Bitcoin (BTC) is a decentralized digital currency that uses cryptography to secure and ensure the validity of transactions within the network. Hence the term crypto-currency. Decentralization is a key aspect of bitcoin. There is no CEO or central government in control of it. The currency is ran by the people, for the people and all of the code is open-source.
Bitcoin is a product of blockchain technology. Blockchain is what allows for the security and decentralization of bitcoin but before we get into that, let’s go through a brief history.
- A Brief History
- What Is Blockchain?
- What is Bitcoin Mining
- Technical Aspects of Bitcoin
- Technical Aspects Continued
- What is a Fork?
- A Case For Bitcoin in a World of Centralization
- Final Conclusions
A Brief History
Bitcoin was created under the pseudonym Satoshi Nakamoto. The identity of Nakamoto is unknown and it is believed he/she could be a group of people. The idea of bitcoin was first introduced in 2008 when Nakamoto released the bitcoin white paper – Bitcoin: A Peer-to-Peer Electronic Cash System. Later, in January 2009, Nakamoto announced the bitcoin software and the Bitcoin network officially began.
What Is Blockchain?
Blockchain is the underlying technology of Bitcoin. Blockchain is a just a buzz word for distributed ledger. This is a ledger that is distributed across the thousands of computers running the bitcoin software (aka full node).
Blockchain is how transactions are kept track in the network. What makes it so secure is its decentralized nature; there is no central point of failure. This means that in order to compromise the network, you’d need to take over 51% of the computers. This is known as a 51% attack.
Blockchain is the combined form of two words block & chain. A ‘block’ is an aggregate of encrypted data consisting of transactional and meta data. It is referred as a ‘chain’ because each block is cryptographically signed by the previous block in the chain. Visualizing this would look like a chain of blocks, hence the term, blockchain.
Blocks are also discovered through a process known as mining.
For more information regarding blockchain I’ve provided more resources below:
- How Does a Blockchain Work – Simply Explained
- Blockchain 101 – A Visual Demo
- Bitcoin for Beginners – Andreas Antonopoulos
What is Bitcoin Mining
Bitcoin mining is how transactions are placed into blocks and added onto the blockchain. This is done to ensure proof of work, where computational power is staked in order to solve a mathematical puzzle. If your computer solves puzzle correctly, you are rewarded bitcoin in the form of transaction fees, and the block reward (reward received for successfully mining a block).
The bitcoin given during a block reward is also the only way new bitcoin can be introduced into the economy. With a halving event occurring roughly every 4 years, it is estimated that the last bitcoin block will be mined in the year 2,140. (See What is Block Reward below for more info).
Mining plays an integral role in ensuring the security of the network. It’s an aspect of bitcoin that can get extremely technical the further down the rabbit hole you go. An entire website could be created solely to information regarding bitcoin mining. Treat the small paragraph above as a brief exposure to its function as it doesn’t even scratch the surface regarding the topic.
How do you Purchase Bitcoin?
The most popular way to purchase bitcoin through is through an online exchange where you trade your national currency for bitcoin.
Popular exchanges include:
There’s tons of different exchanges. Just make sure you find one that supports your national currency.
Also note that bitcoin is fungible, you do not need to buy a full unit. The smallest unit of bitcoin is 1 satoshi or 0.00000001 BTC.
Bitcoin and cryptocurrencies are EXTREMELY volatile. Swings of 30% or more within a few days is not unheard of. Understand that there is always inherent risks with any investment. Cryptocurrencies especially. Only invest what you’re willing to lose.
Transaction & Network Fees
Transacting on the Bitcoin network is not free. Every purchase or transfer of bitcoin will cost X amount of BTC depending on how congested the network is. These fees are given to miners as part of the block reward.
Late 2017 when bitcoin got up to $20,000USD, the average network fee was ~$50. Currently, at the time of writing this, the average network fee is $1.46. This data is available in real-time on BitInfoCharts.
Technical Aspects of Bitcoin
- Address: What you send bitcoin to.
- Wallet: Where you store your bitcoin
- Max Supply: 21 million
- Block Time: ~10 minutes
- Block Size: 1-2 MB
- Block Reward: BTC reward received from mining.
What is a Bitcoin Address?
A bitcoin address is what you send bitcoin to. If you want to receive bitcoin you’d give someone your bitcoin address. Think of a bitcoin address as an email address for money.
What is a Bitcoin Wallet?
As the title implies, a bitcoin wallet is anything that can store bitcoin. There are many different types of wallets including paper wallets, software wallets and hardware wallets. It is generally advised NOT to keep cryptocurrency on an exchange, as exchanges are prone to hacks (see Mt. Gox hack).
Read More: Bitcoin Wallet Types
My preferred method of storing cryptocurrency is using a hardware wallet such as the Ledger Nano S or Trezor. These allow you to keep your crypto offline in physical form and as a result, much more safe from hacks. Paper wallets also allow for this but have less functionality in my opinion.
After I make crypto purchases, I transfer it to my Ledger Nano S and keep that in a safe at home. Hardware wallets also come with a special key so that if it gets lost or damaged, you can recover your crypto. I recommend keeping your recovery key in a safety deposit box.
What is Bitcoins Max Supply?
The max supply of bitcoin is 21 million. The only way new bitcoins can be introduced into the economy are through block rewards which are given after successfully mining a block (more on this later).
What is Bitcoins Block Time?
The average time in which blocks are created is called block time. For bitcoin, the block time is ~10 minutes, meaning, 10 minutes is the minimum amount of time it will take for a bitcoin transaction to be processed. Note that transactions on the Bitcoin network can take much longer depending on how congested the network is. Having to wait a few hours or even a few days in some instances for a transaction to clear is not unheard of.
Other cryptocurrencies will have different block times. For example, Ethereum has a block time of ~15 seconds.
For more information on how block time works, Prabath Siriwardena has a good block post on this subject which can be found here.
What is Bitcoins Block Size?
There is a limit to how large blocks can be. In the early days of bitcoin, the block size was 36MB, but in 2010 this was reduced to 1 MB in order to prevent distributed denial of service attacks (DDoS), spam, and other malicious use on the blockchain. Nowadays, blocks are routinely in excess of 1MB, with the largest to date being somewhere around 2.1 MB.
There is much debate amongst the community on whether or not to increase bitcoin’s block size limit to account for ever-increasing network demand. A larger block size would allow for more transactions to be processed. The con argument to this is that decentralization would be at risk as mining would become more centralized. As a result of this debate, on August 1, 2017, bitcoin underwent a hard-fork and bitcoin cash was created which has a block size limit of 8 MB. Note that these are two completely different blockchains and sending bitcoin to a bitcoin cash wallet (or vice versa) will result in a failed transaction.
Update: As of May 15th, 2018 bitcoin cash underwent another hard fork and the block size has increased to 32 MB.
On the topic of bitcoin vs bitcoin cash and which cryptocurrency is better, I’ll let you do your own research and make that decision for yourself. It is good to know that this is a debated topic within the community and example of the politics that manifest within the space. Now if you see community members arguing about this topic, you’ll at least have a bit of background to the issue.
What is Block Reward?
Block reward is the BTC you receive after discovering a block. Blocks are discovered through a process called mining. The only way new BTC can be added to the economy is through block rewards and the block reward is halved every 210,000 blocks (approximately every 4 years). Halving events are done to limit the supply of bitcoin. At the inception of bitcoin, the block reward was 50BTC. At the time of writing this, the block reward is 12.5BTC. Halving events will continue to occur until the amount of new bitcoin introduced into the economy becomes less than 1 Satoshi. This is expected to happen around the year 2,140. All 21 million bitcoins will have been mined. Once all bitcoins have been mined, the block reward will only consist of transaction fees.
Technical Aspects Continued
Straight from the Bitcoin.it wiki
Any computer that connects to the Bitcoin network is called a node. Nodes that fully verify all of the rules of bitcoin are called full nodes.
In other words, full nodes are what verify the bitcoin blockchain and they play a crucial role in maintaining the decentralized network. Full nodes store the entirety of the blockchain and validate transactions. Anyone can participate in the bitcoin network and run a full node. Bitcoin.org has information on how to set up a full node. Running a full node also gives you wallet capabilities and the ability to query the blockchain.
For more information on bitcoin nodes, see Andreas Antonopoulos’s Q&A on the role of nodes.
What is a Fork?
A fork is a divergence in a blockchain. Since bitcoin is a peer-to-peer network, there’s an overall set of rules (protocol) in which participants within the network must abide by. These rules are put in place to form network consensus. Forks occur when implementations must be made to the blockchain or if there is disagreement amongst the network on how consensus should be achieved.
Soft Fork vs Hard Fork
The difference between soft and hard forks lies in compatibility. Soft forks are backwards compatible, hard forks are not. Think of soft forks as software upgrades to the blockchain, whereas hard forks are a software upgrade that warrant a completely new blockchain.
During a soft fork, miners and nodes upgrade their software to support new consensus rules. Nodes that do not upgrade will still accept the new blockchain.
Examples of bitcoin soft forks include:
A hard fork can be thought of as the creation of a new blockchain that X percentage of the community decides to migrate too. During a hard fork, miners and nodes upgrade their software to support new consensus rules, Nodes that do not upgrade are invalid and cannot accept the new blockchain.
Examples of bitcoin hard forks include:
- Bitcoin Cash
- Bitcoin Gold
Note that these are completely different blockchains and independent from the bitcoin blockchain. If you try to send bitcoin to one of these blockchains, the transaction will fail.
In this new era of money, there is no central bank or government you can go to in need of assistance. This means the responsibility of your money falls 100% into your hands. That being said, the security regarding your cryptocurrency should be impeccable. The anonymity provided by cryptocurrencies alone makes cryptocurrency a valuable target to hackers and scammers. Below I’ve detailed out best practices regarding securing your cryptocurrency.
Two-Factor Authentication (2FA)
Two-factor authentication is a second way of authenticating your identity upon signing in to an account. Most cryptocurrency related software/websites will offer or require some form of 2FA. Upon creation of any crypto-related account find the
Security section and enable 2FA.
The most basic form of 2FA which you are probably most familiar with. This form of authentication sends a text message to your smartphone with a special code that will allow access to your account upon entry. Note that this is not the safest form of 2FA as you may still be vulnerable to what is known as a SIM swap attack. SIM swapping is a social engineering method in which an attacker will call up your phone carrier, impersonating you, in attempt to re-activate your SIM card on his/her device. Once the attacker has access to your SIM card he/she now has access to your text messages which can then be used to access your online accounts. You can prevent this by using an authenticator such as Google Authenticator.
The use of an authenticator is the safest form of 2FA. An authenticator is installed on a seperate device and enabling it requires you input an ever changing six digit code in order to access your account. I recommend using Google Authenticator.
If a website has the option to enable an authenticator, it will give you a QR code and secret key. Use Google Authenticator to scan the QR code. The secret key consists of a random string of numbers and letters. Write this down on a seperate sheet of paper and do not store it on a digital device.
Once Google Authenticator has been enabled, every time you sign into your account, you will have to input a six-digit code that looks similar to this. If you happen to lose or damage the device you have Google Authenticator installed on, you will be locked out of your account UNLESS you have access to the secret key (which you should have written down).
A wallet is what you store bitcoin and cryptocurrency on. I’ll provide resources on the different type of wallets later but I want to emphasize the use of a hardware wallet (aka cold storage).
Hardware wallets are the safest way of storing cryptocurrency because it allows for your crypto to be kept offline in a physical device. After purchasing crypto via an exchange, I recommend transferring it to cold storage. The most popular hardware wallets include the Ledger Nano S, and Trezor.
Hardware wallets come with a special key so that if it gets lost or damaged, you can recover your crypto. I recommend keeping your recovery key as well as any other sensitive information in a safety deposit box.
I know this all may seem a bit manic, but it is important you take the necessary security precautions in order to ensure the safety & longevity of your cryptocurrency.
A Case For Bitcoin in a World of Centralization
Our current financial system is centralized, which means the ledger(s) that operate within this centralized system are subjugated to control, manipulation, fraud, and many other negative aspects that come with this system. There are also pros that come with a centralized system, such as the ability to swiftly make decisions. However, at some point, the cons outweigh the pros, and change is needed. What makes bitcoin so special as opposed to our current financial system is that bitcoin allows for the decentralized transfer of money. Not one person owns the Bitcoin network, everybody does. Not one person controls bitcoin, everybody does. A decentralized system in theory removes much of the baggage that comes with a centralized system. Not to say the Bitcoin network doesn’t have its problems (wink wink it does), and there’s much debate amongst the community as to how to go about solving these issues. But even tiny steps are significant steps in the world of blockchain, and I believe bitcoin will ultimately help to democratize our financial system, whether or not you believe it is here to stay for good.
Well that was a lot of words… Anyways I hope this guide was beneficial, especially to you crypto newbies out there. You may have come into this realm not expecting there to be an abundance of information to learn about. I know I didn’t. Bitcoin is only the tip of the iceberg, but now that you have a fundamental understanding of bitcoin, learning about other cryptocurrencies such as Litecoin, and Ethereum will come more naturally.
Feel free to ask questions below! I’m sure either the community or myself would be happy to answer your questions.
Thanks for reading!