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New in Tech: How does Bitcoin Work?

How does bitcoin work?

 There are public keys and private keys; the public key is given to anyone to add bitcoin while the private key is used to withdraw bitcoin protected by elliptic curve cryptography and governed by mathematics.

  • Private and Public keys are generated using Elliptic Curve Cryptography
  • The public key can be given to anybody and used for deposits
    • paste the public key into blockchain.info
    • You can go to bitaddress.org and generate your own key pairs which can be viewed on the blockchain.
    • You can scan a public key 3d barcode to see how much money is in it

A typical public address looks like this: 1JR2Wd7HgZ1NW8dk1tCurvYDMjPFFaidYz 

The number of possible address combinations is ridiculously large; it's so large that each number has never been seen before and will never be seen again, so large a computer can't be made to count that high - it would require more energy than our sun emits in its lifetime

There are more possible bitcoin addresses than: 
  • Atoms in the earth
  • All the grains of sand on earth each having all the grains of sand on earth
  • Grains of sand comprising the mass of the Milky Way.

 Cyber Security Tip: Always assume your computer is being watched and that anyone has access to your data


Why would I want it?

  • Remittances
    • According to the World Bank the average cost via other means is 7.99%
    • If you want to send money to a family member in another country it will cost you a nickel
  • Banking for the poorest
    • Less than 2 billion people have access to modern banking
    • Today more people have access to cellphones than indoor toilets
  • It's fast, it's cheap
  • It can't be inflated or taken by banks or governments
    • Cyprus in March of 2013 Central bank wanted to take back uninsured deposits larger than $100K
    • In Greece capital controls were imposed limiting the amount of money that could be withdrawn
  • No Credit Card charge-backs or 4% fees; a typical transaction fee is 2 cents
    • Visa costs $427 per household/yr.
  • Hedge against inflation/store of value
  • Safe haven for currency collapse
  • College student allowance
    • Automated repeat amounts
  • You can email money
  • Crowdfunding, new forms of charity
    • 100,000 people can donate half a cent to a worthy cause and  perhaps the recipient gets $500 to stock a store,  buy supplies or start a business
  • There is no central location for your private information to be hacked
  • No inflation, no need for trust or 3rd parties

Some real-world examples of the benefits:

  • I was able to buy a beer for a coworker while he was at a baseball game in another town while I was sitting in my basement.
  •  A multi-signature account (2-of-3 wallet for kid's allowance... mom OR dad have to also approve spending)
  •  An organization or group that stores funds in bitcoin multi-sig so one party can't run off with everyone's funds. These would normally require a business-class bank account (and significant fees).
  • A bitcoin fuel pump, where the pump is unlocked by sending bitcoin to the pump's public address, so when junior runs out of gas in the middle of the night, dad can say "Send me a pic of the QR code and I will unlock it for you. 

Okay, I'm sold - how do I get them?

  • Link your bank account to Gemini or Coinbase
  • Buy from somebody
  • Create something of value
  • How many wallets can I have?
    • Trillions

How do I store them?

  • Install a bitcoin wallet on your phone, tablet or computer - this will generate a public key and a private key
    • Your public key is a long number that starts with a 1 that anybody in the world can send bitcoin to
    • Your private key is a long number that usually starts with a 5 that is used to spend from your wallet
    • Back it up! This is important, if you lose your private key you lose your money
  • Online exchanges like Coinbase
    • They held private keys for their users
    • They turned out to be poor custodians
    • These are run by humans and not guaranteed, Mt. Gox was an online exchange originally used for card trading
    • If you don't hold the private key you don't own them
  • Paper Wallets
    • You will want to generate these securely (offline)
    • You will want to be careful cashing out a paper wallet
  • Brain Wallets
    • An 8 word brain wallet of random words from a dictionary of 100,000 words has 7.47e41 possibilities [times 10 to the 41st power]
    • to try to crack it at 50 million attempts per second it will be about 4.74e26 years
    • the current age of the universe is 1.2e12 years
    • Never use phrases that can be found in an internet search
    • You can store any amount of money solely in your head
    • Unguessable
  • Hardware Wallets
    • Trezor
    • Ledger
    • Keepkey
    • CoolWallet

What are the risks?

  • As with any currency, the main risk is theft
    • This is particularly true on exchanges. For example, Mt. Gox was a bitcoin exchange based in Japan handling over 70% of all bitcoin (BTC) transactions worldwide. In February 2014, Mt. Gox announced that approximately 850,000 bitcoins belonging to customers and the company were missing and likely stolen, an amount valued at more than $450 million at the time.
  • Lost Keys
  • Lost memory
  • EMP Bomb
    • There go your dollars too
  • Exchange Collapse
  • Value Collapse
  • Hacking

The Future

I have only scratched the surface, there are many other cryptocurrencies suited for many purposes. Bitcoin is the market leader today and is the standard to which all others are compared. Within the next few weeks Fidelity will be offering bitcoin to its clients, bakkt is ready to go online pending approval, Brazil, Venezuela, South Korea, Japan, and Russia are large buyers due to either local currency inflation or escape from US led sanctions. These sanctions and inflations underscore the usefulness and need for a global currency that transcends the ability of corruption or incompetence, either by Central Banks or menacing governments. The current adoption rate is purported to be around 3%, when it gets to 10-12% there will be almost no time from that point to global saturation. If you look at this chart the rise in the price of bitcoin will resemble the adoption rate of recent technologies, see: https://hbr.org/2013/11/the-pace-of-technology-adoption-is-speeding-up

This introduction is by no means complete but should at least give you some ideas of the potential of cryptocurrencies and some ideas to look into for further research. A good starting point is the Adamant Capital paper you can find at https://www.cryptonewsz.com/the-report-released-by-tuur-demeester-of-adamant-capital-reveals-that-it-is-a-great-time-to-repurchase-bitcoin-btc/15969/

Many people are still unaware of the potential ramifications of this new technology just as they were unaware of the potential ramifications of the new internet technology. Worse than being unaware, some are scornful or downright hostile. Whether you are on top of this technology or hate that it is coming. The practical uses of independent, programmable, incorruptible money  will engender rapid adoption and render resistance futile and embarrassing. Now is the time to become at least a little bit familiar with it, there is a new economy coming and you will be part of it.

Jason Bachman

Written by Jason Bachman

As the leader of the IT Services team, Jason has over 15 years of experience in managing small, mid-size, and enterprise networks, voice communications systems, and cloud services.