that increase and decrease. Every
transaction that ever took place is stored in a vast general ledger called
the block chain. If you want to work out the balance of any bitcoin
address, the information isn’t held at that address; you must reconstruct
it by looking at the block chain.
Mining
To understand mining, one needs to understand what a hash function is. Put
simply, a hash function takes an input and creates a seemingly random output,
however the output is consistent every time you perform the function on a given
input, and it is very difficult to determine an input, given only the output. What i
want you to do right now is open up a calculator on your computer. In the
calculator, take the square root of 3. You should get
1.73205080756887729352744634150. Now take the digits from the 5th place
after the decimal all the way to the 10th place after the decimal. As you can
see, its 508075. Now try that with another prime number, let’s say 11. sqrt(11) =
3.3166247903553998491149327366707, and the digits in place 5 through 10
are: 247903. This is basically a very simple (and weak) hash function. For any
given prime number (in this case it has to be prime), we can find a number (the
6 digit resultant output) that seems to have nothing to do with it, but can be
consistently calculated easily. If i were to give you the output 512754, what
would be the input? If i didn’t tell you it was 13, you would have to resort to trial
and error to find it.
Blockchain
Blockchain is simply a public ledger.
Bitcoin solves the so called ‘’double spending problem’’ present with
digital goods. For example, if I have an mp3 file or an ebook on my
computer, I can freely copy that file a thousand times and send it to a
thousand different people. For a digital currency, the possibility for
unlimited copying would mean a quick hyperinflationary death. Bitcoin
solves this by maintaining a peer to peer network and recording each
transaction in a public ledger called the block chain. If I send 1 bitcoin
from my bitcoin address to my friend John. The bitcoin network records
that transaction in the block chain and I no longer have possession of
that bitcoin. The coin ‘’moved’’ from my bitcoin wallet to John’s wallet. See more at: http://www.forexnews.com/bitcointrading/#sthash.8DQn5Kjr.dpuf
Why must I sometimes wait for my transaction to clear?
Because your transaction must be verified by miners, you are
sometimes forced to wait until they have finished mining. The bitcoin
protocol is set so that each block takes roughly 10 minutes to mine.
Some merchants may make you wait until this block has been
confirmed, meaning that you may have to make a cup of coffee and
come back again in a short while before you can download the digital
goods or take advantage of the service that you paid for.
On the other hand, some merchants won’t make you wait until the
transaction has been confirmed. They effectively take a chance on you,
assuming that you won’t try and spend the same bitcoins somewhere
else before the transaction confirms. This often happens for low value
transactions, where the risk of fraud isn’t as great.
Are there transaction fees?
Sometimes, but not all the time. Transaction fees are
calculated using various factors. Some wallets let you
set transaction fees manually. Any portion of a
transaction that isn’t picked up by the recipient or
returned as change is considered a fee. This then
goes to the miner lucky enough to solve the
transaction block as an extra reward.
Right now, many miners process transactions for no
fees. As the block reward for bitcoins decreases, this
will be less likely.
What if I only want to send part of a bitcoin?
Bitcoin transactions are divisible. A satoshi is
one millionth of a bitcoin, and it is possible to
send a transaction as small as 5430
satoshis on the bitcoin network.
Link to Satoshi Nakamoto’s Original White
Paper
https://bitcoin.org/bitcoin.pdf
Risks
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Theft
Lost keys
Lost memory
EMP Bomb
Exchange Collapse
Value collapse
Hacking
What are the benefits?
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Low or non-existent fees
No chargebacks
Credit card fees passed to the consumer cost $427 per household
55% of small businesses do not accept credit cards
Only 27% of purchases are made with cash
Every time a customer swipes a credit card at the grocery store, banks and
credit card companies collect up to 4 percent of the total bill.
Hedge against inflation
Safe haven for currency collapse
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For every Trillion dollars that enter, each bitcoin will increase $75,000
If you have a kid in college you can give him an allowance
You can email money
You can send money to anyone in the world who needs quick cash
Profit
Can not be deflated due to printing
Crowdsourcing
What are the Possibilities?
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End of national currencies
End of Banks
The end of predatory lending
The end of the IRS
The end of the voting booth
A new notary system
The end of Western Union/Money Orders
Anyone with a cellphone is a bank
Bitcoin Exchange Review Directory
Trying to figure out where to trade Bitcoin? What Bitcoin exchange to use? What the best Bitcoin exchange is? Look no further: our Bitcoin
Exchange Reviews section is the most detailed and inclusive guide to selecting the perfect Bitcoin exchange for your needs.
Coinbase (A+) (Referral Deal: Get a free $5 in bitcoin after your first $100 purchase!)
Kraken (A)
Bitfinex (A-) (Referral Deal: Get 10% off your trading fees for your first 30 days!)
Bitstamp (A-)
CoinMKT (A-)
Cryptsy (A-)
BTCChina (B+)
BTC-e (B+)
BTER (B) (Referral Deal: Get 10% off your trading fees for your first 6 months!)
MintPal (B)
CoinedUp (C+)
Huobi (C+)
Bittrex (C-)
CampBX (D)
Coins-E (D-)
Vircurex (F+: It’s Complicated)
MtGox (F)
Crypto-trade(F)
OKCoin (F)
http://theblogchain.com/bitcoin-exchange-reviews/
How do I put money in?
• https://en.bitcoin.it/wiki/Buying_bitcoins
• This list is very large, the simplest way is
to link a bank account to a Coinbase
account
• Localbitcoins.com
• Create something of value
How do I store Bitcoin?
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Online exchanges
Wallets
Paper Wallets
Brain Wallets
Transfer money back to bank account
Convert to other currencies
Hardware Wallet (Trezor)
Paper Wallet
• A paper wallet is simply a piece of paper representing
your numbers in the blockchain
• Bitcoins you put in a paper wallet are no longer on the
exchange
• Paper wallets must be imported to be used
• Paper wallets have the complete blockchain information
embedded
• No waiting necessary
Brain Wallet
A brain wallet is a paper wallet whose sha-256 seed is generated by a phrase generated
by you and can be reproduced exactly any time
How long would it take to crack an 8 word brain wallet?
Oxford English Dictionary contains full entries for 171,476 words in current use.
If you use only lower case letters and they are mostly random words (no phrases - "four
score and seven years ago" is like having your password be "secret"), there are about
7.47e41 possibilities.
At 50 million attempts per second, it'll be about 4.74e26 years.
The current estimate for the age of the universe is 1.2e12 years.
If you reduce it to just the most commonly used 1000 words, at 50m guesses a second,
it's reduced to 634,195,839 years.
Never use phrases that can be found in an internet search
More
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This is still not as secure as a randomly generated key
2^60
1,461,501,637,330,902,918,203,684,832,716,283,019,655,932,542,976
possible bitcoin addresses
If everyone on earth generated 10 million addresses the possibility of a
duplication is [90,000,000,000,000,000 / 2^160]
0.00000000000000000000000000000000615%
Finding a collision on your first try is roughly equivalent to being hit by
lightning 16,540,000,000,000,000,000,000,000 times per second for an
entire year or winning the lottery 830,000,000,000,000,000,000,000,000,000
times.
Trezor
• Satoshilabs.com
• Private key never leaves the device
• Protected by passphrase, pin and
keywords
Tools
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Bitcointicker.com
Bitcoinwisdom.com
Btcpredictions.com
Btcbalance.net
Blockchain.info
Blockr.io (Just bought by Coinbase Monday)
Bitaddress.org
bit2factor.org
Tradingview.com
thebitcoinpage.com
Coinmetrics.com
Coinmap.org
Fiatleak.com
blocks.wizb.it