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Unraveling Btcoin, bit by bit
January 13, 2018, 4:17 pm
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Continuing from last week's issue on the Bitcoin story, we need to clarify a few terms that might appear confusing. For starters, throughout the article, we differentiate between Bitcoin (with B in uppercase), which represents the brand, and bitcoin (in lower case) which refers to the brand’s token (currency) that is mined, brought, or sold on the network.

Another word that needs clarification is 'crypto', which is derived from the Greek word kryptós for 'hidden'. When used in the context of crypto-currency, the crypto refers to cryptography, which is a branch of mathematics used to create calculated proofs needed to provide high levels of digital security. 

At the heart of Bitcoin technology is something called a cryptographic ‘hash’, which is basically a mathematical function that takes a file and produces a relative short code used to identify that file. The hash has two main properties that ensure that the data associated with it has not been tampered with. First, the hash is unique in that a particular file can only produce a particular hash, and two different files will never produce the same hash. Second, it cannot be reversed, in that you cannot work out what a file was by looking at its hash.

Cryptographic hash is what underpins bitcoin mining; it helps encrypt a transaction so that it cannot be used without a password, making it nearly impossible for anybody to re-issue the same bitcoin, or to use another person's fund. It also assists in preventing corruption of the overall blockchain environment.

With these explanations out of the way, let us now recap on what we wrote last week. When a new bitcoin is mined, sold or brought on the network, it is registered as a transaction. The Bitcoin software bundles several transactions into a block using cryptography, which is then broadcast on the network where miners, individually or in groups, aim to 'solve' the cryptographic puzzle to derive a value that is based on specific criteria. The first miner to solve the value gains the right to add the block to the Bitcoin blockchain once the transactions in the block and the value are verified by other miners on the network. The miner is then rewarded with a fixed amount of new bitcoins.

How do Bitcoin transactions work?

The first step in buying or selling bitcoins is to install the Bitcoin wallet on your computer or mobile phone. The Wallet will generate your first Bitcoin address, also referred to as your Public key, which can be disclosed to whoever you want to buy or sell bitcoins to.

Bitcoin wallets also generate a separate piece of data called a Private key, which is the digital signature that you use to sign each transaction. You are responsible for the safety and security of your Private key, as it not only provides mathematical proof that the transaction came from your specific Wallet, but also prevents the transaction from being altered by anybody once it has been issued by you.

The two keys are a random set of alphanumeric characters. Think of these keys as your email address and the password you use to login to read your emails. The email is known to public who will use it to send you emails, but only you can open the email or send an email. But on the Bitcoin network, for each new transaction you will need to generate a separate Public key using your Wallet.

To simplify, a Bitcoin transaction is the transfer of a specific value between two Bitcoin wallets which gets bundled into a block. When you buy or sell bitcoins the transaction is immediately broadcast between users and is usually confirmed by the network following the 'mining' process in about 10 minutes. Once the block is confirmed by miners, it gets added to the blockchain using very strict cryptographic rules that prevent previous blocks from being modified in any way by anyone on the network.

How do you go about buying bitcoins?

You can buy bitcoins directly from other people owning bitcoins using online marketplaces, just as you would buy any other service or goods online. Alternately, you can also use a digital currency exchange or broker such as Coinbase, Bitstamp, Kraken, and Gatehub among a host of other available online crypto-currency exchanges.

Step one to buying your first bitcoin is to create your wallet. The easiest way to do this is to go to the website of a third-party crypto-currency exchange such as Coinbase, and sign up with your name email address and password.

You can then download the app from the website to your computer, or download it to your mobile from Google Play or the Apple App store, depending on which mobile operating system you use.

The next step is to visit the online exchange you have chosen, sign in with your password. Most exchanges require you to connect to your bank account. You then pay for your bitcoin purchase through bank transfers or through credit or debit cards. There are also some exchanges that accept cash as well.

Following the registration and confirmation of bank account details, you click on the 'Buy' section and select the amount of bitcoin you want to buy. Given the recent high price of bitcoin, you can buy less than one bitcoin on these exchanges. Bitcoin can be divided up to eight decimal points. This means, depending on what suits your budget, you can buy 0.5 bitcoins, 0.02 bitcoins, or even 0.00000001 bitcoin, which is the smallest unit and called a ‘satoshi’ in honor of Satoshi Nakamoto, the alleged pseudonym of the Bitcoin founder.

As of January 2018, there are over 1,300 crypto-currencies on offer around the world. Bitcoin is just the oldest, biggest and best known crypto-currency brand. Other popular brands and their respective tokens include, Ethereum (Ether ETC), Litecoin (LTC), Ripple (XRC).

At present bitcoins are seen more as an asset to invest in, rather than as a currency to buy something tangible. Nevertheless, Bitcoin has been gaining acceptance as a form of online and offline payment and you can currently buy some products online, including Microsoft products, airline tickets through Expedia, or gift cards to superstores like Walmart.

It will no doubt take some time for crypto-currencies to mature and before governments and mainstream financial sectors grant it acceptance. Maybe we need to be patient; it took more than 25 years for the Internet to grow from an experimental network to what it is today. There is currently a lot of innovation happening in the crypto-currency ecosystem, and some of that innovation may have surprising consequences in the years to come.

 

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