Hey everyone, I started listening to TSP in March and listen to the show daily. I love the different perspectives and the balanced non-alarmist approach to building a sustainable lifestyle. On recent shows I have noticed some interest in Bitcoin as a show topic and even a question asking Jack what Bitcoin wallet he uses. I feel I can lend some of my experience with Bitcoin to other listeners who are interested in getting started.
I started using Bitcoin (and other cryptocurrencies) in 2013 after discovering it while researching the Cyprus financial crisis in March of that same year. At first I was skeptical and thought it was some cheesy digital token that some company controlled. However, after digging deeper and reading Satoshi Nakamoto’s (Bitcoin creator) whitepaper I understood that Bitcoin was revolutionary because there was no central authority to control or expand the money supply and it had all the benefits of Gold and Silver plus the ability to take your money anywhere on Earth without it being subject to confiscation. While this was exciting by itself it also presented a way to reduce my participation in the corrupt financial system and help build a parallel financial system that is resistant to deflationary shocks.
I receive part of my income in Bitcoin and I use it as a way for me to store wealth outside the financial system, buy stuff online to include PM purchases, and even help others buy bitcoin locally with cash. I consider myself a Bitcoin expert and advocate, but I realize I do not know everything. If you have heard something contrary to what I post, please call me out so we can discuss and make sure the information I post is completely accurate. What I will discuss in my upcoming posts are ways to use Bitcoin safely and securely. Bitcoin is still a risky asset as there could be some bug in the Bitcoin codebase that could cause confidence in the ledger to be lost! Just like any investment it should be part of a portfolio that has balanced risk.
Now that this is out of the way let's get started. My goal is to create simple easy to understand posts that will allow folks to get started with Bitcoin. Bitcoin deep down is a very complex and will do my best to keep these posts at a level that make sense for everyone.
What is Bitcoin and how does it work?I feel it is a good idea that everyone understands how something works before diving in if only at a basic level. So before I create a post on how to create a wallet lets go over how Bitcoin works.
Bitcoin is a peer to peer network that is used to exchange digital value without a company/government consent. Bitcoins are not actually sent over the internet, instead transactions are recorded on a public ledger. This public ledger consists of “blocks” that are created on average every 10 minutes and are recorded permanently to the “blockchain” (Take a look at
https://insight.bitpay.com/). As such this public ledger means all transactions are pseudonymous and not entirely private. The moment your random Bitcoin address is linked to your identity anonymity is lost!
Who creates these blocks? Bitcoin miners do! Miners are collectively the payment processing engine for Bitcoin. The miners are computers with specialized processors that listen to the Bitcoin network and record a list of all valid transactions that were made since the last block. As they gather the transactions they are also solving a mathematical puzzle. The first miner to solve the puzzle wins the block reward (currently 25 bitcoins) and publishes the block with all of the transactions they gathered for all other miners to see. All miners on the network then validate that the puzzle was solved correctly and then they start to mine the next block and repeat this process.
The transactions that miners are listening for are created by Bitcoin wallets. A Bitcoin wallet will typically generate and save a “private key”. A private key is just 52 characters randomly generated by the wallet (it can even be created offline by rolling a die many times). This private key gives the wallet holder control of the corresponding address (this key should be kept in a safe place and not shown to anyone). With this private key, the wallet software generates the corresponding Bitcoin address (this is the public address that you can show everyone) and scan the Blockchain to determine how many bitcoins belong to that address. When someone sends bitcoins to another address the wallet will use the private key that it has stored to send out a signed message to the network indicating the quantity and address that the bitcoins have been transferred to.
Hopefully that was simple and straightforward as I intended. Let me know if there are any questions or if you want anymore details into certain functionality. In my next post I will give an overview of the different wallet types and tell you what I use to store my Bitcoin.
