Mining crypto currency. Farm for mining bitcoins. Vector flat illustration

A new study by cryptocurrency exchange BitMex reveals that bitcoin mining revenues fell by more than half in November.

At the beginning of the month, daily mining revenues were at $13 million. By the end of the month, that figure had fallen to just $6 million. The news comes after the bitcoin price collapsed by 36% in November.

The fall in prices means a lower incentive for miners, who are rewarded with bitcoin for keeping the system running.

The BitMex study also noted a 13% reduction in hash rate (a measure of computer power dedicated to the bitcoin blockchain). That’s the equivalent of 1.3 million Bitmain S9 miners going offline.

bitcoin hashrate
Bitcoin hash rate 2018

The Good News

With miners switching off their machines, there’s less competition. It should, theoretically, become more profitable to mine bitcoin with fewer miners competing on the network.

We have also just seen two major shifts in bitcoin “difficulty.” The Bitcoin algorithm is designed to readjust itself every two weeks (roughly) to compensate for the volume of miners. 

The difficulty fell 7.4% on 16th November and 15.1% on 3rd December. These adjustments make it easier to mine bitcoin, thereby re-incentivizing miners.

Further reading: What is Proof of Work? – The Bitcoin Algorithm

Should We Worry?

Probably not. The fall in revenue is likely to knock out miners in regions where electricity is expensive. However, there are plenty of places around the world where mining is more affordable thanks to low energy prices.

We should also point out that most miners adopt a long-term strategy. As blockchain expert Andreas Antonopoulos explains: 

“Miners have a much more long-term perspective, meaning that they have existing investments in equipment and they usually purchase electricity on long-term plans, they don’t pay it by the week. And therefore, if they have to wait to become profitable another three months and they have the equipment in place, they’re not turning it off.”

Crypto Curious? Subscribe to the Block Explorer newsletter to get exclusive crypto insights before they appear on the site.

bigstock-Gold-Bitcoin-Crypto-Currency--213810058

2018 was epic. It started with the madness of altcoins rally at the beginning of the year. Followed by massive steps towards bitcoin and crypto mass-adoption made by regulators, large enterprises, and institutional investors. 

And it ended with the blood and tears of traders on the streets (we can still hear some of them screaming). 

Block Explorer is willing to reflect on the most important events that brought the industry to its current state. So, here are the major crypto announcements that shaped 2018: 

1. January: The Perfect Month to Ban Something

Bitcoin price: $14,112 (on the first of the month)

The beginning of January was marked by the huge news splash made by the South Korean government. They unveiled plans to ban anonymous trading on cryptocurrency exchanges over tax avoidance. And sent the police and tax-collecting authorities to their offices. 

As a result, the bitcoin price decreased by $2,000.

At the end of the month, crypto was in trouble again, as Facebook decided to ban all ads related to digital currencies. Since Facebook marketing was a major driving force for many initial coin offerings (ICOs), it cut the source of easy promo for many blockchain startups. 

2. February: China and Bankers Join Forces Against Bitcoin

Bitcoin price: $10,264

It’s not easy living in China without the freedom of internet browsing, catching up with friends on Facebook or just googling. All of that is restricted by the “Great Firewall of China.”  At the beginning of February, the list of undesirable foreign websites was supplemented with bitcoin-related websites to eliminate the financial risks for Chinese citizens.

Next, the head of the Bank for International Settlements (BIS) called bitcoin “a bubble, a Ponzi scheme, and an environmental disaster”. The media went nuts over it, and the more they referred to it in the following articles the more the price of crypto was sliding down, falling as much as 14% in one day. 

3. March: SEC has a Crush on Crypto Exchanges. Google Doesn’t

Bitcoin price: $10,433

Some more heartbreaking and uncomfortable milestones for bitcoin and crypto included the U.S. Securities and Exchange Commission (SEC) announcement made in March. They obliged all cryptocurrency exchanges to go through the registration procedure through the agency. 

One week later, news from Google set an overall moody tone of the blockchain scene: the company joined Facebook to ban all cryptocurrency-related ads. 

google bans crypto ads

4. April: India Joins the Strike Against Bitcoin 

Bitcoin price: $7,030

In April, crypto’s misadventures continued. This time the Central Bank of India (The Reserve Bank of India) banned financial institutions from allowing transactions from people’s accounts to bitcoin wallets. 

5. May: Goldman Sachs is Going Crypto, “Rich Dudes” are Boiling Over

Bitcoin price: $9,037

A little happy bitcoin rally happened when it was uncovered that Goldman Sachs had its own team dedicated to entering the crypto market. 

Although some people were are not happy about it. Including some very “rich dudes” that were on a mission to come up with the most-quoted insult for bitcoin. For instance, well-known billionaire value investor Warren Buffett referred to bitcoin as “rat poison squared,” and Bill Gates, one of the kindest billionaires in the world, labeled it a “greater fool theory”. 

Later this month the U.S. Justice Department started an investigation into bitcoin price manipulation. Oh, boy, it’s getting tougher.

But even in spite of all those troubles, crypto was still on a good path to wider acceptance. Or how else could you explain the 25 million crypto wallets registered at blockchain.com?  

6. June: Facebook is Stricken by FOMO  

Bitcoin price: $7,519

In June it was time for more bad news. It’s never enough in the crypto world. A panic sell-off happened in the first half of the month after Coinrail’s hack announcement. Even though this South Korean exchange was relatively small it led to a rapid 10% drop in bitcoin price. 

A couple of weeks later, big news came from Facebook who decided to reconsider the crypto advertising ban. Promoting initial coin offerings was still off the table though. 

7. July: Winklevoss Twins Keep Being Stubborn With SEC

Bitcoin price: $6,366

July was relatively calm for cryptocurrencies. Probably because most of the troublemakers were on vacation. But some news was still in the air, including the fact that asset-management heavy-weight BlackRock was looking into crypto assets and another SEC rejection of exchange-traded fund (ETF) proposal filed by Winklevoss twins. 

8. August: Too Many Rejections of ETF Proposals

Bitcoin price: $7,634

August was all about ETF proposals, their postponing and rejections. The bitcoin exchange rates struggled at first, but at the end of the month, after the U.S. Security Exchange Commission declined nine bitcoin ETFs, the price of the major crypto remained stable. How resilient is it? 

9. September: The First Crypto-Related Company Files for IPO

Bitcoin price: $7,192

Most of September’s announcements were quite positive. First, there was more news about Goldman Sachs jumping into crypto. The company’s chief financial officer Martin Chavez confirmed that the Wall Street giant was working on the development of bitcoin-based derivatives that will be accessible to the bank’s clients. 

At the end of the month, one of the leading bitcoin miners, Bitmain, spilled out their intention to run an initial public offering (IPO). And the application for the process was already filed. Bitcoin Cash prices (one of the assets Bitmain is mining) surged up to 20% rapidly. 

10. October: Happy birthday, Bitcoin. Here’s Your Mass-Adoption

Bitcoin price: $6,619

More happy news to celebrate the ten-year anniversary of Bitcoin’s whitepaper. Big steps from institutional investors happened in the middle of October when Fidelity Investments announced the launch of a spin-off company, dedicated to crypto assets exclusively. The new firm named Fidelity Digital Assets was onboarding its first clients and still preparing for the grand opening for the general public in 2019. 

Also, the launch of the first blockchain phone, made by HTC, stole the headlines in October. 

11. November: Blood, Sweat, and Tears of Bitcoin Cash Fork 

Bitcoin price: $6,427

Fights over the Bitcoin Cash fork got completely out of control. The battle between BCHSV (Satoshi Vision), lead by Craig Wright, aka Fake Satoshi and BCHABC (Adjustable Blocksize Cap), driven by Roger Ver, previously labeled as Bitcoin Jesus was observed by the entire industry. It triggered huge crypto volatility, increased trading volume and, as some experts might say, a bitcoin nosedive to a new bottom. And we are still in the middle of that roller coaster.

On the other hand, we had some good news too. Like the announcement about the first state in the U.S. will be accepting bitcoin as a tax payment. Way to go, Ohio! 

This year is not over yet, and we don’t know exactly what the future holds. As you know in crypto, “one day you are in, and another day you are out”.  But we promise to keep you posted. 

And what was your favorite news break of the year? Go ahead and share it in the comment section below.

Learned something new in this article? Subscribe to the Block Explorer newsletter to get exclusive crypto insights before they appear on the site.

Bitcoin death spiral

A version of this article first appeared in our exclusive newsletter. If you’d like Block Explorer’s cutting-edge analysis before it hits our website, sign up now.

Sigh.

Another day, another slew of negative, fear-inducing, factually-inaccurate cryptocurrency reporting in the mainstream media.

The focus of my wrath is this article in Market Watch, titled Bitcoin is Close to Becoming Worthless.

Written by a professor of finance, it carries some weight.

But it’s also wrong on many technical levels.

The author’s basic claim is this:

With the price of bitcoin dropping, bitcoin mining has now become unprofitable.

If mining produces no profits, he says, miners will abandon the network. It will grind to a halt and bitcoin will become worthless. This phenomenon is known as the “bitcoin death spiral.”

Here’s why he’s wrong…

It’s true that bitcoin mining is currently unprofitable (we reported as much recently). However, the Bitcoin system is designed to adapt and morph to account for this.

It does so by altering the “difficulty” of mining.

This gets a little technical but bear with me.

Bitcoin Mining Background

In very simple terms, bitcoin miners process transactions in “blocks” by using extensive computer power.

That computer power directed towards the Bitcoin network is known as hash power. When lots of miners are working on the network, the hash rate goes up.

One Block Every Ten Minutes

The system is designed to produce one block every ten minutes.

Everything else being equal, if miners throw more computer power at the network, blocks will be produced faster. 

Too fast, actually. Miners get a reward (in bitcoin) for every block they produce. If blocks are produced too quickly, too much bitcoin is released.

That’s where the self-adjusting algorithm comes in.

When hash power is high, the algorithm automatically adjusts to make it more difficult to mine a block, slowing down production to meet the ten-minute block target.

The Problem Today

The problem we face currently is that miners are leaving the network. Some mining facilities are closing and throwing away equipment.

Hash power on the network is now lower, but the difficulty remains somewhat high.

In other words, the remaining miners have to work incredibly hard (using much more computer power) to produce the same block – hence the lack of profitability.

The “Difficulty” Just Readjusted

But it works both ways. With fewer miners contributing hash power, the algorithm will automatically adjust to make it easier and ultimately return to profitability.

That readjustment happened this week, with Bitcoin’s difficulty dropping 15%. 

Every Two Weeks

Bitcoin’s difficulty is set to re-adjust after every 2016 blocks (roughly every two weeks).

The “death spiral” is only possible if block production slows down so much that we don’t make it to the next difficulty adjustment.

Worst Case Scenario

If that reality plays out, there’s another option.

Bitcoin could execute a “hard fork” and form a new blockchain where the difficulty is lower.

Still confused? This tweet from Nic Carter sums it up quite neatly.

pastedGraphic.png

As blockchain expert Andreas Antonopoulos explains: “The chances of [a death spiral] actually happening are pretty low. The chances of it happening and nobody doing anything to fix it is near zero.”

So, as usual, the mainstream and financial media are blowing things out of proportion without explaining the full picture or technical background of bitcoin. 

Intrigued? Here are some more resources:

Proof of Work Explained: How Cryptocurrencies Keep Block Production in Check (Block Explorer)

Bitcoin Difficulty Targeting and the “Death Spiral” (Andreas Antonopoulos video)

A version of this article first appeared in our exclusive newsletter. If you’d like Block Explorer’s cutting-edge analysis before it hits our website, sign up now.

Mining crypto currency. Farm for mining bitcoins. Vector flat illustration
  • Proof of Work is the algorithm that powers various blockchains, like Bitcoin, Ethereum, Litecoin, and Monero.
  • Miners solve complex mathematical puzzles using computer power to produce a “block” of transactions.
  • When a block is produced, the miner is rewarded with the native cryptocurrency: bitcoin, ether, or litecoin, for example.
  • Proof of work ensures that blocks are produced at a stable rate and are accurately verified.

Cryptocurrencies work on the principle of a blockchain, where blocks containing transactions are added to the chain to make transactions happen. 

The issue is, the speed and validity of blocks must be kept in check. Proof of Work solves this issue, let’s check out how.

The Problem

Blocks on the blockchain are quite powerful as they confirm the transaction of money between addresses. They also distribute new currency by issuing rewards to the block creator. 

For these reasons, there are two important rules for block production.

  • Blocks need to be verified some way, so that we know what order transactions happened, among other things.
  • We need to control the speed at which blocks are added. If the speed is not controlled, block rewards are added to the network quickly and the worth of the currency plummets.

Bitcoin, for example, has a target block time of ten minutes. If blocks are created too fast, too much bitcoin will be given out to miners, thus flooding the market. Something has to keep that block time regulated.

Enter Proof Of Work

Proof of work solves both of our issues. It’s based on the idea that we include some data in the block that is hard to calculate, but easy to verify. 

In most proof of work cryptocurrencies, this comes in the form of a cryptographic hash.

What is a Hash Function?

A hash function takes a message or piece of data and scrambles it into a long cryptographic, alphanumeric code. 

But the smallest change to the message or data creates huge changes in the code. 

For example:

The SHA1 hash of “Armin Davis” is: 397d23a20e7cf5065238d7cdda5430d62a68445b

But change the capital letters to lower-case…

The SHA1 hash of “armin davis” is: b1371918c95f4693273757a2bc51514dcdfd1697

The hashes are completely different and seemingly random.

But it’s not random. The same input data will always return the same hash. Meaning that we can easily verify that a given hash is right for a given block easily. 

And, if we include the hash of the previous block in ours, we can prove order too.

Enjoying this article? Subscribe to the Block Explorer newsletter to get exclusive crypto insights before they appear on the site.

proof of work
Proof of work compared against alternative algorithm “proof of stake” Credit: CryptoTechies

What About the Timing Issue?

Hash algorithms are perfect for our verification problem but don’t fix the issue of timing on their own. 

Hashes are designed to be fast to compute, very fast in fact. The time it took to calculate the above two hashes was less than one-hundredth of a second.

But we need to regulate the time, so blocks aren’t produced too quickly.

We have a simple solution to this: network difficulty. 

Simply put, you can change how long it takes to create a block by making it harder to solve the cryptographic puzzle.

bitcoin difficulty chart
As more and more miners devote hash power to the Bitcoin network, the “difficulty” has increased dramatically to keep block production in check. Source: Bitinfocharts

Usually, that means including a constraint that the hash must be below a specific number. And that that number is calculated at specific intervals. 

Now miners have to hash their blocks many times, with each one taking up some time and lots of computer power. In order for the block creator to change the hash of their block, an additional bit of information is added to the block called the nonce. 

A nonce is simply a number that can be modified as the block creator sees fit to change the output hash.

Each time a hash is calculated and does not meet the requirements of the network at that time, the nonce is incremented or otherwise changed and the hash re-calculated.

Often a miner will try a very large number of different nonces before they find one that will be accepted by the network. The total time all miners take to find a block should be somewhere around the block time (ten minutes for Bitcoin). 

And if not, the difficulty is adjusted to keep the timing in line.

Not all Proof of Work Algorithms are the Same…

The hashing algorithm a cryptocurrency uses directly affects how difficulty will work, and what hardware you can run the mining software on. 

To use Bitcoin as an example again; Bitcoin uses the algorithm SHA-256, which is an industry standard hashing algorithm used in many places. 

If you’ve saved a password on a website, odds are it was hashed with Secure Hash Algorithm (SHA)-256 before it was stored. Using industry standard hashing algorithms means they are proven secure and worked on by massive communities.

However, using industry-standard algorithms is both a blessing and a curse. 

A blessing because most hardware will be able to run your software. But a curse (depending on how you look at it) due to one word: ASICs.

ASIC (Application Specific Integrated Circuits) are mining hardware that gives your network a massive amount of mining power. That increases centralization due to price and power demands. The more ASICs you own or control, the more of the network you command.

Some other cryptocurrencies, like Monero, use their own hashing algorithm specifically designed for use in proof of work systems. These have the advantage that developers have complete control over what hardware the algorithm works on best.

Downsides to Proof of Work

There are a few downsides to Proof of Work when compared to other solutions.

First, Proof of Work requires a lot of computing power. And, the more mining power on the network, the higher the difficulty. Meaning that you very quickly run into a situation where those with the cash to buy hardware do. And when you have a lot of hardware, you tend to store all their hardware in one place, leading to centralization.

At worst, this could lead to a 51% attack, whereby one actor, or group of actors, control more than half of the network. If that happens, they could theoretically “double spend” the cryptocurrency on the network.

And second, that computing power needs a lot of electricity to run, and at the high end, miners go looking for the cheapest power possible. This means that miners start to congregate in cities or countries where the power is cheap, again leading to centralization.

Learned something new in this article? Subscribe to the Block Explorer newsletter to get exclusive crypto insights before they appear on the site.

bitcoin cover

You’ve probably heard the stories about bitcoin…

The Norwegian student who bought 5,000 bitcoins for $26 in 2009. Four years later, he was a millionaire.

Or the early adopter who bought two pizzas for 10,000 bitcoins (worth $70 million at today’s prices).

But what is bitcoin, exactly? How does it work? How do you buy bitcoin? Where should you store it? And is it safe? This guide will take you through it step-by-step (without any confusing jargon).

Contents

PART 1: What Is Bitcoin, the Digital Currency?
PART 2: What Is Blockchain, the System That Makes It All Work?
PART 3: How to Buy, Store, and Spend Bitcoin
PART 4: Should I Be Worried about Hacks and Scams?
PART 5: What’s Next for Bitcoin?

PART 1: What Is Bitcoin, the Digital Currency?

Before we dive in, you need to know that bitcoin is actually two things:

1. bitcoin (with a small b)

This is the cryptocurrency; digital tokens sent back and forth to one another (or used to buy pizza). When people talk about bitcoin, this is what they’re usually talking about.

2. Bitcoin (with a capital B)

This is the revolutionary network on which the currency runs. It’s also known as the Bitcoin blockchain.

Let’s start with the cryptocurrency.

bitcoin infographic - what is bitcoin and who invented it?

Infographic courtesy of Kriptomat

Bitcoin Basics

 peter thiel bitcoin“I do think Bitcoin is the first [encrypted money] that has the potential to do something like change the world.” Peter Thiel, Co-Founder of Paypal

 

The basic concept of bitcoin is to make payments as easy as sending an email, without a central middleman getting in the way. Here’s how it works:

No banks

Bitcoin exists outside the traditional banking system. Anyone with a digital wallet can buy bitcoin and send it to anyone else in the world (so long as they, too, have a wallet). There is no middleman.

No government control

Most currencies around the world are controlled by their respective governments. For example, the US Federal Reserve controls the dollar’s interest rate and supply. Not bitcoin. No single person, bank or government owns the bitcoin system.

This is what we mean when we say bitcoin is ‘decentralized.’ Bitcoin and all its transactions are powered by its users. We’ll explain more in the ‘blockchain’ section below.

Securely locked with cryptography

Every bitcoin transaction is encrypted with public and private key encryption. Here’s a quick video to explain how that works:

‘Pseudonymous’

You might have heard that bitcoin is anonymous, but that’s not strictly true. Every bitcoin transaction is tagged with your public key address. It’s a long number that looks something like:

1GsOmhLr0FbBpNco1NDar6sSV8tsHaKF6kd

Although this transaction doesn’t contain your name, if someone knows your wallet address, they can see the payments you’ve made or received. In other words, it’s pseudonymous.

Irreversible

Bitcoin transactions absolutely cannot be reversed. If you make a payment by accident or send it to the wrong address, it can’t be retrieved. It’s a blessing and a curse. It means payments cannot be altered making it secure against fraud, but if you get it wrong, your money is lost forever.

Prefer to Read This Guide as an eBook?

If you’d like a hard-copy of this guide (or just want to come back to it later), download the free pdf version here, no email signup required.

bitcoin ebook

Who Created Bitcoin?

Bitcoin was created by the elusive Satoshi Nakamoto. His name, however, is a pseudonym. The real creator remains a complete mystery.

In October 2008, Nakamoto published the famous bitcoin white paper on a cryptography mailing list. It outlined the vision and technology for the Bitcoin system:

satoshi nakamoto“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

 

In January 2009, he created the first 50 bitcoins in a process called “bitcoin mining.”

Who Is Satoshi Nakamoto?

The identity of Satoshi Nakamoto is one of the tech world’s biggest secrets. Countless journalists have tried to reveal his identity by analyzing his writing style, his coding, and various other scattered clues.

He writes in British English, for example, and codes in C++.

Newsweek famously published a front-page splash outing the bitcoin founder as Dorian Satoshi Nakamoto – an elderly Japanese American. Despite his computer-engineering background, it was later revealed that Dorian Nakamoto had never even heard of the cryptocurrency. (He apparently referred to it as ‘Bitcom’ in a later interview!)

More likely theories point to the likes of Nick Szabo and Hal Finney, who were involved in Bitcoin’s development and have been active in the cryptography community for decades. Some have even pointed the finger at Elon Musk. All have denied it.

Further reading: 24 Clues About Satoshi Nakamoto’s Identity

One thing is for sure, Satoshi Nakamoto is a genius with meticulous attention to privacy and anonymity.

He’s also a billionaire.

By tracking Satoshi’s transactions, we can see that he never sold his original bitcoins (other than a few test transactions). He owns about one million coins. At the time of December’s record prices, he was the 44th richest person in the world, worth over $19 billion.

There Will Only Ever Be 21 Million Bitcoins

One of the most interesting features of bitcoin is that its supply is capped. There will only ever be 21 million coins. Unlike dollars, which are created at will by the Federal Reserve, the creation of bitcoins will steadily diminish until 2140, when it will stop entirely.

There are currently 16.7 million bitcoins out there, which leaves just 4.3 million bitcoins left to be created.

Read more: How Many Bitcoins Are There? (Hint: Not That Many)

In other words, the supply is incredibly limited.

Even the existing bitcoins are in short supply. As we’ve mentioned, Satoshi probably owns about one million. The Winklevoss Twins own roughly 1% of the bitcoins in circulation. And the FBI holds at least 144,000 bitcoins after seizing them from illegal activity.

It’s also guessed that up to 30% of bitcoins are lost forever (on broken hard drives and forgotten keys).

The 21 million bitcoin cap is partly why the price has skyrocketed. When there is a finite amount of something, the price tends to rise because everyone wants a piece (like gold or diamonds).

The finite supply is also why bitcoin is often likened to gold rather than traditional currency. There is only so much gold on the planet, just like there are only so many bitcoins.

chart depicting the bitcoin halving rate

Chart source

Luckily, each bitcoin can be split into smaller units denominations, right down to one hundred millionth of a bitcoin.

Bitcoin Price: Why Is It so Volatile?

When it was launched in 2009, the first exchange valued one bitcoin at eight-hundredths of a cent.

Flash forward to January 2018, and that price soared to $20,000.

Along the way, bitcoin has experienced some heart-stopping swings in value. Since January 2018, bitcoin has dropped 60%. Bitcoin is much more volatile than traditional investments like bonds or stocks. It’s why many investors are nervous about getting involved.

bitcoin price chart
Chart: CoinMarketCap

Why? The simple fact is that bitcoin is brand new. It’s still less than a decade old. Compare that to traditional markets like gold, oil or the stock market. It takes time for a new market to settle and find a stable price.

Bitcoin also goes through ‘hype cycles.’ Every so often, bitcoin attracts mainstream attention (usually when there’s a new technology breakthrough). Excited investors flood in, which pushes the price up. When the excitement dies down, we see big drops in price.

Investing in bitcoin means bracing yourself for big, volatile movements.

Don’t Confuse Bitcoin with ‘Bitcoin Cash’ or ‘Bitcoin Gold’

Bitcoin is altogether separate from other cryptocurrencies you might have heard of, like bitcoin cash (BCH) or bitcoin gold (BTG).

These alternative currencies were created when they split off from bitcoin (known as “forking”). This happened because there was a dispute in the bitcoin community about how to go forward.

Read more: What Is a Hard Fork in Cryptocurrency?

When users disagree about the technology or the ethos of a particular coin, they may split off and create a new cryptocurrency using different tech and ideals.

To understand why, we need to know how bitcoin works.

——————————————————————————————–



——————————————————————————————–

PART 2: What Is Blockchain, the System That Makes Bitcoin Work?

Satoshi’s most impressive feat is not actually bitcoin-the-currency. It’s the system on which it runs: blockchain.

Also known as the Bitcoin protocol, this is what makes bitcoin transactions possible.

An infographic explaining how the bitcoin blockchain works

What Is Blockchain?

In the simplest possible terms, blockchain is exactly what it sounds like: a chain of blocks.

When you make a transaction with bitcoin, it is bundled into a “block.” That block is processed, verified, and approved before being added to the long chain of blocks that came before it.

That’s the short version. In practice, it’s more complex than that.

Imagine an Excel spreadsheet that everyone in the world can access.

Every bitcoin transaction ever made is written down in this Excel spreadsheet.

Scroll right to the beginning, and you’ll see Satoshi’s very first entry (the ‘genesis block’), preserved forever. You can also see the most recent transactions, logged in real-time, and everything in between.

In simple terms, blockchain is a completely public, transparent way of logging payments and transactions.

This is why you often see blockchain referred to as a ‘digital ledger.’

Of course, it’s not really a spreadsheet; it’s a chain. Every time a bitcoin transaction is made, it’s logged in a 1MB ‘block’ of data. The block is then added to the one that came before it.

Hence, blockchain.

(FYI, you can look for transactions on the bitcoin blockchain using our block explorer).

Blockchain Is Not Stored in One Place

No single person or entity owns the blockchain. It exists on a network of millions of computers all at once.

Using the spreadsheet analogy again, it’s almost like a Google doc. With Google docs, anyone can log in and make edits to the same spreadsheet. The changes are public and everyone with access can see (and approve) those changes in real-time.

This is a huge change in the way we do things. In the past, for example, you’d write a spreadsheet in private, then send it to someone via email. The other person would save it to their computer, make their changes in private before sending it back.

Using this old method, there are two different spreadsheets on different servers. One person can claim theirs is the superior document or make fraudulent changes.

Or a hacker can steal one of the documents.

Now think about it in terms of banks. Banks keep their own private spreadsheets and log their own transactions, all stored in one central location. It’s less transparent, not to mention easier to hack.

With blockchain, everything is transparent. Bitcoin transactions are 100% visible, traceable and accountable.

(Note: the Google docs analogy isn’t 100% accurate since the Google document is still stored on Google’s servers. The bitcoin blockchain is not hosted by any one central server. Thousands of copies are stored on servers all around the world, all at once).

What Is Bitcoin Mining?

Bitcoin mining is how we create bitcoins.

It’s also how we keep the blockchain running.

In very simple terms, miners are rewarded in bitcoins for creating the blocks and validating the transactions.

It a self-regulating system. Miners maintain the blockchain. In return, they get bitcoins.

Anyone can mine bitcoins. However, due to the competition, it now requires an immense amount of computing power. To illustrate the point, giant bitcoin mining facilities are located in Iceland just to keep the temperatures of their hardware down.

In the past, Satoshi mined the very first block with his reportedly modest home computer. He was rewarded with 50 bitcoins for doing so.

How Exactly Does Bitcoin Mining Work?

Bitcoin miners are responsible for producing the 1MB ‘blocks’ that become part of the blockchain.

To create this block, they must solve a mathematical puzzle. This is not literal. The miner is not solving puzzles on a piece of paper. Instead, their computer is trying to ‘guess’ a pre-set 64-digit number, or “hash.”

The first miner to get ‘less than or equal to’ the hash, mines the block and is rewarded with bitcoin.

The current reward is 12.5 BTC per block.

The Bitcoin Halving

Remember we explained that bitcoin supply is capped at 21 million? That’s because the reward for mining is halved every four years.

The mining reward has been halved twice so far. The reward began at 50 BTC per block. It is now 12.5 BTC.

At this rate, we’ll hit the 21 million supply cap in 2140, after 64 halvings.

PART 3: How to Buy, Store, and Spend Bitcoin

How to Buy Bitcoin

Bitcoin is typically bought and sold on an ‘exchange.’

There are hundreds of bitcoin exchanges out there so it’s important to choose wisely. Many exchanges have been hacked over the years, and investors have lost their money, so do your due diligence to find a reputable exchange in your country.

Among the largest and most reputable exchanges are Coinbase and Gemini in the US. (Others are available and this should not be considered a recommendation).

To set up an account at these exchanges, you’re often required to upload a picture of your photo ID and proof of address. This is to ensure they comply with anti-money laundering (AML) laws and know-your-client (KYC) laws.

Can you buy bitcoin anonymously? Yes, some exchanges don’t require ID or proof-of-address. BitMEX is one example where you only need an email address. You can also buy in cash (see below).

Once registered with an exchange, you can link a bank account, or – occasionally for smaller amounts – a credit card or PayPal account.

Now, you can buy bitcoin with USD or your local currency.

Buying bitcoin on the coinbase exchange screenshot

Whichever exchange you choose, your bitcoins are stored in a wallet on their platform. We highly recommend you now transfer your bitcoin to a private wallet where you control the encryption keys (this is not as complicated as it sounds, and we’ll look at this in the next section).

How to Buy Bitcoin with Cash

If you’d rather not link your bank account to a bitcoin exchange, you can pay cash. Localbitcoins connects you with local cryptocurrency sellers who accept cash for bitcoin.

To make this transaction, however, you will definitely need a private wallet and address. We’ll look at how to set this up in our next section:

How to Store Bitcoin

You store your bitcoin and all cryptocurrencies in a ‘wallet.’

However, choosing the right wallet is perhaps the most important part of this entire guide.

You’ve probably heard that bitcoin is vulnerable to hacks and thieves. There are countless scare stories of people losing thousands.

But it’s important to know that these hacks are not related to the bitcoin system itself (or blockchain). Instead, the hacks usually target exchanges and poorly-maintained wallets.

Storing bitcoin can be safe and secure, but only if you do it correctly.

Recommended reading: 8 Cryptocurrency Best Practices (Keep Your Crypto Safe!)

infographic explaining bitcoin wallets - cold storage and hot wallets

Explaining Bitcoin Wallets and Encryption Keys

As we explained earlier, there are two aspects to storing and transferring bitcoin:

Public key – your wallet address that everyone can see (people need your public key to send you bitcoins)

Private key – a second key that only you have access to. This allows you to unlock the wallet.

When you keep your bitcoins on an exchange (like Coinbase), they hold the private key for you. This is called an ‘online wallet.’ While they are convenient and user-friendly, they are less secure.

Why? Because if the private key is on their servers, it can be stolen by hackers, who are more likely to target a large exchange.

So it’s important to make sure you hold the private key. That means moving your bitcoin off the exchange and into a private wallet.

Hardware Wallets (Cold Storage)

Hardware wallets are your most secure option. Think of them like an external hard drive or USB stick for bitcoin. For the vast majority of time they are offline, so cannot be hacked (except for the short periods when you connect to transfer bitcoin). This is known as “cold storage.”

Read More: What is Cold Storage for Bitcoin?

Of course, there is the risk of losing the hardware wallet, which is why some people keep them locked in secure bank vaults.

The most popular hardware wallets are Ledger and Trezor.

ledger nano cold storage bitcoin wallet plugged into a laptop

Desktop Wallet

With a desktop wallet, your private key is stored as a file on your computer.

The main advantage here is that you control the private key. They are usually free and easy-to-use, too.

However, your bitcoins are lost forever if your computer is lost, stolen or destroyed (unless you backed them up elsewhere). A hacker can also access your computer and take them.

In the past, using a desktop wallet meant downloading the entire bitcoin blockchain. Nowadays, light wallets are available which makes it a little easier. Some of the most popular wallets include Exodus and Electrum.

Paper Wallet

A paper wallet is simply a piece of paper with your private and public key written on them.

They are incredibly secure since they are never connected to the internet. You cannot hack a piece of paper.

However, you can lose a piece of paper very easily. So make sure you keep it somewhere safe.

Just don’t be this guy who showed his paper wallet to everyone watching Bloomberg TV. Within seconds, his account was empty (although the culprit offered to give it back after proving their point).

a man accidentally reveals his bitcoin paper wallet on Bloomberg TV and has his bitcoins stolen

‘Cold’ Software Storage

Some electronic and software wallets now facilitate offline or ‘cold’ storage options. This is a best-of-both-worlds option. Like electric wallets, they are easy to use, but they are also stored offline for additional security. Electrum, mentioned previously, offers this functionality.

Mobile Wallets

lastly, you can choose a mobile wallet. These are handy if you plan to store small amounts of bitcoin and spend them from time-to-time. Some are designed with spending in mind, such as Samourai for Android and Edge for iPhone.

None of the wallets mentioned here should be considered recommendations and many other options are out there. Do you own research and due diligence before using any of the services listed here.

Where Can I Spend Bitcoin?

The number of shops and businesses accepting bitcoin is increasing rapidly. Here are just some of the things you can buy with bitcoin:

Even if you can’t pay directly with bitcoin, there is often a workaround.

You can buy gift cards using bitcoin from eGifter or Gyft, which you can then spend at Nike, Starbucks, Whole Foods, eBay, and Wal-Mart, among others.

A new platform called Bakkt, powered by the New York Stock Exchange and Microsoft, aims to provide a system to convert bitcoin to dollars. So you could theoretically buy a coffee at Starbucks.

You can even pay for tuition at Lucerne University in Switzerland.

And, in the bitcoin tradition, you can buy pizza through pizzaforcoins.com.

PART 4: Should I Be Worried about Scams and Hacks?

Bitcoin has a reputation for its connection to hacking and scams.

There is, of course, some truth to this.

In 2014, hackers successfully targetted the world’s largest bitcoin exchange, Mt. Gox . The hackers stole 850,000 bitcoins from the exchange (worth about $473 million at the time).

Even in 2018, hackers stole $35 million worth of bitcoin from the South Korean exchange Coinrail.

Again, however, this reaffirms the importance of storing bitcoins safely in a hard wallet and not on an exchange.

Bitcoin has also been connected to numerous scams and Ponzi schemes.

Fake exchanges, fakes bitcoins, and fake crowdfunding campaigns (known as ICOs – initial coin offerings) are still out there.

Until bitcoin exchanges are regulated by government authorities, more will pop up. Here are some of the worst offenders to look out for:

1. Scam wallets – these are the most common scams. They’ll look like a legitimate online wallet, but you’ll know they’re nefarious because they ask how much you’re depositing. They’ll  set up an address for you, but it will link to their wallets, not yours

2. Dodgy miners – these scammers claim to mine bitcoin for you. You pay them money and never see it again.

3. Exchange scams – these exchanges look like legitimate bitcoin exchange websites. The giveaway is that they accept  credit card payments for large amounts of crypto, or offer better-than-usual exchange rates.

The best way to avoid these dodgy schemes is to do your due diligence. Research every exchange before you sign up. Make sure they are trusted and make sure you are on the correct website.

Ignore anything that seems too good to be true. It probably is.

PART 5: The Future of Bitcoin

Although bitcoin is less than a decade old, we are just at the beginning.

Bitcoin, and its revolutionary blockchain technology, has opened the floodgates.

There are now almost 2,000 cryptocurrencies out there. Some aim to compete directly with bitcoin. Others are expanding on the idea and branching out into new territories (see ethereum).

Bitcoin itself is constantly evolving.

Right now, its biggest hurdle is scalability. Without getting too technical, Bitcoin is slow compared to many of its peers.

a chart comparing the transaction speeds of bitcoin vs ethereum, ripple, litecoin, paypal and visa

Source

Bitcoin can currently handle seven transactions per second. Compare that to Visa which handles 24,000.

It also takes ten minutes to confirm a bitcoin transaction. At peak times, like during the ‘gold rush’ in December 2017, it takes days to process bitcoin payments.

If bitcoin aims to become a day-to-day cash system, it needs to be faster.

However, there’s a huge disagreement in the community about how to do this. In fact, this is why bitcoin cash ‘forked’ (but that’s a whole other story. Read about bitcoin cash here.)

Bitcoin developers are now working on the Lightning Network, which will help settle small amounts fast on the bitcoin blockchain.

Is Bitcoin the Future of Money?

It’s perhaps too early to call bitcoin the future. It has some big hurdles to overcome including speed, reputation, and mainstream adoption.

One thing’s for sure, however. Bitcoin triggered a revolution. Cryptocurrencies and blockchain are here to stay. Countries like Venezuela and Iran are even copying the idea by creating their own national cryptocurrencies.

As for blockchain, a huge 84% of companies are now experimenting with the technology.

The future of money might not be bitcoin, but it will be cryptocurrency. Get ready for it.

Learned something new in this article? Subscribe to the Block Explorer newsletter.

Where to Go Next?

  1. Ethereum – Loved this bitcoin guide? Learn about the second-biggest cryptocurrency
  2. Guides – Dive into more guides about bitcoin, blockchain and all things crypto.
  3. News – Keep up to date with the bitcoin world.
  4. Market – See up-to-date price movements for the top 20 coins and more.
  5. Block Explorers – Our block explorers let you dive into the blockchain and find any bitcoin transaction.