Bitcoin FAQ - CryptoWiki

Bitcoin FAQ (frequently asked questions) answers the most commonly asked questions in relation to Bitcoin. This may be particularly useful to those who are new to cryptocurrency and looking to learn about Bitcoin.

General

What is Bitcoin?

Bitcoin was the very first cryptocurrency. In other words, Bitcoin is a virtual currency or digital currency. It works much like any other currency in the sense that it can be used to pay for goods and services. It is decentralised which means that it is not owned by any one person or entity and the system works without the need for relying on a single bank or administrator. Indeed, Bitcoin is run on a peer-to-peer (P2P) network of computers around the world. Transactions are irreversible, pseudonymous and recorded in a distributed public ledger known as the blockchain.

What's the purpose of Bitcoin?

Bitcoin was created in order to create a fairer financial system. Because it's decentralised, there's no need for unscrupulous third parties. Transactions are more transparent, faster and with lower fees.

Who created Bitcoin?

Bitcoin was created by Satoshi Nakamoto. What's particularly interesting is that the true identity of this individual or group is unknown. In a P2P Foundation profile, Nakamoto claimed to be a Japanese man who was born on 5 April 1975. However, there's little proof that this information is true. There are many theories as to the identity of Satoshi Nakamoto, mostly concentrating around computer science and cryptography experts in the USA and Europe. Satoshi Nakamoto was actively involved in the development of Bitcoin until December 2010.

What are bitcoins?

Bitcoins are units of the cryptocurrency Bitcoin. In total, there will only ever be a maximum of 21 million bitcoins in existence. The abbreviation of Bitcoin is "BTC". Thus, one bitcoin is 1BTC.

How does Bitcoin work?

For the average user, the workings of Bitcoin are relatively simple. The user simply creates a new Bitcoin wallet and is provided with their own unique Bitcoin address. However, there's obviously a lot more to it than simply having a wallet.

The Bitcoin network is a shared public ledger known as the blockchain. This contains a history of every transaction ever processed. Users are able to verify the validity of transactions with their computers. Bitcoin wallets all have a private key or seed that is used to sign transactions, providing proof that the funds come from the owner of the wallet. Transactions are broadcast to the network and confirmed through a process known as mining.

How do I get bitcoins?

There are several ways in which a person can get bitcoins. The most common way is to use a cryptocurrency exchange and trade a fiat currency such as USD or EUR for BTC. It's also possible to trade other cryptocurrencies such as Ethereum (ETH) for BTC. You don't have to use a cryptocurrency exchange - it's also possible to trade in-person but there is some element of risk involved with this. Other ways to get bitcoins are by accepting it as a form of payment in an online or physical store and by mining the currency through the use of a mining pool.

What are the advantages of Bitcoin?

Bitcoin has become popular because it offers many advantages over the current financial system and traditional forms of currency. In particular, Bitcoin offers freedom in that people can send and receive the currency anywhere at any time. What's more, users can choose the level of fees they pay (the higher the fee, the faster the confirmation). Fees only apply to sending Bitcoin, not receiving. Also, fees are not related to the amount of bitcoin being transferred so those sending large amounts of the currency can do so without astronomical fees.

Transparency is another advantage of Bitcoin. All transactions are visible on the blockchain and no third party can manipulate this information in any way. While there is transparency, users are offered a level of anonymity in the sense that their wallets are not directly linked to any personal information and their identities. Bitcoin also aims to offer quick and cheap transactions when compared to traditional banking systems and fiat currencies.

What are the disadvantages of Bitcoin?

Despite the many obvious advantages of Bitcoin, there are still some issues that will need to be addressed in time. One of the main issues Bitcoin faces is the rate of adoption. It's not yet possible to spend Bitcoin in most stores and it will take time for this to happen. Another problem is that the cryptocurrency market as a whole is very volatile since cryptocurrencies such as Bitcoin are so new. This limits the rate of adoption as a result.

Scaling is another disadvantage. This refers to the network's ability to scale as it experiences growth. Indeed, there is a limit to the number of transactions the Bitcoin network can process at any one time. High demand can and does result in slower transaction times and higher fees. Finally, Bitcoin perhaps isn't the most user-friendly experience in the sense that private keys can be lost or stolen and because payments are irreversible, making mistakes far more costly.

Transactions

How do Bitcoin transactions work?

The first thing to note is that a Bitcoin wallet doesn't actually hold Bitcoin. Instead, it holds the unique Bitcoin address which keeps a record of all of the transactions made in order to maintain the wallet's balance. A Bitcoin address is also known as a public key and consists of a random and unique sequence of 34 letters and numbers. The address (or public key) has a corresponding private key. The two keys are related but the private key must be kept safe and remain private.

Any transaction made via a Bitcoin address needs to be signed by the private key. With the private key and the transaction details, a digital signature is created. This gets sent out to the network for validation - confirming that the Bitcoin is owned by the owner of the wallet and that they haven't already spent it (see double-spending). Once the transaction is validated or confirmed, it's included in a block. This block is attached to a previous block which is attached to another block before it. This is known as the blockchain.

How long do Bitcoin transactions take?

While not the most satisfying answer, the amount of time it takes to transfer Bitcoin from one wallet to another varies from transaction to transaction. A Bitcoin transaction needs to be approved by the network before it's completed. This means obtaining 6 confirmations before being considered complete.

There are two main factors which influence the length of time that a Bitcoin transaction takes: the level of network activity and the transaction fee selected. 2017 saw Bitcoin's popularity reach an all-time high and this caused network problems since there are only so many miners available and a limited number of transactions that can be included in each block. The result was significantly slower transaction times and higher transaction fees. If the network is quieter, the transaction will therefore process quicker. Miners prioritise transactions by the fee they will receive for confirming them. So the higher the fee selected by the user making the transaction, the more likely a miner is to process your transaction.

How much do Bitcoin transactions cost?

A Bitcoin transaction typically costs $2-3. However, during 2017 and early 2018 transaction fees rose sharply due to sheer demand on the network. Indeed, transaction fees were as much as $15-20 in some cases. Users can choose the level of transaction fee they pay when making a transaction via their Bitcoin wallet. The higher the fee paid, the quicker the transaction will be approved by a miner.

Mining

What is Bitcoin mining?

Bitcoin mining is the process of using computer power in order to verify transactions and secure the Bitcoin network. It's also the means through which new Bitcoin are created. The system is intended to be decentralised with miners located all over the world. Indeed, no individual controls the entire mining process. However, we have seen Bitcoin mining become more centralised over time due to the presence of large mining pools.

How does mining work?

Anyone with internet access and the appropriate hardware can mine Bitcoin. Miners earn rewards in the form of transaction fees for processing and confirming transactions. Mining involves using mining hardware which solves complex mathematical puzzles. Mining is expensive due to the high cost of hardware and the amount of electricity required. This is why so many mining pools are located in China where electricity is cheaper.

What is a mining pool?

A mining pool is the pooling of resources by miners. By sharing their processing power over a network, they are able to mine more effectively and share rewards according to how much they contributed to solving a block. There are different types of mining pool methods that offer different types of rewards. These include pay-per-share and proportional, for example. Other factors to consider are the size and location of the mining pool and the transaction fees involved.

What do I need to start mining?

In the past, anyone could mine using the CPU of their computer. However, the rise in the number of people mining Bitcoin led to an increase in the difficulty of finding new blocks. This resulted in specialised mining hardware being created in order to offer a more cost-effective solution. In order to mine Bitcoin yourself with a more hands-on approach, you'll need to invest in mining hardware. You'll need an ASIC miner such as the AntMiner S9. Alternatively, you can look at cloud mining which involves remotely renting mining hardware and having a cloud mining company do the work for you. However, many cloud mining companies are scams so it's best to stick with those that are more reputable such as Genesis Mining.

What is cloud mining?

Cloud mining involves buying hashing power from a cloud mining company who then mine the cryptocurrency for you. Cloud mining companies have huge data centres with plenty of dedicated mining equipment. This means that you don't need to buy any specialised mining hardware. Instead, you simply purchase a cloud mining contract which usually runs for a duration of several years. The price of the cloud mining contract is based on the length of the contract, the amount of hashing power and whether there are any maintenance fees included.

Security

Is Bitcoin secure?

Bitcoin's protocol and cryptography is considered to be very secure and the transparency of the blockchain is another advantage. If used correctly, Bitcoin can provide a high level of security. Its biggest vulnerability is user error so it's important to choose the right Bitcoin wallet, provide secure storage for the private key and triple-check all details before making a transaction since all transactions are irreversible.

Does Bitcoin provide anonymity?

General consensus is that Bitcoin is not anonymous. Instead, it's often referred to as being pseudo-anonymous. Bitcoin is regarded by some as anonymous because Bitcoin addresses are not tied to the identity of their owners. Indeed, users don't need to submit any personal information in order to have and use a Bitcoin wallet and Bitcoin address. In the same manner, Bitcoin transactions are not tied to the identity of the user. However, there are ways in which anonymity can be compromised. This could be through the use of an exchange or wallet service which requires such personal information or even by sending money to a donation address that is publicly exposed.

Is Bitcoin a privacy cryptocurrency?

While Bitcoin provides a certain level of anonymity, it is not a privacy-oriented cryptocurrency. This is because all Bitcoin transactions are stored publicly and permanently on the network. Anyone can see the balance and transactions of any Bitcoin address. This is great for the sake of transparency but this means that Bitcoin is not a privacy cryptocurrency. However, there are alternative cryptocurrencies that offer a high level of privacy such as Monero.

How do I secure my Bitcoin wallet?

Bitcoin offers many benefits but there are some security concerns if the correct steps are not taken by users. Securing your Bitcoin wallet should be your main priority when purchasing Bitcoin. In particular, this means choosing the right wallet to begin with. Where possible, avoid online wallet services which are vulnerable to security breaches. What's more many web and online wallets don't provide you with your private key. You should always be in possession of the private key for your Bitcoin wallet. If you do use such an online service, be sure to enable two-factor authentication.

If you opt for a desktop or mobile Bitcoin wallet, perhaps don't store a large quantity of funds on there. That's because these wallets are vulnerable to hacked or infected with malware, for example. While this is unlikely, it's better still to set up an offline option such as a hardware wallet or paper wallet. While these are still vulnerable to being lost, stolen or damaged, they're always offline and in the control of the user. Wallets should be backed up and encrypted, protecting from failure and human error. Multi-signature is another feature to consider for added security.

References

External Links