Cryptocurrencies have been dominating the financial world for the past decade ever since the introduction of Bitcoin in 2009. Stories of early investors gaining millions of dollars as the Bitcoin price reaches record highs are reported in the news every now and again. Your eyes see the price climbing and climbing on the TV screen, $10 becomes $1 million, the numbers look so beautiful, so irresistible, so tempting, and — wait, what is Bitcoin?
Bitcoin is a type of cryptocurrency, or encrypted digital currency. It can’t be seen, heard, touched, or felt, yet it is one of the most secure methods of payment in the world. Think about the different types of currency. Paper and coin. Is it secure? Criminals can simply steal money from your wallet, safe, or bank. Credit cards? An unassuming card swipe could reveal thousands of dollars worth of information from the magnetic strip on the back. The concept of Bitcoin is that if you can’t see the money, then it can never be stolen. So, how does Bitcoin work then?
In order for Bitcoin to work, everybody has to trust everybody else. That may sound ridiculous if you think all human beings are corrupt, but Bitcoin implements a trust-based system to properly allocate money. To start, every Bitcoin user has an account number, and a ledger: a copy of a file that lists all transactions ever made using Bitcoin. Let’s say Ricardo and Wanda are friends, and Ricardo needs to send money to Wanda for that one time she babysat his pet hamster. Ricardo has to broadcast a message to every user of Bitcoin, and each user must add Ricardo’s account number, Wanda’s account number, and the amount in bitcoin that Ricardo gave Wanda. Everybody can see everybody else’s ledger, so it’s wise to keep the ledger updated, unless you want trouble.
Simplified Version of Ledger System
What if Julia, their mutual friend, takes Wanda’s account number to get the money all to herself? Not so fast. Each account has its own private key, p, and each transaction has a secret message, m. When inputted into a mathematical function, they create a unique signature that can be verified to come from the original account and contain the original message. Before you get all stringent on me, no, a signature cannot be reverse-engineered to obtain the original message, private key, or account number. Cryptography and mathematics makes sure that secure information is impossible to crack, and public information is readily available.
How all the Bitcoin components relate to one another
“Okay, Justin, I understand this, but tell me how to get rich!” Shh. Patience. Bitcoin mining is what you want to learn about. One of the downsides of Bitcoin is that there is no timestamp on transactions, which can cause lots of problems. What if Ricardo has no bitcoins in his account, yet he sends something to Wanda because he is expecting his salary from his boss later on? You can’t give what you don’t have. Bitcoin sorts this out by storing all transactions in a blockchain (pending list), where blocks/transactions are ordered ‘kindergarten style’; whoever is first on the lunch line will get their lunch sooner. Order matters, yet kindergarteners always have their ways. Bitcoin miners can choose a kindergartener on the line, and they have to crack a kindergartener’s really difficult puzzle in order for their kindergartener (block) to be next on line. In other words, miners attempt to solve a cryptographic hash function to not only get their block first on the list, but to receive free bitcoins. The current block reward is 12.5 BTC, or $45,876.50 USD at the time of publishing, so finding a block can be pretty hefty.
The dream of getting rich quick is slowly dying before your eyes. Don’t think that it’s easy to solve these hash functions. Calculating your chances to find a block and solve it depends on your computer’s CPU, how many hashes (guesses) per second can be generated, and the difficulty rating, currently around one trillion. My testing on my 2015 Macbook Pro indicated that at full speed, it will take me approximately 939,000 years to find a solution to a block. Fantastic. To combat the time gap, people have built large mining computers capable of billions and billions of calculations per second in order to find just one block and get the bitcoin reward.
If you are not deterred, mining is as easy as downloading a program onto your computer and letting the software run in the background. Popular apps for all operating systems include CGMiner or BFGMiner. There are even other kinds of cryptocurrencies like Litecoin and Ethereum that can be easier but less profitable to mine for. So while you’re mining, keep in mind the beauty of cryptocurrencies and the digital world. Making secure payments to your friends down the street or sketchy merchants across the globe has never been more secure than with Bitcoin.