What is a Bitcoin?

You should think of bitcoin as two parts: a monetary unit, and payment processing network.

The payment network is a decentralized network of random joe sixpacks that run some open source software. This software listens for transactions on the network and bundles them up into little squares. These squares are then stacked onto each other, one on top of the other. As you can imagine, the squares deeper in the pile get harder and harder to pull out and change because of the weight of all the newer squares on top of it. This gives historical transactional security. The farther back in the stack, the more secure they are.

Each time Joe Sixpack stacks a bundle of transactions, he gets paid for his work in at least one of two ways: transaction fees, and monetary inflation (money created out of thin air – but don’t worry, there is mathematical regulation that prevents runaway inflation, and actually stops in decades in the future).

The monetary unit is literally just an accounting entry that says acount ABC has X bitcoins available for spending. Each transaction that is made creates a sort of bank check that says “pay to the order of account XYZ in the amount of Y bitcoins” and the owner of the account signs that check with a counterfeit proof pen. This pen has a special property in that it can be verified by anyone in the network. Joe Sixpack uses this property to verify authenticity of transactions as he bundles them into stacks.

Back to inflation… There will only be 2.1 quadrillion monetary units (satoshi) or 21 million bitcoins. This is guaranteed by simple math like “divide 50 in half every four years until you reach zero”. At this point, no more bitcoins can be created. And we’ll never really reach that number in circulation because many people have already lost hundreds of thousands of bitcoins to forgotten passwords, formatted hard drives, and crashes with no backups. These losses to attrition will continue throughout the life of Bitcoin so the monetary units in circulation will continue to go down over centuries.

How many Bitcoins are there?

The current total number of Bitcoins that have been created can be viewed in this chart.

Did you know, a bitcoin is divisible to 8 decimal places? This is such a large number, that IF the bitcoin exchange rate ever reaches $50,000 USD, you still would not be able to purchase less than 10 satoshi, the smallest monetary uniti of Bitcoin, for a single US penny.

Bitcoins certainly have the monetary size to be a globally competitive currency!

Continue reading How many Bitcoins are there?

Is it possible to blacklist Bitcoins?

The short answer is no.

Bitcoin is a global currency that transcends geo/political borders, where each region has its own laws and governing bodies. A declaration of blacklisting made in one region may never receive such curse in any other.

And consider the timeframes for such declarations. An investigation and ruling into a theft could take years. During that time, what happens to all the people that were unfortunate to have received pieces of the blacklisted money – or the poor sap left holding any piece of the bag?

What is Ripple?

Ripple is a closed source, centralized system to relay payments. It uses a currency called XRP to facilitate the movement of debt through the system. This currency is pre-mined and the vast majority of it remains in the posession of the developer, OpenCoin. Some 20% has been release to friends and family of OpenCoin, general giveaways, and gateways to build the network.

Unfortunately, OpenCoin fraudulently promotes its technology by describing it as an open source system – it is not. Much distrust of OpenCoin also comes from the fact that the XPR monetary units are pre-mined.

More details of this fraudulent system can be found at http://RippleScam.org.

What is a cryptographic hash?

A hash is a function of cryptography that can be thought of as a blender.

If you place apples in a blender, you’ll get a specific color and consistency compared to what you would get if you blended oranges.

For each thing you blend, you’ll get a unique output. Change the items you are blending just a little bit, and the result is unpredictably changed. However, each time you blend the exact same thing, you arrive at the same color and consistency.

Hashing functions are completely irreversible due to the fact that they compress data. As the function “blends” the data, it throws most of the original data out. What results is what is a fingerprint of the original input. This fingerprint is very unique to the original data provided, but there is no way to recreated the original data from the fingerprint.

What are the denominations of Bitcoin?

The largest unit of the Bitcoin protocol is a bitcoin. Each bitcoin is divisible to 8 decimal places.

Because it is inconvenient to express fractions of bitcoins, some terms have become popular to describe the smaller denominations: bitcents/centibits, mbits/millibits, ubits/microbits, satoshi.

  • .01 bitcoin can be referred to as a bitcent, or centibit.
  • .020 bitcoins can be referred to as 20 mbits/millibits, or 2 centibits.
  • .332 bitcoins can be referred to as 332 mbits/millibits
  • .000520 bitcoins can be referred to as 520 ubits/microbits
  • .00000011 bitcoin can be referred to as 11 satoshi.

A satoshi is the smallest unit of bitcoin.

What backs Bitcoin?

Bitcoin is not a debt based asset.

Reserve Notes were once issued as an IOU for gold and silver held on account at a bank. A customer would deposit a unit of gold or silver and the bank would issue an IOU in exchange. The Reserve Note was “backed” by the gold or silver on deposit and any bearer of the note could return to the bank an exchange it for the unit of gold or silver.

Reserve Notes are debt money and require a backing to provide faith they can be exchanged for something in the future.

Bitcoin, not being a debt asset, does not require backing. You either are the owner of a bitcoin, with full rights to transferability, or you do not. There is no counter party risk.

What backs the US Dollar? This is a direct quote of the US Treasury:

Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. This has been the case since 1933. The notes have no value for themselves, but for what they will buy.