Chapter 01

What Is Bitcoin?

Bitcoin is the world’s first successful decentralized cryptocurrency and payment system, launched in 2009 by a mysterious creator known only as Satoshi Nakamoto. The word “cryptocurrency” refers to a group of digital assets where transactions are secured and verified using cryptography – a scientific practice of encoding and decoding data. Those transactions are often stored on computers distributed all over the world via a distributed ledger technology called blockchain (see below).

Bitcoin can be divided into smaller units known as “satoshis” (up to eight decimal places) and used for payments, but it’s also considered a store of value like gold. That is because the price of a single bitcoin has increased considerably since its inception – from less than a cent to tens of thousands of dollars. When discussed as a market asset, bitcoin is represented by the ticker symbol BTC.

The term “decentralized” is used often when discussing cryptocurrency, and simply means something that is widely distributed and has no single, centralized location or controlling authority. In the case of bitcoin, and indeed many other cryptocurrencies, the technology and infrastructure that govern the creation, supply and security of it do not rely on centralized entities, like banks and governments, to manage it.

Decentralized network example
(Nuthawut Somsuk/Getty Images)

Instead, Bitcoin is designed in such a way that users can exchange value with one another directly through a peer-to-peer network – a type of network where all users have equal power and are connected directly to each other without a central server or intermediary company acting in the middle. This allows data to be shared and stored, or bitcoin payments to be sent and received seamlessly between parties. 

The Bitcoin network (capital “B”, when referring to the network and technology, lower-case “b” when referring to the actual currency, bitcoin) is completely public, meaning anyone in the world with an internet connection and a device that can connect to the internet can participate without restriction. It’s also open-source, meaning anyone can view or share the source code Bitcoin was built upon.

Perhaps the easiest way to understand Bitcoin is to think of it as the internet for money. The internet is purely digital, no single person owns or controls it, it’s borderless (meaning anyone with electricity and a device can connect to it), it runs 24/7, and people who use it can easily share data with one another. Now imagine if there was an “internet currency,” where everyone who used the internet could help to secure it, issue it and pay each other directly with it without having to involve a bank. That’s essentially what bitcoin is.

An alternative to regular currency

Nakamoto originally designed bitcoin as an alternative to fiat money, with the goal for it to eventually become a globally accepted legal tender so that people could use it to purchase goods and services.

Bitcoin’s utility for payments, however, has been stymied somewhat by its price volatility. Volatility is a word used to describe how much an asset’s price changes over a period of time. In the case of bitcoin, its price can change dramatically day to day – and even minute to minute – making it a less than ideal payment option. For example, you wouldn’t want to pay $3.50 for a cup of coffee and 5 minutes later it’s worth $4.30. Conversely, it doesn’t work out great for merchants either if bitcoin’s price falls dramatically after the coffee’s handed over.

In many ways, bitcoin works in the opposite way as traditional money: It is not controlled or issued by a central bank, it has a fixed supply (which means new bitcoins cannot be created at will), and its price is not predictable. Understanding these differences is the key to understanding bitcoin.

How does Bitcoin work?

It’s important to understand there are three separate components to Bitcoin, all of which combine together to create a decentralized payment system:

  • The Bitcoin network
  • The native cryptocurrency of the Bitcoin network, called bitcoin (BTC)
  • The Bitcoin blockchain

Bitcoin runs on a peer-to-peer network where users – typically individuals or entities who want to exchange bitcoin with others on the network – do not require the help of intermediaries to execute and validate transactions. Users can choose to connect their computer directly to this network and download its public ledger in which all the historical bitcoin transactions are recorded. 

This public ledger uses a technology known as “blockchain,” also referred to as “distributed ledger technology.” Blockchain technology is what allows cryptocurrency transactions to be verified, stored and ordered in an immutable, transparent way. Immutability and transparency are vitally important credentials for a payment system that is verified publicly without a trusted third party in charge.

Whenever new transactions are confirmed and added to the ledger, the network updates every user’s copy of the ledger to reflect the latest changes. Think of it as an open Google document that updates automatically when anyone with access edits its content. 

As its name implies, the Bitcoin blockchain is a digital string of chronologically ordered “blocks” – chunks of code that contain bitcoin transaction data. It is important to mention, however, that validating transactions and bitcoin mining are separate processes. Mining can still occur whether transactions are added to the blockchain or not. Likewise, an explosion in Bitcoin transactions does not necessarily increase the rate at which miners find new blocks. 

Building blocks
(Shutterstock)

Irrespective of the volume of transactions waiting to be confirmed, the Bitcoin network is programmed to allow new blocks to be added to the blockchain approximately once every 10 minutes. 

Because of the public nature of the blockchain, all network participants can track and assess bitcoin transactions in real time. This infrastructure reduces the possibility of an online payment issue known as double-spending. Double spending occurs when a user tries to spend the same cryptocurrency twice.

Bob, who has 1 BTC, might try to send it to both Rishi and Eliza at the same time and hope the system doesn’t spot it.

Double spending is prevented in the traditional banking system because reconciliation is performed by a central authority. It also isn’t a problem with physical cash because you can’t hand two people the same single dollar bill. 

Bitcoin, however, has thousands of copies of the same ledger, and so it requires the entire network of users to unanimously agree on the validity of each and every transaction that takes place. This agreement between all parties is what’s known as “consensus.”

Just as banks constantly update the balances of their users, everyone that has a copy of the Bitcoin ledger is responsible for confirming and updating the balances of all bitcoin holders. So, the question is: How does the Bitcoin network ensure that consensus is achieved, even though there are countless copies of the public ledger stored all over the world? This is done through a process known as “proof-of-work.”

What is proof-of-work?

Computers in the Bitcoin network use a process called proof-of-work (PoW) to validate transactions and secure the network. Proof-of-work is the Bitcoin blockchain’s “consensus mechanism.” 

While proof-of-work was the first and is generally the most common type of consensus mechanism for cryptocurrencies that run on blockchains, there are others – most notably proof-of-stake (PoS), which tends to consume less overall computing power (and therefore less energy).

Proof-of-work elevates certain network contributors to the role of “validators” – more commonly known as “miners” – only after they have proven their commitment to the network by dedicating an immense amount of computing power to discovering new blocks – a process that typically takes approximately 10 minutes.

When a new block is discovered, the successful miner who found it through the mining process gets to fill it with 1 megabyte’s worth of validated transactions. This new block is then added to the chain and everyone’s copy of the ledger is updated to reflect the new data. In exchange for their efforts, the miner is allowed to keep any fees attached to the transactions they add, plus they’re given an amount of newly minted bitcoin. The new coins created and handed to successful miners are known as a “block reward.”

All Bitcoin users have to pay a network fee each time they send a transaction (usually based on the size of it) before the payment can be queued for validation. Think of it as buying a stamp to mail a letter. 

The goal when adding a transaction fee is to match or exceed the average fee paid by other network participants so that your transaction is processed in a timely manner. Miners have to cover their own electricity and maintenance costs when running their machines all day to validate the bitcoin network, and so they prioritize transactions with the highest fees attached to make the most money possible when filling new blocks.

You can view the average fees on the Bitcoin mempool, which can be likened to a waiting room where unconfirmed transactions are held until they are selected and added to the blockchain by miners.

How is bitcoin created?

The Bitcoin network automatically releases newly minted bitcoin to miners when they find and add new blocks to the blockchain. The total supply has a cap of 21 million, meaning once the number of virtual coins in circulation reaches 21 million, the network will stop minting new coins. In a way, Bitcoin mining doubles as both the transaction validation and the issuance process (until all the coins are mined, and then it will only function as the transaction validation process).

Importantly, increasing the amount of computing power dedicated to bitcoin mining will not mean more bitcoins are mined. Miners with more computing power only increase their chances of being rewarded with the next block, so the amount of bitcoin mined remains relatively stable over time.

A technician monitoring mining rigs at a Bitfarms facility
(James MacDonald/Bloomberg/Getty Images)

The Bitcoin network uses a coin distribution strategy known as “bitcoin halving” that ensures the amount of bitcoin distributed to miners reduces over time. By gradually decreasing the supply of new bitcoin entering circulation, the idea is it will help support the asset’s price (based on the fundamental principles of supply and demand). 

A bitcoin halving (sometimes called a “halvenings”) happens every 210,000 blocks or roughly four years. When the network first launched in 2009, each successful miner received 50 bitcoin (BTC) as a block reward. Fast forward to 2021: Block rewards are now 6.25 BTC, a reduction from 12.5 BTC prior to the bitcoin halving in May 2020. 

The next halving is expected to take place sometime in 2024 and will see block rewards drop again, to 3.125 BTC. The process will continue until eventually there are no more coins left to be mined. 

Today, there are more than 18.7 million BTC in circulation, meaning there are just 2.25 million BTC left to enter circulation. However, taking into consideration the halving principle and other network factors like mining difficulty, it’s estimated the last bitcoin will be mined sometime around the year 2140.

What is a bitcoin wallet?

A bitcoin wallet is a software program that runs on a computer or a dedicated device that provides the functionality required to secure, send and receive bitcoin. Counterintuitively, the cryptocurrency itself is not stored in a wallet. Instead, the wallet secures the cryptographic keys – essentially a very specialized type of password – that proves the ownership of a specific amount of bitcoin on the network. 

Anytime a bitcoin transaction is executed, ownership of the bitcoin transfers from the sender to the recipient, with the network designating the recipient’s keys as the new “password” for accessing the bitcoin.

Bitcoin uses a system called public-key cryptography (PKC) to preserve the integrity of its blockchain. Originally used to encrypt and decrypt messages, PKC is now commonly used on blockchains to secure transactions. This system allows only individuals with the right set of keys to access specific coins.

There are two types of keys required to own and execute bitcoin transactions: A private key and a public key. Both keys are strings of randomly generated alphanumeric characters used to encrypt and decrypt transactions. On the Bitcoin network, PKC implements one-way mathematical functions that are easy to solve in one way and almost impossible to reverse. 

The blockchain uses the one-way mathematical algorithm to create a public key from the private key. With this, it is practically impossible to regenerate the private key from the public key, meaning you’d better not lose your keys (or forget your password to access them). Also, you will receive a public address, which is simply the hashed or shorter form of your public key. 

This address functions similarly to a house address and is shared to receive bitcoin. On the other hand, the private key must be kept hidden from prying eyes, just as your debit card’s PIN is meant for your eyes alone.

To execute transactions, you are required to use your private key and public key to encrypt and sign your Bitcoin transactions. Also, you have to include the public address of the recipient. With this, only the recipient with the right private key can unlock or claim the transferred bitcoin. 

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Chapter 02

How Can I Buy Bitcoin?

So you’ve learned the basics of bitcoin, now you’re excited about its potential and want to buy some. But how?

Compared with when Bitcoin first launched in 2009, buying cryptocurrency has gotten easier by the day. Today, you can purchase bitcoin directly on crypto exchanges, peer-to-peer marketplaces, Bitcoin ATMs and even on some traditional brokerage platforms. The list is quite elaborate.

You can also opt to use hard cash, credit or debit cards, or wire transfers, depending on whom and where you are buying from.

Now, before you buy your first bitcoin, you must decide how you want to store it. Think of this as having a bank account or physical wallet to keep your money. 

In the case of bitcoin, you can use an online wallet in the form of an exchange platform or an independent provider, a mobile wallet, a desktop wallet or an offline wallet such as a hardware device or a paper wallet. You can find more information on bitcoin wallets and tips on how to use them here.

That being said, here’s a quick rundown on how you can buy the leading cryptocurrency.

Cryptocurrency exchanges

One of the easiest ways to buy bitcoin is via cryptocurrency exchanges. As the name suggests, a crypto exchange is a platform that allows you to buy and sell cryptocurrencies using different traditional fiat money options or other digital currencies.

To buy bitcoin on a crypto exchange, you will need to open an account on the exchange platform. Chances are that you may also be required to go through some know-your-customer (KYC) and anti-money-laundering (AML) procedures – these are just basic background checks so that the crypto exchange knows you are who you say you are. This typically entails submitting your official ID and sometimes your proof of address. On the flip side, some exchanges give you restricted access and benefits when you sign up with just your email without verifying your identity. This is a perfect option if you wish to stay anonymous and don’t plan to buy a large amount of bitcoin.

Speaking of crypto exchanges, while there are hundreds of them to choose from, as a beginner, it is recommended that you stick with popular high-volume exchanges such as Binance, Coinbase, Houbi, FTX and Kraken. However, it’s always advisable to conduct your own research before selecting a particular exchange to use. Some are available only to people from certain countries, while others are geared toward more experienced traders.

Once you’ve picked an exchange to use, the next step is to fund your account in order to purchase bitcoin. Most exchanges would allow you to fund your account through bank transfers, credit cards or PayPal.

Keep in mind that most platforms will charge fees for certain funding options, such as credit card deposits. In addition to charging deposit fees, you will also need to pay a fee for every transaction, to incentivize a bitcoin miner to process your transaction.

Once your account is funded, you can then proceed to buy bitcoin on your chosen exchange. 

Note that the exchange will automatically generate a wallet for you. The downside of this is that you don’t have control over your private key – the key that determines who the true owner is of the cryptocurrency stored in the wallet – and could potentially lose some of all of your bitcoin if the exchange is hacked. This, however, is a great option if you plan on exchanging your bitcoin for other cryptocurrencies and taking small profits from price swings. 

If you plan to buy a significant amount of bitcoin without a plan to sell any time soon, you are better off moving your funds to an offline or hardware wallet.

Peer-to-peer bitcoin markets

While crypto exchanges may have grown to become the de facto way to buy bitcoin, you can also purchase the digital asset directly from other bitcoin owners via peer-to-peer platforms like LocalBitcoins, Paxful, Binance P2P and Bitquick. This is also known as over-the-counter (OTC) trading.

OTC trading is considerably faster and offers more diverse payment options. However, buying bitcoin directly from individuals can be extremely risky. Meeting a complete stranger face to face to privately exchange money for cryptocurrency doesn’t always work out for the best. Platforms like LocalBitcoins offer a much safer solution and use an in-house escrow service to ensure the exchange process runs smoothly.

Bitcoin ATMs

Bitcoin ATMs operate just like regular cash ATMs. The only difference is they allow you to buy and sell bitcoin, as opposed to just withdrawing fiat. These devices will send bitcoin to your wallet in exchange for cash. All you need to do is feed in the bills, hold your wallet’s QR code up to a screen and the corresponding amount of bitcoin is beamed to your account. Coinatmradar can help you to find a bitcoin ATM near you.

Traditional stock brokers

Thanks to the growing popularity of bitcoin, several traditional brokers now allow customers to buy and sell the digital asset on their platforms. Robinhood is a pioneer in this regard. It is the first mainstream investment broker to allow customers to purchase bitcoin on its platform, along with a selection of other cryptocurrencies. Its crypto arm, Robinhood Crypto, is also available in most states in the U.S. Similarly, you can also buy bitcoin on broker platforms such as eToro and TradeStation.

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Chapter 03

Why Use Bitcoin?

Satoshi Nakamoto originally created bitcoin as an alternative, decentralized payment method. Unlike international bank transfers, it was low-cost and almost instantaneous. 

You’ve probably heard that bitcoin and cryptocurrencies and all the hype around them as being the “future of finance.” The primary philosophy behind Bitcoin was to create an electronic payment system that would not rely on a third party or central authority for confirmation, settlement or issuance.

In addition to eliminating third parties, bitcoin transactions were touted as being irreversible, immutable and relatively cheaper than traditional payment options. Compared to fiat currencies that are controlled by the government, Bitcoin is public and operates independently of any state entity. Transactions are digitally verified through a type of ledger technology known as a blockchain that isn’t bound to one central server, but rather to a global network of computers. This makes bitcoin transactions significantly less vulnerable to fraud or chargebacks.

Imagine waking up one morning to a closed PayPal account because the company claims there has been some fraudulent activity involving your account. That cannot happen in a decentralized setting because your funds are not controlled by a centralized entity. Similarly, the government of your country cannot shut down the blockchain because it is not hosted on a single server or in a single location.

These features are particularly beneficial to online merchants and allow consumers to enjoy a wider selection of domestic and international markets without worrying about high fees or geographical restrictions. Moreover, bitcoin transactions are pseudonymous, meaning they offer users some degree of anonymity when trading or exchanging funds.

Bitcoin for cross border remittance

To an extent, Bitcoin also addresses the problems with the current model of remittance, particularly the issues of price and speed. Traditional remittance services typically charge exorbitant fees and transfers may take several days to get to their destinations. Bitcoin, on the other hand, is not only faster, but also much cheaper. This is because the Bitcoin network does not rely on any intermediary to confirm transactions. There is a network of voluntary contributors all over the world that are running their computing equipment 24/7 to confirm bitcoin transactions. 

It takes about 10 minutes for a BTC payment to be confirmed. This can be lower or higher, depending on how congested the Bitcoin network is. The more people using the network at any given time, the longer it takes to process a transaction and vice versa. You can think of it like traffic on a motorway. The busier it is, the longer it takes for each car to reach its destination.

Bitcoin has proven to be a more efficient and cheaper way to transfer money across borders. For instance, according to the World Bank, the global average cost of sending a $200 remittance in the third quarter of 2020 was 6.82%. That can become quite significant for higher figures. Whereas, the average transaction fee of the Bitcoin network is currently around $2.37. That is why countries like El Salvador have also moved to make the cryptocurrency a legally recognized form of money.

In general, Bitcoin is decentralized and gives people the freedom to exchange value without relying on intermediaries. And thanks to the institutional boom of 2020 and 2021, many traditional companies now accept bitcoin as payments.

A store of value

Away from its use as a medium of exchange, bitcoin has earned itself the title of “digital gold” because of its scarcity and potential use as an economic or inflation hedge – a type of asset purchased to protect against an economic crisis or decreasing currency value (respectively.) 

Just like gold, which has a finite supply, Bitcoin has a maximum supply of 21 million tokens. So far, 18.76 million Bitcoin tokens have been mined. For this reason, many traders, institutional investors, and small-time savers have woken up to the potential gains from bitcoin’s price appreciation because there are only 2.24 million left to enter circulation. 

It’s estimated there are just over 20 million millionaires in the world, meaning there’s just enough for each to own a single BTC, notwithstanding the rest of the world’s population.

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Chapter 04

How to Store Your Bitcoin

Just like with your bank account or physical wallet, you need a place to store your bitcoin after purchasing it.

Bitcoin is stored in digital wallets – a type of computer software that connects to the Bitcoin network. Just like bank cards have account numbers, digital wallets feature a unique address that can be shared with others when you make transactions. 

This unique address is a shorter, more usable version of your public key. It consists of between 26 and 35 random alphanumeric characters and typically appears in this form: 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa.

It is worth stating that every letter and number in this address is important. Always double-check a Bitcoin address before sending or receiving funds.

Keep your bitcoin private keys private

In addition to the public key, a Bitcoin address also has a private key. And as the name suggests, this key should not be shared with anyone. Anyone with access to your private key can easily access your wallet and steal your funds. Similarly, if you fail to securely store your private key and you lose it, chances are that you may never be able to recover your bitcoin.

An easy way to understand public and private keys is to think of your public key like your home address. Anyone can see it and use it to send deliveries to your house, or in this case, transactions. Your private key is like the key to your front door. It is something that only you want to be in possession of, and it is what keeps other people from being able to access the contents of your digital wallet.

A private key is used to verify that you own the public key. It allows you to access your wallet and to sign off on transactions. Some wallets automatically generate a secure seed phrase; a set of words that allow you to unlock your wallet if you lose your keys. Print out this phrase or write it on a piece of paper and keep it in a safe place. Never take a photo of or take a screenshot of your seed words.

Types of bitcoin wallets

Also, as with bank accounts, there are different types of wallets for storing your bitcoin, each offering its own set of pros and cons. In a broad sense, there are two main categories of bitcoin wallets:

  • Hot wallets: These types of bitcoin wallets are connected to the internet and are typically available online or on your smartphone.
  • Cold wallets: These types of bitcoin wallets cannot be accessed through the internet. They often involve physical devices (like a USB stick), where bitcoin and other cryptocurrencies can be stored securely offline.

Hot wallets

Although relatively less secure, hot wallets are the most popular in the crypto world because of their convenience. Because hot wallets are already connected to the internet, it means people can access and exchange funds quickly – something that’s important if you want to make quick trades when the crypto market is moving. Some popular examples in this category include mobile wallets (for example, BitPay), web or online wallets (for example, Coinbase) and desktop wallets (for example, Bitcoin Core). 

When you register on a cryptocurrency trading platform, a web wallet will be automatically created for you to store your bitcoin. One of the downsides of using web wallets on exchange platforms is your private keys are being held by a third party. Remember the front door key analogy? Now, imagine someone else owning the key to your house. If they wanted to, the owner of the key could decide to lock you out or someone could break in without your knowledge if the owner lets the key slip into the wrong hands.

To put things in perspective, in 2019, the New Zealand-based exchange Cryptopia was hacked, and more than $17 million in ether and other cryptocurrencies was stolen, forcing the exchange to shut down. A former employee of the exchange was also convicted for stealing $170,000 in crypto by creating copies of Cryptopia’s private keys and saving them to a USB. This gave him access to over $100 million in crypto.

On the flip side, an online exchange wallet is arguably the easiest to set up and use, and some leading exchanges now have insurance funds to compensate users in the event of a hack. It is worth noting, though, that this should not be exclusively relied upon.

As earlier mentioned, there are also mobile and desktop wallets (otherwise known as software wallets) that give you a greater level of control and security. Unlike the wallets created by crypto exchanges, most mobile and desktop wallets do give you access to your private keys. But that also means if your mobile phone is hacked or stolen, the thief might be able to get a copy of your wallet and your bitcoin. Software wallets, therefore, require greater security precautions. Electrum and Exodus are examples of software wallets.

Before downloading any software wallet, ensure you conduct your own due diligence and read the reviews of other customers. Also, confirm you are downloading a legitimate copy of a real wallet. Some shady programmers create clones of various crypto websites and offer downloads for free, leading to the possibility of a hack.

Cold wallets

Cold wallets such as hardware wallets or paper wallets are the safest options when it comes to storing your bitcoin. These are completely offline products and cannot be accessed by the internet; meaning someone would have to be in the same physical location as the wallet to steal it. When you use an online paper wallet generator, however, it’s important to note some can pose a security risk because you are trusting the website with key generation. If you do use one, be sure to verify the code has no backdoors (ways for the website developers to see your keys).

These are recommended if you plan to hold your bitcoin for a long time and don’t plan to trade it frequently. But, once again, if you lose the hardware wallet, your bitcoin may be lost unless you have kept reliable backups of the keys. Some large investors keep their hardware wallets in secure locations such as bank vaults. Trezor and Ledger are notable examples of leading hardware wallet providers.

If you can’t decide which wallet to go with, don’t worry. Many serious bitcoin investors use a hybrid approach and hold a majority of their crypto wealth offline in cold wallets while keeping a smaller spending balance on a web or online wallet. This is a best-of-both-worlds situation and one that ensures your bitcoin is stored securely.

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Chapter 05

How to Sell Bitcoin

Similar to buying bitcoin, there are several options when it comes to selling the digital asset.

As already mentioned in the previous section, you can purchase bitcoin directly on crypto exchanges, bitcoin ATMs, P2P marketplaces or traditional brokers. Likewise, you can also sell the cryptocurrency via any of these channels, with the exception of some bitcoin ATMs.

You can sell your bitcoin on the same exchange or stockbroker where it was purchased by placing a sell order. As the name suggests, a sell order is an instruction to a broker (crypto exchange) to sell an asset at a particular price.

Bitcoin can also be exchanged or swapped for other cryptocurrencies or stablecoins, such as ether or tether (respectively.) This is useful if you wish to take profit on your bitcoin investment or prevent the value of your portfolio from declining.

If you plan on withdrawing the fiat equivalent of your bitcoin, you would need to first place a sell order involving your preferred fiat currency. Once the order is fulfilled, most exchanges will allow you to withdraw your funds directly to your bank account. Note, most exchanges have a minimum withdrawal amount, which means if you leave small balances in your exchange account you might have to deposit more in order to get the remaining amount out.

Overall, Binance, Coinbase, Huobi, FTX and Kraken are examples of some high-volume exchanges where you can buy and sell bitcoin. Volume refers to the amount of money or digital assets being traded on the exchange at any given time. High volumes mean it’s more likely you’ll be able to successfully complete your sale at any given time.

It is also worth mentioning that depending on the volume of your order and how much you wish to withdraw, you may be required to go through some form of identity verification. “Know Your Customer” (KYC) procedures are now mandatory for many crypto exchanges, just as they are for traditional financial institutions. Therefore, you may be required to submit information such as a valid identification card, utility bills with your house address or a Social Security number, to verify your identity.

Apart from crypto exchanges and bitcoin ATMs, another alternative is through peer-to-peer markets. In this case, the transaction happens directly between you and the buyer. You can register as a seller on platforms such as LocalBitcoins, Paxful and BitQuick.

Localbitcoins screenshot
(Localbitcoins)

Although each platform handles payments a little differently, the process is essentially the same. First, you need to register as a seller on any of these platforms and then set up your sell order. You will be notified when someone shows an interest in your offer. Some platforms such as Localbitcoins have a built-in escrow service to ensure transactions run smoothly. You can receive payment for your bitcoin via Moneygram, cash in the mail, gift cards, bank deposits and even cash in person, depending on your preferred option. If you decide to make in-person trades, make sure you transact in a public setting and be aware of the major risks involved.

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Chapter 06

How Do Bitcoin Transactions Work?

Now that you’ve set up your bitcoin wallet and are ready to make your first transaction, let’s take a look at how bitcoin transactions actually work. 

There are three key variables in any bitcoin transaction: an amount, an input and an output. An input is the address from which the money is sent, and an output is the address that receives the funds. Since a wallet can contain several input addresses, you can send money from one or more inputs to one or more outputs. There is also a data storage portion on each transaction, a sort of note, that allows you to record data to the blockchain immutably.

But the unique thing about bitcoin transactions is that, if you initiate a transaction that’s worth less than the total amount in your input, you get your change back not to your original output, but through a new third address in your control. This means your wallet typically ends up containing multiple addresses, and you can pull funds from these addresses to make future transactions.

You’ve learned how to buy and store your bitcoins, so you already know what public and private keys are for, and you’ll need these to issue a transaction. To do that, you put your private key, the amount of bitcoins you want to send and the output address into the bitcoin software on your computer or smartphone. 

Then the program generates a signature made from your private key to announce this transaction to the network for validation. The network needs to confirm that you own the bitcoin being transferred and that you haven’t spent it by checking all previous transactions which are public on the ledger. Once the bitcoin program verifies that indeed your private key corresponds to the provided public key (without knowing what your private key is), your transaction is confirmed. 

This transaction is now included in a “block” which gets attached to the previous block to be added to the blockchain. Every transaction in the blockchain is tied to a unique identifier called a transaction hash (txid), which looks like a 64-character string of random letters and numbers. You can track a particular transaction by typing this txid in the search bar on the blockchain explorer

Transactions can’t be undone or tampered with, because it would mean re-doing all the blocks that came after. This process is not instantaneous. Because the bitcoin blockchain is fairly large, it takes a lot of time to process a single transaction among the many on the blockchain. 

The amount of time it takes to confirm a transaction varies, ranging anywhere from a few minutes to a couple days, based on traffic on the blockchain and the size of your transaction. Larger transactions with higher fees tend to get validated by miners quicker than smaller ones. That said, once it is confirmed, it is immutably recorded forever.

If you want to indulge in some mindless fascination, you can sit at your desk and watch bitcoin transactions float by. Blockchain.info is good for this, but try BitBonkers if you want a hypnotically fun version.

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Chapter 07

How Bitcoin Mining Works

Bitcoin mining is the process of discovering new blocks, verifying transactions and adding them to the Bitcoin blockchain. Here’s what that means, how it works and why it’s important.

In the traditional sense, bitcoin mining encapsulates the same steps involved in unearthing mineral resources; namely requiring huge amounts of energy, time and money to uncover something before others do. Where gold miners use heavy machinery to find gold, bitcoin miners use powerful computers to “discover” new blocks to add to the Bitcoin blockchain.

Each time a new block is discovered, the successful miner is granted the right to fill that block with new transaction data. In return for dedicating time and resources to performing this task, winning miners receive a free amount of newly minted bitcoin known as a “block reward” as well as any fees attached to transactions they store in the new blocks.

The mining process is how new transaction data is added to the Bitcoin blockchain and governs how new bitcoin enters circulation.

Source: Shutterstock

How do bitcoin miners discover new blocks?

In order to validate and add new transactions to the blockchain, miners must compete with each other using specialized computing equipment. They use their equipment to generate fixed-length codes known as “hashes” (see below.)  In order to discover the next block, miners must generate a hash that has an equal or higher number of zeros in front of it than the “target hash.” 

The target hash is a 64-digit hexadecimal code (comprising numbers 0-9 and letters A-F) all miners are trying to get below in order to discover the next block.

As a starting point, all miners take the data from the previous block, known as the “block header”– which contains things like a timestamp of the block, the hash of the previous block data, and an empty space known as a “cryptographic nonce.” Most of the data in the block header is fixed, meaning it cannot be changed, apart from the nonce. A nonce means “a number only used once” and is the part of the previous block header which miners are allowed to tweak. Remember, just changing a single bit of the input produces a totally different hash.

The tricky part is, hashes are generated completely at random, meaning it’s impossible for miners to know what the hashes will be before they generate them. So it’s simply a case of trial and error until someone finds the right nonce value – known as the “golden nonce.”

This is why miners have to invest in energy-intensive computers, particularly application-specific integrated circuit (ASIC) miners, that can generate trillions of hashes per second.

An easy way to think of bitcoin mining is to imagine each new block is a treasure chest with a combination lock on it. To get the free bitcoin block reward inside and win the right to add new transaction data into it (and collect the associated fees) you have to keep turning one of the number wheels on the lock (the nonce) until you crack the combination (the target hash.)

Here’s an example of what a target hash might look like:

0000000000000000057fcc708cf0130d95e27c5819203e9f967ac56e4df598ee

To see just how difficult it is to generate a hash with more zeros at the front than the above target hash, try creating a winning hash yourself with this free online hash generator. Simply type anything you want in the text box provided and see if it produces a hash with more than 17 zeros at the front!

What is a hash?

A hash is a cryptographic mathematical function that converts any message or data input into a fixed-length code. Think of it as an encryption technique where messages are mathematically transposed into a sequence of numbers and letters of a fixed length. 

The outputs have set lengths to make it impossible to guess the size of the input. For instance, the hash for the word “hi” would be exactly the same length as the hash of the entire text of a Harry Potter book.

These hash functions are irreversible, meaning that it’s impossible to revert the hash back to its original input. The same input will also always generate the same sequence of letters and numbers. For example, the hash of “hi” will be the same code every time. Each code generated is completely unique too, meaning it’s impossible to produce the same hash with two different inputs.

In the case of Bitcoin, the blockchain uses Secure Hash Algorithm 256 or SHA 256 to generate a 256 bit or 64 characters long output, regardless of the size of the input. 

How rewarding is bitcoin mining?

For every new block added to the blockchain, the protocol – a set of rules programmed into Bitcoin – releases a fixed amount of newly minted coins to the successful miner. This block reward system doubles as the distribution mechanism for Bitcoin. 

As part of the programmed measures introduced by Satoshi Nakamoto to steadily decrease the number of bitcoins released over time, the coins awarded to miners are slashed roughly every four years, or 210,000 blocks, in a process known as a “Bitcoin Halving.” In 2009, the block reward was 50 BTC. This figure was reduced to 25 BTC in 2013. The most recent halving occurred in 2020, and saw block rewards fall from 12.5 BTC to 6.25 BTC. 

Note that bitcoin has a 21 million maximum supply cap, and we already have 18.7 million coins in circulation. Block rewards will no longer be distributed once 21 million BTC has been released to the market. Once this happens, miners will only be able to earn rewards from bitcoin transaction fees.

Even with this combination of two revenue sources, not every miner generates profits. To make ends meet, a miner’s earnings must exceed the amount spent on electricity and the purchase and maintenance of mining rigs. Also, as mining difficulty increases, large mining operations are forced to expand or upgrade their equipment to maintain a competitive edge.For most average miners who cannot afford to invest in expensive equipment, there’s an opportunity to combine their resources with other miners around the world. Each miner agrees to share rewards according to the contributions of each miner.  These networks of miners are called “mining pools.

Bitcoin mining difficulty

An important thing to know about Bitcoin is that when Satoshi Nakamoto created the protocol, they programmed in a target block discovery time of 10 minutes. This means it should take approximately 10 minutes for a miner to successfully create the winning code to discover the next block. 

So how does the network ensure new blocks are discovered every 10 minutes? 

The Bitcoin protocol has the ability to automatically increase or decrease the complexity of the mining process depending on how quickly or slowly blocks are being found.

Every two weeks, the Bitcoin protocol automatically adjusts the target hash to make it harder or easier for miners to find blocks. If they are taking too long (more than 10 minutes) the difficulty will adjust downward; less than 10 minutes, it will adjust upward. More specifically, the protocol will increase or decrease the number of zeros at the front. This might not sound like much, but just adding a single zero to the target hash makes the code significantly harder to beat, and vice versa.

The 2021 crackdown on mining activities in China caused bitcoin’s network difficulty to experience its biggest drop in history. This subsequently led to remaining bitcoin miners reporting significant rises in mining revenue.

Through this system, the Bitcoin protocol is able to keep block discovery times as close to 10 minutes as it can. You can track the mining difficulty of Bitcoin here

While actively participating in the Bitcoin network can be a highly rewarding venture, the electricity and hardware requirements often limit its profitability – particularly for miners with limited resources.

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Chapter 08

How to Set Up a Bitcoin Miner

By this stage, you will understand how bitcoin works, and what mining means. But we need to get from theory to practice. How can you set up bitcoin mining hardware and start generating some digital cash? The first thing you need to do is decide on what hardware you’re going to use. There are two main things to think about when choosing it:

  • Hashrate: This is the number of calculations your hardware can perform every second as it tries to beat the target hash described in a previous section. Hashrates are measured in megahashes, gigahashes, terahashes, and exahashes per second (MH/sec, GH/sec, TH/sec, and EH/sec). The higher your hashrate (compared to the current average hashrate), the more likely you are to solve a transaction block. The Bitcoin wiki’s mining hardware comparison page is a good place to go for rough information on hashrates for different hardware.
  • Energy consumption: When choosing your hardware, it’s worth looking at the device’s energy consumption. Bitcoin mining rigs have a healthy appetite for electricity, and that costs money. You want to make sure you don’t end up spending all your money on electricity to mine coins that won’t be worth what you paid.

To work out how many hashes you’re getting for every watt of electricity that you use, divide the hash count by the number of watts shown in the technical specifications of the hardware.

(Anna Baydakova for CoinDesk)

For example, if you have a 500 GH/sec device, and it’s taking 400 watts of power, you’re getting 1.25 GH/sec per watt. You can check your power bill or use an electricity price calculator online to find out how much that means in hard cash.

There are three main hardware categories for bitcoin miners: GPUs, FPGAs, and ASICs. We’ll explore them in depth below.

CPU/GPU bitcoin mining

The least powerful category of bitcoin mining hardware is your computer itself. Theoretically, you could use your computer’s CPU to mine for bitcoins, but in practice, this is so slow by today’s standards that there isn’t any point.

You can enhance your bitcoin hashrate by adding graphics hardware to your desktop computer. Graphics cards feature graphical processing units (GPUs). These are designed for heavy mathematical lifting so they can calculate all the complex polygons needed in high-end video games. This makes them particularly good at the Secure Hash Algorithm (SHA) – or SHA-256 in Bitcoin’s case – hashing mathematics necessary to solve transaction blocks.

One of the nice things about GPUs is they also leave your options open. Unlike other options discussed later, these units can be used with cryptocurrencies other than bitcoin. Litecoin, for example, uses a different proof-of-work algorithm to Bitcoin, called Scrypt. This has been optimized to be friendly to CPUs and GPUs, making them a good option for GPU miners who want to switch between different currencies. However, similar to bitcoin mining, ASICs now dominate the litecoin mining landscape.

CPU and GPU mining are no longer viable these days. Bitcoin’s mining difficulty has accelerated so much with the release of ASIC mining power that simple graphics cards can’t compete.

FPGA miners

A Field Programmable Gate Array (FPGA) is an integrated circuit designed to be configured after being built. This enables a mining hardware manufacturer to buy the chips in volume, and then customize them for bitcoin mining before putting them into their own equipment. Because they are customized for mining, they offer performance improvements over CPUs and GPUs. Single-chip FPGAs have been seen operating at around 750 MH/sec, although that’s at the high end, although manufacturers could put more than one chip on a board.

They were a significant upgrade over CPU and GPU mining at the time. However, today FPGAs are no longer competitive in bitcoin mining due to their low performance.

ASIC chips

This is where the action is. Application Specific Integrated Circuits (ASICs) are specifically designed to do just one thing: mine bitcoin at mind-crushing speeds as efficiently as possible. Because these chips have to be designed specifically for that task and then fabricated, they are expensive and time-consuming to produce – but the speeds are stunning. At the time of writing, units are selling with speeds anywhere from 7-14 Terahash/second (1 Terahash = 1 trillion hashes.) It will be interesting to see if there is more progress to be made past the 14 TH/sec point.

Before making your purchase, calculate the projected profitability of your miner, using mining profitability calculators online like this one. You can input parameters such as equipment cost, hashrate, power consumption and the current bitcoin price to see how long it will take to pay back your investment.

One of the other key parameters here is network difficulty. This metric determines how hard it is to discover new blocks, and varies according to the network hashrate. The difficulty is likely to increase substantially as ASIC devices come on the market, so it might be worth increasing this metric in the calculator to see what your return on investment will be like as more people join the game.

You may well need mining software for your ASIC miner, too, although some newer models promise to ship with everything pre-configured, including a bitcoin address so that all you need to do is plug it in the wall.

Now, you’re all set up. Good for you. But chances are you won’t stand much chance of successfully mining bitcoin unless you work with other people, by joining a bitcoin mining pool for example. Nowadays, the bitcoin mining industry primarily operates on a pool level rather than on an individual level. Some of the biggest bitcoin mining pools in the world right now are F2Pool, Poolin, Binance Pool and AntPool.

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Chapter 09

Can the Bitcoin Network Scale?

You have some bitcoins in your wallet and want to spend them on your daily purchases. What would that look like in a world where Visa, Mastercard and other financial services still dominate the market?

The ability of bitcoin to compete with other payment systems has long been debatable in the cryptocurrency community. When its mysterious creator Satoshi Nakamoto limited Bitcoin’s block size to 1 Megabyte (MB) in 2010 to prevent people from spamming the network, he also limited Bitcoin’s scalability.

Since each block takes an average of 10 minutes to process, only a small number of transactions can go through at a time. For a system many hoped could replace fiat payments, this presents a significant hurdle. An increase in demand would inevitably lead to an increase in fees, and bitcoin’s utility would be limited even further.

The scaling debate has unleashed a wave of technological innovation in the search for workarounds. While significant progress has occurred, a sustainable solution is still far from clear.

The Bitcoin block size debate

A simple solution initially appeared to be an increase in the block size. Yet that idea turned out to be not simple at all.

Increasing the block size could weaken the protocol’s decentralization by giving more power to miners with bigger blocks. Plus, the race for faster machines could eventually make bitcoin mining unprofitable. The number of nodes able to run a much heavier blockchain could also decrease, further centralizing a network that depends on decentralization.

Second, not everyone agrees on this method of change. How do you execute a system-wide upgrade when participation is decentralized? Should everyone have to update their bitcoin software? What if some miners, nodes and merchants don’t?

And finally, bitcoin is bitcoin, why mess with it? If someone didn’t like it, they were welcome to modify the open-source code and launch their own forked coin.

The arrival of SegWit

One of the earliest solutions to this issue was proposed by developer Pieter Wiulle in 2015, called Segregated Witness (SegWit.) 

This process would increase the capacity of bitcoin blocks without changing their size limit by altering how the transaction data was stored. More specifically, SegWit involves removing signature data (the witness information) from the base transaction block (the main 1MB block) and adding it to a separate block, known as an “extended block.” This allows more transaction data to be added to the main block.

SegWit was deployed on the bitcoin blockchain in August 2017 via a soft fork to make it compatible with network contributors that did not upgrade. A soft fork is a change to the software protocol that makes previously valid transaction blocks invalid. While many wallets and other bitcoin services are gradually adjusting their software, others are reluctant to do so because of the perceived risk and cost.

Several industry players argued that SegWit didn’t go far enough. It might help in the short term, but sooner or later bitcoin would again be up against a limit to its growth.

In 2017, coinciding with CoinDesk’s Consensus conference in New York, a new approach was revealed: Segwit2X. This idea combined SegWit with an increase in the block size to 2MB, effectively multiplying the pre-SegWit transaction capacity by a factor of 8.

Far from solving the problem, the proposal created a further wave of discord. The manner of its unveiling (through a public announcement rather than an upgrade proposal) and its lack of replay protection (transactions could happen on both versions, potentially leading to double spending) rankled many. And the perceived redistribution of power away from developers towards miners and businesses threatened to cause a fundamental split in the community, despite being ultimately avoided.

Alternative bitcoin scaling solutions

Other technological approaches are being developed as a potential way to increase capacity.

  • Schnorr signatures: These offer a way to consolidate signature data, reducing the space it occupies within a bitcoin block (and enhancing privacy). Combined with SegWit, this could allow a much greater number of transactions, without changing the block size limit.
  • The Lightning Network: A second-layer protocol that runs on top of bitcoin. The Lightning Network opens up channels for fast microtransactions that only settle on the bitcoin network when the channel participants are ready.

Adoption of the upgrade is slowly spreading throughout the network, increasing transaction capacity and lowering fees. To date, more than 74% of bitcoin transactions use SegWit. Up from 44% last year.

Progress is accelerating on more advanced solutions such as Lightning, and the potential of Schnorr signatures is attracting increasing attention, with several developments working on detailing functionality and integration.

While bitcoin’s use as a payment mechanism has been superseded by its value as a speculative investment asset, the need for a greater number of transactions is still pressing as the fees charged by the miners for processing are now more expensive than fiat equivalents. Enhancing scalable functionality is crucial to unlocking the potential of the underlying blockchain technology as it continues gaining traction as a viable form of currency.

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Chapter 10

What is Bitcoin's Lightning Network?

Bitcoin’s scalability issues mean that smaller transactions can congest the blockchain. The Lightning Network was created to fix that.

Since each block on Bitcoin’s blockchain takes an average of 10 minutes to process, only a small number of transactions can go through at a time. In 2016, developers Thaddeus Dryja and Joseph Poon proposed an idea that could enable fast and cheap transactions on the network without having to change the block size. They called it, the “Lightning Network.”

The Lightning Network creates a second layer on top of the bitcoin blockchain that uses user-generated, micropayment channels to conduct transactions more efficiently.

These transactions are much faster than regular bitcoin transactions because they don’t need to be broadcast to the entire network. And because there are no miners that need incentivizing, transaction fees are low or even non-existent.

How it works

Think of Bitcoin’s main blockchain as a highway, and the Lightning Network as a series of side streets that reduce the highway’s congestion from smaller transactions.

First, two parties who wish to transact with each other set up a multisignature wallet (which requires more than one signature to enact a transaction). The wallet holds some amount of bitcoin. The wallet address is then saved to the Bitcoin blockchain, setting up the payment channel.

The two parties can now conduct an unlimited number of transactions without ever touching the information stored on the blockchain. With each transaction, both parties sign an updated balance sheet to reflect how much of the bitcoin stored in the wallet belongs to each.

Once the two parties finish transacting and close out the channel, the resulting balance is registered on the blockchain. In the event of a dispute, both parties can use the most recently signed balance sheet to recover their share of the wallet.

It is not necessary to set up a direct channel to transact on the Lightning Network – you can send payments to someone via channels with people with whom you are connected. The network automatically finds the shortest route. The network’s goal is to allow users to make smaller payments without transaction fees or delays.

Where are we now with the Bitcoin Lightning Network?

The Lightning Network launched a beta version in 2018, but was far from fully operational. Since then, the number of nodes on the Lightning Network has doubled year over year, moving the project closer to achieving its goal of making bitcoin a viable currency for day-to-day transactions.

Bitcoin Lightning Network chart by CoinDesk

The network went from 6,040 nodes in July 2020 to 12,675 in July 2021, a 105% increase. It should be noted that this includes only public nodes (nodes accessible to anyone). The number of total nodes is much higher if you were to include private connections (nodes accessible only to permissioned users).

Despite significant growth in recent years, the Lightning Network still faces challenges to overcome if it wants to solve bitcoin’s scalability issues. The most demanding issue is security. Because nodes on the Lightning Network are required to always be online, they become more vulnerable to attacks. And while the network aims to reduce fees incurred from processing transactions on bitcoin’s main network, it includes its own set of additional costs for opening and closing channels, along with routing fees. These are issues that will likely be solved with time, as its technology develops and becomes fully optimized.

Exchanges are also beginning to adopt the technology to optimize their users’ bitcoin withdrawals and deposits. Kraken recently announced that it will be adding support for the Lightning Network in 2021, as will the U.K.’s CoinCorner, Vietnam’s VBTC and San Francisco-based OKCoin. The adoption of Lightning by prominent exchanges is good news for the network’s future, and while most agree that the Lightning Network won’t be the solution to all of bitcoin’s future challenges, it will certainly play an important role in the cryptocurrency’s future.

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Chapter 11

What are Bitcoin Mining Pools?

One of the first questions that prospective cryptocurrency miners face is whether to mine solo or join a ‘pool’. There are a multitude of reasons both for and against mining pools. Here’s what you need to know.

If you’re deciding whether to join a mining pool or not, it can be helpful to think of it like a lottery syndicate – the pros and cons are exactly the same. Going solo means you won’t have to share the reward, but your odds of getting a reward are significantly decreased. Although a pool has a much larger chance of solving a block and winning the reward, that reward will be split between all the pool members.

Source: Shutterstock

Therefore, joining a pool creates a steady stream of income, even if each payment is modest compared to the full block reward (which currently stands at 6.25 BTC). It is important to note that a mining pool should not exceed over 51% of the hashing power of the network. If a single entity ends up controlling more than 50% of a cryptocurrency network’s computing power, it could theoretically wreak havoc on the whole network.

Difficulty level is another factor to keep in mind when considering solo mining.  It is currently so high that it’s practically impossible for soloists to make a profit mining. Unless, of course, you happen to have a garage full of ASICs sitting in Arctic conditions. If you’re a beginner, joining a mining pool is a great way to reap a small reward over a short period of time. Indeed, pools are a way to encourage small-scale miners to stay involved.

One method of mining that bitcoin facilitates is “merged mining”. This is where blocks solved for bitcoin can be used for other currencies that use the same proof of work algorithm (for example, namecoin and devcoin). A useful analogy for merged mining is to think of it like entering the same set of numbers into several lotteries.

First-time miners who lack particularly powerful hardware should look at altcoins over bitcoin – especially currencies based on the scrypt algorithm rather than SHA256. This is because the difficulty of bitcoin calculations is far too high for the processors found in regular PCs.

When deciding which mining pool to join, you need to weigh up how each pool shares out its payments and what fees (if any) it deducts. Typical deductions range from 1% to 10%. However, some pools do not deduct anything.

There are many schemes by which pools can divide payments. Most of which concentrate on the amount of ‘shares’ which a miner has submitted to the pool as ‘proof of work’.

Shares are a tricky concept to grasp. Keep two things in mind: firstly, mining is a process of solving cryptographic puzzles; secondly, mining has a difficulty level. When a miner ‘solves a block’ there is a corresponding difficulty level for the solution. Think of it as a measure of quality. If the difficulty rating of the miner’s solution is above the difficulty level of the entire currency, it is added to that currency’s block chain and coins are rewarded.

Additionally, a mining pool sets a difficulty level between 1 and the currency’s difficulty. If a miner returns a block which scores a difficulty level between the pool’s difficulty level and the currency’s difficulty level, the block is recorded as a ‘share’. There is no use whatsoever for these share blocks, but they are recorded as proof of work to show that miners are trying to solve blocks. They also indicate how much processing power they are contributing to the pool – the better the hardware, the more shares are generated.

The most basic version of dividing payments this way is the ‘pay per share’ (PPS) model. Variations on this puts limits on the rate paid per share; for example, equalised shared maximum pay per share (ESMPPS), or shared maximum pay per share (SMPPS). Pools may or may not prioritise payments for how recently miners have submitted shares: for example, recent shared maximum pay per share (RSMPPS). More examples can be found on the bitcoin wiki.

There are many pool options available for mining beside bitcoin. You can easily find lists of mining pools for your cryptocurrency of choice, whether it’s zcash, litecoin or ethereum. Some popular ones are BTC.com, Slush Pool and AntPool.

Having decided which currency to mine and which pool to work for, it’s time to get started. You need to create an account on the pool’s website, which is just like signing up for any other web service. Once you have an account, you’ll need to create a ‘worker’. You can create multiple workers for each piece of mining hardware you’ll use. The default settings on most pools are for workers to be assigned a number as their name, and ‘x’ as their password, but you can change these to whatever you like.

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Chapter 12

What Can You Buy with Bitcoin?

When we talk about buying things with bitcoin, many conjure up an image of a black market filled with shady dealings, off-the-record sales and illegal products, or billionaires in search of luxury yachts and private jets. In reality, the list of goods now available to purchase with bitcoin is long.

With more than one-third of small businesses now accepting cryptocurrency as a form of payment in the United States alone, the list of products and services you can buy with the “digital gold” continues growing by the day.

From large corporations like Microsoft and AT&T to places as small as your local farmer’s market stand, bitcoin’s advantages as a payment method – namely the ease of cross-border transactions, anonymity and nonreversible transactions – have been welcomed by businesses across many industries.

Here are a few common items that can be purchased with bitcoin.

gifts, exchange, trade
Source: Shutterstock

Cars

While Tesla made headlines in May 2021 when company founder Elon Musk announced it would no longer be accepting bitcoin as a payment method, the used car market remains bitcoin friendly, and has been for quite some time. 

BitCars is one example of an online dealership that sells luxury vehicles of all sorts, Teslas included, with its listings priced in BTC. If you ever find yourself with a need for speed, you can purchase a Lamborghini Huracan from BitCars’ site for 12.432 BTC. Going on a road trip? For 38.68394 BTC, you can be the owner of a Vario Perfect 1000 motorhome.

For buyers in the market for something less exotic, companies like AutoCoinCars resemble your run-of-the-mill used car dealership with plenty of modest offerings.

Real estate

Purchasing real estate with bitcoin and other cryptocurrencies has gone from being a novelty to a common occurrence since the first ever bitcoin property sale in 2017. In June, a Miami penthouse sold for $22.5 million in crypto, the largest sale ever paid for by virtual currency. Numerous global real estate groups now offer their listings in bitcoin as well, including:

In the United States, popular office-sharing provider and real estate company WeWork now accepts bitcoin as a payment method through BitPay. Crypto exchange Coinbase was the first customer to take advantage of the offering. 

Sporting events

While buying game-day tickets with bitcoin is not yet commonplace in all stadiums around the U.S., certain franchises have started to pave the way for its adoption. The National Basketball Association’s Dallas Mavericks, owned by blockchain investor and entrepreneur Mark Cuban, are partnered with BitPay to accept bitcoin and other forms of cryptocurrency. They even offer discounted rates on merchandise you pay for with bitcoin.

Before their current season began, Major League Baseball’s Oakland A’s announced they would be selling season tickets for luxury suites at the price of 1 BTC, or its fiat equivalent. Like the Mavericks, the A’s also have made tickets and merchandise purchasable with bitcoin and other cryptocurrencies. 

The technology is being adopted for more than just sporting events. Bitcoin can also be used to buy tickets to concerts and other events held in arenas.

Buy artwork with bitcoin

High-profile auction houses have started to accept cryptocurrency as a payment method on the heels of the non-fungible token boom leaking into the world of fine art. The famed Phillips auction house in Hong Kong recently listed a Banksy piece valued at between $2.82 million and $4.1 million for purchase in bitcoin and ether. The list of galleries that accept bitcoin as a payment method in the United States also continues to expand nationally, and is currently concentrated on the East and West coasts.

Maecenas allows you to buy fractional shares of famous artwork as an investment using bitcoin. In 2019, it auctioned a 31.5% share of the Andy Warhol painting, 14 Small Electric Chairs, for $1.7 million.

Travel

As the travel industry opens back up, bitcoin can be used to book flights and hotels worldwide. CheapAir and Travela are both partnered with Booking.com and Expedia to allow users to make purchases using bitcoin and other cryptocurrencies. 

A week at Los Angeles’ Beverly Hills Hotel can be purchased for 0.33 BTC, or $10,430.

Some hotels even allow customers to book stays with bitcoin directly using BitPay, although most still require the use of a third party to pay completely in bitcoin, which can lead to additional costs.

Private Jets

Crypto-savvy travelers with deeper pockets can now fly private thanks to companies like BitLux and flyExclusive, which recently started accepting bitcoin for purchasing private jet chartering. A flight from Paris to Hong Kong is priced at just under $100,000.

If you’re interested in buying your own plane outright with bitcoin, Aviatrade makes that possible, with a variety of jets listed on the site valued at tens of millions of dollars.

Web services

It intuitively makes sense that web services would be early adoptees of accepting digital currency. You can purchase a virtual private network in bitcoin through a variety of companies. Some of the most popular are  ProtonVPN, Cyberghost and NordVPN.

Cloud storage is also widely available for purchase using bitcoin from companies like MEGA and Sync.

If you’re looking to host a website using bitcoin, look no further than vendors like Coin.host or Server Room. Dedicated servers start from $121.5 per month, or 0.0038 BTC.

Charity

Numerous charities have begun accepting bitcoin as a form of donation. These include popular nonprofits such as the American Red Cross, the American Cancer Society and UNICEF, as well as smaller organizations like The Water Project, Save the Children and Run 2 Rescue

The organization Charityvest also allows you to donate to any charity using bitcoin even if it doesn’t accept cryptocurrencies directly. In 2020, $8.1 million was donated to Charityvest Funds, supporting more than 2,100 charities.

Paypal bitcoin purchases

In May, PayPal announced a new service called “Checkout with Crypto,” which allows users to make purchases using bitcoin with millions of merchants. The service converts cryptocurrency purchased through PayPal’s exchange and converts it to U.S. dollars for the merchant. At one point, it was reported that PayPal was buying up 70% of all newly minted bitcoin to make the operation possible.

While customers are unable to send money from their personal wallet to their PayPal account, the service is useful for those who use PayPal as their primary way of buying and selling bitcoin and other cryptocurrencies.

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Chapter 13

Is Bitcoin Legal?

As the market capitalization of the cryptocurrency market shoots up, through price movements and a surge in new tokens, regulators around the world are stepping up the debate on oversight into the use and trading of digital assets.

Very few countries have gone as far as to declare bitcoin illegal. That does not, however, mean that bitcoin is “legal tender” – so far, only Japan has gone as far as to give bitcoin that designation. However, just because something isn’t legal tender, does not mean that it cannot be used for payment – it just means that there are no protections for either the consumer or the merchant, and that its use as payment is completely discretionary.

Other jurisdictions are still mulling what steps to take. The approaches vary: some smaller nations such as Zimbabwe have few qualms about making brash pronouncements casting doubts on bitcoin’s legality. Larger institutions, such as the European Commission, recognize the need for dialogue and deliberation, while the European Central Bank (ECB) believes that cryptocurrencies are not yet mature enough for regulation. In the United States, the issue is complicated further by the fractured regulatory map – who would do the legislating, the federal government or individual states?

A related question in other countries, to which there is not yet a clear answer, is: should central banks keep an eye on cryptocurrencies, or financial regulators? In some countries they are one and the same thing, but in most developed nations, they are separate institutions with distinct remits.

Another divisive issue is: should bitcoin be regulated on a national or international basis? There needs to be a further distinction between regulation of the cryptocurrency itself (is it a commodity or a currency, is it legal tender?) and cryptocurrency businesses (are they money transmitters, do they need licenses?). In a few countries the considerations are tied together – in most others, they have been dealt with separately.

Below is a brief summary of pronouncements made by certain countries. This list was last updated in July 2020.

Australia

The Australian government has been supportive of cryptocurrency and blockchain technologies. In 2017, it declared that cryptocurrencies were legal, and they would be treated as assets subjected to Capital Gains Tax

In 2018, the Australian Transaction Reports and Analysis Centre announced new regulations that require exchanges operating in the country to register with AUSTRAC, maintain records and verify users. To combat money laundering and terrorism financing in the future, unregistered exchanges will face charges and monetary penalties in the future.

Argentina

Under Argentina’s Constitution, bitcoins aren’t considered legal currency because they are not issued by the central bank. In spite of a strong bitcoin ecosystem, Argentina has not yet drawn up regulations for the cryptocurrency, although the central bank has issued official warnings of the risks involved.

Bangladesh

In 2015, Bangladesh expressly declared that using cryptocurrencies was a “punishable offence.” Authorities have been on the hunt for illegal bitcoin traders in the country. 

Bolivia

In 2014, the central bank of Bolivia officially banned the use of any currency or tokens not issued by the government.

Canada

Canada was one of the first countries to draw up what could be considered “bitcoin legislation.” In 2014, the Governor General of Canada passed Bill C-31 in 2014, which designated “virtual currency businesses” as “money service businesses,” compelling them to comply with anti-money laundering and know-your-client requirements. The law is pending issuance of subsidiary regulations.

The government has specified that bitcoin is not legal tender, and the country’s tax authority has deemed bitcoin transactions taxable, depending on the type of activity.

China

While China has not banned bitcoin (and President Xi Jinping has continued to praise in blockchain developments as critical to technical innovations), financial regulators have cracked down on bitcoin exchanges – all major bitcoin exchanges in the country, including OKCoin, Huobi, BTC China, and ViaBTC, suspended order book trading of digital assets against the yuan in 2017.

It also appears to be withdrawing preferential treatment (tax deductions and cheap electricity) for bitcoin miners.

Ecuador

In 2014, the National Assembly of Ecuador banned bitcoin and decentralized digital currencies while the central bank stated that the online trading of cryptocurrencies is not forbidden. Still, bitcoin is not legal tender and is not an authorized payment method for goods and services..

Egypt

In January 2018, the Grand Mufti of Egypt declared that cryptocurrency trading was forbidden under Islamic religious law due to the risk associated with the activity. While this is not legally binding, it does count as a high-level legal opinion.

However, that ban was lifted in May 2019, easing restrictions by allowing companies with licenses to operate.

Europe

The European Union is taking a cautious approach to cryptocurrency regulation, with several initiatives underway to involve sector participants in the drafting of supportive rules. The focus appears to be on learning before regulating, while boosting innovation and taking into account the needs of the ecosystem.

In April 2018, the parliament’s members voted by a large majority to support a December 2017 agreement with the European Council for measures aimed, in part, to prevent the use of cryptocurrencies in money laundering and terrorism financing. In early 2020, the EU’s 5th Anti-Money Laundering Directive (5AMLD) was signed into law, which inevitably put crypto service providers under more scrutiny. 

India

The Indian central bank has issued a couple of official warnings on bitcoin, and at the end of 2017 the country’s finance minister clarified in an interview that bitcoin is not legal tender. The government does not yet have any regulations that cover cryptocurrencies, although it is looking at recommendations.

The central bank, however, has barred Indian financial institutions from working with cryptocurrency exchanges and other related services (a ban recently upheld by the country’s Supreme Court).

In June 2020, there were rumors of a new ban on crypto, which industry experts later said were premature. 

Iran

In April 2018, Iran’s central bank and one of its principal market regulators said that financial businesses should not deal in bitcoin or other cryptocurrencies. Furthermore, CoinDesk reported on government censorship of cryptocurrency exchange websites operating in the country. In May 2020, the Iranian parliament proposed to include cryptocurrency in currency smuggling laws. 

Japan

Japan was the first country to expressly declare bitcoin “legal tender,” passing a law in early 2017 that also brought bitcoin exchanges under anti-money laundering and know-your-customer rules (although license applications have temporarily been suspended as the regulators deal with a hack on the Coincheck exchange in early 2018).

Japan’s Financial Services Agency (FSA) has been cracking down on exchanges, suspending two, issuing improvement orders to several and mandating better security measures in five others. It has also established a cryptocurrency exchange industry study group which aims to examine institutional issues regarding bitcoin and other assets. In October 2019, the FSA issued additional guidelines for funds investing in crypto.

Japan, flag

Kazakhstan

According to 2018 reports, the National Bank of Kazakhstan recently hinted at plans to ban cryptocurrency trading and mining, although as yet no strict regulations have been passed.

Kyrgyzstan

The central bank of Kyrgyzstan declared in 2014 that using cryptocurrencies for transactions was against the law. In August 2019, the Ministry of Economy drafted a law to impose crypto mining taxation. 

Malaysia

Malaysia’s Securities Commission is working together with the country’s central bank on a cryptocurrency regulation framework. In early 2019, the country’s Securities Commission began to mandate approvals for ICOs as securities offerings.

Malta

In June 2018, The European island passed a series of blockchain-friendly laws, including one that details the registration requirements of cryptocurrency exchanges. Earlier in 2020, Malta Financial Services Authority published a document addressing issues related to offerings of security tokens.

Mexico

In 2014, Mexico’s central bank issued a statement blocking banks from dealing in virtual currencies. The following year, the finance ministry clarified that, although bitcoin was not “legal tender,” it could be used as payment and therefore was subject to the same anti-money laundering restrictions as cash and precious metals.

At the end of 2017, Mexico’s national legislature approved a bill that would bring local bitcoin exchanges under the oversight of the central bank.

Morocco

Towards the end of 2017, Morocco’s foreign exchange authority declared that the use of cryptocurrencies within the country violated foreign exchange regulations and would be met with penalties.

Namibia

Namibia is one of the few countries to have expressly declared that purchases with bitcoin are “illegal.”

Nigeria

While Nigerian banks are prohibited from handling virtual currencies, the central bank is working on a white paper which will draft its official stance on use of cryptocurrencies as a payment method.

Pakistan

In April 2018, Pakistan’s central bank issued a statement barring financial companies in the country from working with cryptocurrency firms. In April 2019, the federal government introduced new regulations and licensing schemes for crypto firms. 

Russia

While cryptocurrencies are used in Russia for various payments and services, the Russian authorities have continued to propose new legislation that would crack down on crypto development around the country. In November 2019, the central bank said it would support a ban on crypto payments. New regulatory draft bills rolled out in early 2020, which would prohibit the issuance and operations of digital currencies in the country, including distributing crypto news.

Singapore

Hailed as a crypto haven of the world, Singapore has embraced an innovative approach toward cryptocurrency and blockchain, thanks to the leadership of the Monetary Authority of Singapore (MAS). In January 2020, the MAS announced a new regulatory framework to cover all Singapore-based crypto businesses and exchanges under anti-money laundering and counterrorist-financing rules. It later added a six-month grace period of license exemption for a number of crypto companies such as Binance, Coinbase, Gemini and Bitstamp.

South Africa

In 2017, the South Africa Reserve Bank implemented a “sandbox approach,” testing draft bitcoin and cryptocurrency regulation with a selected handful of startups. In April 2020, the Intergovernmental Fintech Working Group proposed that would increase oversight of crypto activities and mandate business to register with AML watchdog the Financial Intelligence Centre.

Johannesburg, South Africa

South Korea

In early 2018, South Korea banned anonymous virtual currency accounts. And in an effort to curb cryptocurrency speculation, the authorities are working on increased oversight of exchanges, although the governor of the Financial Supervisory Service has said the government will support “normal” cryptocurrency trading.

In an interesting shift in strategy, a recent report in the South Korean press indicated that the country’s financial authorities are in talks with similar agencies in Japan and China over joint oversight of cryptocurrency investment.

In April 2018, the Fair Trade Commission ordered 12 of the country’s cryptocurrency exchanges to revise their user agreements. In 2020, lawmakers voted on new requirements for crypto exchanges, which would potentially kick out small players who can’t afford new regulatory burdens.

Thailand

After allegedly declaring bitcoin illegal, the Bank of Thailand issued a backtracking statement in 2014, clarifying that it is not legal tender (but not technically illegal), and warning of the risks.

In March 2018, the government’s executive branch provisionally passed two royal decree drafts, establishing formal rules to protect cryptocurrency investors (as well as setting KYC requirements), and setting a tax on their capital gains. The drafts have yet to receive final cabinet approval. There were plans in August 2019 to include cryptocurrencies in the country’s anti-money laundering regime.

United States of America

The U.S. is plagued by a fragmented regulatory system, with legislators at both the state and the federal level responsible for layered jurisdictions and a complex separation of powers.

Some states are more advanced than others in cryptocurrency oversight. New York, for instance, unveiled the controversial BitLicense in 2015, granting bitcoin businesses the official go-ahead to operate in the state (many startups pulled out of the state altogether rather than comply with the expensive requirements). In mid-2017, Washington passed a bill that applied money transmitter laws to bitcoin exchanges.

New Hampshire requires bitcoin sellers to get a money transmitter license and post a $100,000 bond. In Texas, the state securities commission is monitoring (and, on occasion, shutting down) bitcoin-related investment opportunities. And California is in bitcoin regulation limbo after freezing progress on Bill 1326 which – while criticized for issues such as overly broad definitions – was seen as less oppressive than New York’s BitLicense.

At the federal level, the Securities and Exchange Commission’s focus has been on the use of blockchain assets as securities, such as whether or not certain bitcoin investment funds should be sold to the public, and whether or not a certain offering is fraud.

The Commodities Futures Trading Commission (CFTC) has a bigger potential footprint in bitcoin regulation, given its designation of the cryptocurrency as a “commodity.” While it has yet to draw up comprehensive bitcoin regulations, its recent efforts have focused on monitoring the nascent futures market. It has also filed charges in several bitcoin-related schemes, which underlines its intent to exercise jurisdiction over cryptocurrencies whenever it suspects there may be fraud.

The Uniform Law Commission, a non-profit association that aims to bring clarity and cohesion to state legislation, has drafted the Uniform Regulation of Virtual Currency Business Act, which several states are contemplating introducing in upcoming legislative sessions. The Act aims to spell out which virtual currency activities are money transmission businesses, and what type of license they would require. Critics fear it too closely resembles the New York BitLicense.

United Kingdom

Britain’s Financial Conduct Authority (FCA) sees bitcoin as a “commodity,” and therefore does plan to regulate it. It has hinted, however, that it will step in to oversee bitcoin-related derivatives. This lack of consumer protection has been behind recent FCA warnings on the risks inherent in cryptocurrencies.

In July 2019, the Financial Conduct Authority finalized its guidance on crypto assets, clarifying which tokens would fall under its jurisdiction.

Ukraine

The government of Ukraine has created a working group composed of regulators from various branches to draft cryptocurrency regulation proposals, including the determination of which agencies will have oversight and access. Also, a bill already before the legislature would bring cryptocurrency exchanges under the jurisdiction of the central bank. The Ministry of Digital Information said in February 2020 that it won’t be regulating the crypto mining sector

Zimbabwe

Late in 2017, a senior official from Zimbabwe’s central bank stated that bitcoin was not “actually legal.” While the extent to which it can and cannot be used is not yet clear, the central bank is apparently undertaking research to determine the risks. CoinDesk recently produced a podcast series about the future of bitcoin in Africa, including in Zimbabwe

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Chapter 14

Who Is Satoshi Nakamoto?

Mystery man

While we may not know who Satoshi Nakamoto was, we know what he (or she) did. Nakamoto was the inventor of the Bitcoin protocol, publishing a paper via the Cryptography Mailing List in November 2008.

Nakamoto then released the first version of the Bitcoin software client in 2009, participating with others on the project via mailing lists,until he finally began to fade from the community toward the end of 2010.

Nakamoto worked with people on the open-source team but took care never to reveal anything personal about himself, and the last anyone heard from him was in the spring of 2011, when he said that he had “moved on to other things.”

Was Satoshi Nakamoto Japanese?

Best not to judge a book by its cover. Or in fact, maybe we should.

“Satoshi” means “clear thinking, quick witted; wise.” “Naka” can mean “medium, inside, or relationship.” “Moto” can mean “origin” or “foundation.”

Those things would all apply to the person who founded a movement by designing a clever algorithm. The problem, of course, is that each word has multiple possible meanings.

We can’t know for sure whether Nakamoto was Japanese or not. In fact, it’s presumptuous to assume that he was actually a “he.” Allowing for the fact that “Satoshi Nakamoto” could have been a pseudonym, “he” could have been a “she,” or even a “they.”

Does anyone know who Satoshi Nakamoto was?

No, but the detective techniques that people use when guessing are sometimes even more intriguing than the answer. The New Yorker’s Joshua Davis believed that Satoshi Nakamoto was Michael Clear, a graduate cryptography student at Dublin’s Trinity College.

He arrived at this conclusion by analyzing 80,000 words of Nakamoto’s online writings and searching for linguistic clues. He also suspected Finnish economic sociologist and former games developer Vili Lehdonvirta.

Both have denied being bitcoin’s inventor. Michael Clear publicly denied being Satoshi at the 2013 Web Summit.

Adam Penenberg at Fast Company disputed that claim, arguing instead that Nakamoto may actually have been three people: Neal King, Vladimir Oksman and Charles Bry. He figured this out by typing unique phrases from Nakamoto’s bitcoin paper into Google, to see if they were used anywhere else.

One of them, “computationally impractical to reverse,” turned up in a patent application made by these three for updating and distributing encryption keys. The bitcoin.org domain name originally used by Satoshi to publish the paper had been registered three days after the patent application was filed.

It was registered in Finland, and one of the patent authors had traveled there six months before the domain was registered. All of them deny it.

In any case, when bitcoin.org was registered on Aug. 18, 2008, the registrant actually used a Japanese anonymous registration service, and hosted it using a Japanese ISP. The registration for the site was only transferred to Finland on May 18, 2011, which weakens the Finland theory somewhat.

Others think Nakamoto was Martii Malmi, a developer living in Finland who has been involved with bitcoin since the beginning and developed its user interface.

Another possibility is Jed McCaleb, a lover of Japanese culture and resident of Japan, who created troubled bitcoin exchange Mt. Gox and cofounded decentralized payment systems Ripple and later Stellar.

Another theory suggests that computer scientists Donal O’Mahony and Michael Peirce are Satoshi, based on a paper that they authored concerning digital payments, along with Hitesh Tewari, based on a book that they published together. O’Mahony and Tewari also studied at Trinity College, where Michael Clear was a student.

Israeli scholars Dorit Ron and Adi Shamir of the Weizmann Institute retracted allegations made in a paper suggesting a link between Satoshi and Silk Road, the black market web site that was taken down by the FBI in October 2013. They had suggested a link between an address allegedly owned by Satoshi, and the site. Security researcher Dustin D. Trammell owned the address, and disputed claims that he was Satoshi.

In May 2013, internet pioneer Ted Nelson threw another hat into the ring: Japanese mathematician Professor Shinichi Mochizuki, although he admits that the evidence is circumstantial at best.

In February 2014, Newsweek’s Leah McGrath Goodman claimed to have tracked down the real Satoshi Nakamoto. Dorian S. Nakamoto has since denied he knows anything about bitcoin, eventually hiring a lawyer and releasing an official statement to that effect.

No, Satoshi Nakamoto is not Dorian S. Nakamoto, a 64-year-old Japanese man living in California, probably.
(Damian Dovarganes/AP)

Hal Finney, Michael Weber, Wei Dai and several other developers were among those who are periodically named in media reports and online discussions as potential Satoshis. A group of forensic linguistics experts from Aston University believe the real creator of bitcoin is Nick Szabo, based upon analysis of the Bitcoin White Paper.

Dominic Frisby, a comedian and a writer, also suggests that BitGold creator Szabo was the most likely candidate to be Satoshi in his book, “Bitcoin: The Future of Money.” His detailed analysis involved the linguistics of Satoshi’s writing, judging the level of technical skill in C++ and even Satoshi’s likely birthday.

In Nathaniel Popper’s book, “Digitial Gold,” released in May 2015, Popper reveals that in a rare encounter at an event Szabo again denied that he was Satoshi.

Then in early December 2015, reports by Wired and Gizmodo tentatively claimed to have identified Nakamoto as Australian entrepreneur Craig S Wright. WIRED cited “an anonymous source close to Wright” who provided a cache of emails, transcripts and other documents that point to Wright’s role in the creation of bitcoin. Gizmodo cited a cache of documents sourced from someone claiming to have hacked Wright’s business email account, as well as efforts to interview individuals close to him. While most other individuals speculated to be Nakamoto have insisted they are not the inventor of Bitcoin, Wright is the exception, claiming to be Nakamoto. However, many believe the evidence so far presented to be insufficient to confirm this claim, and some even think the reports that made the initial connection were misled by Wright himself in an elaborate hoax.

So what do we know about Satoshi Nakamoto?

One thing we know, based on interviews with people that were involved with him at an early stage in the development of bitcoin, is that he thought the system out very thoroughly.

His coding wasn’t conventional, according to core developer Jeff Garzik, in that he didn’t apply the same rigorous testing that you would expect from a classic software engineer.

How rich is Satoshi Nakamoto?

An analysis by Sergio Lerner, an authority on bitcoin and cryptography, suggests Nakamoto mined many of the early blocks in the bitcoin network, and that he had built up a fortune of around 1 million unspent bitcoins. That hoard would be worth $18.4 billion U.S. dollars as of Nov. 23, 2020.

What is Satoshi Nakamoto doing now?

No one knows what Nakamoto is up to, but one of the last emails he sent to a software developer, dated Apr. 23, 2011, said, “I’ve moved on to other things. It’s in good hands with Gavin and everyone.”

Did Satoshi Nakamoto work for the government?

There are rumors, of course. People have interpreted his name as meaning “central intelligence,” but people will see whatever they want to see. Such is the nature of conspiracy theories.

The obvious question would be why one of the three-letter agencies would be interested in creating a cryptocurrency that would subsequently be used as an anonymous trading mechanism, causing senators and the FBI alike to wring their hands about potential terrorism and other criminal endeavors. No doubt conspiracy theorists will have their views on that, too.

Perhaps it doesn’t matter. Core developer Jeff Garzik puts it succinctly, “Satoshi published an open-source system for the purpose that you didn’t have to know who he was, and trust who he was, or care about his knowledge,” he points out. Open-source code makes it impossible to hide secrets. “The source code spoke for itself.”

Moreover, it was smart to use a pseudonym, he argues, because it forced people to focus on the technology itself rather than on the personality behind it. At the end of the day, bitcoin is now far bigger than Satoshi Nakamoto.

Having said that, if the real Satoshi Nakamoto is out there – get in touch!

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Chapter 15

What is the Difference Between Litecoin and Bitcoin?

In 2009, Satoshi Nakamoto launched bitcoin as the world’s first cryptocurrency. The code is open source, which means it can be modified by anyone and freely used for other projects. Many cryptocurrencies have launched with modified versions of this code, with varying levels of success.

Litecoin Logo
Source: Flickr

Litecoin was announced in 2011 with the goal of being the ‘silver’ to bitcoin’s ‘gold’. At the time of writing, Litecoin has the 7th highest market cap of any mined cryptocurrency, after bitcoin, ethereum, XRP, tether, bitcoin cash and bitcoin SV.

Here’s our guide to show you the crucial difference between bitcoin and litecoin.

At-a-glance differences

bitcoin litecoin
Coin limit 21 Million 84 Million
Algorithm SHA-256 Scrypt
Mean block time 10 minutes 2.5 minutes
Difficulty retarget 2016 block 2016 blocks
Block reward details Halved every 210,000 blocks. Halved every 840,000 blocks
Initial reward 50 BTC 50 LTC
Current block reward 6.25 BTC 12.5 LTC
Block explorer blockchain.info block-explorer.com
Created by Satoshi Nakamoto Charles Lee
Creation date January 3rd, 2009 October 7th, 2011
Market cap $167.28B $2.68B
 Bitcoin Statistics  Litecoin Statistics

Mining differences

Just like bitcoin, litecoin is a cryptocurrency that is generated by mining. Litecoin was created in October 2011 by former Google engineer Charles Lee. The motivation behind its creation was to improve upon bitcoin. The key difference for end-users being the 2.5 minute time to generate a block, as opposed to bitcoin’s 10 minutes. Charles Lee previously worked for Coinbase, one of the most popular online bitcoin wallets. He now dedicates his time to the Litecoin Foundation.

ASIC Mining
Source: Shutterstock

For miners and enthusiasts though, litecoin holds a much more important difference to bitcoin, and that is its different proof of work algorithm. Bitcoin uses the SHA-256 hashing algorithm, which involves calculations that can be greatly accelerated in parallel processing. It is this characteristic that has given rise to the intense race in ASIC technology, and has caused an exponential increase in bitcoin’s difficulty level.

Litecoin, however, uses the scrypt algorithm – originally named as s-crypt, but pronounced as ‘script’. This algorithm incorporates the SHA-256 algorithm, but its calculations are much more serialised than those of SHA-256 in bitcoin. Scrypt favours large amounts of high-speed RAM, rather than raw processing power alone. As a result, scrypt is known as a ‘memory hard problem.

The consequences of using scrypt mean that there has not been as much of an ‘arms race’ in litecoin (and other scrypt currencies), because there is (so far) no ASIC technology available for this algorithm. However, this is soon to change, thanks to companies like Alpha Technologies, which is now taking preorders.

GPU mining
Source: Wikipedia

To highlight the difference in hashing power, at the time of writing, the total hashing rate of the bitcoin network is over 20,000 Terra Hashes per second, while litecoin is just 95,642 Mega Hashes per second.

For the time being, ‘state of the art’ litecoin mining rigs come in the form of custom PCs fitted with multiple graphics cards (ie: GPUs). These devices can handle the calculations needed for scrypt and have access to blisteringly fast memory built into their own circuit boards.

There was a time when people could use GPU mining for bitcoin, but ASICs have made this method not worth the effort.

Transaction differences

The main difference is that litecoin can confirm transactions much faster than bitcoin. The implications of that are as follows:

  • Litecoin can handle a higher volume of transactions thanks to its faster block generation. If bitcoin were to try to match this, it would require significant updates to the code that everyone on the bitcoin network is currently running.
  • The disadvantage of this higher volume of blocks is that the litecoin blockchain will be proportionately larger than bitcoin's, with more orphaned blocks.
  • The faster block time of litecoin reduces the risk of double spending attacks – this is theoretical in the case of both networks having the same hashing power.
  • A merchant who waited for a minimum of two confirmations would only need to wait five minutes, whereas they would have to wait 10 minutes for just one confirmation with bitcoin.

Transaction speed (or faster block time) and confirmation speed are often touted as moot points by many involved in bitcoin, as most merchants would allow zero-confirmation transactions for most purchases. It is necessary to bear in mind that a transaction is instant, it is just confirmed by the network as it propagates.

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Chapter 16

How to Accept Bitcoin Payments for Your Store

One issue holding bitcoin back from wider adoption is the lack of businesses that accept the digital currency as payment. This is a chicken-and-egg problem. If more businesses had the ability to accept bitcoin, it might encourage consumers to start obtaining and spending it, and vice versa.

With this in mind, here is our guide to accepting bitcoin in a physical store.

Person-to-person payments

The easiest way to accept bitcoin payments is in-person, simply by getting your customer to send the correct amount of bitcoin (BTC) to your digital wallet. This is similar to thinking of it as a cash-in-hand payment.

A simple QR code system to accept bitcoin payment.

This can be done via many smartphone apps, such as the Bitcoin Wallet app by Andreas Schildbach, on Android. There are also options available on the Windows Phone app store for users of that OS.

Some months ago, Apple removed all bitcoin wallet apps from its App Store. However, on 2nd June, the company rescinded this policy, once again paving the way for wallet apps on iOS devices. These are already starting to appear, with Blockchain, Coinbase and others apps now available. We can expect many more to arrive in coming months too.

Read More: How Do Bitcoin Transactions Work?

Another alternative is CoinBox which is specifically designed for merchants wanting a straightforward option to receive payments. In these scenarios, the merchant enters the price of an item or service into the phone, which then presents a QR code containing the amount to be paid and the address the funds are sent to. The customer scans the QR code with their bitcoin wallet app and the payment is sent.

All of these simple systems are ideal for small businesses testing bitcoin acceptance or for those doing odd-jobs for small amounts. Businesses which are larger in scale will likely look into a dedicated solution that fits in with their existing POS systems.

Merchant bitcoin point-of-sale (POS) solutions

There is also a growing number of commerce-specific options that aim to streamline the process of taking bitcoin payments. The following services offer a variety of POS solutions for merchants, both online and off.

Coinify

Coinify, a Danish firm that acquired BIPS and Coinzone, offers POS solutions for both brick-and-mortar and online stores. Merchants can get paid in bitcoin or fiat currency – or a mixture of the two – and its mobile app, Coinify POS, works with both Android and iOS devices.

POS promo

For online sellers, Coinify offers various integration tools, such as payment buttons, shopping cart plugins or hosted invoicing.

CoinKite

CoinKite is a new startup that offers a bitcoin payment terminal looking exactly like the over-the-counter chip-and-PIN terminals we are so used to using in stores today. This handset reads a bitcoin-based debit card, also offered by CoinKite. The handsets can also serve as a bitcoin and litecoin ATM, as well as offer the option to print QR codes for customers to scan with their smartphone apps.

CoinBase

Coinbase is another payment processor that provides a point of sale app (Android) for bricks-and-mortar retailers. While it currently only supports US bank accounts as a funding source, it offers extensive e-commerce support. Not only does it offer an HTML code segment for easily inserting payment buttons into your website, it also provides plugins for WordPress, WooCommerce, Megento, and ZenCart.

BitPay

BitPay is an international payments processor for businesses and charities. It is integrated into the SoftTouch POS system for bricks-and-mortar retail stores. However, BitPay has an API which could be implemented into any other POS system with some coding work. BitPay has various tariffs that merchants can subscribe to, enabling features such as using the service on a custom domain (for online stores), exporting transactions to QuickBooks, etc.

Blockchain Merchant

Blockchain have also produced a merchant app for Android devices. Blockchain Merchant promises instant transactions, 0% fees on payments and it has multiple linguistic versions for use around the world.

Revel

As mentioned in our recent report: “Revel Systems offers a range of POS solutions for quick-service restaurants, self-service kiosks, grocery stores and retail outlets, among other merchants. POS packages start at $3,000 plus a monthly fee for an iPad, cash drawer and scanner.” It was recently announced that Revel will also include bitcoin as a method of payment in its POS software.

BitXATM

Germany-based startup BitXatm has announced the arrival of its Sumo Pro – a cryptocurrency ATM with a POS (point of sale) function that will appeal to merchants seeking to easily accept payments from customers in digital currencies.

Costing €2,900 (around $3,993), the stand-alone machine offers a generous 17-inch touchscreen and has the ability to accept any fiat currency. Additionally, it can accept or dispense any digital currency, according to the company’s website.

Paystand

California-based online payment processor PayStand provides US-based websites and mobile applications another way to accept payments such e-checks, credit cards and bitcoin. Paystand have recieved $1m in investment as part of its initial seed-funding round.

Founded in 2009, PayStand aims to be a multi-payment gateway that eliminates merchant transaction fees, in part by supporting digital currency acceptance.

Coin of Sale

A new bitcoin POS system, Coin of Sale, is trying to make it easier for merchants to accept bitcoin payments for their goods and services.

Created by Singapore-based expat Thomas Forgac, Coin of Sale works with both Android and iOS devices. When users sign up for an account, they are automatically set up with an Electrum wallet.

The merchant must simply enter the amount of money that needs to be charged and the app will automatically generate a QR code for it. The customer then scans this QR code to complete the payment.

XBTerminal

XBTerminal

 provides a bitcoin POS device that allows the merchant’s customers to pay from any mobile bitcoin wallet by NFC or QR code. Payment from offline mobile devices is supported by bluetooth. Payments take place through the company’s platform and, if desired, bitcoin can be converted instantly to fiat currency at the time of sale.

The company also provides web apps and an online interface for its payments solution for those that wish to invest in third-party hardware.

DIY

With bitcoin, it is possible to forego the fees of using a payment processor or provider, and simply integrate payments into your own custom system. Those with a technical background have achieved this, such as Stephen Early, who integrated bitcoin payments into the POS system of his UK pubs single-handedly.

Get noticed

Whether you have an online or a bricks-and-mortar store, if you accept bitcoin, you need to publicize the fact. You can find a ‘bitcoin accepted here’ sign at the bitcoin wiki.

We Accept Bitcoin

A sign with more impact may alert customers to the fact you accept bitcoin. Cryptocables produces a range of neon and LED signage.

Additionally, Coco Mats ’n More offersitcoin-logoed doormats and ‘Bitcoin Accepted Here’ mats for merchants wanting to advertise the cryptocurrency as a payment option. 

bitcoin-is-accepted-here-doormat

Last updated 14th October 2015

Disclosure
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.