BIT Coin Report 1

Introduction to BIT Coin

CONTENTS

BIT COIN 1 : BIT COIN operation

1. Introduction

2. Introduction to BITCOIN

3. What is Cryptocurrency?

4. Why use BITCOIN

5. BITCOIN’s operation

6. Storage and sending of BITCOINs

7. BITCOIN payment and tracking of BITCOINs

8. BITCOIN security

9. What are other upcoming Cryptocurrency?

10. Conclusion
1
Introduction
As our world transits into online existence, systems such as BITCOIN and BLOCK
CHAIN emerged.

BITCOIN is Cryptocurrency which is a digital currency that is not regulated by a

central banking system.

Cryptocurrencies provide secure anonymous trasactions which is a major contributor

to its success.

Without the need of a middleman to process transactions BITCOIN is also a cheap

alternative to traditional currencies.

BITCOIN was invented by an unknown person or group of people under the name
Satoshi Nakamoto and released as open-source software in 2009. The system is peer-
to-peer, and transactions take place between users directly, without an intermediary.[
These transactions are verified by network nodes and recorded in a public distributed
ledger called a blockchain.

Bitcoins are created as a reward for a process known as mining. They can be
exchanged for other currencies, products, and services. As of February 2015, over
100,000 merchants and vendors accepted bitcoin as payment. Bitcoin can also be held
as an investment. According to research produced by Cambridge University in 2017,
there are 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them
using Bitcoin.

Cryptocurrency has revolutionanized the way the online payment systems function in
various ways. They are treated in the similar way as regular currency hence you need
to be well aare about its usage before making any major transactions.

The price of this electronic currency is constantly varying similar to that of the public
stock market and is also reliant of the current market conditions.

It is advisable to not keep your savings in the form of Bitcoins as it would pose a
great deal of risk. The best thing to do would be to convert the digital currency
immediately to your local currency and never invest more in Bitcoin than you are able
to lose.

It is important to understand that payments that are made through the online
currencies are irreversible and anonymous. The coins can only be refunded by the
concerned individual organization to which it has been sent to transactions should
only be done with businesses you trust and have knowledge about. Otherwise, you
will be at loss.
Nowadays, many people make use of these electronic coins for trading. To obtain
Bitcoin, you can buy it from an online seller or if you have the knowledge and
hardare, you can mine them.

Buying these can be quite a daunting task if you are not well aware about the
processes associated with it but there are some websites that can help you a great deal
when it comes to buying these coins.

You can also seek the help of professional websites to trade based on the electronic
currency easily. This is not turning out to be the best exchange trading method as it
turns out to be a cost effective method as well.

The unit of account of the bitcoin system is bitcoin. As of 2014, tickers used to
represent bitcoin are BTC and XBT. Its Unicode character is ₿. Small amounts of
bitcoin used as alternative units are millibitcoin (mBTC) and satoshi. Named in
homage to bitcoin's creator, a satoshi is the smallest amount within bitcoin
representing 0.00000001 bitcoin, one hundred millionth of a bitcoin. A millibitcoin
equals to 0.001 bitcoin, one thousandth of a bitcoin.
2
Introduction to BITCOIN
Many people are still not too aware of Bitcoin. Could Bitcoin be the future of online
currency? This is just one of the freuqently asked questions about Bitcoin.

How Does Bitcoin Work?

Bitcoin is a type of electronic currency (Cryptocurrency) that is autonomous from

traditional banding and came into circulation in 2009.

According to some of the top online traders, Bitcoin is considered the best known
digital currency that relies on computer networks to solve complex mathematical
problems, in order to verify and record the details of each transaction made.

The Bitcoin exchange rate does not depend on the central bank and there is no single
authority that governs the supply of Cryptocurrency. However, the Bitcoin price
depends on the level of confidence its users have, as the more major companies accept
Bitcoin as a method of payment, the more successful Bitcoin will become.

Benefits and Risks of Bitcoin

One of the benefits of Bitcoin is its low inflation risk. Traditional currencies suffer
from inflation and they tend to lose their purchasing power each year, as governments
continue to use quantitative easing to stimulate the economy.

Bitcoin doesn’t suffer from low inflation, because Bitcoin mining is limited to 21
million units. That means the release of new Bitcoin is slowing down and the full
amount will be mined out within the next few of decades. Experts have predicted that
the last Bitcoin will be mined by 2050.

Bitcoin has a low risk of collapse unlike traditional currencies that rely on
governments. When currencies collapse, it leads to hyperinflation or the wipeout of
one’s savings in an instant. Bitcoin exchange rate is not regulated by any
government and is a digital currency available worldwide.

Bitcoin is easy to carry. A billion dollars in the Bitcoin can be stored on a memory
stick and placed in one’s pocket. It is that easy to transport Bitcoins compared to
paper money.

One disadvantage of Bitcoin is its untraceable nature, as governments and other

organisations cannot trace the source of your funds and as such can attract some
unscrupulous individuals.

Unlike other currencies, there are three ways to make money with Bitcoin, saving,
trading, and mining. Bitcoin can be traded on open markets, which means you can
buy Bitcoin now and sell them high.
India has already been cited as the next likely popular market that Bitcoin could move
into. Africa could also benefit hugely from using BTC as a currency-of-exchange to
get around not having a functionaing central bank system or any other country that
relies heavily on mobile payments.

More people have accepted the use of Bitcoin and supporters hope one day, the digital
currency will be used by consumers for their online shopping and other electronic
deals. Major companies have already accepted payments using the virtual currency.
Some of the large firms include Fiverr, TigerDirect and Zynga etc.

Bitcoin works, but critics have said that the digital currency is not ready to be used by
the mainstream because of its volatility. They also point to the hacking of the Bitcoin
exchange in the past that has resulted in the loss of several million dollars.

Supporters of digital currencis have said that there are newer exhanges that are
supervised by financial experts and venture capitalists. Experts added that there is
still hope for the virtual currency system and the predicted growth is huge.
3
What is Cryptocurrency?
A Cryptocurrency is a decenralised payment system, which basically lets people send
currency to each other over the web without the need for a trusted third party such as
a bank or financial institution. The transactions are cheap, and in many cases, they’re
free. And also, the payments are pseudo anonymous as well.

As well as that, the main feature is that it’s totally decentralised, which means that
there’s no single central point of authority or anything like that.

The implications of this is done by everyone having a full copy of all the transactions
that have ever happened with Bitcoin. This creates an incredible resilient network,
which means that no one can change or reverse or police any of the transactions.

The high level of anonymity in there means that it’s very hard to trace transactions.
It’s not totally impossible, bit it’s impracticial in most cases.

In most cases when there’s a crime online with online payment systems, they tend to
go to the authorities and, say, we can hand over this payment information or we can
stop these transactions and reverse them. And none of that can happen with Bitcoin
in theory.

Many different agencies are researching into Bitcoin and looking at Bitcoin and trying
to understand how it works and what they can do to police it. It’s also been in the
media a couple of times, and being in the media, they tend to focus on the negative
side of it.

As they focus very heavily on the crime with it. If there is a theft or a scam or
something like that, they tend to blame it on Bitcoin and Bitcoin users.

One of the most notable example is Silk Road, which got taken down recently, and
through their $1.2 billion worth of Bitcoins, went to pay for anything from drugs to
guns to hit men to those sorts of things. The media, again, very quickly to blame this
on Bitcoins and say that it was the Bitcoin user’s fault.

However, there is actually very little evidence of the scale of the problem of crime
with Cryptocurrencies. We do not know if there is a lot or we do not know if there is
a little. Despite this, people are very quick to brand it as a criminal thing, and they
forget the legitimate uses, such as the fast and quick payment.

Therefore, the next issue that we’d like to research as well is looking at the scale of
the problem of crime with Cryptocurrency. By generating a log of known scams and
thefts and things like that, we can then cross reference that with the public transaction
log of all transactions and see just how much of the transactions are actually illegal
and criminal.

By looking back at the crime logs, we can see what kinds of crime happen, and if is
the technology’s problem, or is this just the same old crimes that we’ve been looking
at before. Once we have considered these things, we can start to brain storm about
possible solutions to the issue of crime with Bitcoin.

We can consider the only possible solution would be one that preserves the
underlying values of the technology iself, which would be privacy and
decentralisation.

Most focus from the media is to look at the criminal aspects of it. They do not give
enough value to the legitimate uses, because Bitcoin is a technology that enables fast,
quick payments, which is useful to anyone that’s evern paid for anything on the web.

If you are aksed what the birth of CryptoCurrency would bring to the world of
finance, the first thing that will probably cross your mind is what is CryptoCurrency?
This thought however, will only come to the mind of people who are not well versed
with the exisiting online currencies.

However, if you are one of the few but dominant figures who know Crypto
Currencies even if you eyes are closed, you would be able to answer he question more
elaborately.

The actual beginning of the disturbance existed when Bitcoin was introduced to the
world and eventually became the most famous and wanted CryptoCurrency. It was
started primarily to answer the lingering complains of people whose money and
assets are held by one centralized unit (and often intervened by the government
itself) and whose transfers are limited and frozen at a timely basis.

With the start of Bitcoin, many had the option to acquire an online coin or currency
that they can use similary with flat money.

Eventhough acquiring it is tedious and requires resources, many were attracted to it

from the very start because many were wanting to break away with the confinement
of a single entity controlling everything else in terms of finance.

Slowly and gradually, Bitcoin started to gain actual monetary value and new types of
cryptocurrencies came into exisitence as a possible answer to the problems that
Bitcoin imposes and also to create their own currencies that people can opt to use as
the one generated from the former is limited and hard to acquire.

Although cryptocurrencies was not widely accepted, it slowly gained its momentum
and now, many other businesses even accept it as a form of payment or exchange.
The very same thing is slowly happening to new cryptocurrencies.

Although the profits are not guaranteed and the software running them is open-
source, many still try to vie to acquire these currencies as another means of
investment.
This type of merge of merge between technology and finance continues to improve
over time, it will be no wonder if more and more people will divert their attention to
acquiring these coins and more businesses will open themselves to exchanging and
accepting them as actual reward or trade for goods and services.

The slow but steady approach of cryptocurrency could result to major changes in the
way finance has been seen and treated in the past.

More people are opening their minds to the existence and stability of such platforms
and many are craving to break away from the scrutinizing eyes of the governing
bodies involved in the storage and exchange of their assets.
Bitcoin
A GENTLE INTRO

4 use Bitcoin?
Why
Why use BITCOIN
Price volatility. Jus
currencies, bitcoin’s p
Bitcoin’s price is mor
of currencies, althou
decreasing). If you ac
wealth in your local c
owning bitcoin coul
on bitcoin’s future ex
otherwise know as s
can see historical pri
BNC website.

Conversion. Just lik

if you have one curre
Although Bitcoin is often referred to as a decentralised digital currency, think of it as Sterling), and you wa
an electronic asset. This sidesteps questions around which government backs it and bitcoin, you need to
Although
who sets thebitcoin is often
interest rate,referred
which to areasoften aBitcoin
mentalis block
just likeinany other
understanding bitcoin. exchange it with. Th
a decentralised digital currency, think international currency whose ‘home some friction and fee
of
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as eletronic
an electronic
assetasset.
you This
buy bitcoins, ownground’ is thesend
them, and internet,
themas toopposed
someonetoelse. up as commissions o
sidesteps questions around which any geographical location. Put another
Currently, there are around 14 million bitcoins that have been created, increasing by conversion price, kno
government backs10
25 bitcoins every it and who sets
minutes or so.theThere way:
is anifagreed
the internet were aofcountry,
upon limit, 21 million, the With time, conversio
interest rate, which are often a mental bitcoin
last of which should be created a little before the year 2140. would be its currency. For the and cheaper as more
block in understanding bitcoin. first time we have an entirely digital springing up in more
Bitcoin transactions from account to account assetarewhich can beglobally
recognised controlled in by the of
a matter
As an electronic
seconds, and areasset, youconsidered
usually can buy settledend user,anwithout
within hour. requiring
Bitcoins havean account
a price, Maintain cynicism
bitcoins,
which can own bethem,
in anyand send them
currency, but istousuallywith an institution.
in USD. This price is set by normal bitcoin being ‘fast’ an
someone
supply and else. Currently
demand there
market are in market places with traders, just like with oil or While that is true wh
forces
gold. 14 million bitcoins that have
around Bitcoin payments. Payments of in bitcoin, it’s worth
been created, increasing by 25 bitcoins bitcoins can be made from one person costs involved in the
Bitcoin
every 10isminutes
just likeorany other isinternational
so. There an currency
to another, whose ‘home of
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geographical getting from soverei
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agreed as opposed to any
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million, the last location.
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or jurisdiction. if the internet
Payments are bitcoin and back.
were
of a country,
which should be bitcoin
createdwould be its currency.
a little For the
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– thetime wenotification
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year 2140.can be controlled by thewithin end user, without
seconds, andrequiring anabout
it ‘settles’ in account It’s worth noting tha
with an instituition. an hour. In situations where the spawned many othe
Bitcoin transactions from account to normal financial system is inadequate, cryptocurrencies, suc
Bitcoin are
account payments.
recognised Payment
globallyofinbitcoins
a can be made
it can from way
be a useful one of person to another,
transferring dogecoin, bitcoin is
irrespective
matter of geographical
of seconds, location or jurisdiction.
and are usually Payments
value to anyone who hasare relatively
access to the fast – thewidely used and trad
intital notification
considered is within
settled within seconds, and itinternet.
an hour. ‘settles’ in about an hour. In situations
where the normal financial
Bitcoins have a price, which can be insystem is inadequate. It can be a useful way of
transferring
any currency,value
but isto anyone
usually who This
in USD. has access to the internet.
Potential users. Some communities
price is set by normal supply and are underserved by banks, due to the
demand market forces in marketplaces cost/benefit of the brick & mortar
with traders, just like with oil or gold. banking model, and regulatory cost;
some international transfers are
unreliable, or can take many days, with
manual processes and faxes being
used as part of the plumbing; some
people may want to accept digital
Potential users. Some communities are underserved by banks, due to the cost/benefit
of the brick & mortar banking model, and regulatory cost; some international transfers
are unreliable, or can take many days, with manual processes and faxes being used as
part of the plumbing; some people may want to accept digital money for selling
digital goods; there may be use cases where small payments, less than a penny, may
be useful; these are all currently difficult with existing fee structures and payment
options.

Price volatility. Just like other currencies, bitcoin’s price fluctuates. Bitcoin’s price is
more volatile than a lot of currencies, although the volatility is decreasing). If you
account for your wealth in your local currency, then owning bitcoin could be seen as a
bet on bitcoin’s future exchange rate price, otherwise know as speculation. You can
see historical price volatility on the BNC website.

Conversion. Just like other currencies, if you have one currency (say, Pound
Sterling), and you want to convert it to bitcoin, you need to find someone to exchange
it with. This necessarily has some friction and fees, either dressed up as commissions
or built into the conversion price, know as the spread. With time, conversion is getting
easier and cheaper as more exchanges are springing up in more countries.

Maintain cynicism. You may hear of bitcoin being ‘fast’ and ‘free’ or ‘low cost’.
While that is true when you are strictly in bitcoin, it’s worth thinking about the costs
involved in the ‘on’ and ‘off ’ ramps, getting from sovereign currencies into bitcoin
and back.

It’s worth noting that while bitcoin has spawned many other similar cryptocurrencies,
such as litecoin and dogecoin, bitcoin is still the most widely used and traded.
 A GENTLE INTRODUCTION TO BITCOIN

How 5Does It Work? A GENTLE INTRODUCTION TO BITCOIN

How Does It Work?

BITCOIN’s operation
Keeping track of payments: The Bitcoin Blockchain
KeepingKeeping
tracktrack of payments: The Bitcoin Blockchain
of payments: The Bitcoin Blockchain
A network of computers keeps track of bitcoin payments, and adds them to an ever-
A network of computers keeps track of bitcoin payments, and adds them to an ever-growing list of all the bitcoin payments
growing list of all the bitcoin payments that have been made.
that have been made.
A network ofThis computers
list iskeeps
a filetrack of bitcoin
called “Thepayments,
Bitcoin and adds them to and
Blockchain”, an ever-growing list of all the
sits on thousands of bitcoin payments
that have been made.
computers
This list is a file called “The across the world.and
Bitcoin Blockchain”, When you
sits on read theof word
thousands “blockchain”,
computers thinkWhen
across the world. “database”
you read the
or even
word “blockchain”, “list”
think and you
“database” have
or even “list”the
andright kindthe
you have ofright
idea.kind of idea.
This list is a file called “The Bitcoin Blockchain”, and sits on thousands of computers across the world. When you read the
word “blockchain”, think “database” or even “list” and you have the right kind of idea.

A screenshot of The Bitcoin Blockchain files on a computer. Here you can see The Bitcoin
Blockchain split into files, each 134MB big, and the total currently (september 2015) is about
A50GB.
screenshot of The Bitcoin Blockchain files on a computer. Here you can see The Bitcoin
Blockchain split into files, each 134MB big, and the total currently (september 2015) is about
This file50GB.
contains data about all the bitcoin transactions, payments of bitcoins from
onedata
This file contains account
abouttoall another,
the bitcointhat have ever
transactions, happened.
payments Thisfrom
of bitcoins is often called to
one account a ledger,
another, a term
that have ever
happened. Thisfound in accounting.
is often called a ledger,Aa bank’s ledger
term found keeps a Arecord
in accounting. bank’s of payments
ledger between
keeps a record bank between
of payments
bankfile
This accounts.
accounts.
contains data about all the bitcoin transactions, payments of bitcoins from one account to another, that have ever
happened. This is often called a ledger, a term found in accounting. A bank’s ledger keeps a record of payments between
bank accounts.
 A GENTLE INTRODUCTION TO BITCOIN

How Does It Work?

Keeping track of payments: The Bitcoin Blockchain
Keeping
Thetrack of payments:
bitcoin network. The computersThe Bitcoin
which store the list ofBlockchain
transactions also run
software that connects them, over the internet, to the other computers running the
same software. This forms a network of computers that can talk to each other,
relaying information.
The bitcoin network. The computers which store the list of transactions also run software that connects them, over the
internet, to the other computers
1. New payments,running the same
currently software. 2015)
(September This forms a network
there is aboutof computers that can talk
one new bitcoin to each other,
payment
relaying information.
per second, but this comes in fits and starts.

2. Updates
1. New payments, to(September
currently The Bitcoin Blockchain
2015) occur
there is about every
one new 10 mins,
bitcoin on per
payment average.
second,A new
but this page,
comes in fits
and starts. or block, of valid transactions is confirmed and added to the ledger on all of the
computers. This lengthens the chain of blocks, and gives the ledger its name.
2. Updates to The Bitcoin Blockchain occur every 10 mins, on average. A new page, or block, of valid transactions is confirmed
and added to the ledger
When you on all ofathe
make computers.
bitcoin This lengthens
payment the chain
an instruction isofsent
blocks, and network.
to the gives the ledger
The its name.
computers on the network validate the instruction and relay it to the other computers.
After some time has passed, the payment gets included in one of the new blocks, and
When you make a bitcoin payment an instruction is sent to the network. The computers on the network validate the instruction
isthe
and relay it to added
othertocomputers.
The Bitcoin
AfterBlockchain
some time hasfile on all
passed, thethe computers
payment acrossinthe
gets included onenetwork.
of the new blocks, and is
added to The Bitcoin Blockchain file on all the computers across the network.
Peer-to-peer. The distribution of data works on a peer-to-peer basis, rather than
Peer-to-peer.client-server. Peer-to-peer
The distribution ison
of data works like a gossip network
a peer-to-peer where
basis, rather than everyone tells
client-server. a few other
Peer-to-peer is like a gossip
network where everyone
people tells a few
the news, andother people the
eventually thenews, and eventually
message gets to the messageingets
everyone thetonetwork.
everyone in the network. The
The
client-serverclient-server
model is more like
model a conventional organisation,
is more like where a boss
a conventional tells subordinates
organisation, wherethe news, tells
a boss and the boss is a central
point of reference, and potential failure.
subordinates the news, and the boss is a central point of reference, and potential
failure.

Client-server vs Peer-to-peer data distribution models

One benefit of peer-to-peer (p2p) over client-server is that with p2p, the network
One benefit doesn’t
of peer-to-peer
rely on(p2p)
oneover client-server
central point ofis that with p2p,
control the network
which can fail.doesn’t rely on one central point of control
which can fail.

6
6
Storage and sending of BITCOINs
How are BITCOINs stored? How Are Bitcoins Stored?
Bitcoin accounts: Addresses & wallets
Bitcoin
Bitcoin ownership is tracked accounts:
on The Bitcoin Addresses
Blockchain, and bitcoins are& wallets
associated with “bitcoin addresses”. Bitcoins themselves are not stored; but
rather the keys or passwords needed to make payments are stored, in “wallets,”
which are apps that manageBitcoin
the addresses,
ownership is keys,
trackedbalances, and
on The Bitcoin payments.
Blockchain, and bitcoins are associated with “bit
are not stored; but rather the keys or passwords needed to make payments are stored, in “w
In banking you have accounts which keep
the addresses, keys, pots of money
balances, separate; in bitcoin
and payments.
you have addresses. A bitcoin address is similar to a bank account number,
with a few differences.
In banking you have accounts which keep pots of money separate; in bitcoin you have addr
Here’s an example of a bitcoin address:
a bank account number, with a few differences.

1MKe24pNsLmFYk9mJd1dXHkKj9h5YhoEey
Here’s an example of a bitcoin address:

1MKe24pNsLmFYk9mJd1dXHkKj9h5YhoEey
Just like with bank accounts, if you want to receive a bitcoin payment, you
need to tell someone your bitcoin address, so they know where to send bitcoins
Just like with bank accounts, if you want to receive a bitcoin payment, you need to tell some
to. A typical conversation, which could be in
know where to send person,
bitcoins to. Aor online,
typical or on chat
conversation, which could be in person, or online
(Whatsapp/Skype etc) lookslooks
like:like:

Using a bank, under one single username/password, yo

(eg incoming salary, monthly savings, tax, etc), each of w
currency. Similarly, Bitcoin wallets are apps that display
balances and make it easy to send and receive payment

For a wallet to provide accurate information, it needs to

Blockchain file, which it uses as its source of information
Blockchain file and calculate the balances in each addre

(BTC and XBT mean the same

thing and are industry standard
abbreviations for bitcoins, like
GBP for Pound Sterling)

Bitcoin wallets let you create bitcoin addresses to receiv

outgoing payments, plus have other features that make
count number, with a few differences.

example of a bitcoin address:

NsLmFYk9mJd1dXHkKj9h5YhoEey

ith bank accounts, if you want to receive a bitcoin payment, you need to tell someone your bitcoin address, so they
ere to send bitcoins to. Using
A typicalaconversation,
bank, under one
which single
could be in username/password,
person, or online, or on chatyou can controletc)
(Whatsapp/Skype a number
of accounts (eg incoming salary, monthly savings, tax, etc), each of which has
a balance or amount of currency. Similarly, Bitcoin wallets are apps that
display all your
Using a bank, underbitcoin
one singleaddresses, display
username/password, youbalances
can controland makeofitaccounts
a number easy to send
(egreceive
and incomingpayments.
salary, monthly savings, tax, etc), each of which has a balance or amount of
currency. Similarly, Bitcoin wallets are apps that display all your bitcoin addresses, display
balances
For and to
a wallet make it easy toaccurate
provide send and receive payments.it needs to be online or connected
information,
to For
a Bitcoin
a wallet toBlockchain file,
provide accurate which itit uses
information, needs as itsonline
to be source of information.
or connected to a BitcoinThe
wallet will file,
Blockchain read theitBitcoin
which uses as itsBlockchain file and
source of information. Thecalculate the the
wallet will read balances
Bitcoin in each
Blockchain file and calculate the balances in each address.
address.

XBT mean the same

d are industry standard
ions for bitcoins, like
ound Sterling)

Bitcoin wallets let you create bitcoin addresses to receive incoming transactions and make
outgoing payments, plus have other features that make them user friendly.

How are BITCOINs sent?

Payments, or bitcoin transactions

Each bitcoin address has its own private key, which is needed to send payments
from that address. Think of a key as a kind of password, but it’s
mathematically linked to its respective address, so it can’t be changed, unlike 7a
conventional passwordor PIN number.

For this address (1MKe24pNsLmFYk9mJd1dXHkKj9h5YhoEey), the

private key is

5KkKR3VAjjPbHPzi3pWEHVQWrVa3C4fwD4PjR9wWgSV2D3kdmeM.

Whoever knows this private key, can now make payments from the address.

To get your own address/private key combination, it is not given to you by

some authority like a bank, but rather you use a random number and apply
some maths to it – wallet software will do this for you.
Each bitcoin address has its own private key, which is needed to send payments from that address. Think of a key as a kind of
password, but it’s mathematically linked to its respective address, so it can’t be changed, unlike a conventional password
or PIN number.

For this address (1MKe24pNsLmFYk9mJd1dXHkKj9h5YhoEey), the private key is

5KkKR3VAjjPbHPzi3pWEHVQWrVa3C4fwD4PjR9wWgSV2D3kdmeM. Whoever knows this private key, can now make
payments fromPrivate keys. The private key is something you want to keep securely and
the address.
never expose. Because you can not change that private key to something more
To get your own address/private
memorable, keybe
it can combination,
a pain toit remember.
is not given to Most
you by some
walletauthority like a bank,
apps will but rather
encrypt that you use a
random number and apply some maths to it – wallet software will do this for you.
key with a password that you choose. Later, when you want to make a
payment,
Private keys. you
The private key just need toyou
is something remember your
want to keep password.
securely and never expose. Because you can not change
that private key to something more memorable, it can be a pain to remember. Most wallet apps will encrypt that key with a
password thatBecause bitcoins
you choose. don’t
Later, when youexist, asmake
want to such, bitcoinyou
a payment, wallets don’t
just need store bitcoins
to remember but
your password.
store the keys that let you transfer or ‘spend’ them. Copying a wallet doesn’t
Because bitcoins don’t exist, as such, bitcoin wallets don’t store bitcoins but store the keys that let you transfer or ‘spend’ them.
double the number of bitcoins you own, you simply have a copy of the same
Copying a wallet doesn’t double the number of bitcoins you own, you simply have a copy of the same keys. If someone
manages to keys.
copy andIf read
someone manages
your wallet, they canto copytheand
empty read just
accounts, your wallet,
as two peoplethey
withcan empty
duplicate keysthe
to a bank’s safe
accounts,
deposit locker can race tojust as the
unlock two people
locker, with
but the duplicate
contents keysdo
of the locker tonot
a bank’s
double. safe deposit locker
can race to unlock the locker, but the contents of the locker do not double.

Bitcoin wallets contain private keys, not bitcoins!

8
 7
WhatBITCOIN
happenspayments
when I and
make
A GENTLE INTRODUCTION TO BITCOIN

tracking of
a bitcoin payment?
BITCOINs
What happens when I make a bitcoin payment

A payment A payment
is an is to
instruction anunlink
instruction to unlink
some bitcoins from some bitcoins
an address from and
you control, an address youtocontrol,
move them and
the control of another
move them
address (your recipient). to the control of another address (your recipient).

Your
Your payment payment
instruction instruction
includes includes
everything everything
you’d expect, you’d expect, including:
including:

1. Which bitcoins
1.you’re
Whichsending.
bitcoins you’re sending.
2. Which address you’re sending them from.
2. Which address you’re sending them from.
3. Which address you’re sending them to.
3. Which address you’re sending them to.
Digital cryptographic signatures. The instruction is digitally signed with the private
key of the address which currently holds the bitcoins. This digital signing
demonstrates
Digital cryptographic that youThe
signatures. areinstruction
owner ofisthe address
digitally inwith
signed question (because
the private only
key of the you know
address which currently holds
the bitcoins.the
This digital signing
private key). demonstrates that you are owner of the address in question (because only you know the
private key).
Payment instructions are sent from the wallet software to any of the computers on the
Payment instructions
network are sent from
,called the wallet
“nodes” software tovalidators.”
or “payment any of the computers on the network ,called “nodes” or
“payment validators.”
Validators. When the first computer receives the instruction, it checks some technical
Validators. When the first computer receives the instruction, it checks some technical details, and some business logic details
details,
(eg, does the paymentand sometobusiness
attempt logicout
create bitcoins details (eg, does
of nothing? Havethe
the payment
coins beingattempt to create
sent already been sent elsewhere? etc).
bitcoins out of nothing? Have the coins being sent already been sent elsewhere? etc).

Validators validate at technical and business logic levels.

If these tests pass, then the computer relays it to others on the network. Eventually all
If these tests pass, then the computer relays it to others on the network. Eventually all computers on the network know about
computers on the network know about this payment, and it appears on screens
this payment, and it appears on screens everywhere in the world as an “unconfirmed transaction”. It is unconfirmed because
everywhere in the world as an “unconfirmed transaction”. It is unconfirmed because
although the payment has been verified and passed around, it isn’t entered into the ledger yet.
although the payment has been verified and passed around, it isn’t entered into the
ledger yet.
How are bitcoins tracked?
A GENTLE INTRODUCTION TO BITCOIN

How do transactions get entered into everyone’s blockchains?

How doAstransactions getabout
well as passing information entered into
transactions everyone’s
between each other, nodesblockchains?
are also
generally working to add these transactions, in blocks, to the blockchain. This is
known as “mining” bitcoin. This is often described as “solving complex mathematical
puzzles to win bitcoin.” In fact there is nothing complex about this process, it just
As well as passing information
deliberately takesabout
manytransactions betweensteps,
computational each other,
withnodes are also generally working to add these
no shortcuts.
transactions, in blocks, to the blockchain. This is known as “mining” bitcoin. This is often described as “solving complex
mathematical puzzles A
Mining. to guessing
win bitcoin.game
” In factwhere
there isyour
nothing complex
chance about this is
of winning process,
relatedit just deliberately
to the takes many
processing
computational steps, with no shortcuts.
power of your machine. Whoever guesses the right number first can publish this to the
Mining. Aother computers
guessing game where on your
the chance
network, who perform
of winning is relatedatoquick validation,
the processing andof ifyour
power it checks
machine.out,
Whoever
then the guesser awards themselves with some amount of new bitcoins (currently 25
guesses the right number first can publish this to the other computers on the network, who perform a quick validation, and if it
checks out,BTC, and
then the halving
guesser roughly
awards everywith
themselves 4 years). This happens
some amount roughly
of new bitcoins every2510
(currently minutes
BTC, on roughly
and halving
every 4 years).
the This happens roughly every 10 minutes on the network.
network.

Due to this Due to bitcoin

reward, this reward, bitcoin
mining has mining
become has become
very competitive, very
with competitive,
companies withspecialised
developing companies hardware, called
ASICs, which are very quick
developing at the guessing
specialised game and
hardware, associated
called ASICs,number-crunching.
which are very quick at the guessing
game and associated number-crunching.
Bitcoin’s protocol and code ensures that it takes around 10 minutes for the network as a whole to guess correctly. This is the
speed that transactions take to be confirmed onto the blockchain.
Bitcoin’s protocol and code ensures that it takes around 10 minutes for the network as
a wholeBytomaking
Slow for security. guess itcorrectly. This is
slow (10 minutes the speed
is slow thattotransactions
compared take
how fast it could be to be ifconfirmed
done the guessing game was
onto the blockchain.
removed), and by making it computationally and therefore financially expensive to participate in this process, it also makes it
financially expensive for malicious attackers to buy enough processing power to write their own abnormal blocks of
transactionsSlow forblockchain.
into the security.Bear By in
making it slow
mind that even if(10
theyminutes
were to dois this,
slowallcompared to how fast
the other computers wouldit need to agree
with the transactions,
could be so theyifstill
done thecannot insert game
guessing transactions that break the
was removed), business
and logic rules,
by making eg conjuring bitcoins out of
it computationally
thin air. and therefore financially expensive to participate in this process, it also makes it
financially expensive for malicious attackers to buy enough processing power to write
their own abnormal blocks of transactions into the blockchain. Bear in mind that even
if they were to do this, all the other computers would need to agree with the
transactions, so they still cannot insert transactions that break the business logic rules,
eg conjuring bitcoins out of thin air.
8
BITCOIN security

There are two parts to bitcoin payments:

1. Making payments

2. Block control

Making payments. The only thing needed to make a bitcoin payment is the private
key of the address you want to spend from. There is a balance between making it hard
for people to steal private keys, and having backups in case they are lost – there are
stories of people throwing away old laptops containing – not bitcoins – bitcoin private
keys controlling bitcoins worth millionsof dollars.

Block control. Like an army of independent accountants and auditors, all auditing the
same ledger, the romantic vision of bitcoin was for many thousands of independent
block validators keeping the system true. This independence and mutual validation of
transaction and blocks is supposed to prevent any one person or entity from adding
rogue blocks and dominating the network with their influence.

In practice, miners join forces into ‘mining pools’ in order to win blocks more often.
The spoils are shared, which has the effect of each participant winning less value but
more often, much like a lottery syndicate. This works well for paying back capital
needed to buy mining equipment. As a consequence, the mining pool owners have
greater power over the bitcoin network in terms of creating blocks, voting on protocol
changes, and potentially re-writing recent ledger entries.

If you have ability to re-write a recent block, then you could ‘unwind’ a payment in
what is known as a ‘double spend’ attack. You would make a payment to a vendor,
and have it confirmed in a block. If you can create a couple of blocks without the
payment to the vendor, then the network will invoke the ‘longest chain rule’ and
ignore / orphan the first block and use your longer chain instead. You also need to
invalidate the original payment, by creating a slightly different transaction, spending
the same bitcoins, but paying yourself or someone else, instead of the vendor. If you
can slip this transaction into your new blocks, then the old transaction will be invalid
to the network.

Your ability to do this shuffle increases with ‘mining power’ and decreases with the
age of the block you are trying to replace, as each block ‘costs’ a certain amount of
mining power to create, and you are competing against the rest of the network to
create blocks.

Scams. It’s hard to research bitcoin security without hearing of Mt Gox, an early
bitcoin exchange. Bitcoin exchanges are websites you go to to buy or sell bitcoins. If
you want to buy bitcoins, you first make a bank wire to the exchange’s bank account.
When they see the funds in their bank, they let you place orders to buy bitcoins from
sellers. Likewise, sellers need to send bitcoins to the exchange’s bitcoin wallets
before the exchange will let them sell the bitcoins. The exchange acts as escrow,
holding onto cash and bitcoins and then releasing them once the trade has been made.

It is unknown what happened at Gox, but rumours include having private keys stolen,
poor accounting practices, letting people trade first before sending collateral, etc. Just
as you don’t blame the US Dollar if a Citibank branch gets held up and funds stolen,
it wasn’t the security of the bitcoin network that was at fault; it was the security and
poor practices of the exchange.
9
What are other upcoming
cryptocurrencies?
Everyone has heard of Bitcoin, even if they don’t fully understand it. There are
numerous other cryptocurrencies besides Bitcoin. There are about 19 active
cryptocurrencies and most of these were released in the last couple of years.

Bitcoin has a considerable head start on the other offerings. Several cryptocurrencies
are slight variatins on the Bitcoin platform and may be more attractive to conventional
financial institutions.

The first cryptocurrency to be welcomed by the banking industry will likely dominate
the market. Only the future will reveal the one that comes out on top.

The following are the current five top cryptocurrencies after Bitcoin:

1. Ripple.

Ripple has a market capitalization of nearly $150 million. For comparison purposes,
Bitcoin is almost $5 billion. This cryptocurrency was released in 2012 and has benen
making strong inroads into the banking industry and payment networks.

A “Bitcoin Bridge” permits Ripple currency holders to make payments to Bitcoin

users without ever holding Bitcoins themselves. Some financial experts believe that
Ripple will eventually ovetake Bitcoin and become the dominant digital currency.

2. Litecoin.

Litecoin is the third largest cryptocurrency with a market cap of $137 million.
Charles Lee, a former Google employee, released Litecoin in 2011. This
cryptocurrency is very similar to Bitcoin.

Litecoin offers several enhancements when compared to Bitcoin, including a higher

limit on the maximum number of coins, improved user interface, and faster
transaction approvals.

Several exchanges permit transactions of Litecoin with Bitcoin users and various
conventional currencies, including US dollars, Euros, and Chinese Yuan.
3. Ethereum.

The Ethereum market is half the size of Litecoin. Ethereum is challenging to

understand, even for the experts. Ethereum combines the blockchain technology of
Bitcoin with a programming language. This platform permits the construction of new
applications to be developed.

4. Dash.

Dash was started in 2014 as Xcoin. You may have heard of Xcoin or Darkcoin before
they were rebranded to the name Dash. Dash is roughly one-tenth the size of Litecoin
at $14 million. There are currently 6 million Dash coins in circulation.

Dash transactions are arguably more private than those of the previously mentioned
currencies. Inputs from multiple users are needed to complete a transaction. Multiple
identical outputs are also generated. These identical inputs and outputs shield the
location and identity of the true parties.

5. Dogecoin.

Dogecoin has approximately the same market capitalization as Dash. However Dash
currently has 6 million coins in circulation compared to the 102 billion coins of
Dogecoin!

This crypto currency started as a joke, but quickly developed a loyal following. Coins
are produced very quickly and have very little value, roughly $0.0001 per coin.

The Dogecoin community has been actively involved in fundraising for interesting
causes, including the Jamaican Bosled Team, A NASCAR driver, and building a well
in Kenya. Several online exhanges exist to service those that wish to use Dogecoin.

The Cryptography technology employed is similar to that of Bitcoin and Litecoin and
utilizes a private and public key system. There is no limit on the number of
Dogecoins that can be produced. More than 5 billion coins are expected to be
produced each year.

There’s more going on in the cryptocurrency world than just Bitcoin. However,
Bitcoin is the oldest and most well-known cryptocurrency in exisitence. The current
Bitcoins in circulation are worth more than all of the other cryptocurrencies
combined. It will be interesting to see what the future holds.
10
Conclusion
You will probably have guessed by now that there is a lot more to bitcoin than we
have been able to set out here. In giving an introduction we have had to present some
concepts at a high level, which in practice are complex and highly nuanced. But as
you read and learn more in our reports, we hope to be able to take you through a more
detailed understanding of bitcoin, virtual currencies, and the underlying Blockchain
technologies.