Making sense of Bitcoin and Blockchain

Bitcoin in a nutshell

Bitcoin seems as puzzling as its secret founder, Satoshi Nakamoto, an alias for the person or persons who authored the bitcoin white paper entitled; Bitcoin: A Peer-to-Peer Electronic Cash System. This title aptly describes a way to let two entities trade directly with each other without relying on intermediaries. Bitcoin pioneers wanted to remove the middleman, cancel interest fees, and make transactions transparent.

The Bitcoin Blockchain

Bitcoin, a decentralised digital currency, was released in 2009 as the first major application of blockchain technology. Where bitcoin is a virtual or cryptocurrency, the blockchain is the technology that underpins it. A cryptocurrency refers to a digital coin that runs on a blockchain. Bitcoins can be sent from user to user on the peer-to-peer bitcoin blockchain network. It uses public key cryptography and an innovative approach to bookkeeping to achieve the authorisation, balance verification, prohibition on double spending, delivery of assets and recording of transactions. This process happens in near real time at no cost. it seems possible that bitcoin could eventually increase tremendously, but it all depends on how it is adopted. “If bitcoin were to achieve 15 percent of this valuation, its market capitalisation in today’s money would be 10.8 trillion U.S. dollars. With all 21 million bitcoins in circulation, that would put the price of 1 bitcoin at $514,000” (Investopedia). 

How the Bitcoin Blockchain works

Traditional currencies are issued by central banks, but bitcoin has no central authority. The blockchain behind bitcoin is a public ledger of every transaction that has taken place. It cannot be tampered with or changed retrospectively making transactions secure and safer than current systems. You can make transactions by check, wiring, cash or Bitcoin (or BTC), where you refer the purchaser to your signature, which is a long line of security code encrypted with 16 distinct symbols.

What is Bitcoin Mining?

Miners play a vital role in the Bitcoin ecosystem as keepers of the blockchain. Miners are individuals or cooperative organisations with access to powerful computers, often stored at remote, privately owned “farms.” They perform complex mathematical tasks in an effort to mint new Bitcoin, which they then keep or exchange for fiat currency. Miners serve as nodes in the blockchain network using purpose-built computers that compete to solve complex mathematical problems to allow a transaction to go through. Each transaction initiates from a wallet which has a “private key.” This is a digital signature and provides mathematical proof that the transaction has come from the owner of the wallet. Individual transactions are grouped together into a block, organised by strict cryptographic rules. The block is sent out to the bitcoin network consisting of miners competing to validate the transactions by trying to solve complex mathematical puzzles. It becomes progressively difficult to mine bitcoins due to the mathematics of the Bitcoin system, and the total number that can ever be mined is limited to around 21 million preventing the flooding of new Bitcoins.

The Advantages and Disadvantages of Bitcoin

Bitcoin blockchains are secure and tamperproof, but also irreversible which is problematic if you have been scammed or hacked. Transactions are pseudonymous, meaning that no transactions and accounts are connected to real-world identities. Transactions are fast, global and are confirmed in minutes. Additionally, there are no gatekeepers involved. The software can be downloaded by anyone for free. After you installed it, you can receive and send Bitcoins or other cryptocurrencies. Bitcoin is also free from government interference and manipulation.  It is also transparent and you can start accepting bitcoins instantly, without investing money and energy into setting up a merchant account or buying credit card processing hardware. Bitcoins cannot be forged, nor can your client demand a refund.

Hacking and scams include Ponzi schemes, mining scams, scam wallets and fraudulent exchanges. The largest and most notorious Bitcoin hack involved wallets held by a Japanese Bitcoin exchange that shut down after hackers stole hundreds of millions of dollars in Bitcoin (in contemporary valuations) from its supposedly secure servers. Despite high-visibility prosecutions, Bitcoin remains attractive to criminals in dark web marketplaces like Silk Road and Sheep which threaten to corrode Bitcoin’s reputation and the entire system faces marginalisation.

How do I buy and sell stuff with Bitcoins?

Bitcoin users have at least one private key (basically, a password), which is a whole number between 1 and 78 digits in length. Private keys confirm their owners’ identities and allow them to spend or receive Bitcoin. Users either manually create their own private keys or use a random number generator to do the same. Keys can be stored online (either in private cloud storage or on public Bitcoin exchanges), on physical storage media (such as thumb drives), or on paper, and only entered online during transactions. Actual Bitcoin units are stored in “wallets” secure cloud storage locations with special information confirming their owners.  Copies of wallets can be stored on the cloud, an internal hard drive, or an external storage device but not on paper.

The actual process consists of the buyer sending a key, the amount, and the digital wallet address of the seller. The seller scans the “key” with a smartphone to decode it. The transaction is concurrently broadcast to all the other network participants (nodes or miners) on the buyer’s ledger, and is confirmed. 

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