What is Bitcoin?

Bitcoin was created in 2009 by an anonymous individual who went by the name of Satoshi Nakamoto. His original paper on the technology can be found here and I highly suggest you read it after you finish this guide.

Bitcoin is a groundbreaking new technology that uses math to create a trustless public ledger. This public ledger is called the blockchain and it can be viewed in its entirety at anytime by anyone. This system essentially allows the transfer of any type of property between two people without relying on a third party such as a company or government. All different types of information can be stored in the blockchain, including but not limited to ownership of assets such as houses or stock shares, timestamping of important data, proof of identity,trustless lotteries, and votes. This technology isn’t just about digital cash, it’s about trustless transfers of all kinds through the internet, securely and decentralized.

What the ledger (blockchain) shows: Address X sent .0199 btc to Address Y on April 24th 2014 at 5:48 PM

alt text

The network runs in a similar fashion to other Peer2Peer technlogies such as bittorrent and folding@home, all transactions are processed by computers running the Bitcoin software and with their own copy of the blockchain. Those computers can be located in personal homes, corporate server farms, or anywhere else: they just need to be connected to the internet and running the Bitcoin software.

The properties of bitcoin and it’s blockchain are set in the code of the software that makes up the backbone of the network. To change this code, a majority of the people running the software must update to a new version of the client.

If you have the skillset required, you can easily access and interface with the blockchain using the Bitcoin software. For normal users, you can use block explorers powered by independent companies such as BlockChain.info and Blockr.io, which not only allow you to view transactions in real time, but also allows you to look at every transaction that has ever occurred in the history of Bitcoin.

Bitcoin: The Currency

What email did to traditional mail, bitcoin will do to traditional money.

“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for non-reversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.

What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers.” -Satoshi Nakamoto

Bitcoin allows you to store wealth easily and securely, and transfer that wealth around the world instantly for little to no fees through the internet. It is completely open source and decentralized; no government or corporation can decide who you can and cannot send money to.

alt text

For example, it is the only way you can send money to someone in Iran or Cuba from America. Sanctions do not affect it. Borders do not affect it. Censorship does not affect it.

If you were to store 1 million dollars in cash, gold, or bitcoin, the cash and gold would take up a ton of physical space. The same amount of bitcoin would take up virtually no space because it is stored in the cloud (on the blockchain) and all you would have to store is a copy of your private key. Also try sending 1 million dollars in cash or gold somewhere, it would require a lot of trucks and security guards, but with bitcoin you can do that instantly from your phone or computer with a click of a button.

Bitcoin has several advantages:

  • It permits direct transfers of funds from one person to another, with no middleman (bank).

    • This eliminates the need to trust any third party, and eliminates the fees that they charge.
  • It cannot be forged/counterfeited! This is not true of any traditional currency, or even gold.

  • It cannot be inflated at the whim of any government. Inflation occurs when the quantity of a currency is increased.

    • The Federal Reserve of the United States prints more US Dollars everyday, this means the spending power of the dollar in your pocket goes down every time another dollar is printed.
    • Bitcoin on the other hand has a finite supply just like gold, there will never be more than 21 million bitcoin.
  • Similar to cash, transactions cannot be reversed -- they are final. Once a merchant receives bitcoin funds, they cannot be taken back without the merchant initiating the transaction.

    • Credit Card charge backs can be reversed up to a month after the transaction.
    • Same with PayPal.
  • It has the essential qualities that a currency must possess, some to an extent never before seen.

    • It is divisible to any unit size: each bitcoin is made up of 100 million Satoshis for instance
    • It is completely fungible: every bitcoin is indistinguishable from every other in value)
    • It is completely portable: funds are stored in the cloud (the blockchain)
      • It can be sent anywhere as easily as an email or text message (imagine the problems sending $10 million in gold to Zimbabwe).
      • You are currently not allowed to travel out of America with more than $10,000 without declaring it to customs. With bitcoin you can travel with millions of dollars and customs would be none the wiser.
  • It obviates many of the needs for banks, since you can safely keep your money yourself (once you follow some important security guidelines).

    • Some people will choose to still use banks for security and ease of use but at least they have the option not to.
  • Just like cash, it does not require identification of individuals in a transaction, thus eliminating the major cause of identity theft.

    • When Target was hacked, anyone who had used a credit or debit card there was at risk.
    • When you pay with bitcoin, the merchant only sees your public key so even if their system is compromised, a hacker can’t take any of your funds. You no longer have to trust the merchant.
  • Proof of Payment

    • All transactions are recorded in the blockchain so you have hard proof that you paid someone and when the payment went through.

Disclaimer: This post is intended solely to provide information. As I have no knowledge of individual circumstances and technical level, readers are expected to complete their own due diligence before proceeding with anything mentioned in this article. The topics discussed in this post are advanced and readers proceed at their own risk.