Bitcoin not-so-FAQ

There are way too many Bitcoin FAQ's out there. Here are 6 interesting Bitcoin questions that no one has ever asked me.

Why do most Bitcoin services wait for 6 confirmations?

A transaction is confirmed every time a miner includes it in a block. Most exchanges and online wallets wait for 6 confirmations before they consider a transaction complete. They do this to protect themselves from double-spending, which is when a bad guy tries to spend the same bitcoin in two different places. Seeing one confirmation means a miner has submitted a block of transactions to the network, but what if that miner is the bad guy and the bad guy includes a double spend in that block?  The more confirmations we wait for, the less likely it becomes that those miners are controlled by the bad guy trying to double-spend. 6 confirmations gives the wallet or exchange over 99.9% certainty that a double-spend did not occur.

Edit: Admittedly this is an over-simplification of double spending.  You can read more about how doubles spending works here, and here.

Source: https://bitcoil.co.il/Doublespend.pdf

What is a transaction fee?

You can pay a transaction fee to get your transaction confirmed more quickly. Your transaction fee goes to the miner who first confirms the transaction. This provides an incentive to miners so they include your transaction in the next block.

Source: Bitcoin.it/wiki

When will the last Bitcoin be mined?

The last of the 21 million bitcoins will be mined sometime in 2140, so most likely none of us will be around! This graph doesn't extend all the way out to 2140 but that is the intended finale if everything goes to Satoshi's plan.

The Bitcoin network self regulates by adjusting two variables: the amount of Bitcoin rewarded to miners (block reward), and how difficult it is for miners to find a block (difficulty factor). These two variables change to keep the rate of Bitcoin creation consistent with this graph. The Bitcoin network tries to have a block created every 10 minutes, which it does by adjusting the difficulty factor. The block reward started at 50 bitcoins and is cut in half every 210,000 blocks, or about every 4 years. From this we can extrapolate that the last bitcoin will be rewarded in 2140.

As it turns out, bitcoin mining is ahead of schedule because so far we have been mining a block every ~9 minutes instead of every 10.  The world is developing mining tech more quickly than the bitcoin network can adjust the difficulty factor. This could put the last bitcoin somewhere around 2085.

 

What will happen when the last Bitcoin is mined?

Well, none of us will see this happen, but we can speculate. The best theory is that even though the miners won't receive any more block rewards, the transaction fees will be enough of an incentive to continue mining. If there aren't enough miners, transaction fees will be forced up, providing incentive for new miners to start confirming transactions.

 

Can a government shut down Bitcoin?

Since Bitcoin is decentralized, it would be very difficult for any government to stop Bitcoin completely. However, they could make Bitcoin illegal and very difficult to buy. This would drastically reduce the appeal of bitcoin to the more law-abiding citizens, and force it into the realm of drug dealers and anti-government factions.

A government could also start shutting down any businesses that deal with fiat currency and Bitcoin. Stopping exchanges, brokers and the companies that accept Bitcoin for products and services would make Bitcoin very hard to obtain or use. We might see a network of "Bitcoin dealers" who only do face-to-face deals in sketchy alleyways.

In the same way that governments have a difficult time stopping BitTorrent pirating, there isn't a practical way to stop all computers from mining and submitting transactions to the block chain. So even if Bitcoin becomes unappealing, illegal and difficult to use, it can still survive.

How many Bitcoins have been stolen?

We don't really know, but its at least 600,000 BTC.

Here is a list of the most significant bitcoin thefts. You can read about these over on Bitcoin Talk.

Rank Name Time Amount (BTC)
1 Bitcoin Savings and Trust 2011–2012 263,024
2 MyBitcoin Theft July 2011 78,739
3 Linode Hacks March 2012 46,653
4 July 2012 Bitcoinica Theft July 2012 40,000
5 May 2012 Bitcoinica Hack May 2012 18,547
6 Allinvain Theft June 2011 25,000
7 Tony Silk Road Scam April 2012 30,000
8 Bitfloor Theft September 2012 24,086
9 Bitomat.pl Loss August 2011 17,000
10 Bitcoin7 Hack October 2011 11,000
11 Cdecker Theft September 2012 9,222
12 Stefan Thomas Loss June 2011 7,000
13 BTC-E Hack July 2012 4,500
14 Mass MyBitcoin Thefts June 2011 4,019
15 Mooncoin Theft September 2011 4,000
16 Kronos Hack ??? 4,000
17 2012 Trojan Sept-Nov 2012 3,500
18 Betcoin Theft April 2012 3,171
19 June 2011 Mt. Gox Incident June 2011 2,643
20 October 2011 Mt. Gox Loss October 2011 2,609
21 Andrew Nollan Scam February 2012 2,211
22 Bit LC Theft February 2013 2,000
23 Bitcoin Syndicate Theft July 2012 1,852
24 Just Dice Incident July 2013 1,300
25 Ubitex Scam ~2011 1,138
26 Bitscalper Scam ~2012 1,000
27 2013 Fork March 2013 960
28 Ozcoin Theft April 2013 922
29 BTCGuild Incident March 2013 254
Total 610,356 BTC
Current Bitcoin Price $97.68
Value Today $59,619,617 USD

 

If you have any more questions, or would like other Bitcoin topics covered, feel free to tweet me at@rossrobinson, or send me an email at ross@tinkercoin.com. If you don’t own any bitcoins yet, check out our new project, Tinkercoin. It helps you get started in the Bitcoin world, buy your first bitcoins and start spending them in under fifteen minutes.

Bitcoin Basics: How to read a Market Dashboard

The price of Bitcoin can be a daunting subject to study. Market dashboards like this one from The Genesis Block provide tons of useful information, but they're very confusing to read at first.  I'm going to walk you through what everything means!

Overview

  1. Price / Volume Chart - Displays the bitcoin price and volume history. 
  2. Order Book - A list of Bid (buy) and Ask (sell) orders that people have submitted to, in this case, Mt.Gox.
  3. Depth Chart - a visual representation of the order book.

Market Dashboard

Price/Volume Chart

Lets take a closer look at the Price/Volume chart. This chart shows a timeline that describes how the price and volume have changed over a number of time periods. The period is selected in the top left corner and in this case is set to 1 hour.

There are actually 4 separate data representations on this chart. The volume of bitcoin traded during each 1 hour period is shown across the bottom.The color of those volume bars indicates whether the price went up or down during that period. Red means the price went down and blue means the price went up.

The orange line shows the 7 period simple moving average of bitcoin price and the yellow line shows the 30 period simple moving average of bitcoin price. A simple moving average is the average price that bitcoin has sold for over the X previous periods, where X is the variable you set, in this case 7 and 30 periods. These lines are configurable in the dashboard settings and will be explained further below.

The final data representation is the candlestick chart (the red and blue bars with sticks coming out), which displays the highest, lowest, opening and closing prices during the period. The color indicates whether price went up or down during that period. Again, red means the price went down and blue means the price went up.

Price and Volume

Candlesticks

Lets take a look at the candlesticks in more detail. Each candlestick gives 5 pieces of data and represents the data for a specific period of time, in this case 1 hour. The very top of the stick gives the highest bitcoin trading price for that period. The very bottom shows the lowest bitcoin trading price. The color of the bar says whether the price went up or down. If the bar is red, the top of the bar indicates the opening price and the bottom of the bar indicates the closing price. If the bar is blue the bottom of the bar represents the opening price and the top represents the closing price. The closing price of one period always lines up with the opening price of the next period, for obvious reasons.

Detailed Candlestick Description

Order Book

The order book is just two lists.  The Bids are a list of orders people have made to buy a certain volume of bitcoin at a certain price.  The Asks are a list of orders people have made to sell a certain volume of bitcoin at a certain price.  In this chart the lowest ask price is slightly higher than the highest bid price.  When the lowest ask price and the highest bid price overlap a trade on the exchange is executed.

Order book

Depth Chart

The depth chart is a visual representation of the order book. The blue line represents the bids and the red line represents the asks.

The height of the bid line at any point represents the total number of people looking to buy at that price or higher. So as a seller, you would be able to list 5,000 BTC at 102 and have the sale execute immediately. This chart is cumulative, so those 5,000 BTC include people who are willing to buy at higher prices, in this case about 2,000 BTC at 104 for example.

The same theory applies to the ask line. The height at any point is the number of bitcoins available for sale at that price or lower.

These two lines meet at the current price of bitcoin. Market Dept

What does this all mean?

I've given you the tools to extract data from these charts, but how do you use that data to make trading decisions in the Bitcoin world? Unfortunately that's a much more difficult problem. There's a lot of speculation about what different features of depth charts can mean. One forum has a thread over 1200 pages long discussing what "bid walls" mean, like the one at 101 on this chart. You'll have to do a bunch of research yourself, but a good starting point would be this Introduction to Stock Chart Patterns.

 

Hope that was helpful, and good luck trading!

If you have any more questions, or would like other Bitcoin topics covered, feel free to tweet me at@rossrobinson, or send me an email at ross@tinkercoin.com. If you don’t own any bitcoins yet, check out our new project, Tinkercoin. It helps you get started in the Bitcoin world, buy your first bitcoins and start spending them in under fifteen minutes.

Bitcoin Basics: Wallet Roundup

Wallet  

If you're new to Bitcoin, you should start with our first post: What is a Bitcoin?

A Bitcoin Wallet is where you store, spend and receive bitcoins. At its core, a Bitcoin Wallet is a pair of tokens (long strings of characters). One is a public address like this, 1tinKeRXU3Um35ar884RqRaepQeuxX9R6, which is what other people use to send you bitcoins. The other is a secret key like 5Kb8kLf9zgWQnogidDA76MzPL6TsZZY36hWXMssSzNydYXYB9KF, which allows you to send bitcoins from your wallet. To manage your wallet, you can run a desktop program on your own computer, or use one of the many online wallet services.

NOTE: Never give anyone your secret key, or they will be able to steal all the bitcoins in your wallet!

Desktop Wallets

Running a Bitcoin wallet on your own computer is the purest form of owning bitcoins. It's like keeping cash in your home instead of relying on a bank to keep it safe for you. While you have total control, you are also directly responsible for the security of your bitcoins. There are two main things which could go wrong: theft or loss. If someone manages to install a virus on your computer, then they can easily steal your bitcoins. Or, if you accidentally lose your wallet's secret key, those bitcoins are gone forever. So, desktop wallets are not for the faint of heart, but they do give you much more control if you are willing to accept the technological risks.

When to use a Desktop Wallet

  1. You want to store between 0 and 100BTC.
  2. You are technically savvy and are not afraid of accidentally losing your bitcoins.
  3. You want to protect yourself from theft.
  4. You only need access to your bitcoins from your computer.

Desktop Wallet Options

  1. MultiBit - the recommendation that Bitcoin.org makes for desktop wallets.  This is a "lightweight wallet" which means you don't have to download the entire blockchain (almost 9 Gigabytes now) and you can get started very quickly. MultiBit is built for ease of use.
  2. Bitcoin-QT - the original and canonical bitcoin wallet. It has more features than MultiBit but takes a while to get started because you have to download the blockchain.

Online Wallets

Online wallets are doing to Bitcoin what Gmail did to email way back in 2004. These wallets are run by a third-party company, who lets you use your bitcoins through their website. They are very easy to get started, and let you use your bitcoins from any computer or smartphone. The downside here is that you are trusting someone else to take care of your bitcoins, which has sometimes turned out badly. Online wallets are targeted by cyber-criminals because they have a lot of bitcoins in one place. On the upside, you are less likely to lose your bitcoins accidentally with an online wallet than a desktop wallet. If your hard drive crashes, your bitcoins are still going to be safe.

You can think of an online wallet as having your Bitcoin in a checking account.

When to use an Online Wallet

  1. You want access to your bitcoin wallet from any computer.
  2. You are needing to store between 0 and 20 BTC.
  3. You want to access a wallet from your computer and your phone.
  4. You are more scared of accidentally losing your bitcoin as opposed to them being stolen.

Online Wallet Options

  1. Coinbase 
  2. Blockchain.info

Paper Wallets

Paper wallets are only used for semi-permanent storage of bitcoins. The idea is that you "export" your bitcoins to an address that isn't attached to the Bitcoin network. With a paper wallet you can receive bitcoins but you cannot send them. When you  want to use the bitcoins from your paper wallet, you import it into a regular desktop or online wallet, where you can then use the bitcoins normally. The reason for this offline storage is security. If you set up the wallet properly (see note below), no one will be able to steal your bitcoins without the secret key printed on this physical piece of paper.  You can keep this in a safety deposit box or safe for maximum protection.

You can think of a paper wallet as a savings or investment account for Bitcoin.

When to use Paper Wallets

  1. You want a safe place to send and store bitcoins
  2. You have bitcoins you don't plan on spending immediately.
  3. You want to store between 20 and 21,000,000 bitcoins.
  4. You have access to a safe, safety deposit box or some kind of secure physical storage.

Paper Wallet Options

  1. Coinbase Paper Wallet Generator - if you have a Coinbase account with Bitcoin you can export your bitcoin from coinbase into a paper wallet.
  2. Papercoin.org - Papercoin will give you a sheet with 3 fresh bitcoin wallets with addresses to which you can send Bitcoin.  The easiest way to get started with paper wallets.

NOTE: when printing and generating paper wallets, make sure you use a computer and printer that is not connected to the internet. This removes any possibility of the secret key being stolen during the process.

Myself and the other founders of Tinker use Coinbase for our day-to-day balances (under 10 bitcoins), and keep any larger savings in paper wallets.

If you have any more questions, or would like other topics about Bitcoin covered, feel free to tweet me at @rossrobinson, or send me an email at ross@tinkercoin.com. If you don't own any bitcoins yet, check out our new project, Tinkercoin. It helps you get started in the Bitcoin world, buy your first bitcoins and start spending them in under fifteen minutes.

Bitcoin Basics: Blockchain Security, or Why no one else can spend your bitcoins.

creditcardkeyOnce you understand the fundamentals of Bitcoin, in particular the public transaction log thatanyone can submit transactions to called the Blockchain, there are some fairly obvious questions that follow. First among these is something like “If anyone can submit transactions to the blockchain, what’s to stop someone else from spending my bitcoins?”

It’s a good question with a really good answer.

One of the fundamentals of modern computer security is a system called “Public/Private Key Cryptography”. This system allows people to make signatures on digital goods that only they can make. You can sign documents, images, or bitcoin transactions on your computer in a way that is impossible for anyone else to replicate.

Public/Private Key cryptography works by giving everyone two numbers, called a “Public Key” and a “Private Key”. As the name implies, I tell everyone my public key, but I keep my private key secret. To make a signature, I “sign” a document using my private key. After I publish the document, anyone who wishes to check that the author is really me can verify that the document carries my signature by using my public key. [The actual method of signing and verifying are mathematical processes which are not really important to the concepts involved.]

You could say that my private key is a special pen that is the only pen in the world that can make my signature. Then the public key is a “signature-verifier” tool. The public key can’t make my signature, but it can be used to verify that a document carries my signature.

Bitcoins always have a public key attached to them in the blockchain. Only the person that can make the corresponding signature with their private key can submit transactions to the blockchain involving those bitcoins. When John sends bitcoins in a transaction to myself, the transaction, paraphrased from computer-speak, looks like this:

Transaction 25:

Here is John’s signature, therefore he can use the bitcoins sent to him in Transaction 24.jon_sig

John is sending these bitcoins to Gareth, whose signature is this.Screen Shot 2013-07-16 at 1.15.52 PM

Then, when I send the same bitcoins to Ross, the transaction looks like this:

Transaction 26:

Here is Gareth’s signature, therefore he can use the bitcoins sent to him in Transaction 25.Screen Shot 2013-07-16 at 1.15.52 PM

Gareth is sending these bitcoins to Ross, whose signature is this:Screen Shot 2013-07-16 at 1.18.08 PM

When a computer in the bitcoin network hears about a new transaction through the network, it does a couple things. First, it looks up the historical transaction referenced in the new transaction (this is the part of the transaction that says “these bitcoins were sent to him in Transaction 25"). Then it compares the signature on the new transaction to the signatures on the old transaction in the blockchain. If the signatures match, the computer “confirms” the transaction by repeating it back to the network.

A hacker named Eve could try to broadcast a transaction involving my bitcoins, such as

Transaction 27:

Here is Gareth’s signature, therefore he can use the bitcoins sent to him in Transaction 25.

gareth_bad_sigGareth is sending these bitcoins to Eve, whose signature is this.eve_sig

But anyone can see that the signature in Transaction 27 is not the same as my signature in Transaction 25, so it probably isn’t me sending this transaction. It’s equally easy for computers to see that the digital signature on a forged transaction does not match the signature stored in the blockchain, so any computer asked to confirm this transaction will reject it. The forged transaction will not be recorded in the blockchain and will be forgotten.

This is how the blockchain can be public but still secure. So long as only you have your private key, only you can make your signature, and no one will be able to make transactions involving your bitcoins that the rest of the computers in the network will accept. Only you can spend your bitcoins.

Practically speaking, you will never have to worry about this because your signatures are managed by your wallet program and you never have to see nor think about them.

Hopefully this has given you more confidence in the security of Bitcoin as a whole. Now you know that when you own bitcoins, no one can spend them except you.

If you have any more questions, or would like other topics about Bitcoin covered, feel free to tweet at me at @garethmacleod, or send me an email at gareth@tinkercoin.com.

 

Bitcoin Basics: What is a Bitcoin?

matrix No matter what they tell you, Bitcoin is not like normal currency.

Most of us have a good understanding of how government currency works. Money is a physical quantity printed by the government in mints and stored in banks. I can withdraw money at ATMs or branches, and physically give it to other people. When you hold money in your hand you own it.

In order to make good decisions about bitcoin, we have to understand as much about how it operates as we do government currency. So then, what is a bitcoin? Where are they stored? What does it practically mean to say “I own a bitcoin”? When I send bitcoins to someone else, what happens? We’re about to answer all of these questions in a way that’s easy to understand, but doesn’t brush off complex concepts or use analogies that hide deeper truth.

What is Bitcoin?

Bitcoin is a software system that operates over the internet. A close relative is Bittorrent, which is software that allows people to download files from their neighbors, or the Hypertext Transfer Protocol, otherwise known as HTTP, which is the software that lets us view web pages hosted on other people’s servers.

Bitcoin, instead of letting you download files or webpages, is designed to be used as a currency, the same as government-issued money. The fundamentals of any currency system - ownership, transactions, monetary policy - are all built into the Bitcoin system.

The Bitcoin Network

When you download a file off of bittorrent, you are downloading it from other people just like you who have the same file on their computers. There isn’t a central computer that everyone is connected to -- you’re downloading the file directly from your neighbors. This is why bittorrent is called a peer-to-peer network.

Similarly, the infrastructure of bitcoin is a peer-to-peer network of tens of thousands of people. All these people are running the same program on their computer, called the “Bitcoin Client”, and all of these programs are talking to each other.

What do these programs talk to each other about? Well it turns out they say only a few very basic things:

“Alice sends 2 bitcoins to Bob” “I confirm that Alice sends 2 bitcoins to Bob”

“Hey do you know anything about this transaction between Alice and Bob yesterday?” “Yeah, here’s my record of it”

The work of the bitcoin network is to enable and track transactions of bitcoins. When I send one bitcoin to Ross, my computer says to it’s neighbors “Gareth sends 1 bitcoin to Ross”, these neighbors check that everything about the transaction is valid, and then repeat the same message to their neighbors.

In this way, a single transaction is relayed to every node in the network, and all machines agree on a single global transaction log, called the “Blockchain”.

The Blockchain

The Blockchain is a public record of all bitcoin transactions. It is maintained by each computer in the bitcoin network, in the sense that each computer maintains a copy of the blockchain, and is constantly listening for and adding transactions to it. The blockchain looks like a long list of transactions just like

“Ross sends 3 bitcoins to Gareth” “John sends 1 bitcoin to Gareth” “Gareth sends 2 bitcoins to Ross”

Of course, it isn’t written in exactly that language. It’s written in a format that’s easy for computers to read and a bit harder for humans. You can directly read the blockchain on many public websites. Here’s an example section of the real blockchain for the curious.

The Blockchain is a public record of all bitcoin transactions, but this explanation ignores a very important subtlety: the record of a transaction in the blockchain *is* the transaction. The act of recording a transaction in the blockchain is the act of transferring money between people. They’re the same thing.

Understanding the centrality of the blockchain allows us to answer two fundamental questions very easily:

What does it mean to say “I own bitcoins”?

Let’s say we looked at the blockchain and found three transactions with my name in them:

“Ross sends 3 bitcoins to Gareth” “John sends 1 bitcoin to Gareth” “Gareth sends 2 bitcoins to Ross”

Then I own 2 bitcoins. The number of bitcoins I own is simply the number of bitcoins that have been sent to me, minus the number of bitcoins I have sent to other people.

Furthermore, this is the definition of owning bitcoins. There is no more substance or reality to my ownership of them other than the fact that these transactions are recorded in the blockchain, and are there for anyone to see and verify.

What is “a bitcoin”?

A bitcoin is just a quantity of one unit in a transaction recorded in the blockchain. Bitcoins do not have unique identities, it never makes sense to talk about “this bitcoin” or “that bitcoin”. Sending a bitcoin from me to you simply means my balance goes down and yours goes up. That’s it.

Outro

That is the core of bitcoin: many computers in a peer-to-peer network with a shared transaction log called the blockchain, and balances recorded in the blockchain are called bitcoins. Now, the next time someone tells you bitcoins are “digital coins sent through the internet”, you can nod your head and say “yeah”, but also understand how the statement is a gargantuan understatement.

There are more questions which follow immediately from these answers. If there’s anything you’d like answered specifically, feel free to tweet at me, @garethmacleod or send me an email at gareth@tinkercoin.com.

 

Want to try this whole bitcoin thing yourself? Check out our new project at tinkercoin.com. We'll walk you through the whole process, start to finish!