Cryptocurrency Basics

Bitcoin Introduction

A short animated video explaining Bitcoin. A great place to start if you are new to cryptocurrency.

The Bitcoin Phenomenon

Bitcoin origins: In October 2008, a person or entity, using the pseudonym "Satoshi Nakamoto" distributed a white paper called "Bitcoin: A Peer-to-Peer Electronic Cash System". In January 2009, the first bitcoin software and blockchain network was started. Bitcoin’s most prevalent innovation is the concept of the “blockchain”, a publicly reviewable “open” ledger containing a verified record of every Bitcoin transaction since the beginning, the Genesis Block. Bitcoins act as a medium of exchange in this network and exist as entries in the decentralized Bitcoin ledger. In his white paper, Satoshi explains that only 21 million bitcoins can come into circulation. The process of mining (yes like gold) is the term he assigned to the computational power that users in the network employ in order to solve challenging cryptographic computations. When a new transaction is solved, all computers in the blockchain network will verify that this indeed is a valid transaction. The miner has established his "proof of work" and receives bitcoins as the reward for a successful solution. The transaction is added to a block on the Bitcoin blockchain.

Buying Bitcoin on a Crypto Exchange

Buying bitcoin in exchange for other sovereign currency is transacted on an exchange. Thus far, the cryptocurrency space spawned more than 200 exchanges that provide varying degrees of safety, security, privacy, and control over your funds and information. Individual research is paramount when selecting an exchange as the gateway in and out of the cryptocurrency world from traditional financial systems. Some important features to consider from an exchange’s website:

Verification Requirements: Residency address verification and government issued ID is required by most exchanges in order to deposit and withdraw. Exchanges that allow users to remain anonymous can be flagged as vulnerable to scams including money laundering.
Payment Methods: Choose an exchange which allows you to deposit/withdraw by a variety of ways (e.g. credit card, debit card, wire transfer, PayPal etc.)
Fees: Deposit, transaction and withdraw fees can vary significantly.
Cryptocurrencies supported: Though Bitcoin is widely available, consider other coins the exchange lists (e.g. Ether, Monero, Zerocoin, Bitcoin Cash etc.)
Reputation: User reviews are valuable within Bitcoin communities.

Bitcoin Wallet - Explained

Blockchain is a decentralized data structure that allows computer networks from all over the world participate in the process of validating cryptographic transactions. Since this network is open, participants need not know each other. Thus, the blockchain system is called “trustless” and functions without a central authority or gate keeper. These participants can transact directly with each other and each participant can store the present state and history of these transactions on the Blockchain digital ledger for all to see. A transaction is a record informing the participants in the network of a transfer of bitcoins from one owner to another. The Bitcoin blockchain innovation has revolutionized asset transfers on its public ledger in a tamper-proof, transparent, and censorship-resistant manner.

The Blockchain

Mining Bitcoin

New bitcoins are generated by miners, the anonymous participants within the global bitcoin network of computers. Since mining creates new bitcoins in each block, its equivalent to a central bank printing new money. This system of trust is reinforced as transactions are confirmed only when enough computational power is devoted (proven) to the block that contains then. More blocks require more computational power which equates to more trust within the network.

Solving the "Proof of Work" problem requires a lot of computing power and that power costs money. To incentivize miners to devote more resources to computing, Bitcoin is rewarded for each successfully mined block (plus the transaction fees contained in the new block). The creation of new blocks must take an average of 10 minutes as specifically chosen by Satoshi Nakamoto (a tradeoff between fast confirmation time and the amount of work wasted on processing logistics like chain splits and orphan blocks). As the difficulty to compute the mathematical proof rises, it may take years for a slower individual miner to generate a block. To compensate for the increased difficulty whilst striving for the Bitcoin reward payout, miners pool their resources to boost hashing power so they can generate blocks even faster. These shared efforts called “mining pools” reward members based on their contribution to solving a block.

Currently miners reward is 12.5 bitcoins. In accordance with Satoshi’s algorithm, this bounty is cut in half every 210,000 blocks (i.e. approximately every 4 years) Eventually, the reward will be dissolved entirely when Satoshi’s maximum of 21 million bitcoins is reached by the year 2140.

Public and Private Keys

Bitcoin network relies on digital signatures in order to verify transactions since all information is visible to everyone in the network. In fact, ownership of bitcoins is documented using: (a) digital keys in combination with (b) Bitcoin addresses and (c) digital signatures. A public key and a private key are two mathematically related but not identical parts. The keys provide a method of authentication and encryption for blockchain transactions. The actual key codes are long strings of numbers and letters. Understand that Public keys are shared and used in cryptocurrency transactions since they are used to encrypt messages but not decrypt them.

IMPORTANT- Never share your private keys, because anybody that has them can steal your funds!

Proof of Work, Proof of Stake and More

A consensus mechanism is used so that the blockchain networks can come to an agreement about the state of the blockchain. This is important since the participants in the network are not known to each other and should not be trusted. Proof of Work (POW) and Proof of Stake (POS) are two popular consensus mechanisms because the Bitcoin blockchain uses POW and the Ethereum blockchain uses POS. However, there are others to be aware of such as Proof or Burn, Proof of Authority, Proof of Existence, and Proof of Importance, just to name a few.

The Proof of Work mechanism entails repetitive random guesses to solve a computational challenge by using substantial processing or “work” by a computer. As an alternative to POW exorbitant energy cost requirements, Proof of Stake aims to reward network participants based on the number of coins they hold. The more cryptocurrency held in a participant’s digital wallet, the more likely the chance of being selected to add to that blockchain because they’d be able to “stake” high amounts.

Proof of Work, Proof of Stake and More

A new business venture or project can raise money by accepting capital from investor participants. Traditionally, this was done by selling shares, issuing debt or presale of goods/service. The innovation associated with the cryptocurrency space gave rise to new crowdfunding methods like the Initial Coin Offering (ICO) and the Security Token Offering (STO).

INITIAL COIN OFFERING Startup companies that fundraise via ICO publish project details, financial goals and team member bios on their website designed to explain the purpose of the coin and its blockchain application. Using a designated digital wallet address, investors can send cryptocurrency, like Bitcoin, as payment in order to receive the new coins. Ethereum is an example of a successful ICO project. The global excitement over cryptocurrency innovations was sparked by the runup of bitcoin prices in 2017. Unfortunately, numerous ICO scams were introduced by bad actors seeking to bypass traditional capital raising processes. Since then, regulatory authorities around the world have stepped up their efforts to provide detailed framework for legal ICOs within their respective jurisdictions

A significant benefit of these crowdfunding methods is allowing the regular investor to participate in them. Today to take part in a stock IPO before it starts trading requires exceptional wealth, the regular investor is virtually shut out of this option.

Digital Coins vs Tokens

A cryptocurrency coin has its own platform and is not dependant on another cryptocurreny system. A cryptocurrency token is designed and built on top of another cryptocurrency platform.

Smart Contracts

The cryptocurrency Ethereum added a programming layer to its blockchain implementation called a "smart contract". A smart contract specifies rules that must be performed, executed and verified for a peer to peer computerized transaction to occur.