a Bitcoin primer

Being the web3 nerd that I am, I am often asked about cryptocurrency and I often have the same conversation with friends and family about cryptocurrency. I figured I would write this article to help out future askers.

The Tech

It’s first essential to understand a blockchain. A blockchain is the cryptographic magic that powers bitcoin. It allows every individual from their computer to share the same knowledge of who owns cryptocurrency. This knowledge can be shared because each block on the blockchain contains transactions and these transactions are permanently stored on the chain. When someone has knowledge of the entire blockchain, they have knowledge of every single transaction that has occurred and therefore every single bitcoin balance. That is how global decentralized consensus is achieved. The blockchain is widely available for download, so it is easy to view the universal state of Bitcoin for example.

Before a transaction is cemented into the chain, it must be verified that the sender has a sufficient balance to send the amount. There are of course tons of other security and verification measures in place, and once the transaction is verified and the block is mined, that transaction is permanently in the blockchain.

The Ownership

Owning a cryptocurrency requires you to own a ‘crypto wallet’ where you can ‘store’ your crypto.

I use quotes around ‘crypto wallet’ because what you actually own is just a private key, which is a simple string of characters. This private key gives you the power to send any cryptocurrency that is associated with the key. Because protecting this private key is so important, there are many software solutions that abstract out the private key, freeing you from the responsibility of securely storing it. In these cases of abstraction, you are more or less interacting with a wallet that holds your crypto.

I use quotes around the word ‘store’ because the crypto isn’t a physical thing and it cannot be physically stored anywhere. When crypto is sent to a wallet, a block is put into the blockchain with the information of how much crypto is sent where. For example, if I want to send 1 bitcoin to address 0x12345, I will send that transaction into the blockchain, wait for it to be verified, and then the bitcoin will be removed from my address and attributed to the new address. Everyone with knowledge of the blockchain now knows that I own 1 fewer bitcoin and address 0x12345 owns 1 more bitcoin. The crypto didn’t magically get sent anywhere on a physical level, there is simply global knowledge of virtual bitcoin balances.

The Practical Use

Bitcoin can be sent by signing a transaction with your private key. This achieves the goal of ensuring that bitcoin can only be sent by the true owner and this makes it clear that knowledge of the private key is congruent to ownership of the bitcoin.

Wallet softwares make it easy to sign transactions. In practice this is as simple as entering the public address you’d like to send the bitcoin and then clicking confirm.

Bitcoin transactions make it incredibly easy and efficient to exchange goods globally. There are already thriving bitcoin use-cases in developing countries that did not previously have means to make transactions across borders, and countries fighting with runaway inflation of their fiat currencies.

The Cybersecurity

This is by far the biggest area for improvement in the bitcoin world. Due to the permanent nature of blockchain transactions, there are no refunds. That means if you accidentally send the wrong amount, or your private key is compromised and your bitcoin is sent to a scammer, it’s gone.

Many are working towards a solution for security with new and innovative ways to secure private keys. The best solutions so far are hardware wallets (like the ledger) that keep the private keys as far removed from any outside influence as possible. However, there are still countless examples of hardware wallets getting stolen by bad actors without any hope of recourse.

I urge you to make sure you have an incredibly solid understanding of bitcoin and blockchain tech before owning any cryptocurrency. It is a dangerous game in the wild wild west of web3.