Bitcoin is a complex topic, covering cryptography, software engineering and economics. It is difficult to grasp its essence with only a superficial look at it. But that is all this article has to offer. We’ll try to answer a few basic questions and wet your appetite for more.

1. What you should know
about Bitcoin
Paul Tocatlian

2. Preface

3. The first time I heard about Bitcoin was in 2012.
Jeff, one of the software architects I worked with at
the time, was enthusiastic about the matter. What I
took away from our conversations is that Bitcoin is a
virtual currency that can be used anonymously to
buy things online. My limited – and naive –
research led me to believe that the primary use cases
for Bitcoin were money laundering and purchasing
illegal goods on the Silk Road. Given that I had no
money to launder and no interest in what was being
sold on the Silk Road, I dismissed Bitcoin altogether,
despite Jeff’s repeated attempts to convince me that
it was the future of money and very cool technology.

4. Fast forward two years… I’m in Montreal with a few
colleagues. One of them, Fred, was even more
passionate about Bitcoin than Jeff. Fred had purchased
bitcoins as an investment, which appreciated five fold.
His only regret was not buying more. Had I missed the
boat? So I returned online to seek the truth. Fred was
right. Bitcoin had significantly appreciated in value. But
was the bubble about to burst? Should I ignore the
news stories about Mount Gox – a Bitcoin exchange –
getting hacked and loosing $450 million worth of
bitcoins? Silk Road was also in the news with its
founder Ross Ulbricbht’s arrest, conviction of seven
charges related to the Silk Road, and sentence to life in
prison without parole. There and then, I dismissed
Bitcoin for the second time. Sigh.

5. Which brings us to today. Right before Christmas,
Netflix recommended a Bitcoin documentary… so I
watched. It piqued my curiosity enough to watch a
second documentary that was equally interesting. At
this point, I wanted to learn more, so I decided to go
straight to the source and downloaded Satoshi
Nakamoto’s original paper on Bitcoin. After reading
the paper, I realized that Bitcoin was a lot more than
just a currency that could be used for illegal activities.
Jeff was right – but don’t tell him I said so. The
underlying technology described in the paper has the
potential to disrupt entire industries. That week, I read
two books on the subject, setup a wallet, and purchased
my first Bitcoin. As they say, third time’s a charm.

6. Introduction

7. Bitcoin is a complex topic, covering cryptography,
software engineering and economics. It is difficult to
grasp its essence with only a superficial look at it. But
that is all this article has to offer. We’ll try to answer
a few basic questions and wet your appetite for
more:
What is Bitcoin?
How does Bitcoin work?
Who invented Bitcoin?
What can you do with bitcoins?
How many bitcoins are there?
How much is a bitcoin worth?
Without further due, let me introduce you to Bitcoin.

8. What is Bitcoin?

9. Originally referred to as a peer-to-peer electronic
cash system by its inventor Satoshi Nakamoto,
Bitcoin consists of a cryptographic currency
that is transferred, stored and traded on a
decentralized network of computer nodes that
manage a distributed ledger used to validate
transactions.

10. Bitcoin is a cryptographic currency
Bitcoin is called a cryptographic currency (or crypto-currency
for short) because it is based on the science of cryptography,
which involves the encoding and decoding of information in
order to protect its integrity or secrecy. Without cryptography,
Bitcoin could not have existed. Cryptographic tools used by
Bitcoin include:
Public-private key cryptography to handle transactions
Cryptographic hash functions to secure the information in
the ledger
Symmetric key cryptography to protect a user’s private
keys

11. The legal status of Bitcoin as a currency varies
substantially from country to country and is still
undefined or changing in many of them. While
some countries have explicitly allowed its use and
trade, others have banned or restricted it. The
United States classifies bitcoin as a convertible
decentralized virtual currency. In Argentina,
where the inflation rate averaged 203.46 percent
from 1944 until 2015, bitcoin is considered money
but not legal currency. Bitcoin is illegal in Russia.
While private parties can hold and trade bitcoins
in China, regulation prohibits financial firms like
banks from doing the same.

12. Bitcoin is a decentralized network
One of the most innovative features of Bitcoin is that it is decentralized. Most
currencies in use today are fiat money, where the currency is issued by a government
and its supply managed by a central bank. Bitcoin on the other hand is independent
from any institution or government.
Bitcoin operates as a peer-to-peer network of computers – called nodes – that allows its
users to engage in pseudo anonymous financial transactions, while ensuring that
payments are properly processed. For their efforts, the miners that operate the
computers and take on the role of validating transactions are awarded small transaction
fees and newly created bitcoins.
There are currently over 6000 nodes distributed across eighty countries. Anyone can
support the Bitcoin network by running a node to validate transactions and blocks.
However, Bitcoin mining can be difficult, costly, and not without risk. As it stands,
mining solo is nearly deprecated. The energy cost and equipment depreciation can cost
more than the actual bitcoins earned are worth.

13. Bitcoin is a distributed ledger
When you purchase a bitcoin, you buy a slot in the ledger that is
maintained across the decentralized network.
The idea of a crypto-currency has been popular for years, but it
did not gain traction until Bitcoin, which incorporated a ledger
combined with financial incentives to keep the system honest and
protect it from hackers. The ledger does not store accounts and
balances. The ledger – or blockchain – holds the transactions that
have occurred in the past as well as the current holders of the
funds. It is a financial database that is designed to be immutable
and resilient against users trying to double-spend their funds.

14. How does Bitcoin work?

15. By solving the double-spending problem
The main technological breakthrough
accomplished by Bitcoin is solving the double-
spending problem, which occurs when a user tries
to spend the same funds twice. This is relatively
straightforward to address in a centralized system.
However, in a decentralized system, many copies
of the ledger are shared among the nodes, which
must agree on the state of the ledger when
messages between the nodes can be corrupted.

16. By verifying transactions using a system of
consensus
Potential transactions are broadcast to nodes on the
network, which in turn devote large amounts of
computational power to verify that the transactions are
valid using a proof-of-work system. A transaction is
considered valid only when a majority of nodes in the
network determine that it is valid. This computational
power serves the purpose of providing protection
against attacks and is rewarded with the payment of
small transaction fees and issuance of new bitcoins.

17. By not identifying users with their personal
information
All financial information flowing through the
Bitcoin network is public, except for the identities
behind the transactions. Bitcoin does not use
personal information to identify the holders of
funds, but Bitcoin addresses. An address is a long
string of seemingly random letters and numbers.
An addresses is the public part of a public–private
cryptographic key. The private part of the key is
under the safeguard of the user.

18. By creating an immutable chain of blocks of
transactions
Transactions are grouped in blocks of transactions
roughly every 10 minutes. These blocks are then
recorded one after the other in a chain of blocks,
hence the name blockchain. Blocks are linked to
create a record of the history of transactions that
cannot be altered. The link between blocks is a
cryptographic link that cannot be forged unless
the attacker has vast computational resources at
their disposal.

19. Who invented Bitcoin?

20. Satoshi Nakamoto
Bitcoin began as a paper released to a mailing list of cryptography enthusiasts in November
2008 by an individual or group known only pseudonymously as Satoshi Nakamoto.
In January 2009, Satoshi released the first code for using Bitcoin and started the network by
mining the first bitcoins. Bitcoin is open source. This makes the source code available for
anyone to use, modify, and redistribute free of charge. Interested? Download it from here.
Nakamoto’s release of Bitcoin came one month after Lehman Brothers declared bankruptcy,
setting the stage for the 2008 financial crisis. Although the timing was most likely
unintentional, it certainly came at a time when many people were losing trust in fiat
currencies and methods of controlling money.
Satoshi Nakamoto is believed to hold an estimated 1 million bitcoins, worth $428 million as
of April 17, 2016. Satoshi largely went underground in 2010. However, as intended,
Bitcoin’s popularity and the range of use cases for its distributed ledger protocol have
continued to grow despite the absence of its creator.

21. Who is Satoshi Nakamoto?
No one knows. Not conclusively at any rate. Numerous people have been suggested as possible
Satoshi Nakamoto’s by major media outlets:
On Oct. 10, 2011, the New Yorker published an article speculating that Nakamoto might
be Irish cryptography student Michael Clear, or economic sociologist Vili Lehdonvirta.
A day later, Fast Company suggested that Nakamoto could be a group of three people –
Neal King, Vladimir Oksman and Charles Bry – who together appear on a patent
related to secure communications that was filed two months before bitcoin.org was
registered.
A Vice article published in May 2013 added more suspects to the list, including Gavin
Andresen, the Bitcoin project’s lead developer; Jed McCaleb, co-founder of now-
defunct Bitcoin exchange Mt. Gox; and famed Japanese mathematician Shinichi
Mochizuki.
Perhaps most famously, in March 2014, Newsweek ran a cover article claiming that Satoshi
is actually Satoshi Nakamoto, a 64-year-old Japanese American engineer living in
California.
Or is Nakamoto this unknown Australia genius? Maybe yes, maybe no.

22. What can you do with
bitcoins?

23. Very much like traditional money, Bitcoin is
expected to satisfy three functions:
As a medium of exchange, bitcoins can be used
to facilitate the sale, purchase or trade of
goods between parties.
As a store of value, bitcoins have value and can
be stored and retrieved over time.
As a unit of account, a bitcoin is a
measurement of value that is divisible,
fungible, and countable.

24. Most common Bitcoin business applications
Money transfer. The average fee in the remittance market is reported to be in the range of 8% to
9%. Bitcoin transaction fees on the other hand are in the order of 0.01% to 0.05%. In
principle, Bitcoin has a cost advantage compared to current money transmitters.
Exchanges. Exchanges allow users to convert bitcoins (and other cryptocurrencies) to money. Some
exchanges allow the conversion of different cryptocurrencies, such as between bitcoin and other
alt-coins.
Thousands of merchants have signed up with the leading payment processors. The fees charged
stand at around 1%, which compare favorably with fees of around 2% to 3% for other payment
methods such as credit cards.
Web wallets. Web wallets are companies that hide the complexity of managing a Bitcoin wallet from
their users, providing an experience more similar to online banking services.
Mining. Miners receive revenues via block rewards and transaction fees. Total mining revenue for a
year is around 1.3 million bitcoins. Mining is therefore one of the biggest businesses in Bitcoin.
ATMs. Bitcoin ATMs allow users to buy or sell bitcoins with cash. Optionally, some ATMs might
generate a paper wallet, that would include the public and private keys for users that do not
have a wallet.

25. How many bitcoins are there?

26. There are approximately 15 million bitcoins in
circulation today. New bitcoins are minted
approximately every ten minutes when a
transaction block is added to the ledger. This will
continue until 21 million bitcoins have been
created in the year 2041. At that time, no further
bitcoins will ever be issued. Contrast this to a
central bank that has the authority to issue new
currencies at any time, therefore deflating its value.

27. How much is a bitcoin worth?

28. Bitcoins are the unit of currency of the Bitcoin
system. A commonly used shorthand for this is
“BTC” to refer to a price or amount (e.g. “1 BTC”).
The price of bitcoin will fluctuate based on it’s
perceived value. As of April 17, a bitcoin was worth
$428. See how much a bitcoin is worth today.
A bitcoin can be divided down to 8 decimal places,
known as a Satoshi. Therefore, 0.00000001 BTC is
the smallest amount that can be handled in a
transaction. If necessary, the protocol and related
software can be modified to handle even smaller
amounts.

29. In summary

30. Bitcoin is a cryptographic currency that has the potential to empower people
of all nations to take back control over their financial lives. It removes
government monopolies over the creation and management of money,
replacing politicians with mathematics in a decentralized network. It cuts
down on the cost and burdens imposed by middlemen such as banks, credit
card companies and money transfers. More than 100,000 merchants accept
Bitcoin as payment and the number of Bitcoin users is now estimated to be
at around 10 million worldwide and constantly rising. Yet, it is just be
beginning.
Bitcoin is more than a cryptographic currency. Its underlying distributed
ledger technology – called the blockchain – has the potential to transform
entire industries beyond financial services including education, energy,
entertainment, from fine wine to lotteries, governments, healthcare,
insurance, law, music, pay TV, real estate, smart cities, supply chain
management, travel, and many more businesses and society altogether.
Alternative blockchain implementations such as the Ethereum
and Hyperledger projects are beginning to emerge. Blockchain could be the
most disruptive invention since the Internet and deserves it’s own article –
hopefully soon! Until then, checkout this video and follow Bitcoin Twit on
Twitter for the latest stories on Bitcoin and the blockchain.

31. This article contains derivative works of Mastering
Bitcoin by Andreas M. Antonopoulos used
under CC BY 4.0, and Wikipedia used under CC
BY-SA 3.0. This work is licensed under CC BY
4.0 by Paul Tocatlian.