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Bitcoin 101


 

Welcome to Brave New Coin’s Bitcoin 101. First-timers, we’d like to introduce you to the wonderful world of cryptocurrency; where payment is frictionless, free and instantaneous, and pizza could cost you $5 million dollars (more on that later). Sections 1-6 will cover the essential things you need to know about Bitcoin. 

To our experienced readers, welcome back. Sections 7-10 contain some more advanced ideas and fun trivia. Read up, get to know Bitcoin better, and discover how cryptocurrency could change the world. Let’s get started.

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51% Attack

An attack on the Bitcoin network which allows the attacker to create fraudulent transactions, see “double spend”. This is possible because controlling more than 50% of the Bitcoin network’s hash rate means the attacker can out-compute everyone else who is mining.

A


Address

This is where bitcoins are sent to in a transaction. Also known as a “public key”, addresses are a string of letters and numbers which correspond to a bitcoin wallet. For bitcoin, these addresses always start with a “1” or a “3”. Addresses can come in qr codes and various other forms.
Here’s an example: 1CBtcGivXmHQ8ZqdPgeMfcpQNJrqTrSAcG

Airdrop

A method of distributing cryptocurrency amongst a population, first attempted with Auroracoin in early 2014.

Algorithm

A process or set of rules to be followed in calculations or other problem-solving operations, especially by a computer.

Altcoin

 An Altcoin is the name given to all the cryptocurrencies that are based on the Bitcoin protocol. They are attempts to improve upon Bitcoin by tweaking parameters such as confirmation time, total coin supply, and mining algorithm. Litecoin, Reddcoin, Feathercoin and Peercoin are some examples of altcoins. Most altcoins have their own separate blockchains.

AML

Anti-Money Laundering laws are a series of regulations designed to prevent money being converted from criminal activity to what appear to be legitimate assets.

Angel Investor

A wealthy individual who provides startup businesses with capital in exchange for debt or equity in the business.

Arbitrage

The generation of risk free profits by trading between markets which have different prices for the same asset.

ASIC

An Application-Specific-Intergrated-Circuit is a customised microchip usually used to perform a narrow set of tasks. For Bitcoin, they process the SHA 256 algorithm in order to mine bitcoins.

B


Base58

Base58 encodes binary data into text and is used to encode Bitcoin addresses. Created by Satoshi Nakamoto, its alphanumeric characters exclude "0", "O", "I", “l" since they are hard to distinguish. Addresses are written in Base58.

Base58Check

A variant of Base58 used to detect typing errors in bitcoin addresses.

BIP

An acronym for “Bitcoin Improvement Proposals” which can be submitted by anyone who wants to improve the Bitcoin network.

Bitcoin

Bitcoin can refer to the protocol, network or the unit of currency. Strictly, Bitcoin with a capital “B” refers to the protocol & the network, whilst bitcoin with a lowercase “b” is the currency.

Bitcoin Protocol

The open source, cryptographic protocol which operates on the Bitcoin network, setting the “rules” for how the network runs.

Bitcoin Network

The decentralised, peer-to-peer network which maintains the blockchain. This is what processes all Bitcoin transactions.

Bitcoin (unit of currency)

100,000,000 satoshis. A unit of the decentralised, digital currency which can be traded for goods and services. Bitcoin also functions as a reserve currency for the altcoin ecosystem.

BitcoinJS

An online library of javascript code used for Bitcoin development, particularly web wallets. bitcoinjs.org

BitcoinQT

Bitcoin QT is an open source software client used by your computer.It contains a copy of the blockchain and once installed it turns your computer into a node in the Bitcoin Network. Also acts as a “desktop wallet”.

Bitcoin Days Destroyed

An estimate for the “velocity of money” within the Bitcoin network. This is used because it gives greater weight to bitcoins that have not been spent for a long time, and better represents the level of economic activity taking place with bitcoin than total transaction volume per day.

Blockchain

A transparent, public ledger shared by all nodes participating in the Bitcoin network. It can be accessed and scrutinised at anytime by anyone. Every bitcoin transaction is recorded into the Blockchain in files called “blocks”. Each block represents some or all of the most recent bitcoin transactions that have not yet been recorded in any previous blocks.

Block Halving

The halving of the bitcoin reward that miners receive for mining a block. This takes place approximately every 4 years (every 210,000 block to be precise)

Block Header

Contains information about a block, such as the hash of the previous block header, its version number, the current target, a timestamp, and a nonce.

Block Height

This indicates a block's location in the blockchain, with blocks “higher” up being more recent.

Block Reward

The bitcoin rewarded to a miner for solving a block.

Bitcoin Price Index(BPI)

Brave New coin’s BPI is calculated by converting each Market Weighted Average from its market currency to USD and then taking the weighted average across all the markets based on the total volume traded in each.

Bot Trading

Software programs that operate on trading platforms, executing buy and sell orders with pre-programmed trading instructions.

Brain Wallet

A bitcoin wallet which uses a long string of words to secure its coins. This “passphrase” can be memorised, allowing the wallet owner to spend bitcoins by simply remembering the passphrase.

BTC

An acronym for bitcoin. A single unit of the bitcoin currency.

C


Capital Controls

These are local measures such as transaction taxes, limits, or prohibitions that a government can use to regulate flows from capital markets into and out of the country.

Client

The piece of software that transforms a computer into a “node” in the Bitcoin network. Clients help in the generation of private keys, security, and payment. Clients can be “full” or “mobile”, with full clients storing the entire blockchain whilst mobile clients only store parts of it.

The Cloud

A reference to the internet and functions it can carry out for anyone such as storage, file sending, and using apps.

Cloud-hashing/mining

A type of mining where people can pay to rent computer power from someone else in the cloud to mine bitcoin or other cryptocurrencies. This is done by selling mining contracts. Cloudhashing is also the name of a business which offers this service.

Coin age

A measure of how long a coin or group of coins from a transaction have remained unspent. It can be determined by multiplying currency amount by holding period.

Cold Storage

The safest way to store your private keys is by keeping them offline in “cold storage”. This could be in the form of a hardware wallet, USB stick or a paper wallet. These wallets are known as “cold wallets”

Coloured Coins

The coloured coins protocol is an project built on top of the blockchain. It aims to facilitate the trading of assets beyond bitcoin such as financial instruments, gold, or property using Bitcoin’s underlying payment infrastructure. coloredcoins.org

Confirmation

The incorporation new transactions into the blockchain. For bitcoin, this occurs on average every 10 minutes when a miner solves a block.

Counterfeiting

The act of imitating something in order to commit fraudulent behaviour. An example of this is shopping with fake money.

CPU

A “Central Processing Unit”, responsible for handling commands it receives from a computer’s hardware & software.

Crowdsourcing

The pooling of resources such as information or money contributed by the general population, to a goal. This is usually done online via websites where people can donate.

Cryptocurrency

A vehicle for exchange which uses cryptographic functions to secure transactions and mint new units of the currency.
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Cryptography

The study of storing and transmitting data securely through the use of encryption. Latin for “secret writing”.

CSRNG

Acronym for “Cryptographically Secure Random Number Generator”, used in private key generation for bitcoin wallets. 

D


 DAO

An acronym for “Decentralised Autonomous Organisation”, a theoretical company that could exist in the cloud and carry out business according to preset algorithms, needing no human management. Also known as “DACs”.

Darksend

Darksend is Darkcoin’s decentralized mixing implementation, which was designed to give users of Darkcoin greater transactional privacy/anonymity. 

DDos Attack

An attack on a server or network intended to suspend or interrupt the services it provides. Stands for “distributed denial of service” attack. This is done by overwhelming it with traffic from multiple sources.

Deepweb

The content online not indexed by search engines making it difficult to access. The majority of content on the internet resides on the deepweb and can be accessed using a program called TOR. This is also where illegal sites such as Silk Road exist.

Deflation

A decrease in the general price level of goods in an economy. Traditionally this has taken place when a currency’s demand collapses, however it is a natural property of bitcoin.

Demurrage

Certain currencies penalise users for hoarding, this is done via demurrage, where a fee is charged for holding unspent coins. This fee increases as time passes.

Desktop Wallet

A wallet that stores the private keys on your computer, which allow the spending and management of your bitcoins.

Deterministic Wallet

A wallet based on a system of deriving multiple keys from a single starting point known as a seed. This seed is all that is needed to restore a wallet if it is lost and can allow the creation of public addresses without the knowledge of the private key.

Difficulty

A measure of the amount of computing power required to solve the hash of a block. This is what increases to counteract increasing network hashrate in order to maintain a 10 minute confirmation time; re-adjusts every 2016 blocks.

Double spend

The spending of a single token (a bitcoin for example) twice in order to fraudulently get goods or services without paying for them. This is possible because digital information can be replicated easily and sent to multiple parties.

Dust transactions

Transactions so small that they are considered “spam” by the network. They are not relayed to stop people accidentally or deliberately clogging the blockchain.

E


Escrow

The practice of having a third party act as an intermediary in a transaction. This third party holds the funds on and sends them off when the transaction is completed.

ETF

Acronym for “Exchange Traded Fund”. These are investment funds traded on stock markets that track the price index of an underlying asset.

Exchange

A place where buyers and sellers can trade bitcoins or other cryptocurrencies.

F


Faucet

A website which gives away free bitcoins or other cryptocurrency to any IP address that connects to them.

Fiat currency

Currency that a government has declared to be legal tender. Demand exists for them because they can be used to buy things and pay taxes, however they are not backed by any physical commodity. US dollars are the most notable form of fiat currency.

FinCEN

Financial Crimes Enforcement Network. A bureau of the United States Treasury Department dedicated to combating financial crime, money laundering and maintaining national security.

Fork

A split in the blockchain where there are temporarily two different blockchains which miners can work on.These can occur if software updates to a Bitcoin client are incompatible or if developers decide that changes must be made to the programming of a coin. This deliberate change is called a “Hard fork”.
It can also be used to describe a separate cryptocurrency which has been split from the main blockchain, such as Namecoin being a “fork” of Bitcoin.

Frictionless

In reference to payment systems, a system is “frictionless” when there are zero transaction costs or restraints on trading.

G


The Genesis Block

The first block ever mined and the beginning of a blockchain.

GPU

Acronym for “graphics processing unit” is a specialised processor originally designed for the high graphics requirements of computer games. These are also used to mine cryptocurrency since they outperform CPUs.

H


Hardware wallet

A bitcoin wallet which stores a users bitcoins offline on hardware devices.

Hash function

A hash function takes an arbitrary input such as a string of integers (a key) and outputs a value of a pre specified length (a hash). Bitcoin uses a cryptographic hash function to secure the network.
wiki/Cryptographic_hash_function

Hash Rate

A measure of the amount of computing power dedicated to solving blocks/mining bitcoin.

Hot Wallet

A bitcoin wallet that has an active connection to the internet. These are used for “everyday” transactions and should never hold large amounts of bitcoin, since their connectivity reduces their security.

HTML

Acronym for “HyperText Markup Language”, the language in which webpages are written.

HTTP

Acronym for “HyperText Transfer Protocol”, this is the underlying protocol for the world wide web.

I


Inflation

An increase in the general price level of goods in an economy.

Inputs

This is a reference to an output of a previous transaction. Inputs to an address are added up, and this amount determines the amount a wallet can spend in outputs.

K


Kimoto Gravity Well

A mining difficulty readjustment algorithm, which was created in 2013 for Megacoin, an altcoin. The well allows difficulty readjustment to occur every block, instead of every 2016 blocks for Bitcoin. This was done as a response to concern about multi pool mining schemes.

KYC

Acronym for “Know Your Customer”, used to describe a series of laws and regulations which require businesses to know the identity of their customers.

L


Laundry

Also known as a “mixing service”, they combine funds from various users and redistribute them, making tracing the bitcoins back to their original source very difficult by mixing their “taint”.

Leverage

Often used to describe trading with borrowed capital (margin) in order to increase the potential return of an investment. Trading with “borrowed” bitcoins/money.

Litecoin

One of the first notable “altcoins”. Created by Bobby Lee to be a “silver to bitcoin’s gold”. Litecoin uses the Scrypt mining algorithm instead of SHA256, has a 2.5 minute confirmation times, and has a total coin supply of 84 million coins.

Liquidity

The availability of an asset to be bought and sold easily, without affecting its market price.

Liquidity Swap

As a financial instrument on cryptocurrency exchanges, liquidity swaps are contracts where investors offer loans to others to trade with in exchange for a set return.

M


Margin Trading

The trading of assets or securities bought with borrowed money. A trader usually contributes an initial amount which is then used as collateral for their debt.

Market Order

A buy or sell order which gets executed at whatever the market price is at the time.

mBTC

0.001 bitcoins

Merged Mining

This allows a miner to work on multiple blockchains simultaneously, contributing to the hash rate (and thus security) of both currencies being mined. E.g. Namecoin has implemented merged mining with Bitcoin.

Micro-transaction

A financial transaction involving small to tiny sums of money. Traditionally amounts under a dollar have been impractical due to transaction fees, however, cryptocurrencies have potential to change this.

Mining

The process of computers validating transactions in the Bitcoin network, adding blocks onto the blockchain.

Mining Algorithm

The algorithm used by a cryptocurrency to sign transactions, these vary across different cryptocurrencies. Bitcoin’s mining algorithm is SHA256, whilst Litecoin & Dogecoin’s are Scrypt.

Miner

A computer participating in any cryptocurrency network performing proof of work. This is usually done to receive block rewards.

Mining Pool

A group of miners who have decided to combine their computing power for mining. This allows rewards to be distributed more consistently between participants in the pool.

Mining Contract

A method of investing in bitcoin mining hardware, allowing anyone to rent out a pre-specified amount of hashing power, for an agreed amount of time. The mining service takes care of hardware maintenance, hosting and electricity costs, making it simpler for investors.

Minting

The process of rewarding users in proof of stake coins. New coins are minted as the reward for verifying transactions in a block. 

Mixing Service

See “laundry

Mobile Wallet

A wallet which runs a “mobile client”, allowing people to have bitcoin wallets on their phones and tablet computers and pay on the go.

Money Laundering

The act of trying to “clean” money earned from criminal activity by converting these profits to what appear to be legitimate assets.

Mt. Gox

A bitcoin exchange based in Japan that collapsed in February 2014 due to poor security practices and incompetent management. Managed by Mark Karpeles.

Multi signature transaction

A bitcoin transaction which requires signatures from multiple parties to authorise the sending of bitcoins. This has the potential to improve consumer protection.

N


Namecoin

An altcoin which implemented a distributed DNS (domain name system)  amongst other features. This distributed DNS helps people using the .bit domain to resist internet censorship. Can also be used to refer to the unit of currency NMC.

Network Effect

The increase in value of a good or service that occurs when its use becomes more widespread.

NFC

Acronym for “Near Field Communication”, a low power, short range method of wireless communication. This can be used to build upon RFID systems and is what contactless smart cards (oyster cards) and payment systems (paypass) use. Most recently implemented in the Apple Pay app.

Node

See “client

Nonce

A random number used once when a miner attempts to hash a transaction block. The parameters of these numbers are set by the “difficulty”.

O


Off Blockchain Transactions

Exchanges of value which occur off the blockchain between trusted parties. These occur because they are quicker and do not bloat the blockchain.

Orphaned Block

A valid block which is discarded by the network after the blockchain has “forked” and then re-achieved consensus on a single blockchain again. This usually happens after two miners simultaneously solve a block, temporarily resulting in two valid blocks in the blockchain.

Open Source

The practice of sharing the source code for a piece of computer software, allowing it to be distributed and altered by anyone.

OTC exchange

Stands for “Over the Counter”. These exchanges are places where trading is done directly between the two parties involved in the transaction, allowing traders to escape some of the limitations set by trading on formalised exchanges.

Output

The part of the transaction which contains instructions for the sending of bitcoin.

P


Paper wallet

A form of “cold storage” where the private keys are printed onto a piece of paper and stored offline.

Peercoin

The first cryptocurrency to implement “Proof Of Stake” alongside Proof Of Work.

Peer-to-Peer network (P2P)

Any computer network where two or more computers are connected and share resources without going through a separate server. These networks can become massive, allowing for things like file-sharing or cryptocurrency.

Pre-mining

The mining of a cryptocurrency by its developers before it is released to the public. This can be done with good intentions, however it is also strongly associated with scamcoins.

Price Bubble

An economic cycle in which the price of a security or asset will surge unsustainably, and then crash as a selloff occurs. This is usually caused by speculation, and has been observable in bitcoin’s past prices. When done deliberately, this is known as a “Pump and Dump”

Private Key

A secret number held by a user which entitles them to spend bitcoins assigned to a public address/wallet. This Public Key is derived from the private key.

Proof of Burn

This is a method of “burning” one Proof of Work cryptocurrency in order to receive a different cryptocurrency. This is a form of “bootstrapping” one cryptocurrency off another, and is done by sending coins to a verifiable unspendable address.

Proof of Existence

A service provided through the blockchain that allows anyone to anonymously and securely store a proof of existence for any document they choose online. This allows people to prove that a document existed at a certain point in time and demonstrate their ownership of it, without fear of that proof being taken from them.

Proof of Stake

An alternative to Proof of Work, providing an alternative method for deciding who signs transactions into the blockchain. In Proof of Stake, the resource held by the “miner” is their stake in the currency. So someone holding 10% of a proof of stake currency is equivalent to controlling 10% of the network hash rate of a Proof of Work currency.

Proof of Work

This is the type of mining algorithm Bitcoin uses, and is a method of determining who signs transactions in the blockchain. The Proof of Work scheme used by bitcoin is SHA256, a cryptographic hashing function.

Public Key

See “Address

Pump and Dump

A form of market manipulation usually performed on small market cap stocks (or cryptocurrencies). This occurs when traders artificially inflate the assets price and then exit their positions, causing a price collapse.

Q


Quantitative easing

A form of monetary policy where a Central Bank purchases government securities with cash which did not exist before, in order to increase the money supply and lower interest rates.

QR code

Acronym for “Quick Response” code, these are 2d barcodes which can have data encoded onto them.

R


Remittance

A sum of money being sent, usually internationally, as a payment or gift.

Ripple

An alternative payment network to Bitcoin based on similar cryptography. The ripple network uses XRP as currency, and is capable of sending any asset type.

S


A Satoshi

The smallest unit of bitcoin possible. There are 100 million satoshis in a single bitcoin.

Satoshi Nakamoto

The mysterious creator of Bitcoin. Known to possess over a million bitcoins, his/her/their/its identity is still unknown.

Scamcoin

Coins created as get rich quick schemes by their developers. These coins usually have certain properties, such as being clones of an existing coin and being pre-mined.

Scrypt

An alternative Proof of Work scheme to SHA256. This mining algorithm is used by Litecoin, Dogecoin and many other cryptocurrencies. Originally touted as being “ASIC resistant” due to its heavier memory requirements, ASICs have now been released for mining Scrypt.

SHA256

The proof of work scheme used by Bitcoin, SHA256 is a cryptographic hash function.

Seed

The private key used in a “deterministic wallet”

Self executing contract

Also known as “smart contracts” these are protocols that facilitate or enforce the obligations of a contract without the need for human intervention.

Sidechain

These are theroetical, independent blockchains which are “two way pegged” to the Bitcoin blockchain. These can have their own unique features and can have bitcoins sent to and from them.

Signature

The combination of private and public keys in a hash, this proves ownership of Bitcoin in a wallet and authorises the transaction.

Silk Road

The online marketplace where drugs and other illicit items could be traded for Bitcoin. Accessible through “TOR”, Silk Road was shut down in October 2013 by the FBI.

Speculator

An individual who speculates on the price of bitcoin or any other form of asset. Aiming to make profits by buying and selling at different prices.

SPV

Acronym for “Simplified Payment Verification”, this allows mobile clients to make payments without needing a copy of the entire blockchain.

Stale Block

A block that has already been solved and thus cannot offer miners any reward for further work on it.

T


Taint

A measure of correlation between two addresses, this is used in attempts to track a coin’s history.

TCP/IP

Acronyms stand for “Transmission Control Protocol”/“Internet Protocol” and is the connection protocol used by the internet.

Testnet

An alternative blockchain on which developers can test and experiment with changes to a cryptocurrency without the risk of damaging or interfering with the real blockchain.

Timestamp

A proof that a piece of data existed at a certain point in time. For Bitcoin this is the cryptographic proof of when transactions have taken place.

TOR

Stands for “The Onion Router” and is a free web browser designed to protect users anonymity and resist censorship. Allowing them to surf the web anonymously and access sites on the “deepweb”.

Total Coin Supply

For many cryptocurrencies, there is a limit on the total number of coins that will ever come into existence, bitcoin’s total supply is capped at 21 million coins.

Transaction Block

A group of transactions that are collected and hashed on the Bitcoin network by being added to the blockchain.

Transaction Fee

An amount of money users can choose to deduct from their transaction when sending money. This is optional and used to give miners incentive to quickly process their transaction, since they receive the fee as a reward for doing so.

V


Vanity Address

A bitcoin address which contains a desired word/pattern or sequence of numbers. Kind of like a customised number plate.
Example: 1JAMES2K4rWaduCmCds36ox2VXdeBE7LNd

Velocity of Money

The velocity of money is an indicator of how quickly money received is then spent again. For bitcoin, we use “bitcoin days destroyed” to measure its velocity, this can indicate whether people are hoarding or spending their bitcoins.

Venture Capitalist

Can refer to an individual or organisation that provide initial funding for start-up business ventures that cannot access public funding. This money is known as “seed funding”, and is usually exchanged for equity in the start-up.

Virgin Bitcoin

A bitcoin that has been received by a miner as a block reward, and thus has never been “spent” before.

Volatility

A measure of fluctuations in price of a financial instrument over time. High volatility in bitcoin is seen as risky since its shifting value discourages people from spending or accepting it.

W


Wallet

Wallets are where public and private keys are stored, they come in many different varieties. See “hot wallet” &“cold wallet

Whitepaper

A report or guide made to understand an issue or help decision making. Satoshi Nakamoto released the whitepaper on Bitcoin, titled “Bitcoin: A Peer-to-Peer Electronic Cash System” in late 2008.

Wire Transfer

An electronic method of transferring money from one party to another.

Z


Zerocoin

A project aimed at implementing true anonymity into the Bitcoin network.

Zero Confirmation transaction

A bitcoin transaction that has been relayed to nodes in the Bitcoin network but has not yet been incorporated into a block. Also known as “unconfirmed transactions”

 

 

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