In the wake of the new highs it has reached, now soaring to prices over $59,000, bitcoin, following years of skepticism, is at last gaining credibility past insiders, even in the mainstream media. As recently Tesla announced that it will accept bitcoin as payment for its EVs and revealed that it has purchased $1.5 billion in cryptocurrency as part of its cash holdings.
At the same time, Uber and Mastercard also stated that they intend to begin taking bitcoin. In addition, BNY Mellon – the longest-running American bank, tracing its roots all the way back to the establishment of the Bank of New York in 1784 – has announced that it has formed a “digital assets” unit. So basically, if until now you’ve ignored cryptocurrencies and thought they were just a passing trend, now is the time to finally begin paying attention to them.
In our ultimate guide about Bitcoin and Cryptocurrencies we will talk about everything you need to know before entering the crypto market, stay tuned!
The Beginnings of Bitcoin
Bitcoin, a virtual currency governed by a decentralized and transparent open-source network with no banks, started in 2009, enabling anyone who installs the software on their computer to become part of the network. The story of U.S. citizen Laszlo Hanvecz, paying for two pizzas with 10,000 Bitcoins – now almost $5.9 million – is one everyone probably knows. That was the first documented commercial transaction in which Bitcoins were exchanged for a real product. Since then, much has happened.
Who invented Bitcoin?
Bitcoin is credited to a man hiding behind the pseudonym Satoshi Nakamoto. He published a research paper in October 2008 in a community of cryptography enthusiasts. Nakamoto finished the software side of bitcoin technology in 2009 and invited everybody to contribute to the open source code.
The first bitcoin block was created by Nakamoto on the 3rd of January, 2009. In fact, looking through publicly available statistics and finding out how many bitcoins are in his account now, it turns out that Satoshi is a rich man whose fortune is over $59 billion!
However, no one knows what this Nakamoto really is. Many journalists have done their investigations in an attempt to find out, and quite a few speculations and conjectures have been made. Some have argued that Nakamoto is the pseudonym of a whole group of scientists, others believed that there was a celebrity behind the name, although no one has been able to prove anything. The funny thing is that some claim as if Satoshi came from the future.
However, no one would deny that by creating bitcoin, Satoshi Nakamoto made a revolution and forever changed the concept of money as such, and solved many problems related to the use of conventional money.
The Problem of Conventional Money
How many of us haven’t withdrawn money from an ATM to later spend it? Do you know how all these transactions actually work? And why do we even accept these pieces of paper and iron as payment in the first place?
Well, at first, currency was backed by tangible assets ( like gold). For example, in 1900, gold was worth $20.67 an ounce. Meaning that the U.S. government could only mint $20.67 with only one ounce of gold in its reserves. What it also meant was that anyone holding U.S. dollars could go to the government of that country and request an exchange of that money for its equivalent in gold.
That system was abandoned in the United States in 1971, when the U.S. dollar became a so-called fiat currency, which had no value in and of itself. In the last few decades, all major currencies of the world have switched to fiat currency.
Fiat currency’s value is determined only by the volume of supply and demand, and is supported by people who have confidence in a country’s economy. This gives the government the ability to achieve a degree of economic stability by exercising control over various aspects of the economy: for example, credit, liquidity, interest rates. Conversely, it can cause the government to print too much money, in which case the country will go into a spiral of hyperinflation.
There is another problem with fiat currency: since the system is centralized, it needs to be controlled, and heavily so. Which means that every single transaction has to be checked by the appropriate financial institution (credit card company or bank) for accuracy. That’s why you have to pay a fee when you try to withdraw money from an ATM of a bank that is not your card issuer, or when transferring money from your account to a third party’s account.
Bitcoin as a Solution to the Problem of Centralized Currencies
Bitcoin was designed as a way to solve the problems associated with fiat currency. By using this cryptocurrency, you can send money to anyone in seconds and with minimal fees. Why? Because bitcoin is a decentralized system.
Essentially, bitcoin is a distributed and decentralized database that keeps a record of all financial transactions. The database is implemented based on blockchain technology. Every block in the chain (blockchain) is a series of transactions. Once enough transactions have been made, a block is created that cannot be changed afterwards.
Bitcoin aims to solve several problems at once with this public registry:
The most important feature of bitcoin is its decentralized nature. This means that it is not under the control of any individual or even organization. The code is in the public domain and is maintained by volunteers. It is maintained by an open network of computers scattered all over the world. Whoever wants to join will be able to do so without any barriers.
As opposed to traditional financial systems, bitcoin does not force you to identify yourself by your personal identity at all. Your identity is your address on the bitcoin network. You will be able to make financial transactions only if you have sufficient funds in your account.
Bitcoin network and its underlying blockchain cannot be changed. This means that you cannot undo the transaction and the person will actually receive the money sent to them. Some might think that it is not the most convenient system for e-commerce, where you need to protect the interests of the buyer. Although, with bitcoin, this can also be achieved with so-called escrow accounts.
Traditional fiat currency does not have any limits to its issue, since central banks can print as much money as they need. But you can’t create more than 21 million bitcoins. The demand for a currency and how valuable people think it is determines its value.
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So now let’s take a deep dive into understanding the principles behind the blockchain technology that underpins bitcoin. In order to do that, we will look at the problems involved in creating a decentralized payment system and see how bitcoin solves them.
User Authorization through Digital Signature
You need to at least show your ID or other similar document when you go to the bank to send money to someone. This is needed so that only you can withdraw money from your account or transfer it somewhere else. If some scammer tries to pretend to be you, this is where his plan will fail (hopefully).
As we already said, bitcoin is based on a shared registry in which all transactions are recorded. So what prevents people from entering fake transactions into this registry? You could, for example, just add to the registry that a user sent you money. In order to protect against fraud, all transactions are sent over the network with a digital signature.
A digital signature ensures that:
- The message was successfully delivered to the selected address;
- The message has not been modified.
The digital signature is created using a hashing algorithm and asymmetric encryption. Hashing is the utilization of an algorithm that transforms input data irreversibly into unique data of a fixed length. The hashing algorithm used in the bitcoin network is named SHA256. Its conversion result (hash or digest) consists of 256 zeros and ones mixed together.
It can be seen as a mathematical method of very quickly converting entered data into a certain format. This is because when you look at the result of the algorithm it is almost impossible to understand what kind of data has been entered.
Metaphorically speaking, by mixing flour, sugar, eggs, and so on, you can get a cake. In this case, the role of the algorithm will be the oven, in which the raw ingredients will turn into a finished product. The cooked pie will be impossible to divide back into the original ingredients, as it will also be impossible to determine exactly what and how much was used to prepare the food.
In order to create a digital signature, you first need to hash out the message that will be sent to the network. The hash then must be encrypted. As we have already mentioned, the bitcoin network utilizes asymmetric encryption, using a pair of keys: public and private.
The point is that each member of the network has a pair of keys that match each other. It is possible to encrypt the message with any of those keys, although in order to decrypt the message, you must take the one which is not used for encryption. That is, if the public key is used for encryption, the private key must be used to decrypt the message, and vice versa.
The private key is accessible only to its owner, but the public key can be sent to anyone. For example, let’s imagine Maria wants to send a private message to John. So Maria encrypts the message using John’s public key (of course, John has to send the key to Maria first).
Because John is the only person who has the right private key, he is the only one who can decrypt Maria’s message. And vice versa: if John wants to send a private message to Maria, he will encrypt the text with her public key, and she will be able to decrypt it with her private key.
However, in the case of bitcoin, the goal is not to send a private message – as you remember, the registry is available to everyone. Yet asymmetric encryption still helps to ensure that the message you send will be received by exactly the addressee you were going to send it to, and will not be manipulated in the process.
Now suppose that Maria wants to send one bitcoin to John. For that she needs to send two things to the network:
- The message itself (with details about the transaction). This transaction is unencrypted and has a link to previous transactions. It also includes the data entered and processed, which can help determine if the user has enough money in his account to be able to carry out the transaction.
- A digital signature (a hashed message encrypted with Maria’s private key)
Then John authorizes the transaction as follows:
- By applying a hash algorithm to the message, which gives him hash A.
- By decrypting Maria’s digital signature with her public key. This will give him hash B.
As both hashes were derived from the same message, they must be identical. Furthermore, if they really don’t differ from each other, then that means that the message hasn’t been changed since it was sent. And if John was able to decipher the hashed message with Maria’s public key, and Maria is the only person with access to her private key, it lets us make sure that Maria was the sender of the message as well.
How Information is Stored in a Bitcoin Network
The other potential problem with a decentralized network like bitcoin is the matter of information storage. Where are the balances of all the wallets stored? And where are the records of all transactions?
In traditional centralized systems, this information is stored on special servers, belonging to and maintained by financial institutions (like banks). This data is supposed to be a secret inside, but hackers have been able to get access to it many times recently.
The bitcoin system has nothing to control the data. What’s more, everything on this network is publicly available. For this purpose, bitcoin utilizes a distributed peer-to-peer network. It stores data on thousands of computers connected to the bitcoin network (also known as nodes) and communicates with each other over the Internet.
Every node has access to a registry (blockchain), that is updated whenever a new transaction (or block) is added. The transactions are performed according to a set of rules, aka the bitcoin network protocol.
How Exactly does the Transaction Work?
Let’s say Maria wants to send one bitcoin to John. At first, we have to ensure that Maria really has at least 1 bitcoin. But the blockchain network does not have any separate record of exactly how much balance a person has. Rather, the balance is shown as a sequence of all earlier transactions (a chain of transactions).
The first time you download a bitcoin database, you receive a full copy of the transaction chain (which is why it can take so long to fully load it). Once you have downloaded the transaction chain, you should have no difficulty finding out the current balance of Maria’s account.
Once we are certain that there is just enough money in Maria’s account, we start the next step: delivering a message about the transaction. It includes the sender and receiver addresses, the amount of the transaction, and a digital signature created by the sender. When the message is transmitted publicly, then any node in the network can be chosen to process it.
Before processing, the transaction goes to a so-called mempool, which is a group for unconfirmed transactions. That is where miners get transactions from. The miners are basically just facilitators who confirm transactions. Once a transaction is approved, the miner then adds it to the new block itself. The block size is fixed, and after a given number of transactions, a new block must be created. Every new block is linked to the previous one, which forms a sequence or, say, a chain (blockchain).
However, now the question is that who decides which transactions must be added to the newest block? In general, miners can pick and choose which transactions to process or reject. In order to position them in your favor (or rather, in favor of your transaction), a small fraction of the transaction amount can be paid to them. However, this is not mandatory, as miners get their reward for creating blocks anyway.
Each time a block is added to the chain, the miner who created that block gets a bitcoin. More precisely, the amount of the reward is constantly changing, shrinking as the network grows. Rewards for block creation are a way of creating new money used in the bitcoin system. And only after a new transaction is officially entered into the blockchain it will be executed.
How Blocks are Verified
So far, we have covered how newly confirmed transactions are added to a block and then entered into the blockchain. But how are the transactions themselves checked for compliance with the rules? In order to do so, miners must prepare a proof-of-work.
Essentially, a proof-of-work is the concept that the best known and most “trusted” version works for the maximum number of computing devices. Proof-of-work needs the data to be complicated and time-consuming to generate, but the proof-of-work is fast and simple.
This is accomplished with the hashing method we described above in the section on digital signatures. If you recall, the hashing is done by an algorithm that processes an amount of input data to create a result of a certain length.
Correspondingly, miners have to discover the answer to the mathematical equation before they can add their block to the existing sequence, which takes a while to find the answer. More specifically, they have to guess the entered data, that will be converted into a hash starting with a certain number of zeros.
This all works in the following way:
Suppose a miner is working on a block. On top of that block is the hash of the last block of the blockchain. Below that are all the transactions taken for processing by this miner. Underneath them, the miner adds a random number (nonce). Then, the miner runs a hash algorithm to process the entire block.
Like we said earlier, the miner’s mission is to look for a hash that starts with a certain number of zeros. Do you remember that even a minimal change in the input will cause a completely different result? That means that the miner needs to insert a very specific random number to find the right hash. Does the miner know what to put in? No.
His only option is to search through all the matching values in a random fashion, and so on, until he finds the right hash. Whoever miner finds the right number first will write their block to the blockchain. Under the rules of the bitcoin protocol, this entire process should take about 10 minutes. Because new miners, with different computing resources at their disposal, are constantly connected to the network, the right number of zeros changes over time.
Not only does this process allow for new blocks to join the chain, but also performs another very important function: ensuring the security and integrity of the entire system. And how does it do that?
Since each block includes the hash of the previous block in its header, therefore even a single change of a single character in any transaction will lead to a change not only in the hash of that block, but also in the hash of all the other blocks in the chain.
That means if someone wanted to change a transaction, they would need to recalculate all the blocks before it, and that requires just an unimaginable amount of computer resources. What it also means is that as each new block is added, the blockchain becomes more and more secure.
How Proof of Work Keeps You from Spending Money Twice
Assume Maria has an online shop that accepts bitcoin as payment. John goes to her website and buys an iPad. Should John choose to pay with bitcoins, of course, Maria has to wait for the payment to be confirmed before sending him the order.
Only because of the way the blockchain works, John has a chance to trick Maria into sending two messages about the transaction with his signature: in one he sends money to Maria, while in the other he sends money to himself, albeit to a different wallet.
Thus, Maria will see the message of sending her money and will send the product. However, if the transaction in which John sends money to himself hits the blockchain before the transaction paying for Maria’s product, then John will get his iPad for free…
So, it turns out that if Maria is smart and cautious enough, she won’t send the iPad right after receiving the message – but she will do it after she sees the transaction in the blockchain. Still, even this does not guarantee anything.
The thing is that sometimes multiple blocks are created at the same point in time, leading to a branching of the blockchain (fork). When this happens, the next miner who finishes the block will get to choose to which branch to add it to. And fairly quickly the length of one branch will surpass the length of the other. If that happens, the shorter branch will be written off, with all of its transactions being returned back to the mempool.
Therefore, it is recommended to wait for at least 6 blocks to be added to the blockchain before you consider a transaction to be completed. Transactions newly added to the blockchain are also called “hot transactions.”
Now imagine another situation: suppose John manages to create two branches, one of which has a legitimate transaction, and one with a fraudulent one? And let’s say he adds blocks to the ” fraudulent” branch at the same rate as the other miners increase the “legitimate” one. Having seen a branch with a legitimate transaction grow, Maria might relax and send the iPad. Then somehow John will make her branch longer, sending the legitimate transaction back to the memepool. As it has the same signature as the fraudulent one, then when the miners get it working again, the system will consider it wrong and won’t let it go.
Theoretically speaking, this scheme is quite possible. But in practice it is not. All because it takes computing resources to create and add a block. To be able to pull off such a trick, John’s computer must be more powerful than computers of more than half of all bitcoin network users. This is exactly the theory called “51% attack”.
Practically speaking, the legitimate transaction branch will always get a continuation, while the fraudulent one will go back to the mempool. Once the new miner reaches it, it is already invalid, since its signature has already been used in another, legal transaction.
Even if, by some magic, John manages to get control of the network… it would take so much time and resources that an iPad alone wouldn’t pay for the risk. In such a case, John would be much better off just mining bitcoins, following the general rules.
How to Use Bitcoins
In fact, there are many different ways, however, they are all based on the same basic process: purchasing bitcoins, using a bitcoin wallet, as well as exchanging bitcoins for goods and services. We will now look at each of them in detail and in stages.
You can either mine bitcoins (as discussed in section 2) or you can simply buy them. This can be done on an online cryptocurrency exchange or by simply buying them for cash.
Such an OTC transaction is simply an attempt by two individuals to negotiate favorable terms with each other, and often everything happens with the help of a broker. This method is preferred by those who want to buy a lot of bitcoins (hundreds of thousands or even millions of dollars). No wonder, because a rare cryptocurrency exchange has enough currency liquidity to conduct such large deals.
Over-the-counter transactions are not as controlled as exchanges, so you can save yourself from scammers by using a well-known broker. China’s Richfund, New York-based Genesis Global Trading, and London-based Bitstocks are some examples.
The easiest way for the average user to buy bitcoins is through online exchanges (Coinbase, Coinmama, itBit and others). In order to avoid currency conversion fees, we recommend buying bitcoins through an exchange trading in your currency. These services may even have set up full integration with local banks. It is very easy to work with exchangers: you only have to sign up and go to the website to be able to buy bitcoins.
Note that most cryptocurrency exchangers will demand your personal information (name, email address, phone number and so on). Certainly, if you are about to buy bitcoins via bank card or money transfer, then the exchange will keep this information too. If you are going to use online exchanges, then it is at the stage of buying or selling bitcoins that you may lose your anonymity.
Bitcoin Wallet Management
For users of the bitcoin network it is sufficient to have an address and a private key in order to own bitcoins. As we have already mentioned, with a private key you can also encrypt a digital signature.
If you do not have a private key you will not have access to your bitcoins and moreover you will not be in a position to prove that the bitcoins are yours, that is why you must keep your private key in a very secure place.
You will obtain a private key at the same time as the bitcoin address. Your key is a 256-bit character string that can also be presented in alphanumeric format. Some users represent it in hexadecimal (writing in 64 characters from 0 to 9 and A to F). The most often used format is Wallet Import Format (WIF), where the 51 characters (letters and numbers) are used for writing, the first of which is always the number 5.
The following is an example of a WIF private key: 5KJvsngHeMpm884wtkJNzQGaCErckhHJBGFsvd3VyK5qMZXj3hS
Losing your private key means losing your bitcoins. It is not a joke, you will not regain access without the key. If someone else gets access to your key, he can withdraw all your bitcoins. So, exactly how can you protect your private key and your money?
Your first option is straightforward: keep your bitcoins off the web. To give an example, you can put your money and your key on a USB flash drive, and that way hackers will not be able to steal your bitcoins. But if you lose the flash drive yourself (or if it is stolen), you will be in trouble.
The other choice is to entrust your bitcoins to a third-party service or program – a bitcoin wallet. This type of program stores the addresses and key pairs of all user bitcoin transactions. But the problem is that online cryptocurrency exchanges have been more and more often attacked by hackers lately, so keeping keys there is not the most reliable solution. We suggest storing keys off the web.
It is very simple: when you need to send money to someone, all you need to know is that person’s Bitcoin address, and you can do the transaction through a bitcoin wallet. In case the person you are sending the money to uses the same bitcoin wallet that you use, all you need to do is to provide the recipient’s e-mail address, to which the wallet is registered.
Online stores and services that accept bitcoins generally have a dedicated button on their website, which will open up your bitcoin wallet, through which you can pay for everything. For the wallets installed on mobile devices there is often a QR-code that can be scanned.
How to Earn from Cryptocurrency
Cryptocurrency and blockchain is a relatively new technology, so there are a lot of ways to make money from it. But to make it simple, you either mine or invest.
How to Become a Bitcoin Miner
Mining is a very slow but safe way to earn bitcoins and almost any other cryptocurrency. As you remember, miners are those who handle transactions in exchange for payments. There are two types of payments used in the bitcoin network: for adding a new block and for selecting a particular transaction.
Various cryptocurrencies have different payment mechanisms for miners; some pay only transaction fees, and some use different motivation methods.
One can participate in mining by dividing the computing power of the process with the network. Because the processor consumes electricity to run, it is important to think in advance about whether you can recoup the cost of the electricity. That all depends on where you live. For example, electricity is very cheap in countries like Iran and China, so most of the miner networks are located there.
Besides, you will have to consider the hash power of your computer and the current bitcoin exchange rate. Serious miners can purchase special computers with a higher hash rate, which increases their chances of creating a block. Such devices are known in the crypto community as asics (ASIC – Application Specific Integrated Circuit). Mining can be a profitable venture if you have a lot of asics and access to cheap electricity.
Alternatively, you can mine on your own or as part of a group that allocates some of the processing power of their computers for mining. These groups are also known as mining pools, and if you do not have a very powerful computer, then this is your only option. The members of a mining pool receive income in accordance with the contribution of the computing resources to the common cause. The most well-known among bitcoin miners are the following pools:
- Bitfury (Georgia).
- com (China)
- Slush (Czech Republic)
Regarding other cryptocurrencies, you will have to look for everything yourself. Generally, pools are created as soon as a particular cryptocurrency begins to attract serious interest.
Investing in Cryptocurrency
Direct investment is a fast, although risky way to make money from cryptocurrencies. Unless you have the time or opportunity to engage in mining, instead you can simply buy cryptocurrency on an exchange and wait. For example, bitcoin rate has been rising at an unprecedented rate over the past few years, which has attracted the eyes of investors of all kinds to this cryptocurrency.
You can buy cryptocurrency whenever you want, obviously, though there is a certain period when the potential profit (or loss, depending on your luck) is the highest. What we are talking about is the so-called ICO (Initial Coin Offering). If you know the nuances of stock trading, you will find a parallel with the initial public offerings (IPO, Initial Public Offering).
The ICO is the event when a cryptocurrency is first announced to the world. This is when the cryptocurrency has no price. Prospective investors evaluate the project and determine whether they are ready to invest in it, and if so, how much. If a project “takes off”, as they call it, then the investors get a profit due to the growth of the cryptocurrency’s value.
Now, here are some interesting stories about people who once bought bitcoins, and then were very surprised.
- A Norwegian student who was studying encryption systems in 2009 bought 5,000 bitcoins for about $27. After some time, he forgot about the purchase. After 4 years, when bitcoins were all over the media, he recalled his purchase and was happily surprised to learn that those 5,000 bitcoins were now worth over $886,000. So he sold half of his coins to buy a swanky house in one of Oslo’s finest neighborhoods. The other half of his money is worth something like $148 million at today’s exchange rate…
- James Howell is an IT guy from Newport who has been mining bitcoins on his laptop since 2009. He had mined something like 7,500 bitcoins and stopped. He sold the laptop some time later on eBay, but before doing so, he took out the hard drive where the bitcoins were stored. That hard drive was stored in a closet in the hope that one day the value of the bitcoins would rise. Unfortunately, a couple of years later, the drive was thrown away – accidentally, during a routine housecleaning. According to today’s exchange rate, the value of the lost bitcoins exceeds $446 million. He even wanted to set up a search operation at a local landfill (which is difficult and expensive), but was never given permission because of concerns about possible leaks of hazardous gases.
- On May 22, 2010, developer Laszlo Hanyecz purchased two pizzas with bitcoins. He paid something like 10,000 bitcoins, the equivalent of $41 at the time. If he had exchanged those bitcoins today, he would have gotten over 590 million! Altogether, these were the two most expensive pizzas in the history of mankind. He later stated that he was extremely happy at the time that he was able to buy the pizza, since the bitcoins were worth practically nothing.
In all these stories, yes, bitcoin values have risen, but investors should keep in mind that the value of cryptocurrencies is extremely volatile. Although bitcoin has risen vigorously in the past, that does not guarantee that the celebration of life will continue.
Our advice is not to invest more than you are willing to lose. You should NOT invest most of your capital in cryptocurrencies in the hope of making huge profits. You might get lucky, yes, however it is not worth the risk of losing a substantial part of your fortune after the price of the same bitcoin drops drastically once again.
Is Cryptocurrency Technology Legal?
The growing popularity of bitcoin has brought cryptocurrencies to the forefront of the attention of governments and financial regulators. In contrast to counterfeit fiat money, bitcoins themselves are legal in most countries.
The problem is that bitcoin is anonymous and not centrally managed, so many countries have restrictions on the use of cryptocurrency. There are even some who believe that Bitcoin and other cryptocurrencies will one day lead to a situation where governments have little or no control over their finances.
In most countries, there are not clear laws on the topic of cryptocurrency use, making many people quite rightly hesitant to get involved with it all. Well, you should check the laws in your country and remember that they can change at any moment.
They are completely illegal in Algeria, Colombia, Nepal, Bangladesh, and a few other countries. On the other hand, in the United States, bitcoins are not only completely legal, but they are also considered to be traded – and for good reason, according to the Commodity Futures Trading Commission. In the United States, even bitcoins are taxed just like any other asset.
However, there are many countries (e.g., India) where bitcoins are in a so-called “gray zone,” in which the government has not completely banned cryptocurrency, but has warned its citizens not to use it. Certainly, you can’t use bitcoins to buy or sell anything that is illegal. It’s simple: if you cannot pay for something with fiat money, then you cannot pay for it with cryptocurrencies either. And what kind of cryptocurrency you have in your hands is completely irrelevant.
The Dark Side of Bitcoin
There are many advantages to bitcoin, this is a fact. Nonetheless, there are a number of warnings that can be heard from the government of one country or another that are not without merit. The thing is that criminals do not hesitate to take advantage of this new technology, which now has a lot of media attention. Some scammers, for example, are once again turning to Ponzi schemes and offering astronomically high investment returns to unsuspecting victims.
Unfortunately, many people realize that their money was given to fraudsters only after the money is no longer there! For this reason, many countries have conducted and continue to conduct campaigns urging people to invest wisely and cautiously.
And these are not the only cases when cryptocurrency is not used for good:
- However, the anonymity of bitcoin and the simplicity of transferring funds could not fail to attract terrorists, who have started collecting donations through their websites. Of course, few of them have managed to collect anything at all, but that certainly doesn’t mean that one day some group won’t get lucky. However, it is worth mentioning that bitcoin users’ anonymity is restricted by the blockchain network itself. When converting bitcoins into any other currency, all transactions and user data are traceable by IP address. Funds are very easy to track – the blockchain is accessible to everyone.
- On the 12th of May 2017, the world shook under the impact of the Wannacry ransomware virus. A virus blocked users’ computers and asked for a ransom to regain access to them. In essence, the virus itself was nothing new, the catch was that the criminals demanded a ransom in bitcoins. Bitcoin’s reputation was badly damaged by this incident.
- Scammers have been known to steal other people’s bitcoins more than once. There are several layers of security in online banking: passwords, two-factor authentication, one-time passwords, and so on. For bitcoin, it’s simpler: to completely empty someone’s wallet, all they need to do is gain access to the victim’s private key. And scammers don’t shy away from using different means: keyloggers, trojans, phishing, and others are used. Accordingly, you should protect your bitcoin wallet with utmost vigilance (or, if you like, as safe as cash). Quite often, a fraudulent online shop will offer you a huge discount on an item, only accepting bitcoins as payment. When you pay, the seller sends you a very poor quality product or doesn’t even send it at all! There is no way to get a bitcoin payment back, so you cannot do anything to get your money back.
- ICOs have not been spared by scammers either. The cryptocurrency market is virtually completely unregulated, and therefore some people are launching blatantly fraudulent blockchain projects. These people promise to revolutionize their technology and try their best to convince investors to invest in the project. Once they get the money, the crooks announce after a while that it didn’t work out, and pocket the entire investment. It is easy to file for bankruptcy and investing has always been fraught with the risk of losing money, which makes it almost impossible to protect investors in such projects. Trouble is, there are also perfectly honest ICOs, but it’s hard to tell scammers from honest developers, and then you have to reach for your wallet.
Other Blockchain Technology Implementations
Bitcoin was the first implementation of blockchain technology and remains the best known of them all. But progress does not stand still!
The blockchain technology has encouraged many people to create their own versions of bitcoin – better, more secure and so on. These resulting cryptocurrencies are referred to as altcoins, with the most famous among them being:
This cryptocurrency was created in 2011, and differs only slightly from bitcoin. For instance, the block creation is much faster: whereas in the bitcoin network a new block appears one every 10 minutes, in this one it appears every 2.5 minutes. That means that the transactions are confirmed much faster. Furthermore, a different hash algorithm is used here: Bitcoin uses SHA256 for the proof-of-work process, whereas Litecoin uses scrypt. What makes scrypt special is the fact that it is more difficult to create an optimized and fast enough mining device for this algorithm. There are, however, asics available today for Litecoin as well.
It is a relatively new cryptocurrency, it emerged in 2016. Similar to bitcoin, it has protected transactions and a distributed ledger. What makes Zcash different from bitcoin is its proof-of-work algorithm (zk-SNARK) and privacy strategy. Essentially, in a bitcoin system the details of the sender, recipient and amount of the transaction are publicly available, while in Zcash these details remain private. Zcash had a market size of more than $1 billion at the end of 2017.
This cryptocurrency in general was designed as an attempt to mock the general interest in bitcoin. Its logo shows the face of a dog from a popular internet meme. What’s more, this is also a complete copy of bitcoin – no differences, no enhancements. No wonder, because nobody thought that this cryptocurrency would be taken seriously! At the beginning the value of Dogecoins was extremely low. Later there was growth, interest of serious investors, media attention… All in all, Dogecoin market volume exceeded USD 2 billion at some point.
The founders, however, were not very happy that their creation had turned into something that was intended to be a mockery, and withdrew from further involvement with the project. But when Ryan Kennedy, owner of the cryptocurrency exchange Moolah, which offered a way to buy and sell the altcoin, was arrested for fraud, Dogecoin’s value went down sharply. However, in January 2018, it seemed to have pushed back from the bottom and went back up.
Blockchain technology can be used for more than just creating cryptocurrencies, as we’ve said before. It has been the basis of a wide variety of ideas and projects that are now worth billions of dollars!
The Ethereum for applications is the exact same thing as bitcoin for currency. In fact, Ethereum gives applications the infrastructure that allows them to run without some sort of central server. Like bitcoin, everything here depends on nodes on the network, and in the Ethereum network, the nodes supply the computing power needed to run the applications.
In order to guard against misuse and poor-quality applications, a rule of thumb in the Ethereum ecosystem is to spend ether (a special currency) in order for applications to run. Codes developed on the Ethereum network launch using a special Ethereum virtual machine. Smart contracts are used by developers to develop applications that run automatically (provided certain rules are met). For instance, a smart contract can control the automatic shipment of goods once payment is received.
Ethereum network applications are also known as ‘decentralised applications’ (DAPs), and hundreds of DAPs have been successfully launched so far, for example, digital signature applications, forecasting software, electric car battery management systems and online casinos.
Whereas bitcoin was intended for a more or less broad audience, Ripple was designed as a solution for banks and payment services. Nowadays, banks use SWIFT (Society for Worldwide Interbank Financial Telecommunication), a protocol that involves working through intermediaries. As a result, it takes longer to complete money transfers and there are currency fluctuations that also play a role.
However, Ripple allows financial institutions to send, receive, return and exchange payments in real time and without significant costs. Most banks are already testing Ripple in practice, although the system is not officially used anywhere else. One important difference between Ripple and bitcoin is the fact that not everyone can join the Ripple network: computers must be identified and approved to participate. Therefore, Ripple can neither be called truly decentralized, nor an open system.
As you have seen for yourself, Bitcoin has certain issues and vulnerabilities, and that must be taken into account. We certainly do not encourage you to start ignoring this technology! Blockchain is a real innovation that can solve a myriad of problems. You just need to be smart and approach it in a smart way.