Category: Bitcoin

Bitcoin – Mining With Bitcoins, the process of creating the currency is called mining. Bitcoin miners use specialized software and hardware to verify bitcoin transactions and to solve complex math problems and are compensated by a certain number of bitcoins in exchange. This is how bitcoin currency is issued and anyone can mine bitcoins. We can use mining to create or earn our own bitcoins. Presently, a successful miner is rewarded with 25 bitcoins for every new block that is created roughly for every 10 minutes. This mutually agreed value will halve after every 210,000 blocks are added to the chain. Bitcoin mining involves verifying and adding transaction records to Bitcoin”s public ledger of past transactions or blockchain. The blockchain is used to confirm transactions as having taken place to the rest of the network. Bitcoin nodes use the blockchain to legitimate or validate genuine Bitcoin transactions and prevent double spending of bitcoins, that is, stop re-spend of coins that have already been spent elsewhere. Bitcoin mining is willfully designed to be resource-intensive and difficult so that the number of blocks mined each day by miners remains moderate and steady. Individual blocks are also required to contain a proof of work to be considered valid. This proof of work is verified by other Bitcoin nodes every time they receive a block. Bitcoin employs the hashcash proof-of-work function for its working. The primary goal of mining is to facilitate Bitcoin nodes to reach a secure, tamper-proof consensus. Mining is also the mechanism used to introduce Bitcoins into the bitcoin eco system: Miners earn (if any) transaction fees as well as a “reward or bounty” of newly created bitcoins. This both serves the purpose of distributing new coins as well as motivating people to secure the system. Proof of work A proof of work is a piece of data which was resource-intensive and time-consuming to produce so as to satisfy certain requirements. Producing a proof of work is usually a random process with low probability, and a lot of trial and error is required before a valid proof of work is generated. Bitcoin uses the Hashcash type of proof of work. Additionally, the miner is awarded the transaction fees paid by users. The fee is a sort of incentive for the miners to include the transaction in their block. In the future, the fees will make up a significant percentage of mining income. There are two main types of mining: Solo and Pool. Solo Mining Solo mining is done alone or on your own. With the configuration of a normal desktop or laptop, it would take years to earn actual bitcoins as mining requires enormous computing power. Pool Mining The second method we can use is pool mining. It involves signing up for an account with any one of the different pooling sites. Using their software and hardware, these sites pool the mining efforts of a lot of people”s computers. Every person in the pool gets small number of bitcoins as his share as a reward. For individuals, pooling is preferable over solo mining. BitMinter BitMinter is a bitcoin mining pool that aims to make it easy for anyone to make bitcoins. It is one of the oldest pools. Since its opening in 2011, over 450000 people have registered accounts with it. In the earlier period, CPUs and GPUs were used for bitcoin mining. Now we need to have specialized Application Specific Integrated Circuits (in short ASIC) machines for bitcoin mining. The speed of these machines is given by their hash rate which is presently of the order of tera hashes/second or T H/s. ASICs took over mining in 2013. Mining just one bitcoin with an ordinary PC would take quite lot of time. You will need a 1 TH/s or faster ASIC machine to start a small mining operation at your home. Using BitMinter for Mining Below is the process to use BitMinter for mining − Step 1 − First, we signup with BitMinter site using our google or yahoo mail accounts and then confirm our mail id by clicking on the link in our mail received from BitMinter. Step 2 − We set up a Worker account with a worker name and worker password besides the username created when creating BitMinter account. We link the Bitminter Client to the worker account. Step 3 − Then we log in by filling up account details as shown below. Step 4 − After this by opening the BitMinter Client application, we get following console as shown below − Step 5 − We press the Engine Start button to start mining. We have to ensure that our machine clocks a hashrate speed of atleast 25 million hashes/second or 25 M H/s. Step 6 − We will also need to change a few settings regarding automation. We can leave our machine on all day and all night. Step 7 − We can go to Settings > Options to change these settings. Automated devices are a list of devices that you set so that they start automatically when the software starts. Step 8 − We will let our machine run at night increasing the prospect of making more number of bitcoins. Mining secures the transactions by finding random strings that make the block to hash to a value with lot of leading zeros. The more the zeros, the more difficult it is to decrypt. Mining bitcoins does not mean finding new bitcoins; these are awarded by the network for completing validation of all outstanding transactions of a block and solving some complex math puzzle. Ways to Earn Bitcoins The best way to earn bitcoins is to find and execute work paying in bitcoins. We can purchase the bitcoins as well. Lastly, if we want to earn them the hard way, we should go for mining. To mine bitcoins, we can buy some cheap hardware on sites: ebay.

Bitcoin – Cryptocurrencies Cryptocurrency is digital currency that uses cryptography to secure its transactions. It is difficult to make counterfeit crypto currency because of this security feature. A remarkable feature of any cryptocurrency, is the fact that it is not issued by any central bank or government authority, making it immune to any government manipulation. There are over 17 million bitcoins in circulation as of May 2018, with a total market capitalization of over $140 billion. Bitcoin”s success has given rise to a number of similar cryptocurrencies called altcoins: Namecoin, Litecoin, PPCoin, etc. Pros and Cons of Cryptocurrencies Cryptocurrencies make it possible to transfer funds between parties and these transfers are effected through the use of public and private keys as a means of security. These fund transfers are carried out with nominal or zero processing fees, allowing users to avoid the exorbitant fees charged by most banks and other financial intermediaries for the transfers. Apart from the fact that prices of cryptocurrencies are based on supply and demand, it has been found that the exchange rates of cryptocurrency fluctuate widely due to a host of reasons. The anonymous feature of cryptocurrency transactions renders them vulnerable to illegal transactions, such as money laundering, drug and weapons dealing, terror funding and tax evasion by criminals. However, anonymity of transactions has its own host of plus points. Cryptocurrencies are also considered by some economists to be a passing phenomenon or a speculative bubble that can burst any moment because of their virtual or digital nature. Bitcoin has indeed seen some exponential surges and sudden collapses in value. Cryptocurrencies are also not totally secure from hacking. In Bitcoin”s short life-span, the currency has been subject to over 40 hackings, including few that topped $1 million in value. Still, many see cryptocurrencies with hope as a medium of exchange that preserves value, facilitates easy exchange, is more liquid and portable than bullion, and is outside the purview of central banks and governments. Through many of their unique properties, cryptocurrencies allow exciting applications that could not be provided by any traditional payment systems. There is no physical cryptocurrency, but balances are secured with public and private keys. These balances are maintained on public ledgers, along with all transactions, that are verified by a huge amount of computing power. In early 2014, the Inland Revenue Service of the US declared that all crypto-currencies, including Bitcoin, would be taxed as property rather than currency. It was stated that all gains or losses from such currencies held as capital will be treated as capital gains or losses, while those held as inventory will attract ordinary gains or losses.

Bitcoin – How do they work? The process of creating or minting bitcoins is difficult to hack and this gives security to bitcoins. Another layer of security is the provision that every transaction has to be verified before being validated. This verification is effected through “mining”. Mining is a process where some high-level computing like SHA256 decoding is done to verify transfers of bitcoins. Bitcoins are stored in a “digital wallet”, which exists either on a user”s computer or on the cloud. The wallet is a type of virtual bank account that facilitates users to send or receive bitcoins, pay for goods and services or save their money. How do bitcoin transactions work? Every bitcoin account consists of a public key which works like a bitcoin address and a private key. Anyone can send you bitcoins if he/she knows your public key. To spend bitcoins, you have to use your private key for authentication. Every bitcoin transaction appears on the bitcoin network. The miners confirm the transactions after verification to validate them. Addresses An example of a bitcoin address is as follows − 73nRKoXJAUqKYYbzw6Nrqh9gW2p26zerpZ There are 2160 or about 1048possible addresses. The corresponding private key is as given below − 5HuEupY3DNF87UypjFtXDTm4BVuAwZtAgYf94sMALPyakgafVnU Private keys are of 256-bit length. There are about 1077 possible private keys. How to send bitcoins? In the previous section we have seen how a bitcoin transaction works. Now, we shall discuss how to send bitcoins. To buy some merchandise or pay for some services, you will have to send bitcoins to the address of vendor. To receive bitcoins, you will have to share your address with the vendor. Following is the process of sending bitcoins to someone − Copy the vendor”s address and open your bitcoin wallet. Click on the “Send coins” tab and enter the address in the ”Pay to” field to which you want to send bitcoins. If you have to send bitcoins to the same person or a group several times, you can create a label so as to find them in the address book. Enter amount in the next field and click send to complete the operation. Confirmations In the mining process, all transactions are collected in a container called block. A new block is created in about every 10 minutes. In case of small payments or transactions with trusted peers, confirmations may not be necessary. However, for large transactions to be considered safe, the norm is 6 confirmations. Anonymity of Bitcoin transactions The level of anonymity can be customized depending on the requirement. Every transaction from one address to another address is public. The analysis of the transactions through their addresses or public keys whose records are public is called traffic analysis. The larger the transfer the easier the traffic analysis. To increase anonymity, mixing services are used. It is also advisable to create a new public key or new address for every transaction to ramp up security and anonymity. From the point of view of a user, Bitcoin is nothing but a mobile app or software that makes available a personal Bitcoin wallet which allows a user to send and receive bitcoins. However, at the backend, the Bitcoin network shares a humongous public ledger called the “block chain”. This ledger carries the record of every transaction ever processed that makes it possible for a user”s system to verify the validity of each transaction. The need of consensus for compatibility In order to maintain compatibility with each other, all users of Bitcoins have to use the software following the same rules. Bitcoin can only work correctly as long as there is a complete consensus among all the users. Thus, it is imperative that all users and developers maintain and protect this consensus. Securing a blockchain Bitcoins are not stored on your computer unless you host a node on the network. You carry a clone of the ledger which is secure as each block is hashed before being appended to the chain. This means, changing even one bit of any data on the previous blocks changes the hash of the ledger which marks it as counterfeit. Hash function is an irreversible function that is used extensively in cryptography; the output of this function is shorter than the input. Validation of bitcoin transactions is just a process of quickly checking the keys like finding if the sender has the private key that can unlock any record in the ledger/blockchain.

Bitcoin – Introduction Bitcoin emerged out of the 2008 global economic crisis when big banks were caught misusing borrowers” money, manipulating the system, and charging exorbitant fees. To address such issues, Bitcoin creators wanted to put the owners of bitcoins in-charge of the transactions, eliminate the middleman, cut high interest rates and transaction fees, and make transactions transparent. They created a distributed network system, where people could control their funds in a transparent way. Bitcoin has grown rapidly and spread far in a relatively short period of time. Across the world, companies from a large jewelry chain in the US, to a private hospital in Poland, accept bitcoin currency. Multi-billion dollar corporations such as Dell, PayPal, Microsoft, Expedia, etc., are dealing in bitcoins. Websites promote bitcoins, magazines are publishing bitcoin news, and forums are discussing cryptocurrencies and trading in bitcoins. Bitcoin has its own Application Programming Interface (API), price index, trading exchanges and exchange rate. However, there are issues with bitcoins such as hackers breaking into accounts, high volatility of bitcoins, and long transaction delays. Elsewhere, particularly people in third world countries find Bitcoins as a reliable channel for transacting money bypassing pesky intermediaries. How to use Bitcoins? We can make bitcoin transactions as we do with our familiar fiat currencies. While we use Bitcoin, the purchaser is actually referenced to our digital signature, which is a security code encrypted with sixteen different symbols. The purchaser decrypts the code with his device to get the cryptocurrency. Therefore we can say that cryptocurrency is an exchange of digital information that permits us to buy or sell goods and services. The transaction is secured and made trustworthy by running it on a peer-to-peer network that is akin to a file-sharing system. How does Bitcoin handle double spending problem? For digital cash system, a payment network necessarily should have valid accounts, balances and transaction records. The biggest bottleneck common to every payment network is the double spending problem which is the case when same money is used multiple times to do transactions. To prevent double spending, all transactions have to be recorded and validated every time in a central server where all the balance records are kept. However, in a decentralized network, every node on the network has to do the job of a server; it has to maintain list of transactions and balance records. Thus, it is compulsory for all nodes/entities in the network to keep a consensus about all these records. This was achieved by using the blockchain technology in bitcoins. So we can say that bitcoins like other cryptocurrencies are mere token entries stored in the decentralized databases that keep consensus of all balance and account records. It is to be noted that cryptography is used extensively to secure the consensus records. Bitcoins and other cryptocurrencies are secured by math and logic more than anything else. Bitcoins and cyptocurrencies have gained recognition and adoption based on their perceived value by their creators and users. Bitcoin works on the same concept, the more people participate; the more value is created. History of Bitcoins The first Bitcoin protocol and proof of concept was published in a Whitepaper in 2009 by a shadowy individual or group under the pseudonym Satoshi Nakamoto. Eventually Nakamoto, who remained mysterious, left the project in late 2010. Other developers took over and the Bitcoin community has since grown exponentially. While Satoshi Nakamoto”s real identity remains shrouded in mystery, it is on record that he communicated extensively in Bitcoin”s early days. Let us speculate on questions like when he started working on Bitcoin, to what extent he was inspired by similar ideas and what was the motivation for bitcoin. Creation of the first bitcoin domain It is believed that Satoshi started coding Bitcoin around May 2007. He is said to have registered the domain bitcoin.org in August 2008. Around that time, he started sending emails to a few individuals he thought might be interested in the idea of bitcoins. In October 2008, he publicly published a white paper that dwelt on the Bitcoin protocol, and released the Bitcoin code as well. Then he stayed in contact for about two years, during which he interacted actively in forums, communicated with several developers and later he also submitted patches to the initial code. He maintained the source code along with other developers, tackling issues as they happened. By December 2010, as others had slowly taken over, he quietly left the scene. Entities The entities involved in the implementation and maintenance of Bitcoins are − The Blockchain platform Cryptographic algorithms Bitcoin miners which are computers or specialized machines that mint the currency and make possible transactions People who participate in the transactions and thus help to move the payment system The philosophy of Bitcoin, and in general, of all cryptocurrencies is that they are distributed systems where there is no central entity that manages the activities such as transactions, among others. It is a peer-to-peer (p2p) system that operates at the level of participants. Bitcoin Transactions We shall now see how a new block of bitcoin transaction is created. A bitcoin miner creates a block by using the following steps − Gathering pending transactions, preferentially those with transaction fees first, and then the free ones Verifying the transactions for their validity Solving a hashing problem According to the statistics, in October, 2015, blockchain.info site stated that, the average number of transactions per block was 411, and as of May 2018, the current number of pending unconfirmed transactions is around 2495. Reward and cost per bitcoin transaction Assuming that one bitcoin is worth $400, the reward of 25 bitcoins per block is worth around $10,000, ignoring negligible amount of transaction fees. Taking average number of transactions per second as 2, and the number of transactions per block as 1200, the reward per transaction works out to $8.33. It is found that the cost of electricity consumed in mining is close to the reward which makes mining bitcoins not so profitable. The basic

Bitcoin – Exchanges Cryptocurrency exchange is where users can come together and trade in different cryptocurrencies and fiat currencies. Online currency exchanges are websites that are used for trading, that is, buying or selling bitcoins for dollars or any other currencies like Euros, Pounds, Yen, etc. We can transfer money through any online currency transfer services to trade in bitcoins on these exchanges. Exchanges of Bitcoin The following exchanges dominate Bitcoin market − Bitfinex − Bitfinex is the world”s #1 Bitcoin exchange if trading volume in US dollars is considered. Here about 25,000 BTC are traded every day. Bitstamp − Bitstamp, founded in 2011, is one of the oldest exchanges of Bitcoins. It is presently the second largest exchange in the world based on USD volume, with around 10,000 BTC traded per day. OKCoin − This bitcoin exchange is based in China but trades in US Dollars. Coinbase − This was the first regulated Bitcoin exchange in the United States. About 8,000 BTC are traded daily on this exchange. Kraken − Kraken is the #1 trading exchange in Euros handling nearly 6,000 BTC transactions per day.

Bitcoin – Future Since Bitcoin is a new emerging technology which is underway, unforeseen developments can make its existence and continuation difficult. Concerning its security and future, there are numerous questions which no one can answer. How far can we trust Bitcoins? Are they a bubble that is going to burst? Are they a passing phenomenon and a fad that would fizzle out over a period of time? Or are they going to stay put and perhaps dominate other currencies in future? As of now, bitcoins are mostly unregulated, however this may change. Governments are worried about losing taxes and control over the currency. They may bring legislations to regulate bitcoin which may hugely impact the advantages that bitcoins have over other currencies. The volatility of bitcoin prices is one huge issue. The wild fluctuations in its index is sign of such volatility. In recent years, bitcoin prices have risen exponentially and after some corrections have dipped but still they are on the high side. Many expect that the price will further increase. Favoring Growth Factors The things that favor the growth of bitcoin adoption are as follows − There are limited number of bitcoins. The awareness about bitcoins is growing and so their acceptance and adoption. The number of bitcoin transactions is increasing day by day. A large number of wealthy people do not want government”s regulations on their wealth and would rather prefer storing in bitcoins. Next halving is scheduled to occur in 2020. This will further decrease the rate of supply of bitcoins while bitcoin usage would have increased manifold by 2020. As of now, the number of bitcoin transactions is way behind the number of credit card transactions and the former has to significantly increase to realize the full potential of bitcoins. Some of the issues which have to be tackled to help bitcoin”s growth are as follows − Bitcoin transaction time or the time required to get confirmations is still on the high side as compared to credit or debit card transactions. The security of Bitcoins has become a major issue. As the usage of Bitcoin is increasing, hacking of bitcoin wallets and even exchanges has been more widespread. As of now Bitcoins are too technical for common people and are not so user friendly. It is difficult for people to understand why bitcoin prices are so volatile, why transaction time is so high and how they should safeguard their bitcoins. Governments of several countries including India are discouraging legal use of Bitcoins as they understand that Bitcoin is a parallel financial system beyond their control. However, countries like Japan, Australia and several European countries have made Bitcoin legal as they realized that they cannot stop the usage of bitcoins. Some countries have banned bitcoin exchanges. People are using global exchanges to hide their transactions. Meanwhile India and China have been discouraging Bitcoin transactions. China has tried to ban all Bitcoin Exchanges in their country while India has not banned any exchange. Zebpay and Unocoin are Bitcoin Exchanges that are under operation in India. They require submission of KYC documents before executing any Buy or Sell transaction.

Bitcoin – Environmental Setup Satoshi Nakamoto released the first bitcoin software as open source code in January 2009. He later renamed it to “Bitcoin Core” to differentiate it from Bitcoin network. Bitcoin Core is a bitcoin implementation. It is a full Bitcoin client and is backbone of the network which provides high levels of security, stability, and privacy. It also assists network in relaying transactions. It requires at least 50 GB of hard disk space and is not recommended for new Bitcoin users who can opt for lightweight mobile or desktop wallets. What is a Bitcoin full node? A full node is a software program that fully validates transactions and blocks. Most full nodes also assist the network by accepting and validating transactions and blocks from other full nodes, and then relaying them further to other full nodes. Bitcoin Core full nodes need to have certain requirements. If a node is run on weak hardware, it may work − but with a host of issues. It will be an easy-to-use node, if the following requirements are met − Desktop or laptop hardware running latest versions of Windows, Mac OS X, or Linux About 150 Gb of free disk space, accessible at a minimum speed of 100 MB/s 2 GB of RAM memory A broadband internet connection with upload speed of at least 50 kilobytes per second Preferably, an unmetered connection, a connection with high upload limits. It is common for full nodes on high-speed connections to use 200 GB upload or more a month. Download usage is around 20 GB a month, plus an additional 150 GB the first time you start your node 6 hours a day of full node running Bitcoin Core can be downloaded from the site Apart from downloading bitcoin client, we have to set up several accounts. Going further in this tutorial, we will learn how to open accounts in bitcoin sites and to create accounts in bitcoin wallets, bitcoin exchanges, bitcoin mining sites, faucet sites, and sites that offer bitcoin tools and value added services. Java Installation To run a mining software like BitMinter client, we need to have latest compatible version of Java installed. BitMinter client can be downloaded from To install Java, you can follow these steps − Go to www.java.com/download. Click on the button “Free Java Download“. Click on “Agree and Start Free Download” button. Select the version that is compatible with your operating system. Follow the onscreen instructions to continue installing the software. Once the installation is completed, click on Finish button. Continue on to the next step to set up a miner.