The very Basics of Bitcoin for the Crypto Beginner

By rumjus | Rumjus Crypto Discussions | 17 May 2024


I recently met a retired engineer, a man who had been about the world and had now retired with his beautiful wife of 50 years to live out life doing the things they enjoy doing, gardening for him, crafts and embroidery for her. He was a friend of my father's and I had gone over to say hi, as I was in the neighbourhood.

The discussion turned to Crypto and he expressed incredulity that people would even take the crypto currencies industry seriously. He said people just expected to make magic internet assets but they all these fads had no real life value and the whole thing was bound to come crashing down sooner rather than later. He did not have any idea of what crypto was or how it worked, but he was an engineer and he was willing to talk about it to understand how it worked. Based on my discussion with him, I write the following in the hope that it will serve as a very basic introduction to the world of crypto currencies. I will concentrate on the main and first crypto currency - Bitcoin, and try to take the magic out of it; and try to answer the basic questions he had, which I assume any reasonable person with limited exposure to crypto will have.

One main point he brought forward was that a web based currency had no intrinsic value. I agreed. I pointed out to him, that hard cash also had no intrinsic value. Cash isn't backed by gold reserves anymore. It is just pieces of paper. The value comes from two people agreeing to the value, i.e. Peter gives so much of his time to Paul in exchange for two pieces of paper, or Harriet gives one loaf of bread for one piece of paper from Peter. In every case the parties agree and that is where the value of the piece of paper comes from.


What in good heavens is Bitcoin?
Bitcoin is the first form of cryptocurrency. It has been widely adopted by the world, and at current (May 2024) market prices, the market capitalisation is over a trillion US$. Yes, that means there is over a trillion dollars of hard cash worth of Bitcoins ready to change hands.

How does it work?
A very simplified way bitcoin works can be thought of follows. All Bitcoin transaction go on a ledger. But this ledger is not kept in your bank or any one place. Instead it is in the public domain, with tens of thousands of "computers" around the world. Every transaction is shared with all of these machines and they update their ledgers. Now this ledger is called the blockchain (the data that is recorded continuously being the "blocks"). People can have "accounts" on this blockchain, by means of owning a pair of asymmetric (meaning different) keys. These keys are generated in pairs. This is a string of characters (or a file), with one you can give out to the public, your public key, which anyone can use to send you Bitcoins. The second key is your private key, which you will need to access Bitcoin and send Bitcoin out of your account. This system works because it is very unlikely that your private key can be guessed (or brute forced) from your public key. The mathematical probability of that being able to be done is very small with even the most modern technology. So, in essence, while it is easy to generate both public and private keys in pairs, it is extremely difficult to reverse engineer the process, and this is the main form of encryption used in cryptocurrency, and indeed, hence the name cryptocurrency.

What do they mean "mining" Bitcoin? Do they go into cyberspace mines with software droids to dig out Bitcoin?
I do not (and did not) wish to go into the intricacies of mining. I will say, the term mining refers to complicated calculations that the individual "nodes" on the network perform, that verify transactions in Bitcoin taking place all over the Internet. When these computers on the network verify (or process) these transactions, new bitcoins are created (or mined as we call it). The miners also get a reward in bitcoin for their work. All the miners compete to solve each calculation as quickly as possible and have to produce the correct hash as proof of work.

Miners incur several costs, for powerful CPUs, electricity, maintenance and upgrading, but as each bitcoin is worth (May 2024) over US $60,000 the rewards can be enticing. Infact it has been calculated that Bitcoin Mining consumes electricity than some small countries do, annually.

So do criminals and kidnappers and rogue states use Bitcoin?
They probably do. But, it is not a very clever idea. Criminals, typically want their transactions hidden from everyone except those that they are dealing with, so a ledger that is not only public, but records every transaction for posterity should be the least favourite method of money transfer for the intelligent criminal. While the wallet address does not give you the name, anyone with access to a computer can look at a public address and see what transactions are happening with that account, specially money (Bitcoin) coming in. The criminal would not be aware he was being watched.

Why should I get into crypto?
While no one "has" to get into crypto, it is the emerging form of value transfer (between Peter and Paul) and looks set to over from cash and other forms of currency. The banks not having control over it is one factor.

What can you use Bitcoin for?
Theoretically, you could use Bitcoin for anything normal cash (or fiat currency) is used for. You can use it to buy/sell stuff, you can use it as an investment, specially to diversify your portfolio.

If I can use cash, why would I use Bitcoin?
Now we are talking about the advantages of Bitcoin over fiat currency and there are some, most notably, the ability to transfer money internationally without banks or governments intefering, and in the case of banks, whacking a siginificant portion of your money.It is difficult to censor or control which free people like.

So how would I get into Bitcoin?
The easiest and most reliable way to transact Bitcoin, or own Bitcoin, is to open an account with a reputed exchange and trade Bitcoin through them, just like you would trade shares on the share market. There are many, but as this is still relatively new technology, fraudsters and scammers abound. As with most of life, watch out for too good to be true offers, and check and triple check before doing any money transaction.

And as always none of this is financial advice, I have only outline a discussion I had with a retired engineer, who wanted the very basics of Bitcoin. You should always do your own due diligence before doing any investment or business deal.

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rumjus
rumjus

Experienced trader


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