No doubt you’ve heard of Bitcoin otherwise you probably wouldn’t be on this page right now, right? But if you’re new to Bitcoin or even if you’ve got a basic understanding of it, there is no doubt that behind Bitcoin itself there is a complex protocol and ecosystem that supports everything and makes it all work.
This article will go into great detail on what Bitcoin actually is, how it can be used and some speculation into whats in store for it in the future.
Cryptocurrencies – An Overview
For a lot of people, it is hard to get their head around the concept of cryptocurrency. Why is something digital or virtual worth so much normal currency? This exact question often confuses people and leaves many believing that Bitcoin is simply a ‘scam’ or ‘ponzi scheme’ and they dismiss it as an actual serious store of value.
The truth is that our world is changing and evolving at an exceptionally fast rate and technological advancements mean we’re changing the way we do things in all aspects of our life. With this is mind, what is stopping us from having a global currency that is stored digitally and cannot be physically held in the form of a coin or note? The answer is simple – nothing is stopping us from doing this and in fact we are in the midst of a global revolution regarding currency and how we transact and exchange money for goods and services.
A common argument by those against cryptocurrency is that because it’s digital it’s worthless, whereas our dollars and pounds are worth money because they are backed by gold and other precious metals. This is in fact a fallacy, and the vast majority of currencies are backed by nothing! Less than 5% of American dollars in circulation are backed by gold. This means that in most cases, your coins and notes are actually only worth the paper they’re printed on or the metals they are forged upon.
Our normal national currencies are worth money because the government say they are. We have entire economic ecosystems that support the actual value of a dollar, pound, euro or any other currency. National and global events can affect the value of currency (think the 2008 recession) and things like inflation can affect how much we can purchase with our notes and coins.
Don’t worry, I won’t be going off on a tangent about currency, economics, inflation and recessions, but it’s important to remember the reason why our currencies are worth something in the first place, and it isn’t because of gold! The very same reason applies to Bitcoin and cryptocurrencies; they are worth something because there is an entire ecosystem of miners (more on this later), developers, users, consumers, retailers and other bodies that use Bitcoin on a daily basis to buy, sell and trade with.
Essentially then, cryptocurrency are electronic stores of value much like their physical equivalents in dollars or other currencies. Bitcoin is not the only cryptocurrency out there, in fact it is one of over 1,600! But, most offer absolutely nothing new to the table and are simply copies of Bitcoin. Some of them offer practical uses; Monero coin for example offers a very high level of privacy by obfuscating transactions and allow for truly anonymous payments. With that being said, Bitcoin is and in my opinion always will be the king of cryptocurrency. Most likely in ten years a vast majority of other cryptos will be extinct.
The history of Bitcoin
From what we know, Bitcoin started its life in 2007 by a man who called himself Satoshi Nakamato. This man’s identity has never been verified, in fact some people claim this was simply a pseudonym and that Bitcoin started its development by a group of enthusiasts. Bitcoin started off being discussed on Internet forums and Reddit and soon gathered interest from fellow programmers and tech heads.
In 2008, Satoshi’s vision was written on a whitepaper describing the concept behind Bitcoin and how it would work. It was a high level overview but perfectly explained the goals behind Bitcoin and the benefits it would bring the world as a global currency.
In 2009, Satoshi mined the first Bitcoin block known as the ‘genesis’ block. Shortly after this, the first ever Bitcoin transaction took place between Satoshi and another programmer. Later on in the year, Bitcoin was given its first exchange rate value against the American dollar, it was valued at 1,309 Bitcoin to every dollar! To think that in late 2017 Bitcoin was valued at $20,000 per coin is almost unbelievable.
In 2010 Bitcoin made history by having the first real world transaction between Bitcoin and a physical product. In this case, a man named Laslo Hanyecz bought a pizza for 10,000 Bitcoin (at its peak last year, this would have been worth $200,000,000 dollars!)
In the following eight years from 2010, Bitcoin has seen its fair share of action, excitement and highs and lows. There is now an extremely large community online who follow and participate in Bitcoin and other cryptocurrencies. Aside from the online aspect, Bitcoin has entered the mainstream and seen global news outlets reporting on it as well as Wall Street taking a great interest in it. With that being said, Bitcoin is still in its infant stage and is yet to see complete global acceptance, this could still take quite some years. At present, Bitcoin can be used to pay for goods and services from a very large number of retailers and businesses both online and offline. Here are some facts and statistics to show you how much Bitcoin has progressed from its birth in 2007:
- Around 15,000 locations around the world now accept Bitcoin
- Over 3,000 Bitcoin ATMs exist around the world
- The current market cap of Bitcoin is around 60 billion US dollars
- Approximetely 17.5 million Bitcoins have been mined with a maximum total of 21 million
- The average number of Bitcoin transactions per day is around 287,000
- There are approximetly 1,600 other cryptocurrencies besides Bitcoin
The blockchain is the heart of bitcoin as well as most other cryptocurrencies. But a blockchain has many other uses than just cryptocurrency which will hopefully become a bit more apparent after I’ve explained a little bit about it.
What makes Bitcoin a secure, scalable and global currency all lies within the magic of the blockchain. The blockchain is essentially a large public ledger of all transactions that have ever occured for Bitcoin. In its most basic form, the Bitcoin blockchain is just a database that is stored on what are known as ‘nodes’. At the time of writing, the blockchain weighs in at around 192GB and is growing daily.
This public ledger has and always will have details for every single transaction in Bitcoin including the senders Bitcoin address, the recipient(s) address(es) and the amount. Once a transaction has been confirmed (a bit more on this later) and put onto the blockchain, it can never be removed or edited. This is what makes the blockchain bulletproof in terms of forgery or tampering. Whilst there is a lot of technical detail behind how it works, the important thing to remember is that this tamper-proof nature of the blockchain is what makes Bitcoin the world’s most secure and valuable currency.
The blockchain itself is managed by thousands of distributed computers and devices around the world, these are not managed by a single person, company or entity. The very nature of this system makes Bitcoin exceptionally trustworthy and reliable. The devices are known as ‘nodes’.
What’s a node?
A node is simply a computer that stores a copy of the blockchain database on it. The decentralised nature of Bitcoin is what makes it so unique on a global scale and means that Bitcoin doesn’t rely on a single company, or a single server somewhere to operate. In fact, the Bitcoin blockchain operates on a peer-to-peer architecture that means that if a node goes offline, nothing is disrupted within the Bitcoin system.
At the time of me writing this, there are 9,595 Bitcoin nodes online. These will range from high-end blade servers, to desktop computers and Raspberry Pi’s! Anybody, anywhere in the world, at any time can create their own node and support the Bitcoin network. All that is required is a Windows, Linux, or Mac device with an Internet connection and enough disk space to house the blockchain.
A node has the Bitcoin software installed on it which then downloads and synchronises the blockchain. At this point the node can participate in the Bitcoin network. The role of a node is to do the following:
- Accept transactions from users
- Relay transactions to other nodes in the network
- Synchronise itself with other nodes in the network
Blockchain Security & Bitcoin Mining
You have probably already heard of the concept of Bitcoin mining, it is another concept that can be hard for people to get their head around but it is a crucial part of the Bitcoin ecosystem.
For Bitcoin to be secure and tamper-proof it needs a way to verify that each transaction is legitimate and that when funds are sent, the sending address actually has a sufficient balance to send that amount, this is where mining comes into play.
Once a user has begun their bitcoin transaction it is first sent to a node. The node that is used depends upon the software being used as the bitcoin wallet, sometimes they have predefined lists of nodes and sometimes they are picked at random. Remember that due to the peer-to-peer nature of Bitcoin and how nodes work, these transactions are synchronised across nodes in the Bitcoin network.
To begin with, the transaction sits in a pool of unconfirmed transactions and waits for a Bitcoin miner to pick it up. Generally there are many separate pools of unconfirmed transactions that will be picked up by the mining network. This is how the mining process goes:
- Bitcoin miners ‘mine’ by trying to find the next available block in the blockchain. This is done by throwing lots of computational power at a proof of work problem that needs solving. This is essentially brute forcing (trying every single combination) of a cryptographic protocol known as SHA-256. Every combination is attempted until the answer is found. In this case, the answer is the hash of the next block that must begin with a certain amount of zeros. Every combination is attempted until it is found.
- The above process is attempted by bitcoin miners around the world, everybody is trying to find the same answer for the same problem. Nowadays, most miners join mining pools which are basically teams of miners who combine their mining power to find the answer.
- As transactions are entered onto the network, miners pick these up and first verify that the sender actually has the funds to send the amount they want to. This is done by referring to the blockchain and checking all their previous transactions which will then return their current balance.
- If the transaction is valid, it is added to the miners block and will be confirmed on the network as soon as the proof of work problem is solved. Because mining is a competitive business, many different miners will add the same transaction onto the next available block, but only one miner (or mining pool) will solve the problem and therefore the transaction will only be confirmed onto the blockchain by a single miner (or mining pool).
- As soon as the proof of work answer is solved, all those transactions that were collected are confirmed onto the blockchain and the process begins again.
The question you’re probably wondering is why? What is the point of mining? After all, it takes a lot of power and expensive hardware to have a succesful mining operation. Well, when a miner or mining pool finds the next block they receive a reward. This reward is currently 12.5 bitcoins (around $46,000 at the time of writing.) In addition to this, miners are rewarded with the transaction fees that are paid as part of a user sending bitcoin to another user.
When Bitcoin began its life back in 2007, mining could be done on a simple home computer or laptop. Back then you could leave your laptop on and mine 20 or so coins a day (that’s equates to over $60,000 per day at todays rates!) Due to the increase in difficulty, mining is now only feasible on expensive ASIC based hardware which has been specifically manufactured and designed for mining only.
Every time a Bitcoin payment is sent, a fee is defined and added as part of the transaction. This fee is normally automatically defined by the software that is used to send the transaction (otherwise known as a Bitcoin wallet), however it can be modified. For example, a user can choose to send a small or higher fee (or even none at all!) But why would they want to do this? Well currently Bitcoin transactions are not instantaneous; it takes time for miners to pick them up, confirm the next block in the blockchain and then confirm those transactions as part of it. During times of ‘congestion’ in the Bitcoin network (i.e. times where there are an unusually high number of unconfirmed transactions), it can take longer than usual to confirm a transaction. But what if you really need this payment to go through ASAP? Well, you would increase your transaction fee; this would give miners a bigger incentive to pick up your transaction and confirm it within the next block.
Let’s say for example there are one hundred unconfirmed Bitcoin transactions. Fifty of them have a fee of 0.0001 bitcoin and the other fifty have a fee of 0.0002 bitcoin. As miners are gathering unconfirmed transactions they are more likely to pickup the higher fee ones first as they will earn more once the block is confirmed.
This whole system allows those who want fast transactions to pay a bit of a premium to get them confirmed quicker, whereas users who aren’t in a rush for a confirmation can pay a much smaller fee and be happy to wait longer.
This system isn’t perfect by any means and can actually be quite confusing to newcomers. For Bitcoin to ever replace or compete with a global payment system such as Visa, something a little more user-friendly and straightforward will need to be introduced for end-users to be comfortable with using on a day-to-day basis. Some ideas are already being worked on (the Lightning network for example) and as Bitcoin evolves this is sure to change and improve over the coming years.
So far we’ve looked at the concept behind cryptocurrencies, as well as how the Blockchain is the heart of bitcoin and how the whole network is supported by nodes, miners and transaction fees. Now it’s time to look at wallets. A Bitcoin wallet is essentially an electronic wallet used to store, send and receive Bitcoin. The three main types of wallets are full node, light node and hardware based wallets.
Full node wallets
A full node wallet uses the same software that a full node uses and has a full copy of the blockchain that is synchronised with other nodes. When sending Bitcoin from one of these wallets, in essence, the transaction is sent to itself (the node) and then shared with other nodes and picked up by miners.
The obvious disadvantage to a full node wallet is the fact that you will require a lot of disk space to store the blockchain and that they are not feasible to be installed on devices such as phones or tablets. Some would say that the advantages are that you are helping to support the network as well as adding an extra element of security for yourself. Using other nodes to send your transaction to directly involves a certain element of trust.
A lightweight wallet is a much simpler and more compact wallet that does not require a local copy of the blockchain. Lightweight wallets connect to a node for sending transactions and synchronising a very small portion of the blockchain. For you to own and use a Bitcoin address, you only need to know the parts of the Blockchain that have that Bitcoin address in (either as a sender or recipient) and the node you’re connecting with can provide this information.
The node you connect with is normally from a list of pre-defined nodes that are pre-configured as part of the software although these can be changed at your discretion. The beauty of lightweight wallets is that they’re so compact and simple that they can be installed on just about any device including phones and tablets. Lightweight wallets are the wallet of choice for the vast majority of end users, particularly those who simply want to use Bitcoin for transactions and don’t neccesarily care about supporting the network or doing anything outside of the ordinary.
These are lightweight wallets in the form of a piece of hardware. They offer additional security and ease of use and allow you to store your Bitcoin wallet on a secure hardware device that can only be accessed through the use of a pin number or password. Currently, these are probably the safest approach to using Bitcoin. A paper backup is required in case of theft or loss of the hardware device itself. The paper backup is normally a large set of words or ‘seed phrase’ that can be used to recreate the wallet.
Imagine the following set of words:
witch collapse practice feed shame open despair creek road again ice least
This series of words in this exact order could be used to recreate your Bitcoin wallet and this would typically be stored on paper in a safe place. There are a series of reserved words that can be used in this series and when you first create a wallet you will be given these words automatically (although you can also pick your own).
The protocol itself is known as BIP39 and this approach has proven to be very secure. You might be thinking that a system like this could be susceptible to a brute force attack but this has been proven to be mathematically impossible. The protocol offers a lot of possible combinations – 340 trillion trillion trillion. This is an incredibly large number, and even with an enormous amount of computing power at your disposal you would not be able to ‘guess’ a combination that is currently in use and has funds in it.
To put things into perspective, even checking a trillion combinations a second (even this in itself is completely impossible with current hardware power), in around 40 years time you would only have checked 0.000000000000000000000000000000000000000000000000000001% of the possible combinations.
Creating a wallet
All Bitcoin wallet software allows you to create as many wallets as you like with as many Bitcoin addresses as you want. There are numereous reasons people would want to do this, mainly for extra privacy and also to help manage and separate your Bitcoin funds better. Imagine your Bitcoin address(es) as your sort code and account number. You can safely give these out to people to send and receive payments. With the traditional banking system, if you wanted a new account you would have to go and visit your bank to open a new one. If you were using a new bank you would have to provide all kinds of documentation and proof of identity and then wait weeks for it to opened. With Bitcoin, a few clicks of the mouse and you can have a new Bitcoin wallet and a new address in an instant!
However, with this power comes more responsibility. You are in charge of managing and securing your Bitcoin wallet(s) and the funds in them. Many think this is the biggest hurdle that Bitcoin will have to overcome to ever get true global adoption. If you lose your bank card you ring up your bank, get it cancelled and order a new one and your funds are safe. In the Bitcoin world if you use your wallet and seed phrase and you have no backup then say goodbye to your money.
People are naturally clumsy and careless and for most, having to ensure your Bitcoin wallet is safe, secure and backed up is a task that they won’t or can’t achieve. As Bitcoin evolves there is sure to be a secure, user-friendly and easy approach to securing your Bitcoin wallet. There are some approaches to this problem, the most common currently being hardware devices. These are normally a small piece of hardware like a USB stick that safely house your wallet and cannot be accessed without a pin number or password. Of course if you were to lose this you would still be in big trouble, so paper backups are essential.
But for now, education is key. Your Bitcoin wallet is essentially just a file on your computer or phone (normally called wallet.dat) that stores your wallet information including the public and private keys that it uses to send transactions (more on this later). This file is of huge importance to secure your funds. For this reason, this file should never ever be shared with other people and should also be backed up securely in case of a disaster.
Public & Private Keys
Bitcoin wallets and all the transactions that are sent from them rely upon cryptography to make them secure, in particular, the use of public and private keys.
For Bitcoin to be secure we have to ensure that transactions are valid, in other words we have to make sure that the sender’s address is actually who they say they are. So whats stopping someone from trying to forge a transaction to say that they have sent Bitcoin from an address they don’t own? The answer lies in their private key.
Private keys, public keys and bitcoin addresses
The above three things are all linked together to form an exceptionally secure cryptographic system that makes the security of Bitcoin unbreakable with our current knowledge and technology at our disposal. If a vulnerability is ever found in the cryptographic functions used to secure Bitcoin, then not only will Bitcoin be vulnerable, but so will all the other technologies that make use of it. Just about any protocol that is deemed ‘secure’ makes use of the same cryptography that Bitcoin uses. This includes Facebook, Google, your online bank, and even this blog you’re reading right now.
The process of generating keys and addresses is as follows:
- When creating a Bitcoin wallet, most wallet software will generate a random private key or will allow you to generate your own based on the seed phrase which we discussed previously. These 12 or more words are put through a cryptographic function known as ECDSA (Elliptic Curve Digital Signature Algorithm) which in turn generates a 256bit integer which is the private key.
- Once the private key has been generated, another cryptographic function that makes use of modulus arithmetic is used to generate another 256bit integer which is used as the public key. The clever part here is that the public key can be generated from the private key but not the other way around, i.e, a public key cannot be ‘reversed’ to determine the private key, making it safe to be made publicly available.
- Finally, a hashing function is used on the public key to generate a bitcoin address. This address is then used in the same way a sort code and account number would be used when sending money to or from your bank account.
Once a wallet has the private key, public key and bitcoin address it’s ready to send and receive Bitcoin. What makes Bitcoin transactions secure is the use of ‘signatures’ to validate a transaction. For a transaction to be presented on the Bitcoin network, the sender must ‘sign’ the transaction through the use of their private key. When a node receives the transaction along with the public key and signature, it is able to run a cryptographic check on both these items to ensure that this transaction was generated from the holder of the private key.
This type of cryptography boils down to one simple thing; the owner of the private key is able to prove they are who they say they are and that their transactions were indeed sent and signed by them. The use of the public key (which everyone has access to) means we can verify them and their transactions are legitimate. Calculating the signatures with the private key is very easy, but reversing them without the private key is essentially impossible given our current technology and hardware.
Bitcoin As A Currency
Satoshi’s vision of Bitcoin was to have an easy to use global currency that allowed anybody from anywhere in the world to send money to anyone else in the world without having to use third parties such as banks.
In many ways, this vision has already been achieved. I can send Bitcoin right now to anybody else in the world who has a Bitcoin wallet and it will cost me very very little to do so. To put this into perspective, I could send a million dollars worth of Bitcoin (if I had it!) to anyone else in the world and pay around 5 cents for the privilege. That Bitcoin would then be available for the other person to use within the hour. I could pay a little more (maybe a dollar or so) to ensure the Bitcoin arrived even quicker.
How a Bitcoin is divided
Since a whole Bitcoin is currently worth several thousands of dollars, it’s important to understand how we can send much smaller amounts. A Bitcoin can be represented up to eight decimal places. The lowest amount of Bitcoin that can be used is:
0.00000001 Bitcoin (currently worth around 0.000034 of an American dollar.) Many have argued that this numbering system is not particularly user-friendly and something needs to be done about it before Bitcoin can ever be a true global currency. Some other naming conventions have been derived to try to help represent bitcoin:
- A milliBitcoin or mBTC represents 0.001 Bitcoin
- A microBitcoin of uBTC represent 0.000001
- A satoshi represents the smallest value – 0.00000001 Bitcoin
Growth against the dollar
Bitcoin first entered the market valued at a fraction of a cent, it’s highest point saw an astronomical rise to $20,000! Since then the price has dropped to around $3,400 at the time of writing. The market itself has a lot of volatility which has attracted many traders, both amateur and those within Wall Street. It is clear that Bitcoin has made a lot of people very rich, unfortunately it has also made a lot of people poorer who chose to buy in at the all time highs and then sold as the price dropped.
Much like the stock market, Bitcoin shares the same ups and downs, market manipulation and the excitement and panic when it rises and drops. Each bull market is accompanied by lots of optimism and people declaring Bitcoin to have reached global adoption and speculation on the price rising as much as $100,000 or beyond. Each bear market is then accompanied by lots of negativity, pessimism and people declaring that this is the end of Bitcoin and it is starting to die.
The future of Bitcoin
Truthfully nobody knows where Bitcoin will go in terms of price. Will we see it valued at $100,000 or higher as many people claim? Or will we continue to see price drops until we drop back down to $100 or less. Only time will tell.
Regardless of the price though, nobody can deny the huge advancements Bitcoin has made in the past decade. Thousands and thousands of businesses both online and offline work with Bitcoin every day and accept it as a means of payment. Every day more end-users take an interest in Bitcoin and buy for investment purposes or to use it as means of buying goods and services. This adoption shows no real sign of slowing down or dying out any time soon.
Many people would argue that Bitcoin is too big to die. The ecosystem is supported by billions of dollars and an enormous user base, it seems almost impossible that this could just die out, paticularly since there is no real competition to Bitcoin. Many other cryptocurrencies have tried and failed to do what Bitcoin does. The simple fact of the matter is that Bitcoin has stood the test of time and has a huge amount of trust behind it, other cryptocurrencies have gone an enormous way to go before they can match this.
The future is exciting for Bitcoin! We hope you’ve found this blog post useful and would love to hear your comments and feedback.
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