What is the Bitcoin Blockchain
What is bitcoin? Bitcoin is a token that represents the answer to a mathematical question. The token has value because a certain amount of work had to be done to solve the mathematical problem. That problem is called a hash. At the time this book was written the current hash rate was 1,494,648,765 GH/s. The GH stands for giga hash. This number is the amount of giga hash necessary to solve the mathematical problem within 10 minutes. The process of solving these mathematical problems is called mining.
So in essence bitcoin is produced as a byproduct of mining. As the math problems are solved they are placed into what is called a block chain. The block chain is the sequence of hashes that have been solved since the bitcoin protocol was first initiated. Bitcoin is the most secure bank in the world. It has never been hacked.
As a reward for solving a hash a miner is paid a certain amount of bitcoin. This is called a block reward. Originally the block reward was 100 bitcoin. About every four years this block reward is reduced by half. Right now in June of 2016 the block reward is 25 bitcoin and the halving is upon us. In a few weeks the block reward will be reduced to 12.5 bitcoin. It will continue at this rate cutting the block reward in half every four years or so until the total number of bitcoin mined reaches 21 million. At which point bitcoin mining ceases.
The current price per bitcoin in June of 2016 is hovering around $620 each. In 2009 when the block reward was 100 bitcoin it was worth nearly 0 dollars. At the current rate bitcoin mining will stop in 2024.
For most of us the technical details of how bitcoin works is not really important, we just want to know if it does work how is this new technology going to be used in the future. Right now as new applications for this technology are being developed bitcoin has mostly benefited speculators. People like myself who adopted bitcoin in its early stages have been rewarded handsomely.
Now the technology is moving into a phase where it is becoming implemented. You can transmit money anywhere around the world in seconds. Bitcoin is the digital equivalent of gold. The block sharing technology has spawned a new industry built around the Internet of things. It threatens to revolutionize the banking industry. Contracts will no longer require lawyers and judges to settle cases, they will be settled in the block chain.
Bitcoin is not a computer program it’s a computer protocol, meaning it is it’s own computer language. The block chain has given birth to completely programmable money in the form of bitcoin spin offs like Ether, which will be explained in a later chapter.
In essence, bitcoin is decentralized electronic money that is not controlled by any one person or one government. Each person that runs the bitcoin protocol on their computer is an individual bank, has a complete copy of the ledger and is free to transact with anyone anywhere in the world for a few pennies no matter how large the transaction is. From your cell phone you can send $200,000 to someone anywhere in the world even if you don’t know their location for under four cents without anyone’s permission. It is revolutionary.
Becoming Your Own Bank
The banking industry is about to be turned on its ear. People will no longer need banks to send money or store their money. Since there will be only 21 million bitcoin ever produced the value will always be rising. Which is the opposite of Fiat currency. The US dollar has lost 97% of its value since 1913. The reason for this is inflation caused by the constant printing of money. If you are not familiar with how money is created here’s a quick lesson. For every dollar that you put in a bank that bank can lend one dollar to nine people. Since they only have one real dollar they just print the other nine to lend out. Of course this is an oversimplification of the Federal Reserve, but in a nutshell this is what’s going on. So if everything goes well when the debts are repaid the bank now has $10. One dollar from you and nine dollars from the borrowers. Now it can send an order to the Federal Reserve for an additional $90 to lend out. It’s not too hard to see how this can become a problem.
Becoming your own bank doesn’t mean that you can practice fractional reserve lending. It means that you can fully control your money without a middleman. The most secure way to do this with bitcoin is to host a full node. A bitcoin full node can be run on any Windows-based, IOS-based or Linux based operating system.
It takes three or four days to download the entire block chain but once you do you are free to send and receive bitcoin from anyone in the world. It’s really that simple as long as you have their bitcoin address.
If you don’t have any bitcoin there are several places where you can buy them. Some are regulated and some are not. The most established and regulation compliant of all of these is called Coinbase. They also have an exchange where you can trade crypto-currency for a variety of other crypto-currencies as well as Fiat. Since they are regulated they do require KYC (Know Your Customer) information. They make it pretty easy to get started. You simply give them your bank account information and within a day or two they verify that you are the owner of the account. Once they do that they incrementally increased the amount of bitcoin that you can buy at one time up to $50,000.
Once you have the bitcoin you can transfer them to your full node and from there you are free to distribute them as you wish without anyone’s interference. The only time that you really need a third party is when you on-ramp to bitcoin or off ramp into Fiat. Of course there are other ways to acquire bitcoin but they are not best suited for newbies.