Michael Caughey - Bitcoin Step by Step

Bitcoin

Step by Step

Author: Michael Caughey

Copyright Michael J Caughey 2012. All rights reserved.

I dedicate this book to

the developers of the software,

the designers of the mining rigs,

the miners digging for BTC blocks that keep the network alive,

the exchanges and services that tie non BTC to BTC so this market can coincide with traditional markets,

the old hands that continue to help others enter the marketplace,

the newcomer who will be an old hand soon enough,

the merchants that use BTC in their Markets,

the depositors,

Cindi for editing this,

and my wife who realizes that I have BTC fever.

-Michael

Contents

The goal of this book is not to be the complete guide to Bitcoin (BTC). This eBook is meant to get the new user up to speed quickly and safely. The user should be able to have a secure wallet, buy and sell BTC, accept and send BTC with the same level of trust and confidence as the existing user base.

There are many people before me that put a lot of hard work into documenting everything there is to know about Bitcoins. My goal is to condense all that into something that will get you up and running quickly. If you are the type of person willing to take the time and make the mistakes, you can figure it out without this eBook. I had it figured out in about three weeks of research and something like 80 to 100 hours of time. There has been even more time added since then. I hope to fast track your users experience and get you using the BTC infrastructure as easily as possible. The goal is to get you up to speed and using the Bitcoin network in the time that it takes you to read this eBook.

I will make references throughout the eBook to a number of additional resources that expand on the information that Im giving you. Often times I will point to the wiki site. Throughout many places in the eBook, there are screenshots from copyrighted sources. I did obtain the written permission to include the screen shots. I hope you will visit the sites referenced in the eBook.

A Bitcoin is a unit of measure in an online currency exchange system. Unlike government backed fiat, such as the USD, there is no government or central owner of the BTC (Bitcoin). A Bitcoin is traded within a peer to peer network which uses cryptographic processes to build trust around each transaction, thus building proof of ownership for your BTC. According to the Bitcoin wiki site:

Bitcoin is an experimental new digital currency that enables instant payments to anyone, anywhere in the world. Bitcoin uses peer-to-peer technology to operate with no central authority: managing transactions and issuing money are carried out collectively by the network. Bitcoin is also the name of the open source software which enables the use of this currency.

The software is a community-driven open source project, released under the MIT license and originally created by Satoshi Nakamoto.

Bitcoin is one of the first implementations of a concept called crypto-currency which was first described in 1998 by Wei Dai on the cypherpunks mailing list. Building upon the notion that money is any object, or any sort of record, accepted as payment for goods and services and repayment of debts in a given country or socio-economic context, Bitcoin is designed around the idea of using cryptography to control the creation and transfer of money, rather than relying on central authorities. (anonymous, 2012)

Lets define a few terms.

Bitcoin: a unit of measure for the currency traded, which can be sent over the internet

Block: used to record the ownership of the BTC within the network

Hash: used in the cryptographic process

Market Value: the total number of BTC times the current exchange rate in the government backed currency

Mining: The process of finding cryptographic hashes that can be used to keep the network running or to find new blocks of 50 BTC which enter circulation after found

The current number of blocks is 199,446. There are 9,972,350 BTC and the USD Exchange rate is $12.10 / BTC. So, the total market capitalization is $120,665,435 USD. In simple terms, if I had $121 Million USD, I could buy all the BTC in existence if everyone sold them to me at the current rate.

As I will explain in the chapters that follow, the exchange rate is determined by supply and demand. What you should take away now is that the number of BTC is not fixed at this time but growing. In the future it will become fixed.

The number of BTC grows slowly over time and will reach a maximum number at 21 million at which time there will be no more BTC created. The only method through which new BTC can enter into the market is through BTC Mining operations. This is where users buy specialized computer equipment which can be used to process the work required to find the unique hashes that are used for the network. The miners keep the network alive. The hardware they use is what keeps the network traffic flowing. Without it moving, a transaction would not occur. The miners must buy the equipment and pay for the electricity to run it. In exchange, they stand a chance of finding new 50 BTC Blocks, known as a reward. The reward will reduce to 25 BTC sometime around 12/1/2012. Once a miner finds the reward it becomes theirs. Some miners mine in pools that share in the finds over time.

If you are the sort of reader that is strong in math and are looking for a really good source of information about how the Bitcoin infrastructure works, here is a good link to the Bitcoin wiki:

https://en.bitcoin.it/wiki/Difficulty

The eBook, which can be found for $0.99 on Amazon, describes the math in great detail.

Bitcoin: A Peer-to-Peer Electronic Cash System [Illustrated]

http://www.amazon.com/Bitcoin-Peer---Peer-Illustrated-ebook/dp/B00538IVFK/ref=sr_1_1?ie=UTF8&qid=1348453217&sr=8-1&keywords=Bitcoin%3A+A+Peer-to-Peer+Electronic+Cash+System

As a user of the Bitcoin network, you will eventually own your own BTC. Youll need somewhere to put them. The most logical place is a wallet. As it would happen, this is exactly where you would put them, into an electronic wallet. The wallet can reside locally on your computer, on a USB Stick or online in one of the many online wallet sites.

As a professional security practitioner, I feel the need to make the following statement with regards to all implications of security referenced in this eBook:

Note: All claims to security in this book cannot take into account all threat vectors, namely you. If you allow an attacker to infiltrate your computer with a Trojan that has a back door and key logger, they will likely end up with your wallet.

There are many unforeseen attack surfaces. I will attempt to document some good practices. I also cannot speak to the level of security actually provided on the secure online wallets. Recently an exchange was infiltrated and approximately $250,000 USD worth of BTC was stolen (Kirk, 2012).

My goal is not to scare would-be users away, but I do want to instill in them a fair sense of security. I can say that I use the Bitcoin network and feel safe in using it.

Let us start with how BTC is exchanged. In simple terms, the process of sending BTC from one user to another is based on asymmetric cryptography. This means that if Alice wants to send Bob 12.5 BTC, the following would have to occur:

1. Bob uses the wallet application to create an address, which is represented by the software as a long string of alphanumeric characters.

2. Bob gives Alice the address which is the public key for which Bob has a matching private key in his wallet.

3. Alice uses her Bitcoin application to send 12.5 BTC to Bob using the provided address.