How to

Current Market Cap and Trading Price: https://coinmarketcap.com/currencies/bitcoin/

Cryptocurrencies and the ICO Hype

The value of any including Bitcoin depends on its adoption. The more users it has, the more the value increases. And the more likely it will be adopted by merchants to pay for goods and services.

Critics usually say that Bitcoin and other are just hot air, based on the trust, that you will be able to find someone more stupid than you, to buy your Bitcoin off you. True. But the same goes for any (fiat) . All of them are based on the trust, that the nation state whose central bank prints the money, will not go bankrupt any time soon. This may seem un- likely. But a look at our recent history draws a different picture. France did go bankrupt at least three times during the last 500 years. Other failures include Italy, Spain, and Germany. A very good book illustrating those cases is "The Ascent of Money: A Financial History of the World" by Niall Ferguson. Since there is no gold standard left in the world (see also https://en.wikipe- dia.org/wiki/Gold_standard), and as our coins are not made of silver or gold anymore, all of our money is actually just a promise made by the issuing national bank.

Living in a developed market economy, one could say, that you have a stable currency and there is no need for such a thing as a Bitcoin. True again. Now in the case of Venezuela, which is faced with a triple-digit inflation and a high volatility downwards, the idea of having an alterna- tive for it starts making sense. Even if it is in the case of Bitcoin also highly volatile – but at least upwards. As (https://antonopoulos.com/) puts it "70% of the world popu- lation do not have access to a stable currency. The 30% in developing markets live in a stable currency bubble."

If we now add 2 billion underbanked people to the world economy by way of cryptocurrencies – we can expect that their market cap somehow expands to more than what it is today. And those people will most probably stick to what they have already heard of and deem most trusted – Bitcoin.

A note on ICOs: ICOs (Initial Coin Offerings) are the latest version of crowdfunding – just less or non-regulated. Usually what you get is the promise to participate in the economic value that a company could eventually create in the future. It's a sort of tokenization of venture capital, just without any or the rights associated with that, and even much more risky. In almost every case you will make a bunch of developers rich. But not yourself.

What is Bitcoin (BTC)

Bitcoin is a collaboratively developed standard for digital money, initiated by someone named .

This digital money is stored online in the so-called which is stored in multiple copies on a distributed network of servers (called mining nodes) running the Bitcoin software.

To buy Bitcoin you need a wallet with Bitcoin addresses (which is the equivalent of a bank ac- count). You therefore need a wallet, which can be on online a website, on your mobile or even offline on paper (called cold storage). The wallet software creates a cryptographic key pair for you, consisting of a private key and a public key. These are then used to create one or many Bitcoin wallet addresses for you, which you can use to transfer Bitcoin to.

When you buy Bitcoin, the blockchain stores what amount was transferred to your wallet ad- dress in a transaction. This transaction is signed with the public key of your wallet. This means, only your private key can unlock the amount of Bitcoin in this past transaction on your

Carole Hofmann [email protected] Page 1 of 6 wallet address and use it in a new transaction – e.g. send it to another wallet or sell it for USD or other currency on an exchange or elsewhere.

Technically you can only spend the full amount stored in a wallet address. In practice you will not notice as the remainder is automatically sent back to you in the same transaction – usually to a new wallet address. If what you want to buy exceeds the amount you have in one wallet address, you can combine multiple wallet addresses. Every transaction will also cost a small fee, to be paid to a mining node for including it in a block on the blockchain. The fee is based on the size of the transaction in kilobytes, and does not depend on the amount of Bitcoin trans- ferred.

Mining

All mining nodes in the work on creating the blocks in the blockchain that con- tain the transactions. Roughly every ten minutes a new block is mined. The mining nodes collect the transactions that users want to execute, check if they are valid, and form a new block con- taining them. To add their block on top of the chain, the nodes need to solve a mathematical problem (called proof-of-work) that uses up computing power to calculate. The first node that finds the solution can put their block on top and receives the mining reward – which is an amount of newly created Bitcoin. Currently the amount is 12.5 Bitcoin. The amount is decreas- ing over time while the mathematical problem to solve gets harder. It is adjusted so that the time spent to mine a new block is kept at ca. 10 minutes, taking into account the increasing number of mining nodes (resp. their computing power) joining the network.

Transactions are not reversible once mined and stored in a block. Every block contains a link back to the previous block (a cryptographic hash of the header of the previous block), so that they form a chain, the blockchain.

The deeper a block is buried under new blocks, the more computing power effort would be re- quired to change this block. Because to change a block, all the blocks above would have to be recalculated as well as they are cryptographically linked – which is not feasible in practice. If the distributed network of mining nodes temporarily does not agree on which block is the newest one, a can happen. In general this is resolved within two blocks, as the nodes are pro- grammed to use the longer chain as the master, and discard the shorter one (called decentral- ized consensus) – and one of the forked chains always happens to be mined faster and there- fore be longer than the other. The transactions in the discarded blocks are then re-aligned to be included in the main chain in future blocks.

The first block of the Bitcoin blockchain was mined in January 2009 – called the genesis block. The total amount of Bitcoin that will be issued overall is ca. 20 million (exactly 20.99999998 mil- lion). In the year 2140 all Bitcoin will be issued. Bitcoin is by design deflationary (as opposed to "normal" ) as the amount of Bitcoin that can exist is fixed.

Wallets and Bitcoin wallet addresses

Bitcoin uses as a mathematical foundation elliptic curve cryptography, a type of public key cryp- tography (see also https://en.wikipedia.org/wiki/Public-key_cryptography). This allows to be able to calculate things, but not undo the calculation by just knowing the result of a calculation.

For using Bitcoin you need to create a private key, which is a random number (integer) be- tween 1 and 10^77. From this a public key is created using a cryptographic function (elliptic curve multiplication), and from the public key Bitcoin wallet addresses are created using an- other cryptographic function (hashing algorithm). Both cryptographic functions cannot be re- versed by just knowing the result of them.

Your wallet will store a private key in encrypted form (BIP-38 encryption), and ask for a pass- phrase to decrypt it. You can print such an encrypted private key on a piece of paper, and store it in your bank's safe. Without the passphrase it will be useless to any third party looking at it.

Carole Hofmann [email protected] Page 2 of 6 To decrypt encrypted private keys without a wallet, this website is useful: https://www.bit- address.org

To be able to use multiple key pairs, it is now common to use seeded wallets. A random num- ber – called seed – is used to derive private keys in a deterministic way (actually a chain of keys, so-called key chain). The seed is then sufficient to recreate an entire wallet and all de- rived private keys, public keys and wallet addresses, or import and export between different wallets.

The seed can be expressed in mnemonic words that are standardized (in total 2048 words de- fined in BIP-39). So oftentimes when you initiate a wallet software, it will present you with a se- quence of 12 to 24 English words such as "army", "jealous", "true" and so on. You can print this on a paper and store it in your bank's safe. It is however advised to use a passphrase, so that the wallet cannot be recreated without your passphrase. Here, the passphrase is constitutional to the wallet. A different passphrase produces a different wallet.

To create or convert mnemonic codes with passphrases, this website is useful https://iancole- man.io/bip39/

A word about numbers: in the current Bitcoin realm, 10^77 possible private keys can exist. Our visible universe is estimated to contain 10^80 atoms. So it is unlikely to ever produce the same key twice.

When using seeds – the realm of possible wallets is 2^512.

Bitcoin encodes wallet addresses (and also key pairs) in a set of 58 allowed alphanumeric characters (called Base58Check1). This is to help readability, and prevent spelling errors and ambiguity. Because an amount of Bitcoin sent to a dead or non-existing wallet address is lost forever.

A Bitcoin wallet address looks like this:

13nqdrL5VmbgGUB7RxLMGkVsFS7CA1VHAS or like this:

393q3mEiKrPHp7N8DRUuW37nbkhLCk6ikq

Wallet addresses can are also oftentimes expressed as QR codes, to make it easy just scan them for transferring money to them.

Wallet addresses that begin with "1" are derived from a public key. Wallet addresses that begin with "3" are derived from a script, instead of a public key.

If you host your wallet online on a website, you might see that your wallet addresses start with "3". This means you do not fully control the Bitcoin on such a wallet as you are not controlling the private key. You depend on a third party to access your wallet. Also the website could get hacked, your Bitcoin lost, or confiscated by authorities for any reason. It is therefore a good idea to not store large amounts of Bitcoin on online wallets, but instead transfer them to your mobile or even offline wallet – where you control the wallet's private key.

If you store Bitcoin on a mobile wallet and your phone gets lost or stolen – you can still recreate your wallet from your seed or private key.

Some common mobile wallets with full key control are:

MyCelium https://wallet.mycelium.com/

Breadwallet https://breadwallet.com/

1 123456789ABCDEFGHJKLMNPQRSTUVWXYZabcdefghijkmnopqrstuvwxyz

Carole Hofmann [email protected] Page 3 of 6

Most common software resp. offline wallet with full key control:

Armory https://www.bitcoinarmory.com/

Bitcoin Exchanges

Bitcoin exchanges allow you to buy and sell Bitcoin (and also other cryptocurrencies) against USD or other currency. The Bitcoin price can vary on different platforms quite a bit – make sure you compare exchange rates and transaction fees. Also – never use an exchange nobody has ever heard of. It could be a fraud page.

In most cases you must provide identity and further documents to be able to purchase crypto- currency with a credit card or via bank transfer, and to raise daily/weekly etc. limits to buy or sell.

If you want to transfer USD or other currency you have received for your Bitcoin back to a bank account, you can also do so on most exchanges. But you will be asked to disclose documents identifying you as the owner of that bank account.

Most commonly used exchanges are:

Coinbase https://coinbase.com

Bitfinex https://www.bitfinex.com/

Bitstamp https://www.bitstamp.net/

Kraken (also for business accounts) https://www.kraken.com/

Two further interesting pages are IntraCoin – it lets you buy Bitcoin in more than 200 countries with a credit or debit card with no registration. There are limits that get lifted the more you buy.

IndaCoin https://indacoin.com

And LocalBitcoins allows to buy or sell locally against cash or other means.

LocalBitcoins https://localbitcoins.com/

Bitcoin Credit/Debit Cards

Bitcoin credit and debit cards are available from the following services (make sure you compare fees):

Bitwala https://www.bitwala.com/

SpectroCoin https://spectrocoin.com

Cryptopay https://cryptopay.me

Carole Hofmann [email protected] Page 4 of 6

BitPay https://bitpay.com/card/

A more in-depth overview of cards and services can be found here: https://www.weuse- coins.com/bitcoin-debit-cards/

Anonymity and Privacy

Contrary to common belief, Bitcoin transactions are not anonymous. All transactions including sender address, recipient address and amount are written on the blockchain and available publicly to inspect. Knowing a wallet address automatically allows you to view every transac- tion stored on the blockchain that was ever done using this address.

To explore the blockchain you can use this website: https://www.coinprism.info/

If you buy or sell on an exchange, this can be traced back to you, as you will have to register and bring forward identity and further documents. Also a credit card you may use, can be traced back to you.

It is still possible to somewhat anonymize your Bitcoin by sending it through a chain of wallet addresses. With mobile or offline wallets you can create as many wallet addresses as you wish, without legal identification required. As you can transfer any amount of Bitcoin almost in- stantly to any Bitcoin wallet (less the small fee), you can move your money back and forth as much as you want and to wallets that are not liked to you on any service.

Or you can use mixers. Mixers are online services designed to cover up the trail of money through the network. You send an amount of Bitcoin to a mixer and get back the same amount from different sources (less the small fee) on a different wallet address. Evidently this requires a trustworthy counterparty, who does not take your Bitcoin and runs.

Bitcoin Risks

There are three major risks that can (and probably will) impair the use and / or availability of Bitcoin: 1) Regulation 2) Security 3) Energy consumption

ad 1) As seen in the case of China, it is possible that governments ban the mining and hence also restrict the trading and use of Bitcoin in a country. China imposes strict financial export controls over its citizens, Bitcoin allowed to easily transfer funds out of the country or into other currencies – outside of the control of the government. Therefore China had to intervene, as they deem it imperative to keep their money inside their borders in order to guarantee the stability of the RMB and the financial system. And to force investors to invest domestically.

For other emerging markets, Bitcoin can be seen as an alternative to potential unstable local currencies – and to make a living when the economy around you fails. Two recent examples in- clude Venezuela (see also https://www.facebook.com/cnbc/videos/10155916057764369/), and Zimbabwe – with Bitcoin prices spiking during the Mugabe crisis (see also http://for- tune.com/2017/11/15/zimbabwe-mugabe-bitcoin-price/).

For developed markets – large US venture capitalists have invested substantial amounts in the large Bitcoin exchange platforms. These exchanges are regulated already, so that they are al- lowed trade Bitcoin against USD and other currencies. As a user you need to disclose a number of identity and other documents to be allowed to trade or raise your limits. A ban in those mar- kets is unlikely, unless it could be proven that Bitcoin is used as a cold storage for non-declared money in substantial amounts, or as a currency for black market activities.

Carole Hofmann [email protected] Page 5 of 6 But other cryptocurrencies such as (https://getmonero.org/) are already prevalent in those areas, and preferred over Bitcoin for their less transparent transaction ledgers.

Also, more and more merchants are starting to accept Bitcoin for the purchase of products and services. Bitcoin-enabled ATMs (on a map here: https://coinatmradar.com/) and credit cards are emerging. Governments are starting to accept Bitcoin as an official means of payment. This adds to the public acceptance and adoption of Bitcoin and makes bans less likely.

ad 2) The largest threat to Bitcoin is its security and a potential breach into exchanges and plat- forms where lots of Bitcoin are held – as has happened to Mt. Gox in 2014. It is very likely that a similar event or another technical glitch will happen again in the future to Bitcoin. The question is when.

It's not the value increase per se (that people without Bitcoin call "bubble") posing a threat to Bitcoin – but the potential lack of security measures matching this value increase: The more val- uable the Bitcoin gets, the more salient it becomes to try to steal it.

ad 3) A recent article in a Swiss newspaper calculated that the current global energy consump- tion of all Bitcoin operations combined amounts to the energy consumption of a country like Ni- geria. This is not sustainable in the long term. The security of Bitcoin depends on solving mathematical problems that use high amounts of computing power. Therefore the security of Bitcoin is directly linked to its energy consumption. Other blockchain technologies have implemented improved algorithms, and there are solutions being discussed in the community to replace the proof-of-work system with a proof-of-stake. Chances are good that the energy consumption problem can be solved in the future.

Closing Note

Bitcoin has changed the way we think about money. And for Bitcoin to be seriously used as a value storage in the longer term (including its use as non-declared money cold storage), it would have to prove its stability over a longer term first. For the moment, it can be viewed as a diversi- fication instrument – with a notably large upside potential. And as for any diversification instru- ment: only invest money you are prepared to loose.

This description is to some extent based on the excellent book of Andreas Antonopoulos "Mas- tering Bitcoin" which I highly recommend to anyone looking to further understand the technical details and mechanisms of Bitcoin.

Carole Hofmann [email protected] Page 6 of 6