How to Bitcoin

How to Bitcoin Current Market Cap and Trading Price: https://coinmarketcap.com/currencies/bitcoin/ Cryptocurrencies and the ICO Hype The value of any cryptocurrency 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 cryptocurrencies 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) currency. 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.wikipedia.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 Andreas Antonopoulos (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 Satoshi Nakamoto. This digital money is stored online in the so-called blockchain 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 account). 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 address 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 transferred. Mining All mining nodes in the Bitcoin network 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 fork 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 therefore 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 million). In the year 2140 all Bitcoin will be issued. Bitcoin is by design deflationary (as opposed to "normal" currencies) 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 cryptography (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) between 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 another 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 passphrase 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 number – 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.

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