Bitcoin Knowledge

Put very simply it is a new form of money that works extremely well on the Internet.

No. Virtual currencies are generally tokens issued by a company for near-exclusive use on their site. Examples include loyalty or gift cards, air miles or mobile phone top-ups.

Bitcoin is a general purpose digital currency. It is programmable money.
Nothing like Bitcoin has ever existed before.
In a similar way that email revolutionised the postal service, Bitcoin can revolutionise financial services.

Yes. It is much easier than other online payment systems. In many cases you simply click a link and confirm that the transaction is correct. On smartphones people tend to use QR codes because it’s easier.

Yes. It is much easier than other online payment systems. In many cases you simply click a link and confirm that the transaction is correct. On smartphones people tend to use QR codes because it’s easier.

Yes. Bitcoin works extremely well on the Internet.

That’s fine. The Bitcoin money supply can easily handle a sum of that magnitude.

Bitcoin fees depend on the size of the data to be stored not the magnitude of the transaction involved. If the above was a simple transaction it should cost about $0.02.

No kidding – Bitcoin is extremely efficient.

Yes. Currently many services offering international remittances charge the person sending money home to their family significant amounts. Bitcoin greatly reduces this.

With Bitcoin an international remittance is as easy as sending an email.

The Bitcoin network has a capital “B”, while the tokens that represent value are called bitcoins with a small “b”.

The three-letter code is currently BTC but many believe that it will finally become XBT in the future. The Bitcoin community is currently working with the International Standards Committee to ratify XBT under ISO 4217.

In a sense. It is not owned or controlled by any organisation. There is no government or corporation backing it. It is not patented or copyrighted.

Regardless, it now being used by millions of people all over the world to conduct transactions. These people are the Bitcoin community. By reading this you are part of that community.

Think about when you log in to a website. Your user name and password are protected using cryptography – a very advanced branch of mathematics that protects secrets.

Bitcoin uses cryptography to prove to others that you, and only you, have the right to spend the funds under your control.

All of the cryptography in Bitcoin is well-known and used in countless other applications including banking systems. There is nothing new or special.

In short, if you trust mathematics, you can trust Bitcoin.

Yes. You don’t even have to know who they are. Also they don’t have to be connected to the Internet to receive bitcoins.

Obviously, you can receive bitcoins from anyone as well – perhaps as part of a crowdfunded project or a loyal fanbase.

Almost. When you want to receive money you would typically provide a Bitcoin address. It is a long string of letters and numbers that starts with either a 1 or a 3. Here’s an example:

Yes. The most private way to use Bitcoin is to never re-use an address. Your Bitcoin wallet will take care of this for you.

Also, if you did find yourself actually typing one and made a mistake the wallet software will tell you that it is not valid.

Bitcoin is available for everyone. You can find Bitcoin wallets for Windows, Mac, Linux, Android, iPhone and pretty much everything else.

Many Bitcoin wallets are “open source” which means that developers can look at how they work and verify that there is nothing suspicious going on.

Some wallet providers will ask you to sign up, others don’t.

It is not a requirement of Bitcoin that you reveal your identity. In fact one of the prime goals of Bitcoin is to avoid revealing your identity to anyone, but still allow you to conduct a transaction.
It is very like cash in that sense.

No. It is possible for someone with significant dedicated resources (governments, police agencies etc) to track your transactions by examining the public block chain.

Overall, its anonymity is much closer to cash than to a credit card.

It is the large database that contains all the transactions ever made using Bitcoin. New transactions are gathered up into a group called a block. Each new block references the one before forming a chain.

At present the block chain is about 65GB and growing every 10 minutes.

You don’t have to. As a normal user of Bitcoin you are only interested in the parts of the block chain that contain your transactions. That small portion is about 25Mb.

Normally people running websites that accept Bitcoin – merchants – would make sure they maintain a complete copy of the block chain to avoid double spends.

That is where you get to spend the same money twice with different people. It was a common problem with digital money before Bitcoin solved it.

In the past there have been many attempts at making digital money. They have all failed because they all required trust in someone. Usually this was a company or government that checked all the transactions going through their system to ensure that no-one was doublespending.

The fundamental problem was trusting the central checker. What if it was cracked and all the transactions rewritten? What if the central checker itself wanted to fake a crack in order to cover something up?

That’s what Bitcoin does. Everyone who downloads the full block chain is contributing to the overall security of the block chain. Everyone is continuously checking everyone else. Nobody trusts anyone, but everyone trusts the mathematics.

Yes. It uses a very similar approach to sharing the big database file that is the block chain. Anyone running the Bitcoin software is known as a node or peer.

Anyone can offer up a block for acceptance by the Bitcoin network. To create blocks you simply run some software called a Bitcoin miner. If your block is accepted you get a reward.

Sure. To get a block accepted you have to prove that you have checked all the transactions in it are valid and that you have expended a certain amount of effort in securing it.

Bitcoin uses cryptography to create a number that is unique to the block. It is impossible to know in advance what the number will be since even the slightest change in the block will produce a completely different number.

The task facing a Bitcoin miner is to fiddle with some settings for the block, without altering the integrity of the transactions, until that number is below a given target.

The lower the target, the greater the difficulty.

For the technically minded, a Bitcoin miner has to find a SHA256 hash that is under the target value.