In this article, I’m going to explore a bit Bitcoin. Though I am fascinated with Bitcoin I haven’t bought one, it’s still a bit strange for me. I use cash and credit cards and if the high street shops are not accepting bitcoins then in my mind I don’t need to buy it yet even though I am itching to try it out.
Despite reading articles on Bitcoin, I still get confused about how it all works. Here I have attempted to answer in a simple way, bitcoin a basic guide for beginners.
Did you know 1Ez69SnzzmePmZX3WpEzMKTrcBF2gpNQ55” represents nearly 30,000 Bitcoins seized during the Silk Road bust—worth about $20 million at the time
What is a Bitcoin?
Bitcoin is a digital created in 2009. It follows the ideas set out in a by the mysterious Satoshi Nakamoto, some say the creator but this is yet to be verified. Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros – they’re produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems.
We are used to money being controlled by banks, it makes us feel secure, how can our money be secure if it's not controlled by a central body with accountability?
Ok so it uses technology to make it safe, in our lifetime we always had cash or debit cards, making the leap from cash to cheques and then debit cards would be seen as revolutionary B.C but the norm now. Technology has enabled us to revolutionise payments over night. The technology behind this is known as Cryptocurrency.
Public Ledgers: All confirmed transactions from the start of a cryptocurrency’s creation are stored in a public ledger. (anyone can see this!) The identities of the coin owners are encrypted, (i.e. secure like when you transfer money via online banking) and the system uses other cryptographic techniques to ensure the legitimacy of record keeping. The ledger ensures that corresponding “digital wallets” can calculate an accurate spendable balance. Also, new transactions can be checked to ensure that each transaction uses only coins currently owned by the spender. Bitcoin calls this public ledger a “ block chain“.
Transactions: You can transfer funds into different digital wallets ( like a bank account) That transaction gets submitted to a public ledger (open for everyone to see) and awaits confirmation. When a transaction is made, wallets use an encrypted electronic signature (an encrypted piece of data called a cryptographic signature) to provide a mathematical proof that the transaction is coming from the owner of the wallet.
The confirmation process takes a bit of time (ten minutes for bitcoin) while “miners” mine (ie. confirm transactions and add them to the public ledger).
Mining is designed to be resource intensive and difficult so that it remains exclusive and steady. Your average Joe won’t be sitting at his computer trying to mine a bit coin. Each individual block must contain a proof of work to be considered valid. This proof of work is verified by other Bitcoin nodes each time they receive a block. Bitcoin uses the hashcash proof-of-work function. Miners get paid for their effort by releasing bitcoin to those who contribute the needed computational power. This comes in the form of both newly issued bitcoins and from the transaction fees included in the transactions validated when mining bitcoins. The more computing power you contribute then the greater your share of the reward. Miners can buy their own hardware or pay for some cloud software.
This process means that in the open world we are able to reach a secure tamper resistant consensus. However The paradox of cryptocurrency is that its associated data create a forensic trail that can suddenly make your entire financial history public information.
The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a “subsidy” of newly created coins.
This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.
Bitcoin mining is so called because it resembles the mining of other commodities: it requires exertion and it slowly makes new currency available at a rate that resembles the rate at which commodities like gold are mined from the ground
. Mining is open source, so anyone can confirm the transaction. The first “miner” to solve the puzzle adds a “block” of transactions to the ledger. The way in which transactions, blocks, and the public blockchain ledger work together ensure that no one individual can easily add or change a block at will. Once a block is added to the ledger, all correlating transactions are permanent and a small transaction fee is added to the miner’s wallet (along with newly created coins). The mining process is what gives value to the coins and is known as a proof-of-work system.
We accept the following:
- The originator of the transaction is in possession of the funds being transferred.
- The originator of the transaction has obtained the funds by one of the means commonly recognised as valid.
- As an outcome of the transaction, the recipient will now be recognised by everyone as being in possession of the funds being transferred.
- As an outcome of the transaction, the sender would not be able to present itself as being in possession of the funds anymore
- The code is the digital signature- i.e. person identity which is hidden
It is impossible to cheat single miners or a group of them because the ledger is open to the whole world.
Bitcoin transactions are stored on a public ledger known as the blockchain, people might be able to link your identity to a transaction over time. Some companies offer various tools such as Bitcoin mixers to help achieve greater privacy, but it takes a huge amount of effort to use Bitcoin anonymously.
You can buy bitcoins online by creating a “wallet” to store them. This is essentially a computer file which holds digital money. You can do this by installing the bitcoin client, the software which powers the currency. But be warned: if your computer is hit by hackers or a virus, or you simply misplace your files, you may lose your bitcoins. The data on your computer is what has value and once it’s gone, it’s gone.
The total of bitcoins in circulation is not expected to exceed 21 million coins. The old saying money doesnt grow on trees is true. There is finite supply and once its all mined there is none left.
Your coins can be stolen
A botnet is a massive network of infected computers. Many black hat hackers are resorting to utilizing botnets, and if your computer is captured by a botnet, it is likely capable of stealing your bitcoins. Once you are infected the owner of the botnet can do pretty much anything with your computer. They can log your keystrokes, to steal Bitcoin wallet encryption passwords, and even stream your screen live.
If you lose your private key you lose your money!
The biggest loss of all may have been intentional. Bitcoin was invented by a person or group going by the name Satoshi Nakamoto. The identity of Satoshi and his/her/their motive is unknown.
What we do know is that Satoshi mined lots of the early coins. Lots. Detailed analysis suggests that it was around a million. That’s one 23rd of all the Bitcoins that will ever exist.
Today they’re worth $230,000,000, but at the peak price of $1,200 Satoshi was a billionaire.