What is Bitcoin

A simple introduction to Bitcoin.

Bitcoin is:

  • a fully digital currency (a value, like Euro or Yen)
  • with a decentralized, autonomous, mathematical system
  • without need of financial institutions to approve transactions
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.

You can buy and sell Bitcoin, like you can with the US Dollar or Pound Sterling, and you can pay and receive money with it.

Bitcoin is software, an impressive set of defined rules and formulas that govern the autonomous network. Nobody's in charge, nobody's the principal or clerk.

Bitcoin payments usually use QR codes for ease of use. They contain the address of the target wallet.

Bitcoin is math, the system works entirely autonomously on algorithms and cryptography (if you want to sleep well, google ecdsa or mathematical trap door).

Payments (transfers) happen directly from one party to the other (peer to peer), and instantly, without bothering with office hours, borders or exchange rates.

The value of 1 Bitcoin is at this very moment € 421,87 (15/12/2015–17h01).
That's the fifteenth of December, America.
Like every currency, the value fluctuates constantly (this is Coinbase's live ticker).

Fun fact: If you would have bought $27 of Bitcoin in 2009, like our friend Kristoffer Koch did, they would be worth approximately $886.000. And he forgot about them. Surprise!

A value in Bitcoin is represented by an encrypted, alphanumerical hash, a sequence of numbers and letters, in a file. So if you erase the file, or it gets stolen, you loose your bitcoins (like Jered Kenna, who accidentally erased 800 Bitcoins of his hard drive in 2010, worth $200.000 then, $319.000 now). Whoops.

Keeping track with The Ledger

Every transaction is saved on a public ledger. Everyone who participates in Bitcoin (has a Wallet), has a list of every transaction ever made. Really.

The thing is, there is no personal information visible, a wallet is identified by just a string of letters and numbers.

These are the live transactions, more exciting than watching Idol:
http://Bitcointicker.co/transactions/

So you can for example (and this was an actual example some two years back) see that wallet 1933phfhK3ZgFQNLGSDXvqCn32k2buXY8a has 111.111 Bitcoins, worth about € 44.5 million.

The system approves changes by majority, so changing your own ledger to a billion Bitcoin will simply be ignored by the system. Bugger.

This is how payments work, behind the scenes

A Bitcoin user has a private key and a public key (identical to his wallet or account number).

  1. The seller shares his Public Key, or his account number
  2. The software of the buyer generates a signature, combining his Private Key,the seller's Public Key and his previous amount.
    This is a way of showing it's really him, without giving out his private key. The signature is unique per transaction, so can't be re-used.
    This is also known as PGP, or Pretty Good Privacy.
  3. The network acknowledges, approves and verifies the transaction, and all ledgers are updated. All of them. World wide.
Using a public and private key, with 'previous amount', or balance, to generate the signature.

Obviously, this usually happens automagically by Bitcoin apps and software. Waving enthusiastically at each-other with some QR codes should do the trick.

Now, miners can earn Bitcoin by verifying the transactions, combined in blocks. Maybe you've heard of the term Blockchain, which is the underlying technology of Bitcoin.

They run software that checks hashes mathematically, and the systems rewards miners with transaction fees and new Bitcoin (as a sort of lottory).

So all transactions ever made get checked continuously to make sure the system stays healthy. I'm impressed.

Really quick start

You need:

1. A wallet

A wallet is your… wallet, or account. This is the address and describes your Bitcoin. This can be an application on your computer or even mobile phone, or one of many online services (I use Coinbase, easy peasy).

Je wallet is je portefeuille of je rekeningnummer. Dit kan een applicatie zijn op je computer of mobile, of een van de vele online services (ik gebruik momenteel Coinbase, easy peasy).

2. Bitcoin

Bitcoin are usually obtained in two ways:

  • purchased with another currency (like Euro or Dollar)
  • deposited into your walled

You can see Bitcoin as:

  • an investment, buy low, sell high
  • a payment method (just like your 'current money')

More and more shops accept Bitcoin as currency, so something you'd also probably need is a payment method, like a mobile app.

It's really simple:

  1. You give the amount you wish to transfer
  2. You usually scan in the address of the merchant (QR code), or type/copy+paste his wallet ID.

And the amount is transferred instantly, straight from your wallet to theirs.

Origin Story

In November of 2008, the elusive Satoshi Nakamoto published his paper named Bitcoin: A Peer-to-Peer Electronic Cash System.

It described Bitcoin like this:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.

Satoshi Nakamoto is thought to be a pseudonym for a person or group of persons. The username only appeared rarely, communicated directly with only certain individuals, and disappeared. Wired recently published suspecting Craig Steven Wright, an Australian genius with more doctorates than he can keep track of.

The Bitcoin-network sprung to life in January of 2009, with the release of the first Open Source Bitcoin client, and releasing the first Bitcoins, mined by Satoshi himself (betterk nown as the Genesis Block, good for 50 BTC).

The value of the first transactions was determined by individuals on Bitcointalk forums, with one remarkable transaction of 10.000 BTC in exchange for two pizza's from Papa Johns.

10.000 BTC now have a value of four. million. Euro. ಠ_ಠ

Mining and Mining Farms

Currency value is created by scarcity, new Bitcoins by 'mining'.

Mining is verifying transactions using mathematical functions, where the system awards new Bitcoins to miners as a reward. Once the creation of new Bitcoins stops, miners get rewarded with small transaction fees in exchange for verifying transactions.

Mining used to be doable on mere laptops or simple computers, but due to the system decreasing the amount of new Bitcoin being released, much more effort is required, in the form of so-called Bitcoin Mining Farms.

Gigantic amounts of processors and big business.

https://www.youtube.com/watch?v=K8kua5B5K3I

Since the beginning, the amount of new Bitcoins awarded gets cut down by half, so we know that:

  • there will be a max of 21 million Bitcoin
  • after 2140, no new Bitcoin will be created

Current State

Right now, there are 14,954,600 BTC in circulation. Those represent, at this very moment, a value of € 5.883.588.278. Yes, almost six billion Euro.

Worldwide, about 8000 transactions are processed every hour.

Silk Road

Due to the anonymous and direct nature of Bitcoin, it of course caught the attention of less legal types of transactions. Bitcoin was the only currency on the famous deep web site Silk Road (documentary).

Gambling sites with a twist

An interesting new breed of gambling sites emerged, that use Bitcoin as currency, and mathematically proves the bet was executed in a fair manner.

Satoshi Dice, sold in 2009 for 126,315 Bitcoin, or US $12.4 million a that time, publishes the mathematical details of each bet.

I tested it, and had the fortune of changing 12.140 bits (0,012140 BTC or € 5) into 27.656,01 bits or € 11,39. (a bit is one millionth of a Bitcoin).

This is how:

  • I transferred € 5 worth of Bitcoin, or 2.140 bits, from my Coinbase wallet to my Satoshi Dice wallet (deposit)
  • I played a few rounds of dice
  • Was smart enough to cash out at a 127,8% profit
  • Transferred the amount back to my Coinbase wallet

I am not encouraging anyone to gamble, this was only for testing purposes with a really small amount. If you would try it, never gamble anything you can't afford to lose. Don't be an idiot.

Get started

  1. create a Coinbase account
  2. Buy some Bitcoin
  3. donate generously to yours truly on wallet 1BPvimykYyE1tmqmAy2S6Xi5tvRK1ow38r

More

Documentary: The Bitcoin Gospel

Documentary: The Bitcoin Phenomenon

Bitcoin on Khan Academy

A Bitcoin course on Udemy

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