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Understanding Bitcoin

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  1. Understanding Bitcoin

  2. What is Bitcoin? Bitcoin is a software-based payment system described by Satoshi Nakamoto in 2008, and introduced as open-source software in 2009. Payments are recorded in a public ledger using its own unit of account, which is also called bitcoin. Payments work peer-to-peer without a central repository or single administrator, which has led the US Treasury to call bitcoin a decentralized virtual currency. Although its status as a currency is disputed, media reports often refer to bitcoin as a cryptocurrency or digital currency. -Wikipedia

  3. Why Bitcoins? • Bitcoin can be used to buy merchandise anonymously • Bitcoin is not tied to any country or subject to regulation • Small businesses like bitcoin because there are no credit card fees or chargebacks • Some people buy bitcoins as an investment, hoping that they’ll go up in value. • This is one of the reasons for it’s price instability

  4. How does it work? There are no bitcoins, only records of bitcoin transactions Here’s the funny thing about bitcoins: they don’t exist anywhere, even on a hard drive. We talk about someone having bitcoins, but when you look at a particular bitcoin address, there are no digital bitcoins held in it, in the same way that you might hold pounds or dollars in a bank account. You cannot point to a physical object, or even a digital file, and say “this is a bitcoin”. Instead, there are only records of transactions between different addresses, with balances that increase and decrease. Every transaction that ever took place is stored in a vast general ledger called the block chain. If you want to work out the balance of any bitcoin address, the information isn’t held at that address; you must reconstruct it by looking at the block chain.

  5. Mining To understand mining, one needs to understand what a hash function is. Put simply, a hash function takes an input and creates a seemingly random output, however the output is consistent every time you perform the function on a given input, and it is very difficult to determine an input, given only the output. What i want you to do right now is open up a calculator on your computer. In the calculator, take the square root of 3. You should get 1.73205080756887729352744634150. Now take the digits from the 5th place after the decimal all the way to the 10th place after the decimal. As you can see, its 508075. Now try that with another prime number, let’s say 11. sqrt(11) = 3.3166247903553998491149327366707, and the digits in place 5 through 10 are: 247903. This is basically a very simple (and weak) hash function. For any given prime number (in this case it has to be prime), we can find a number (the 6 digit resultant output) that seems to have nothing to do with it, but can be consistently calculated easily. If i were to give you the output 512754, what would be the input? If i didn’t tell you it was 13, you would have to resort to trial and error to find it.

  6. Blockchain Blockchain is simply a public ledger. Bitcoin solves the so called ‘’double spending problem’’ present with digital goods. For example, if I have an mp3 file or an ebook on my computer, I can freely copy that file a thousand times and send it to a thousand different people. For a digital currency, the possibility for unlimited copying would mean a quick hyperinflationary death. Bitcoin solves this by maintaining a peer to peer network and recording each transaction in a public ledger called the block chain. If I send 1 bitcoin from my bitcoin address to my friend John. The bitcoin network records that transaction in the block chain and I no longer have possession of that bitcoin. The coin ‘’moved’’ from my bitcoin wallet to John’s wallet. - See more at: http://www.forexnews.com/bitcoin-trading/#sthash.8DQn5Kjr.dpuf

  7. Why must I sometimes wait for my transaction to clear? Because your transaction must be verified by miners, you are sometimes forced to wait until they have finished mining. The bitcoin protocol is set so that each block takes roughly 10 minutes to mine. Some merchants may make you wait until this block has been confirmed, meaning that you may have to make a cup of coffee and come back again in a short while before you can download the digital goods or take advantage of the service that you paid for. On the other hand, some merchants won’t make you wait until the transaction has been confirmed. They effectively take a chance on you, assuming that you won’t try and spend the same bitcoins somewhere else before the transaction confirms. This often happens for low value transactions, where the risk of fraud isn’t as great.

  8. Are there transaction fees? Sometimes, but not all the time. Transaction fees are calculated using various factors. Some wallets let you set transaction fees manually. Any portion of a transaction that isn’t picked up by the recipient or returned as change is considered a fee. This then goes to the miner lucky enough to solve the transaction block as an extra reward. Right now, many miners process transactions for no fees. As the block reward for bitcoins decreases, this will be less likely.

  9. What if I only want to send part of a bitcoin? Bitcoin transactions are divisible. A satoshi is one millionth of a bitcoin, and it is possible to send a transaction as small as 5430 satoshis on the bitcoin network.

  10. Link to Satoshi Nakamoto’s Original White Paper https://bitcoin.org/bitcoin.pdf

  11. Risks Theft Lost keys Lost memory EMP Bomb Exchange Collapse Value collapse Hacking

  12. What are the benefits? • Low or non-existent fees • No chargebacks • Credit card fees passed to the consumer cost $427 per household • 55% of small businesses do not accept credit cards • Only 27% of purchases are made with cash • Every time a customer swipes a credit card at the grocery store, banks and credit card companies collect up to 4 percent of the total bill. • Hedge against inflation • Safe haven for currency collapse • For every Trillion dollars that enter, each bitcoin will increase $75,000 • If you have a kid in college you can give him an allowance • You can email money • You can send money to anyone in the world who needs quick cash • Profit • Can not be deflated due to printing • Crowdsourcing

  13. What are the Possibilities? End of national currencies End of Banks The end of predatory lending The end of the IRS The end of the voting booth A new notary system The end of Western Union/Money Orders Anyone with a cellphone is a bank

  14. Bitcoin Exchange Review Directory Trying to figure out where to trade Bitcoin? What Bitcoin exchange to use? What the best Bitcoin exchange is? Look no further: our Bitcoin Exchange Reviews section is the most detailed and inclusive guide to selecting the perfect Bitcoin exchange for your needs. Coinbase (A+) (Referral Deal: Get a free $5 in bitcoin after your first $100 purchase!) Kraken (A) Bitfinex (A-) (Referral Deal: Get 10% off your trading fees for your first 30 days!) Bitstamp (A-) CoinMKT (A-) Cryptsy (A-) BTCChina (B+) BTC-e (B+) BTER (B) (Referral Deal: Get 10% off your trading fees for your first 6 months!) MintPal (B) CoinedUp (C+) Huobi (C+) Bittrex (C-) CampBX (D) Coins-E (D-) Vircurex (F+: It’s Complicated) MtGox (F) Crypto-trade(F) OKCoin (F) http://theblogchain.com/bitcoin-exchange-reviews/

  15. How do I put money in? https://en.bitcoin.it/wiki/Buying_bitcoins This list is very large, the simplest way is to link a bank account to a Coinbase account Localbitcoins.com Create something of value

  16. How do I store Bitcoin? Online exchanges Wallets Paper Wallets Brain Wallets Transfer money back to bank account Convert to other currencies Hardware Wallet (Trezor)

  17. Paper Wallet • A paper wallet is simply a piece of paper representing your numbers in the blockchain • Bitcoins you put in a paper wallet are no longer on the exchange • Paper wallets must be imported to be used • Paper wallets have the complete blockchain information embedded • No waiting necessary

  18. Brain Wallet A brain wallet is a paper wallet whose sha-256 seed is generated by a phrase generated by you and can be reproduced exactly any time How long would it take to crack an 8 word brain wallet? Oxford English Dictionary contains full entries for 171,476 words in current use. If you use only lower case letters and they are mostly random words (no phrases - "four score and seven years ago" is like having your password be "secret"), there are about 7.47e41 possibilities. At 50 million attempts per second, it'll be about 4.74e26 years. The current estimate for the age of the universe is 1.2e12 years. If you reduce it to just the most commonly used 1000 words, at 50m guesses a second, it's reduced to 634,195,839 years. Never use phrases that can be found in an internet search

  19. More This is still not as secure as a randomly generated key 2^60 1,461,501,637,330,902,918,203,684,832,716,283,019,655,932,542,976 possible bitcoin addresses If everyone on earth generated 10 million addresses the possibility of a duplication is [90,000,000,000,000,000 / 2^160] 0.00000000000000000000000000000000615% Finding a collision on your first try is roughly equivalent to being hit by lightning 16,540,000,000,000,000,000,000,000 times per second for an entire year or winning the lottery 830,000,000,000,000,000,000,000,000,000 times.

  20. Trezor Satoshilabs.com Private key never leaves the device Protected by passphrase, pin and keywords

  21. Tools Bitcointicker.com Bitcoinwisdom.com Btcpredictions.com Btcbalance.net Blockchain.info Blockr.io (Just bought by Coinbase Monday) Bitaddress.org bit2factor.org Tradingview.com thebitcoinpage.com Coinmetrics.com Coinmap.org Fiatleak.com blocks.wizb.it