How to Bitcoin

Kristian Kho, Khor Win Win, Crystaline Loo,

Lee Shu Wei, Shaun Paul Lee, Teh Sze Jin,
Bobby Ong
Copyright © 2021 CoinGecko
1st edition, February 2021

Layout: Anna Tan

teaspoonpublishing.com.my
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“Bitcoin might seem very complicated to the uninitiated and it is, but this book really simplifies it.”
– Mati Greenspan, Founder & CEO of Quantum Economics

“It’s not too late to be early to bitcoin. How to Bitcoin is a great introduction that anyone can learn from
whether you’re a beginner or financial professional. Find out why crypto is the fastest growing asset
class in the world.”
– Nicolas Cary, Co-Founder of Blockchain.com and Co-Founder & Chairman of SkysTheLimit.org

“Education ensures that everyone can benefit from the Bitcoin revolution.”
– Dan Held, Business Development Manager of Kraken
 CONTENTS

INTRODUCTION 1
PART 1: WHAT IS BITCOIN? 3
CHAPTER 1: BITCOIN AND MONEY 4
Government Money 5
2008 Financial Crisis 7
The Birth of a Financial Alternative 8
Characteristics of Bitcoin 11
1. Clearly Defined Monetary Policy 11
2. Permissionless, Peer-to-Peer System 12
3. Open-Source, Transparent and Decentralized Ledger 15
4. Highly Fungible, Durable, Portable, and Divisible 15
5. Digital Money 16
Bitcoin vs Gold vs Fiat Currencies 17
Use Cases of Bitcoin – Can bitcoin be our new money? 18
Medium of Exchange 18
Store of Value 18
Unit of Account 20
Closing Thoughts 21
CHAPTER 2: ANATOMY OF BITCOIN 22
The Bitcoin Ledger 23
Start of the Monopoly Game 23
How are the Pages Generated? 25
Understanding the Blockchain Structure 26
The Chains of a Blockchain – Hash Functions 26
The Blocks in a Blockchain 27
Putting it All Together 29
Mining on the Blockchain 29
What exactly does a miner do? 30
Bitcoin Mining Difficulty 31
What if two miners find the answers at the same time? 32
Bitcoin Transactions 34
Unspent Transaction Output (UTXO) 36
How does Bitcoin Prevent Double-Spending? 36
What if Miners Collude to Double-Spend? 37
CHAPTER 3: THE HISTORY OF BITCOIN 39
Bitcoin Key Events 40
The Mt. Gox Hacking 43
Silk Road Shutdown 44
Block Reward Halving 45
New York Agreement (NYA) 47
Lightning Network 48
Bugs 49
Value Overflow Incident (15 August 2010) 50
Chain Fork Incident (20 March 2013) 51

PART 2: BITCOIN & YOU 52

CHAPTER 4: KEEPING YOUR BITCOINS SAFE 53
Private Key 54
Public Key and Bitcoin Address 56
Wallets 57
Hot Wallets 58
Desktop Wallets 59
Full Node Wallets 59
Simple Payment Verification (SPV) Wallets 59
Mobile Wallets 60
Cold Wallets 61
Hardware Wallets 62
Paper Wallets 64
Common Bitcoin Risks 65
Centralized Exchange Hack 65
Phishing 66
The Basics of Bitcoin Security 66
Password Manager 66
Two-Factor Authentication (2FA) 67
Remove Unused Browser Extensions 68
Do Not Click on Ads 68
Metal Storage Backup Tools 70
Summary 71
CHAPTER 5: GETTING YOUR FIRST BITCOIN 72
Buying Bitcoins 72
Cryptocurrency Brokerages 74
 Coinbase 74
Cryptocurrency Exchanges 80
Kraken 80

Peer-to-Peer (P2P) Marketplaces 85

LocalBitcoins 86
Earning Bitcoin 94
Earn bitcoin cashback using Lolli 95
Provide services in exchange for bitcoin 98
Play to earn via bitcoin faucets 98
Mining Bitcoin 99

CHAPTER 6: STORING YOUR BITCOIN SAFELY 101

Hardware Wallet: Trezor One 101
Blockchain.com Mobile Wallet 113
Blockchain.com Browser Wallet 119
Lightning Network Wallets 121
Phoenix Wallet 122
Alternative Lightning Wallets 130
CHAPTER 7: ADVANCED BITCOIN WALLETS 131
Bitcoin Core Full Node 131
Full Node Requirements 132
Download 133
Installation 137
Downloading the Bitcoin Blockchain 138
Network Traffic Chart 138
Using Bitcoin Core Full Node as a Wallet 140
Receiving Bitcoin 140
Sending Bitcoin 142
Using the Bitcoin Full Node Console 143
Samourai Mobile Wallet 144
Installation 144
Setting Up 146
Receiving Bitcoin 148
Sending Bitcoin 150
Samourai Whirlpool (CoinJoin) 152
PART 3: THE FUTURE OF BITCOIN 162
CHAPTER 8: BITCOIN’S IMPROVEMENTS 163
Scalability 163
Segregated Witness (SegWit) 164
Lightning Network (LN) 166
Privacy 168
CoinJoin 168
JoinMarket 170
Taproot 171
What’s Next? 173
CHAPTER 9: BEYOND BITCOIN 174
Bitcoin Forks 174
Bitcoin Cash 175
Bitcoin SV 175
Smart Contract Platforms 176
Ethereum
Polkadot 177
Stablecoins 178
Tether 178
Dai 179
Privacy Coins 180
Dash 180
Monero 180
CLOSING REMARKS 181
APPENDIX 182
CoinGecko’s Recommended Bitcoin Resources 182
Reads 182
Newsletters 182
Podcast 182
Videos 183
Other Books We Recommend 183
References 184
Chapter 1: Bitcoin and Money 184
Chapter 2: Anatomy of Bitcoin 186
Chapter 3: The History of Bitcoin 187
Chapter 4: Keeping your Bitcoin Safe 189
Chapter 5: Getting your First Bitcoin 190
 Chapter 6: Storing your Bitcoin Safely 191
Chapter 7: Advanced Bitcoin Wallets 191
Chapter 8: Bitcoin’s Improvements 193

GLOSSARY 198
 INTRODUCTION
Welcome to CoinGecko’s second book, How to Bitcoin! We received so
much positive feedback on our first book, How to DeFi, that we decided to
write this one!
Bitcoin was the first cryptocurrency that got us started on our journey. Our
understanding of Bitcoin has opened up many opportunities for us, and in
these pages, we hope to share our collective knowledge with you. In How to
Bitcoin, you will learn of Bitcoin’s transformative aspects and how it can
open new opportunities for you too.
Bitcoin is not new. As we write this, it is 12 years old. That being said, it is
still early and not too late to learn about Bitcoin and its implications for the
future. Perhaps you would have heard of Bitcoin as this “magic Internet
money” with revolutionary potential. We hope to debunk that and put
together what makes Bitcoin revolutionary other than just “magic.”
How to Bitcoin is written for beginners with simple analogies to help you
understand how it works. There are step-by-step guides to show you how to
buy and secure your first bitcoin. It will be a relatively light read if you
already have a deep understanding of Bitcoin. If so, we would be honored to
receive your suggestions on improving this book.

Lastly, we see a future where owning a bitcoin is a matter of choice and

foresight rather than ignorance. We hope this book can contribute to making
that a reality.

CoinGecko Research Team

Kristian Kho, Khor Win Win, Crystaline Loo, Lee Shu Wei, Shaun Paul Lee,
Teh Sze Jin, Bobby Ong
1 January 2021
PART 1: WHAT IS BITCOIN?
 CHAPTER 1: BITCOIN AND MONEY
Bitcoin is a peer-to-peer electronic payment system that allows parties to
transact with each other without the need to use any trusted third-party
intermediaries. It is an alternative to our traditional financial system, where
payments need to be routed through financial institutions.
When you use Bitcoin, you do not need to trust a centralised entity such as a
government, a bank, or a financial institution. For example, in the traditional
financial system, using PayPal requires that you trust PayPal’s ability to
make transactions. Paying with your Mastercard requires that you trust
Mastercard, your bank, your merchant's bank, and other payment processors
to clear your transaction.
Even using cash requires you and your counterparty to trust your government
officials. As recently as 2016 the Prime Minister of India demonetized the
500 and 1,000 rupee notes causing significant immediate volatility.[1]
Bitcoin is a payment protocol and a cryptocurrency itself. This protocol is a
payment network that allows for transactions to be routed without relying on
any third parties. It is powered by a new technology known as the blockchain.
Bitcoin is also known as a cryptocurrency, a type of virtual currency, because
transactions are secured using cryptography.
For the purposes of this book, we will be representing ‘Bitcoin’ with a
capitalized ‘B’ whenever we refer to the Bitcoin protocol and ‘bitcoin’ with a
lowercase ‘b’ when we refer to the bitcoin cryptocurrency.
Bitcoin distinguishes itself from traditional fiat currencies as it is not backed
by any government, central bank, or centralized authority. Instead, it is
created, stored, and distributed digitally on a public, decentralized ledger that
follows a strict set of simple rules.
This is the philosophy that created Bitcoin—the ability to operate a financial
system in a decentralized manner without the need to trust any centralized
intermediary.

Government Money
Before we continue with bitcoin itself, it may be worth revisiting the money
that we use on a day-to-day basis.
For something that almost everyone on Earth labors for and cherishes after,
few understand how money functions and even less comprehend the
intricacies of the fiat monetary system.
“It is well enough that people of the nation do not understand our banking and
monetary system, for if they did, I believe there would be a revolution before
tomorrow morning.”
—Quote attributed to Henry Ford

“Government Money” is what is known as fiat currency, or in simple

English, “Money by Decree”.
Fiat is derived from the Latin word “fiat”, which essentially means “let it be
done”. Fiat has been deemed as money because it is mandated by
governments as being legal tender by law and thus must be accepted as a
valid form of payment under the scrutiny of our legal jurisdiction.
With most things in government, money is handled with a top-down
approach. National leaders decide every facet of the monetary system and
regular folks follow the rules that have been set.
 Fiat’s layered bureaucratic system vs. Bitcoin’s peer-to-peer system.

In an ideal world, a top-down fiat monetary system isn’t all that bad. After
all, not everyone is an expert in economics and finance; it is perfectly
acceptable to just use a robust value-transfer system without needing to worry
about anything as one goes on with their daily lives.
However, for the past century or so, this has not been the case.
Without going into too much detail, the rules governing paper money, more
specifically the US Dollar, changed in 1913.[2] Paper money that used to be
“backed by gold” became paper money “backed by the government”. During
this period, the Federal Reserve (Fed) at least tried to tie the value of the
dollar with gold. Things took a turn for the worse in 1971 when the Fed
stopped trying and decided that the Dollar was worth whatever it says it was
worth.[3]
 Data from St. Louis Federal Reserve

2008 Financial Crisis

The above sets the scene for what was about to happen when the whole world
economy crashed down during the 2008 Financial Crisis.
The 2008 Financial Crisis in the United States was one of the worst economic
disasters in history, crumbling the world’s financial and banking system.[4]
Many large financial institutions and banks tragically fell apart. Amongst the
fallen were Lehman Brothers and Bear Stearns.
This crisis stemmed from subprime mortgage loans, which in simple terms
were loans issued to high-risk borrowers who do not qualify for conventional
loans.[5] These loans were then repackaged multiple times into complex
derivatives. Bad loans combined with widespread fraudulent practices across
various financial institutions exacerbated the housing bubble. It created a
ticking time bomb that ultimately blew up into the 2008 Financial Crisis.
The main reason which caused the credit crisis was the naïve assumption that
interest rates will continuously stay low and residential home prices will
continually increase in price. When both these assumptions broke, many of
the subprime borrowers could not repay their home loans and had their
homes repossessed by the banks.
This caused a devastating ripple effect to the economy. To salvage the
economy, the U.S Treasury bailed out ‘too big to fail’ banks.[6]
The 2008 financial crisis highlighted the fragility of our traditional financial
and banking system. Banks were supposed to be the central trustworthy
authorities safeguarding the money we deposit and governing our monetary
system’s health. However, they have failed miserably to do so.

The Birth of a Financial Alternative

It is against this backdrop of the global monetary crisis that the Bitcoin
whitepaper was published pseudonymously by an entity known as “Satoshi
Nakamoto”. Satoshi released the Bitcoin whitepaper on a cryptography-
focused mailing list on 31st October 2008.[7] The 9-page whitepaper outlines
a new financial system with a new cryptocurrency called bitcoin.
The sudden appearance of Bitcoin’s whitepaper during this period is almost
too good of a coincidence. Compounded by the growing distrust of the fiat
financial system at that time, Bitcoin grew in popularity from an obscure
online forum into a viable financial alternative now.
On 3rd January 2009, The Genesis Block started the Bitcoin Network,
bringing the world’s first decentralized payment system to life.[8] The
resulting alternative payment network allows for the transfer of value over
the Internet electronically in a peer-to-peer manner, without the need for a
centralized authority overseeing the transaction.
Being the first block on the Bitcoin blockchain, the Genesis Block is unique
as it does not contain a previous block reference compared to the subsequent
blocks mined. It may seem that Satoshi was fully aware of the financial
failures of the time and understood the invention of Bitcoin is an apparent
challenge to the financial and monetary institutions. Within the Genesis
Block, Satoshi left a string of characters that may have served as the call to
Bitcoin’s purpose as well as a timestamp to prove that Bitcoin started on the
day itself.
The words “The Times 03/Jan/2009 Chancellor on brink of second bailout
for banks” were etched on the Bitcoin blockchain to be seen by all for
eternity. This Easter egg is a direct copy of The Times headline of the same
date.
Digitized copy of The Times article, “Chancellor on brink of second bailout for banks” from January 3,
2009
 Fun Fact
The first 50 BTC block reward in the Genesis Block is unspendable. Till this
day, it remains a mystery if Satoshi Nakamoto deliberately coded it to be non-
transferable or if it was a mistake.

The Genesis Block’s reward recipient address

1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa, suspected to be owned by
Satoshi, has been receiving donations from fans.[9] At the time of writing, it has
accumulated a total of 68.3 BTC.

Characteristics of Bitcoin
These are some of the core characteristics of Bitcoin which makes it unique:

1. Clearly-defined monetary policy

2. Permissionless, peer-to-peer system
3. Open-source, transparent, and decentralized ledger
4. Highly fungible, durable, portable, and divisible
5. Digital money

1. Clearly Defined Monetary Policy

A crucial characteristic of bitcoin is that it is a decentralized currency,
unlike fiat currency which is controlled by a centralized authority such as
a central bank.[10]
Central banks have the ability to issue new money at their will.
According to the European Central Bank, “Central banks are protected
from insolvency due to their ability to create money and can therefore
operate with negative equity.”[11]
Recall the 2008 Financial Crisis that was mentioned earlier. With the aid
of the Fed, Quantitative Easing (QE) was used to salvage the crisis. This
highlights the immense control that central banks have with regards to
monetary policy.
A key feature of Bitcoin is its scarcity—there will only ever be 21
million bitcoins in circulation. This cap is final and cannot be altered.
Bitcoin differentiates itself from traditional fiat currency with its limitless
supply.
 Bitcoin is also similar to gold in the sense that it has to be mined into
circulation. However, unlike gold, which needs to be mined physically in
actual ores, bitcoin is mined digitally.[12] This is why bitcoin has often
been referred to as “digital gold”.
For every block created, new bitcoins will be mined as block rewards to
Bitcoin miners. This will be explained in detail in the coming chapters.
At the time of writing, 18.5 million bitcoins, or more than two-thirds of
all bitcoins have already been mined.
2. Permissionless, Peer-to-Peer System
Let’s say Alice wants to send $1,000 to Bob. Traditionally, the pathway
taken to do so would look something like this:

Alice would have to not only rely on Alice’s and Bob’s banks, but also a
slew of intermediaries and third party financial institutions and service
providers depending on the requirements of Alice’s and Bob’s banks.
This system of sending money presents inefficiencies and bureaucracy.
Each of the companies may charge a fee, making the transaction
expensive. There are also various money transfer laws that need to be
followed.
For example, if Alice is a US citizen and Bob is an Iranian, the
transaction will never happen due to international sanction laws.[13]
Even if a transaction happens locally, governments can arbitrarily cancel
the transaction or even confiscate the money altogether.
In July 2020, Hong Kong passed legislation allowing the government to
freeze bank accounts and assets of people who have been deemed to
“endanger national security”.[14] This threat may be used as a tool to
suppress the freedom of speech of the people amidst the ongoing political
turmoil.
Using Bitcoin, intermediaries like banks or payment processors are no
longer needed to oversee transactions. Let’s take a look at the scenario if
Alice were to transfer $1,000 worth of bitcoin to Bob:

Using the Bitcoin network, Alice directly transfers value over to Bob
without any authorization from anyone, hence the term “peer-to-peer”.
The removal of the middlemen like the bank is profound as this bypasses
the many potential issues associated with central authorities and third
parties.
By removing third parties from the transfer of value, we remove the
ability for these middlemen to exert authority over our financial
transactions. PayPal is famous for freezing users’ accounts for various
reasons; you can find many people complaining about this issue online.
[15]

Bitcoin allows us to have full control of our own assets without the need
to trust any institutions or third parties. With this control, no one can
 unilaterally freeze or revoke our assets without our permission.
The power now goes back to individuals. Anyone, no matter who or
where they are, can now directly engage in the transfer of value and
economic activity with another person without any third-party's
permission.

3. Open-Source, Transparent and Decentralized Ledger

The Bitcoin protocol, the set of code that powers the Bitcoin network, is
released under the MIT License more popularly known as open-source
software.[16] [17] This means that the code is open for everyone to see,
inspect, copy, and propose improvements. Anyone is free to suggest
improvements to Bitcoin, thereby aligning incentives amongst the
Bitcoin community.[18]
The Bitcoin ledger is distributed globally. It is decentralized and no
single entity is able to tamper or manipulate the data contained in the
blockchain. Anyone who tries to unilaterally manipulate the data on their
ledger will be known immediately because their ledger will not be
similar to the ledger maintained by everyone else.
This means that no one fully owns or controls Bitcoin. No entity—not
even governments—can annihilate Bitcoin’s existence.
To give a simple analogy to explain this concept of a decentralized
ledger, let’s take a look at a game of Monopoly played between 4 friends.
Instead of distributing Monopoly paper money to all 4 players during the
game, a blank notebook and a pen is given to each player. Each player
will record the amount of money that all 4 players have at each turn
during the game.
After every turn, everyone pauses to check each other’s notebooks to
ensure that it tallies with everyone else’s records. This way, any player
who tries to cheat will have the discrepancy caught immediately and can
be easily disqualified from the game.
4. Highly Fungible, Durable, Portable, and Divisible
Bitcoin is also a type of money that is highly fungible, durable, portable
and divisible.
 Fungibility is a concept where things are mutually interchangeable.
Bitcoin is fungible because each bitcoin can be easily replaceable with
another bitcoin.
Bitcoin is also highly durable because it cannot be easily destroyed by
natural elements unlike paper money. So long as the private keys to your
bitcoin are stored safely and are not lost, you will have access to your
bitcoin.
Because bitcoin is a form of digital money, it is incredibly portable. You
can bring your entire net wealth with you wherever you go with just the
private keys. This is significant especially to people who live in countries
without a stable government. With bitcoin, these people can pack their
bags and move to a stable country while still retaining their wealth.
Bitcoin is also divisible to 8 decimal places. The smallest unit for bitcoin
is 0.00000001 BTC, also known as a satoshi. This was named as a tribute
to the creator of Bitcoin, Satoshi Nakamoto. This means that you do not
need to send or own 1 whole bitcoin but can send small fractions of
bitcoin to pay for goods and services.
5. Digital Money
Being a digital currency is important because it means that the money we
use can be easily programmed to do highly customizable things.
Antony Lewis mentioned in his writing that money in your bank
accounts are not really programmable because the money in each bank is
technically different. Dollars in Citibank and JP Morgan have different
legal agreements and have different logic and constraints.[19]
Because there is no ledger referencing the money stored in different bank
accounts, this makes it hard for money to be programmed to follow
certain rules.
With Bitcoin, there is the bitcoin ledger where programmers can set rules
to program escrow, notaries, design payouts and dividends.[20] This
concept of universal cash will become increasingly important as we
move towards machine-to-machine payments in the future.
Bitcoin vs Gold vs Fiat Currencies
Bitcoin has often been compared to gold and fiat currencies like the US
Dollar. There are several similarities and differences between these various
forms of asset classes. This table here provides a summary of the various
characteristics of bitcoin relative to gold and fiat currencies:
Traits of Money Gold Fiat Currencies Bitcoin

Fungible
High High High
(Interchangeable)

Non-Consumable High High High

Portability Moderate High High

Durable High Moderate High

Highly Divisible Moderate Moderate High

Secure (Cannot be
Moderate Moderate High
counterfeited)

Easily Transactable Low High High

Scarce Moderate Low High

Sovereign (Government
Low High Low
issued)

Decentralized Low Low High

Programmable Low Low High

Use Cases of Bitcoin – Can bitcoin be our new money?

With the defining characteristics of bitcoin being so profoundly advantageous
over the traditional financial system, the big question remains: Why isn’t
bitcoin replacing fiat money? Let’s take a look at how bitcoin measures up to
the 3 classical functions of money:

1. Medium of Exchange
2. Store of Value
3. Unit of Account

Medium of Exchange
As a medium of exchange, bitcoin does fulfill this function of money as
payments can be made anytime in a peer-to-peer manner without any third
party. No one needs to approve your transaction or even have the ability to
stop you from making your transaction.
That being said, bitcoin has not reached wide-scale global adoption and is
therefore not treated as a suitable medium of exchange globally. Bitcoin is
prevalent within its community of supporters and used interchangeably as a
suitable medium of exchange. In fact, many in the Bitcoin community
actually prefer being paid in bitcoin.
Despite the lower cost for merchants to accept bitcoin, it is still rarely
accepted by merchants on a global level due to the prevalence of credit cards.
However, there are several merchants that accept bitcoin using crypto
payment processors. This allows you to pay in bitcoin, which then converts
into fiat currency for the merchant.
In less stable economies, we see bitcoin being used as an alternative to fiat
currencies for payments. This may be due to macroeconomic
mismanagement such as high inflation and the depreciation of the fiat
currency.
Store of Value
Bitcoin is an extremely volatile asset class. Its price has gone from pennies in
its early days to $20,000 during its peak in early-2018. As a store of value, it
does a pretty bad job at maintaining price stability in the short-term.
Depending on when you purchased bitcoin, it may or may not store value
reasonably well in the short-term due to its volatile nature.
However, in the long term, it may potentially be an excellent store of value
relative to fiat currencies. Similar to gold, bitcoin is considered an excellent
long-term store of value due to its scarcity and finite supply. This scarce
nature resulted in bitcoin often being referred to as “digital gold”.
While gold has been identified as a safe haven commodity for thousands of
years, bitcoin has only until recently been seen as a safe asset.
Our fiat currency is constantly being inflated away each year. Using an
inflation calculator with the US Consumer Price Index data, an item that was
purchased for $1 in the year 2000 would cost you $1.51 in 2020.[21] This
means that the value of the US Dollar has depreciated by 51% in just the last
20 years.
In countries with unstable economics such as Venezuela, Zimbabwe and
Argentina, residents have lost their life savings due to hyperinflation as a
result of the mismanagement of the country’s monetary policy. Many people
have no other option to retain their wealth and many have resorted to using
bitcoin as a store of value to hedge against their eroding local currency.
Safe Haven for Troubled Nations
Troubled countries such as Venezuela, Zimbabwe and Argentina are suffering
from one of the worst economic crises in modern times. Their political
instability and distorted monetary policies caused extreme hyperinflation and
have diminished the value of their fiat currencies to practically nothing. For
example, inflation in Venezuela was 1,700,000% in 2018.[22]
Bitcoin has become especially relevant in these counties for residents to hedge
against their rapid corroding fiat currency. As a result, cryptocurrency adoption
has soared in Venezuela, ranking 3rd on Chainalysis’s Global Crypto Adoption
Index in 2020.[23]

Unit of Account
As a unit of account, bitcoin does not perform well due to its volatile nature
compared to fiat currencies. With bitcoin’s price fluctuating constantly, the
real economic value of goods and services becomes hard to be determined,
measured, and compared. This makes it extremely difficult to price items in
bitcoin.
For example, retailers that accept bitcoin as a method of payment do not price
their items at a fixed bitcoin rate. Instead, items are priced in fiat currency
terms and are then allowed to constantly fluctuate with the price movement of
bitcoin. Therefore, bitcoin functions as an intermediary between the fiat
currency and the items being exchanged.[24]
We have not reached a stage where bitcoin’s price volatility reduces and
people can denominate goods and services in terms of bitcoin. Some people
have speculated that volatility will reduce as bitcoin matures but we have not
seen this narrative play out yet.
Bitcoin is divisible to the eighth decimal place, down to 0.00000001 BTC,
which is equivalent to one satoshi. Research has shown that there is a strong
upward trend in the use of bitcoin’s highest available degree of precision (one
satoshi) over the years, suggesting that the idea of bitcoin being a unit of
account remains a pipe dream.[25]
 Fun Fact
On 22nd May 2010, Laszlo Hanyecz bought 2 Domino’s pizzas with 10,000
bitcoins.[26] He is known as the first person to make a commercial transaction
using bitcoin. At the time of writing, the 10,000 BTC is worth a whopping $130
million!
Since then, May 22nd has been celebrated in the community each year as the
“Bitcoin Pizza Day”.

Closing Thoughts
All in all, it is important to realize that Bitcoin’s inception was not intended
to be a replacement of the fiat currencies that you use to buy your daily dose
of caffeine.
Rather, Bitcoin’s primary existence serves to provide an alternative financial
system that can operate without the need to trust and rely on third-party
financial institutions. Bitcoin’s inception revolutionizes the way we perform
transactions using a decentralized, peer-to-peer payment system.
 CHAPTER 2: ANATOMY OF BITCOIN
Now that you understand Bitcoin’s background, birth and reasonings, let’s
find out how Bitcoin works.
Bitcoin was set up to be a peer-to-peer digital cash system that does not
require an intermediary to settle a transaction. By decentralizing,
democratizing and allowing everyone in the world access to a single
permissionless payment network, Bitcoin disrupts the traditional financial
system in the same way that the Internet has done to information and media.
[27]

In order to make this possible, Satoshi designed a distributed ledger system

where every participant in the network can inspect and verify every
transaction in the network. We will explore how you as an individual can do
so as well, after equipping yourself with the knowledge of some of the terms
and concepts in the Bitcoin network.
The following chapter uncovers the anatomy of Bitcoin and its underlying
blockchain. There will be several technical terms that may not be
immediately useful for your day-to-day use. However, as they say, you do not
need to understand the carburetor to drive a car, but knowing so might save
you down the road.
The Bitcoin Ledger
One way to envision the workings of the Bitcoin blockchain is to expand
upon the Monopoly analogy that we briefly mentioned in the previous
chapter. We imagined a game of Monopoly played between four friends.
Let’s call the players in this game Alice, Bob, Charlie, and Debbie.
Instead of distributing the usual Monopoly paper money to all four players, a
blank notebook and pen is given to each player instead. Each player will
record transactions made by all players during the game.
For simplicity, we will assume the following for the Monopoly game:

1. Players start at different parts of the board and have 10 BTC each.
2. They will also be given a random selection of Monopoly
properties which they will pay rent to each other.
3. With each turn, transactions are recorded on a new page in the
notebook and only one player can pass “Go” in each round to
collect the 50 BTC reward.

The notebooks distributed to all four players can be thought of as the

decentralized blockchain similar to the Bitcoin blockchain that stores all
transactions in the network.
Start of the Monopoly Game
Let’s say the game started on 1 November 2020 at 8:00 a.m. and the
following actions took place in the first round of this game:

1. Alice landed on Bob’s property and paid Bob 1 BTC.

2. Bob landed on Charlie’s property and paid Charlie 5 BTC.
3. Charlie passed Go and received 50 BTC. (Note: Charlie passing
Go can be thought of as receiving a block reward. More on this
later.)
4. Debbie rolled the dice, but did not land on anyone's property.

The round ended after all players have rolled their dice. Now imagine all four
players made the same records in their notebooks, and then cross-checked
each other to ensure that they all have the same information. The transaction
will look like this on each players’ notebooks.
Once everyone has validated that all their transactions tallied with everyone
else’s, we called it the end of the round. All players have thus reached a
consensus on the state of all players’ balances. The very first page of this
notebook is pretty much similar to the first block of the Bitcoin blockchain.
At the end of Round 1, we saw the following actions:

Player Actions
Alice Landed on Bob’s property (Paid Bob 1 BTC)
Bob Landed on Charlie’s property (Paid Charlie 5
BTC)
Charlie Passed Go (Received 50 BTC Block Reward)
Debbie No transaction made

The above transactions were recorded on Page 1 of all four players’

notebooks. Based on these transaction records, we can then calculate the
balances for each player at the end of Round 1.

Player Balance Notes

Alice 10 BTC Starting Balance
- 1 BTC Paid to Bob
-------------- ---------------------------------
9 BTC End of Round 1 Balance
-------------- ---------------------------------

Bob 10 BTC Starting Balance

+ 1 BTC Received from Alice
- 5 BTC Paid to Charlie
-------------- ---------------------------------
6 BTC End of Round 1 Balance
-------------- ---------------------------------
Charlie 10 BTC Starting Balance
+ 5 BTC Received from Bob
+ 50 BTC Passed Go (block reward, see
-------------- below)
65 BTC ---------------------------------
-------------- End of Round 1 Balance
---------------------------------

Debbie 10 BTC Starting Balance

-------------- ---------------------------------
10 BTC End of Round 1 Balance
-------------- ---------------------------------

The table above is a representation of what happened in Round 1. The

Monopoly game can keep going on, where each page is effectively similar to
a block in a blockchain and contains transactional details. With a record of all
transactions taking place, each players’ balance can thus be derived at any
point in time.
As the game (blockchain) progresses, more payments (transactions) are
made, and with each round, a new page (block) is created by players (users).
How are the Pages Generated?
In this Monopoly game, the one thing that was not explained is the 50 BTC
block reward that Charlie received. The action of flipping over to a new page
is similar to the action of mining and generating a new block.
To fully understand that, it is imperative to first understand how the
blockchain works. This may sound a little daunting, but we have made some
visualizations to help explain the concept in the following section.

Understanding the Blockchain Structure

In the above Monopoly analogy, we have introduced how transactions are
recorded on a blockchain. A quick recap:

1. Monopoly game – simulates the economy where people transact

with one another.
2. Notebook – simulates the blockchain which contains a record of
every transaction. Additionally, each participant will have a copy
of the notebook (blockchain).

Blockchain is called the way it is because it is quite literally a series of blocks

chained together, in which each block contains transaction data. In this
section, we will dig into the structure of a blockchain to illustrate how it
works and what makes it tamper-resistant.
However, before we look into what goes inside a blockchain, it is important
to understand the concept of a hash function.
In the following sections, we will be looking into what makes up a
blockchain, starting with the chain part of it—which are essentially hash
functions.
The Chains of a Blockchain – Hash Functions
A hash function converts an input into a fixed-length output of random letters
and numbers. This hash function will return the same output given the exact
same input. Bitcoin uses the SHA-256 hashing algorithm, which is also used
by the US government to protect certain sensitive information.
Hashes made through the SHA-256 algorithm are effectively one-way, which
means that given an input (transaction data, block headers etc.), you will be
able to produce an output (the resulting hash). However, using the output (the
resulting hash), it would not be possible to back-calculate the initial input.
An analogy that can be used to understand how hashing works is to guess the
mathematical equation that will result in an answer of 100. For example,
some possible equations that will result in 100 are as follow:

1. 1 * 100 = 100
2. 10 * 10 = 100
3. 5 * 20 = 100
4. … and so on (impossible to pinpoint the correct answer)

As for the hashes themselves, even the smallest change may result in a
completely different output. For example, hashing the text “How to Bitcoin”
with the SHA-256 function produces the following output:
f8943d8870b292b2137e0e68d5dbae7562fa7666f60e5b17e3dadbe62fcd00b1
If we change the letter i in Bitcoin to 1, the text “How to B1tcoin” then
hashes to:
01a8f0c498a439685cbf6929f988379f2f53d5ca41ee169002fd00af83d43817
We can see that by changing even a single character in the input text, the
output is completely changed beyond recognition. Therefore, hash functions
are extremely important to blockchains as they can be used to summarize and
ensure that information cannot be changed without being noticeable.
The Blocks in a Blockchain
The other component of a blockchain is the block, which is made up of two
components:

1. Block Header is the summary of an entire block and contains:

a. Hash of the previous block’s header,
b. Hash of all transactions of the current block,
c. Timestamp – Timestamp the block is “mined” in UNIX
d. Version – Bitcoin software version
e. Nonce – Counters used by miners to generate a correct
hash
 f. Block difficulty target – difficulty target of the block

Note that (c) to (f) are like “identification” documents of each block.
We will go through them in more detail in later sections.

2. Block Body – contains records of all transactions included in the

block.

In each block, the list of transactions are all hashed indirectly through the
Merkle Root, and included in the block header, such that even 1,000
transactions in the entire body can be represented as a single line of hash. The
block header is essentially the “summary” of an entire block, plus a reference
to the previous block.
Merkle Root
The merkle root is effectively the hash of all the hashes of all the transactions in
a block. In each block, there can be thousands of transactions—the Merkle Root
is the hash of all these transactions.
This is an extremely efficient method of storing and verifying transaction data.
Merkle root allows one to easily check that a transaction has indeed been
verified without needing to go through the entire list of transactions.
Since the Merkle Root is contained in the block header, the block header then
effectively contains all information that is required to:

1. Summarize the entire block’s transactions (Merkle Root)

 2. Link to previous block (contains previous block header’s hash)

In the subsequent block, the header of the previous block is hashed, and
stored as part of the header of the current block. In this fashion, each block
references the previous block using a hash, including the list of all
transactions. To change any part of the information in previous blocks, you
will have to change everything moving forward as even the most minor
change will result in a completely random change of the hash.
Putting it All Together
The Bitcoin ledger makes use of the blockchain technology very effectively.
It is a transparent database of transactions distributed globally (the blocks)
with tamper-proof features made possible through the use of cryptographic
hashing functions (the chain).
So far, we have gone through what makes up a blockchain, but some key
details remain missing:

1. What is preventing someone from creating a different version of

the entire Bitcoin ledger, and then distributing it as the valid one?
2. What is stopping someone from printing more bitcoin?
3. How do all participants agree on a particular version of the bitcoin
ledger at any given time?
4. How are conflicts resolved in the event there are conflicting and
different bitcoin ledger versions?

That is where miners come into play. Miners effectively provide security to
the Bitcoin network and verify transactions using computers to perform
complex mathematical calculations.

Mining on the Blockchain

Before Bitcoin came along, you would basically picture giant tractors, dusty
tracks and huge piles of rocks when the term “mining” was mentioned. With
the advent of Bitcoin, the term “mining” took a whole new meaning where it
refers to the act of solving complex, repetitive computational math problems
that can only be effectively done by specialized computers.
The main reason why miners are interested in participating in the Bitcoin
mining process is because they are interested in earning the Bitcoin block
reward given out to the producer of the next block.
Miners keep the Bitcoin network secure and help everyone stay in sync with
one version. They invest electrical energy in the form of computational power
to solve complex mathematical problems and are rewarded for their efforts in
the form of block rewards. The block reward that miners earn is effectively
the fee which the Bitcoin network pays for network security. This method
ensures that the Bitcoin blockchain cannot be easily tampered with.
In Bitcoin’s case, each block is produced roughly every 10 minutes. In this
10-minute period, miners pick out transactions to be verified, prioritizing the
ones with the highest fees. Once a new block is “mined”, transactions that are
included are added to the blockchain and broadcasted to participants
worldwide—similar to how a new page is used in our Monopoly notebook
example earlier.
Here’s a handy illustration to showcase the process:

What exactly does a miner do?

In the case of Bitcoin, a miner competes with other miners to find the nonce
which gives the correct answer by repeatedly performing SHA-256 hashing
calculation. The work done by a miner in finding the solution to this puzzle is
also known as the Proof of Work.
For each new block, a miner needs to guess an output hash that fulfills a very
specific condition—the number of leading zeros. Roughly, the equation is:
Hash output = Hash of (previous block header + merkle root hash + nonce)
The previous block header and Merkle Root hash are known, so miners are
effectively guessing the nonce value that will give the correct output hash
with a specific number of leading zeros. This is the hash for block number
647,729:
000000000000000000064b9fcad14d747b725552005db1a77e6344a7c672a9bf
Arriving at the solution above likely requires many iterations and is what
makes the mining process computationally expensive. However, one elegant
aspect to hashing is that once the input parameters are known, it becomes
fairly trivial and easy to verify that it leads to the correct solution. This can be
likened to a Sudoku puzzle, whereby it is difficult to solve, but very easy to
verify if it is solved correctly.
Bitcoin Mining Machine (or commonly called ASIC)
Bitcoin mining rig is also known as an Application Specific Integrated Circuit
(ASIC) machine as it excels at only one thing—calculating SHA-256 hashes for
Bitcoin and nothing else.
The power of an ASIC is measured by its hash rate. Hash rate is a measure of
how many hashes a machine can compute every second. As of 2020, a retail
Bitcoin ASIC can compute around 100 TH/s (12 zeros —that’s
100,000,000,000,000 hashes per second). In comparison, a desktop CPU can
only calculate in terms of MH/s (6 zeros), orders of magnitude smaller.

Bitcoin Mining Difficulty

Bitcoin mining is often compared to a lottery because it involves luck where
miners are required to repetitively guess the solution to a mathematical
problem. In Bitcoin’s case, miners need to find the nonce as an input to the
hash input to guess an output that starts with a required number of zeros (the
difficulty).
In a lottery, if you would like to increase your chances of winning, you can
buy more lottery tickets. In a similar fashion, miners who want to increase
their odds of solving the mathematical puzzle will need to acquire more or
faster mining machines.
Miners are granted the block reward when they solve the puzzle for their
contribution in securing the network.
As more miners join the network, the likelihood for the network to
collectively solve the puzzle and find a block would increase as well. This
creates a situation where the solution to the puzzle (and thus a new block) can
be found much quicker than 10 minutes.
By design, Bitcoin maintains its 10 minutes block time by maintaining a
difficulty level—which is the number of zeros required for a solution to be
considered valid.
The Bitcoin protocol adjusts the difficulty level every 2,016 blocks (~2
weeks). If the previous 2,016 blocks took less than two weeks to be found,
then the difficulty will be increased. If it took more than two weeks, then the
difficulty will be reduced. This dynamic adjustment of difficulty ensures that
Bitcoin blocks are mined on average once every 10 minutes.
What if two miners find the answers at the same time?
For any given block, the correct nonce that will satisfy the difficulty
condition is not limited to just a specific nonce—there are multiple answers.
Miners compete with one another to be the first.
This may lead to a situation where two miners find the solution to this
mathematical puzzle at the same time. Both miners will broadcast their
solutions to the Bitcoin network at the same time where their solutions are
considered equally valid by all participants.
In this section, we will go through this scenario briefly to showcase how the
Bitcoin protocol handles this situation.
Let’s call the two miners Miner A and Miner B. When Miner A and Miner B
both discover their respective valid blocks, both miners will announce and
propagate their results to the network. Nodes in the network will incorporate
the version of the block that they receive first into their blockchain, extending
it by one block.
As such nodes that are closest to Miner A will update their blockchain with
the latest block being the one announced by Miner A, while nodes that are
closest to Miner B will update their blockchain with the latest block being the
one announced by Miner B.
Each node will then continue propagating their version of the blockchain to
their neighbouring nodes. In this example we have two competing versions of
the blockchain that have emerged and we will need a way to resolve this
conflict.

Blockchain Version A

Blockchain Version B

To resolve this conflict and ensure that the blockchain’s state remains
consistent across all participants in the Bitcoin network, each node will select
the blockchain that represents the most Proof of Work, otherwise known as
the longest chain.[28]
In this case, miners who added Block A to their blockchain will attempt to
find the solution to the next block and build on top of their state of the
blockchain. Miners who added Block B to their blockchain will also attempt
to find the solution to the next block and build on top of their state of the
blockchain.
Eventually, a miner will find a solution and extend the blockchain on either
Block A or B. Let’s say Miner X next found a solution extending Block B;
let’s call this Block X. Immediately, Block X forms the longest chain and is
thus regarded as the correct state of the blockchain.
All miners working on finding a solution on top of Block A will stop their
work and move on to find a solution to the next puzzle building on top of
Block X. Block A is now known as an orphan block. Any transactions in
Block A that have not been included in Block B or Block X will now be
queued for addition onto the next block on top of Block X.
This is how the Bitcoin protocol deals with the issue of potentially having
multiple “versions” of the blockchain.

Bitcoin Transactions
Bitcoin transactions are effectively inputs and outputs on a ledger that is the
blockchain. Here’s a quick visualization of two common types of
transactions:
1. Payment with change – Bob has a single address that contains 0.5
BTC. Bob sends 0.1 BTC to Alice, and receives 0.4 BTC as
change. This is like paying for coffee with cash using a large
banknote and receiving change on it.
 2. Aggregating multiple inputs into a single payment – Bob wants
to pay 0.7 BTC to Alice and has two separate addresses containing
0.5 BTC each. The balances of the addresses are combined to form
a single output of 0.7 BTC to Alice, and Bob receives the
remaining 0.3 BTC as change. This is like paying for a large
transaction in cash by combining multiple small banknotes to meet
the required payment amount.

There are many more ways transactions can happen on the Bitcoin
blockchain, but the examples above are the most common form of
transactions. Knowing how it works will be instrumental in understanding
how the Bitcoin protocol handles balances on its ledger.
Note that in the examples above, fees paid to the miners to process the
transaction is omitted for simplicity. The fees will go to a different address
owned by the miner.
Unspent Transaction Output (UTXO)
Bitcoin transactions are made of inputs and outputs. Unspent transaction
outputs, or UTXOs, are exactly what they sound like—they are outputs of
blockchain transactions that have not been spent and can be used as inputs for
new transactions.
On a fundamental level, UTXOs dictate the beginning and end of each
transaction.[29] Whenever a transaction is made, users make use of the balance
of UTXOs that they have as inputs. Their digital signature is required to
verify that they are the real owners of the inputs, before they are converted
into outputs.[30]
After the transaction is completed and added to the blockchain, the UTXOs
used as inputs are now considered ‘spent’, and cannot be used for further
actions. However, the transactions create new UTXOs from the resulting
outputs, which can be spent later.
How does Bitcoin Prevent Double-Spending?
Double-spending occurs when a malicious user is able to send their bitcoin to
two different recipients at the same time.[31] This means the second
transaction uses the same input as another transaction and both transactions
are relayed to the Bitcoin network at the same time.
Double-spending is a problem unique to digital currencies because digital
information can be easily replicated similar to how music and movies can be
easily pirated.
Double-spending is not possible when it comes to physical currencies. If you
purchase a doughnut for $1, you will have to give that $1 note away to the
cashier to receive the doughnut. It is not possible to simultaneously use the
same $1 note a second time to purchase coffee too. If you tried to replicate
the same $1 note using a photocopy machine, the cashier will immediately be
able to know that the photocopied $1 note is not authentic and is able to reject
it too.
There are two primary ways to solve the double-spending problem for digital
currencies—central clearing counterparty and blockchain.[32] A central
clearing counterparty requires trust in a third-party and is the primary way
how our traditional financial system works. Bitcoin relies on a blockchain to
prevent double-spending from occurring without the need for any centralized
authority.
When it comes to people trying to spent bitcoin in a UTXO that has already
been spent, say 1 day ago, it is fairly trivial for a miner to check that this is
not a valid transaction because this UTXO has already been used as an input
to another transaction that has been included in a previous block. As the
UTXO was spent 1 day ago, this UTXO would have been included roughly
144 blocks previously.
If the miner insists on allowing this UTXO to be spent and wants to
invalidate the earlier transaction, the miner will need to redo all the Proof of
Work that has been done for all the previous 144 blocks and race against time
to compete against all other miners to create the longest chain. This is
computationally very expensive and is thus very improbable.
What if Miners Collude to Double-Spend?
Technically this can happen. Double-spending can occur if a majority of the
miners are dishonest. This is known as a 51% attack. This occurs when a
single entity is able to control more than 50% of the entire Bitcoin mining
capacity. When this occurs, the entity will have enough mining power to
modify the ordering of transactions and even exclude certain transactions.
An attacker that has 51% control of a blockchain may double-spend a bitcoin
by sending two transactions at the same time to two different addresses. This
attack usually targets cryptocurrency exchanges as the value of the attack is
the highest. To execute this attack, the first transaction is sent to a merchant
to purchase an item and this transaction is broadcasted to the broader Bitcoin
network.
The second transaction is sent to the attacker’s own address and the attacker
will secretly mine another branch of the blockchain that includes the second
transaction but not the first transaction. The attacker will continue mining the
secret chain for a few blocks until it is longer than the public chain and the
first transaction has been accepted by the merchant.
Once this has been done, the secret chain will be broadcasted to the network.
As the secret chain is now longer than the public chain, the network will
regard the secret chain to be the legitimate chain of the network. The first
payment to the merchant will thus be invalidated.
This is one of the reasons why Bitcoin transactions usually require 3 to 6
confirmations by merchants before it is accepted as a valid transaction. The
more blocks that have been mined on top of the existing blockchain (each
block represents one confirmation), the higher the likelihood that the
transaction would not be reversed as more computational power will be
needed to complete the Proof of Work needed in adding blocks to the
blockchain.
As long as a majority of miners are honest, it will be impossible for any one
entity to accumulate 51% of the hashrate and execute this double-spend
attack. Bitcoin’s network is sufficiently decentralized that no single entity
controls 51% of the hashrate.
 CHAPTER 3: THE HISTORY OF BITCOIN
Since the inception of the Bitcoin blockchain on 3 Jan 2009, Bitcoin has gone
through numerous notable events.
This chapter will discuss several of those events and how they played a role
in Bitcoin’s developments. A lot has happened, so we will be narrowing it
down to some of the most important ones to get you up to speed quickly.
Bitcoin Key Events
Timeline Key Events
18 Aug 2008 The bitcoin.org domain was registered

1 Nov 2008 Bitcoin’s whitepaper "Bitcoin: A Peer-to-Peer Electronic Cash

System" was released by Satoshi Nakamoto

3 Jan 2009 Bitcoin’s Genesis Block was created

18 May 2010 Bitcoin Pizza Day (10,000 BTC exchanged for 1 pizza)

18 Jul 2010 First Bitcoin exchange, Mt. Gox, was established

15 Aug 2010 Value Overflow bug incident took place

14 Feb 2011 SilkRoad, the first Tor darknet market with Bitcoin escrow was
launched

19 Jun 2011 Mt. Gox was hacked. Bitcoin price dropped from $17 to $0.01

15 Jan 2012 First incorporation of bitcoin into a mainstream drama series (The
Good Wife – Season 3, Episode 13)

24 Apr 2012 Satoshi Dice, a Bitcoin betting site was announced

28 Nov 2012 First Bitcoin Halving—Bitcoin block reward reduced from 50 BTC
to 25 BTC per block

20 Mar 2013 Bitcoin Chain Fork bug incident took place

28 Mar 2013 Bitcoin market capitalization passed $1 billion

19 Aug 2013 German Finance Ministry characterizes Bitcoin as a "unit of

account"

26 Jan 2014 CEO of BitInstant, Charlie Shrem was arrested for unlicensed
money-transmitting related to the Silk Road marketplace

15 May 2014 The digital signature of Stoned, an ancient computer virus, was
inserted into the Bitcoin blockchain leading to false positives from
anti-virus programs

14 Jan 2016 Bitcoin Lightning Network whitepaper was released

11 Jun 2016 Bitcoin market capitalization passed $10 billion

9 Jul 2016 Second Bitcoin Halving—Bitcoin block reward reduced from 25

BTC to 12.5 BTC per block
 23 May 2017 New York Agreement was reached to help with Bitcoin scalability

1 Aug 2017 Bitcoin Cash was forked from Bitcoin

23 Aug 2017 SegWit went live

20 Oct 2017 Bitcoin market capitalization passed $100 billion

15 Mar 2018 Lightning Network was launched

11 May 2020 Third Bitcoin Halving—Bitcoin block reward reduced from 12.5
BTC to 6.25 BTC per block

12 Nov 2020 PayPal enabled cryptocurrencies trade

21 Dec 2020 MicroStrategy announced that it now holds 70,470 BTC purchased
for a total of $1.12 billion (average cost of $15,964/BTC)

The above are some of the key events that have transpired in Bitcoin’s
history. For this chapter, we will be focusing on some of these key events.

The Mt. Gox Hacking

On 19 June 2011, a malicious entity managed to penetrate security measures
of the largest Bitcoin exchange at that time—Mt. Gox. A stream of
suspicious trades followed soon after, causing the price of bitcoin to plummet
from $17 to $0.01.[33]
This allegedly occurred as the attacker was able to access a computer
belonging to a Mt. Gox auditor and subsequently transferred the bitcoins
illegally to himself or herself. Using the exchange’s trading software, the
attacker sold the stolen bitcoins on the market, creating a large sell order
which crashed the price.
However, the price soon corrected to its usual price range within minutes.
During the attack, the hacker withdrew $2,000 worth of bitcoin and also
leaked Mt. Gox’s database, containing the username and encrypted
passwords of all the users.[34] Accounts with a total equivalent of close to $9
million were affected by the attack.
To prove that Mt. Gox had the situation under control, more than 400,000
bitcoins were moved from “cold storage” to a Mt. Gox address. Additionally,
Mt. Gox attempted to recover from the attack by rolling back all transactions
to its previous state before the sell orders were placed.[35]
However, the damage was already done. Soon after this incident, users
started facing withdrawal issues. On 28 February 2014, Mt. Gox filed for
bankruptcy, claiming that it had lost approximately 850,000 bitcoins, valued
at $450 million at the time of filing.

Silk Road Shutdown

In its early days, bitcoin was often associated with illegal purchases as it was
perceived to be anonymous, despite this being not quite true. Owing to that,
bitcoin became popular as the currency of choice on Silk Road, a darknet
marketplace where users can buy and sell illicit substances such as drugs.
Bitcoin is only pseudonymous, meaning someone can still track you as the
address owner if they have adequate information. Users of Silk Road who
paid and received bitcoin can be tracked down by relevant enforcement
agencies with sufficient effort. On 23 June 2013, the Drug Enforcement
Administration (DEA) seized a little over 11 bitcoins from one of the
platform’s identified sellers, worth approximately $814 dollars at the time of
seizure.[36]
However, that amount was measly compared to a bust on a previous drug
seller on Silk Road in November 2020 by the US Department of Justice. In
this bust, over 70,000 bitcoins worth more than a $1 billion were seized.[37]
Silk Road was shut down when its pseudonymous founder "Dread Pirate
Roberts” also known as Ross Ulbricht, was arrested by the Federal Bureau of
Investigation (FBI) in October 2013. Although Silk Road became a stain in
Bitcoin’s history, it served as an example for real-world usage, proving that a
decentralized currency could in fact function as a global currency in a
barrierless marketplace.

Block Reward Halving

Bitcoin’s block reward halving is one of the most notable events in Bitcoin’s
history. Halving is the process where the block rewards given to miners for
successfully mining each block is cut in half.[38]
Block rewards are halved every 210,000 blocks, or roughly every 4 years.
The first block reward halving took place at block 210,000 on 28 November
2012, halving the block reward from 50 to 25 BTC per block. The second
block reward halving happened on block 420,000 on 9 July 2016, further
halving the block reward to 12.5 BTC per block. The third halving took place
on block 630,000 on 11 May 2020. At the time of writing (November 2020),
we are in the third halving era where 6.25 BTC is distributed each block.
The process of halving will continue every 210,000 blocks until all 21
millions bitcoins have been mined completely. At the time of writing, over
two-thirds of all bitcoins, or roughly 18 million bitcoins have been mined.
The following chart shows Bitcoin’s block reward schedule and its total
supply as it gets towards the maximum supply of 21 million bitcoin in the
year 2140.

The next block reward halving at block 840,000 will see the block reward
reduce from 6.25 to 3.125 BTC per block. This is expected to take place
sometime in late May 2024.[39] The exact date and time is still not determined
as the Bitcoin block time may vary due to its difficulty level and the chance
involved with mining.
Every four years, the Bitcoin community comes together to celebrate this
halving event. There is a lot of excitement surrounding the halving event as it
represents the growing scarcity of bitcoin. When the block reward halves, the
inflation in the Bitcoin ecosystem halves as well.
Even though the monetary supply for Bitcoin is known where there is a
maximum of 21 million bitcoins, the perception that there are now less
bitcoins being emitted each block usually results in a lot of price action
during the periods leading up to the block halving event.

New York Agreement (NYA)

Each block in Bitcoin is limited to 1 megabyte (MB) and can only fit a
limited number of transactions (approximately 250 byte each). Therefore, the
limited throughput is about 3 transactions per second.
As bitcoin continued to grow rapidly, there was an urgent need for the
Bitcoin network to handle more transactions per second. The Bitcoin
community endured many months of debates in 2015 and 2016 on the best
way to move forward as each suggested scaling solution is not without
drawbacks.
Finally, in an attempt to resolve Bitcoin’s scaling issues, Barry Silbert, CEO
of Digital Currency Group led over 50 Bitcoin companies to jointly propose
the New York Agreement on 23 May 2017.[40] The proposal aims to find a
workable solution to move Bitcoin forward, but also included some
controversial points which might risk causing a rift in the Bitcoin community.
[41]

The New York Agreement raised two action items:

1. Implement Segregated Witness (SegWit)

SegWit removes some data from each transaction, which allows for
more transactions to be packed into each block. Having more
transactions in each block has the added benefit of making transactions
cheaper.
However, opponents claim that SegWit contradicts the very definition
of bitcoin as “a chain of digital signatures” as it creates issues for
 senders and receivers to prove the authenticity of a transaction in the
future.
Note: A more in depth explanation for SegWit is available in Chapter
8.
2. Increase block size to 2 MB

By increasing block size, one can pack more data (and therefore more
transactions) in each block, effectively increasing Bitcoin network’s
throughput.
On the opposite camp, opponents argue that increasing the block size
to 2 MB could inflate mining costs because larger blocks will require
better mining hardware, thus skewing power away from individual
miners to more centralized conglomerates. This goes against the core
tenets of Bitcoin which encourages decentralization.
The Bitcoin community voted on the New York Agreement after debating
and weighing the pros and cons of each solution. They ultimately reached a
majority consensus to deploy SegWit and improve block capacity despite the
potential risks. On 24 August 2017, SegWit was successfully included in the
Bitcoin protocol and the throughput for the Bitcoin network increased to 7
TPS.
However, the second part of the New York Agreement, which is to increase
the block size to 2 MB did not succeed. This ultimately divided and split the
community and led to a hard fork of Bitcoin, resulting in Bitcoin Cash.

Lightning Network
Bitcoin’s network (post SegWit) can only handle 7 transactions per second
and requires 10 minutes to finalize—simply insufficient as a global payments
system. It is also a far cry compared to Visa’s payment network which can
handle approximately 24,000 transactions per second. To solve this issue, the
Lightning Network was proposed as a potential solution.
Lightning Network is effectively a second layer payment channel built on top
of the Bitcoin network which records transactions on a separate sidechain that
is still verifiable on the main Bitcoin network.[42] It achieves several key
goals:

1. High throughput – Lightning Network has a theoretical

throughput of 1 million transactions per second (vs. 7 transactions
per second for Bitcoin)
2. Fast transactions – Transactions are processed in under a minute
(vs. 10 minutes for Bitcoin main network)
3. Low fees – Fees on Lightning Network are much lower and
almost negligible (vs. fees on the main Bitcoin network)
4. Reduces congestion – Once adopted, Lightning Network can
potentially reduce traffic on the main Bitcoin blockchain as
payments primarily get processed on the Lightning Network
sidechain

Lightning Network is still in its early stage and is not entirely bug-free.
Teams such as ACINQ, Blockstream, and Lightning Labs are still hard at
work developing Lightning Network further.
Note: A more in-depth explanation for Lightning Network is available in
Chapter 8.

Bugs
The Bitcoin protocol is software written by humans and mistakes are bound
to happen within the codebase itself. On two separate occasions, bugs were
found on the Bitcoin codebase and caused major disruption to the protocol.
In both cases, Bitcoin developers and community members rallied together to
rectify the bugs and keep the protocol running smoothly. An interesting
statistic to note for Bitcoin is that it has reported a 99.986% server uptime[43],
which is comparable to an enterprise-grade service provider’s guarantee for
servers such as Amazon Web Services.
Value Overflow Incident (15 August 2010)
The value overflow bug was one of the biggest bugs that had been found in
Bitcoin.[44] Without a proper solution, it would ruin Bitcoin. The incident
happened because the code for checking Bitcoin transactions did not work if
outputs were so large that they overflowed when summed.[45]
One hacker took advantage of this bug and generated 184 billion bitcoins out
of thin air. Remember, Bitcoin’s total supply was set to be capped at 21
million.
Jeff Garzig, a former Bitcoin Core developer spotted the anomaly and
reported on the Bitcointalk forum.[46] Satoshi took the matter seriously and
within 3 hours, released a Bitcoin software upgrade to version 0.3.10. The
software upgrade reseted the Bitcoin blockchain and removed the abnormal
transaction that generated 184 billion bitcoins out of thin air.
This software upgrade did not solve the issue entirely yet because now, there
are two blockchains running—the older blockchain with the abnormal
transaction and the updated blockchain that did not contain the abnormal
transaction.
Miners were informed about the incident and were urged to upgrade their
software to mine the new chain and stop mining the bad chain. After 19
hours, the good chain became the dominant chain and many miners stopped
mining the bad chain altogether. This finally put an end to the value overflow
incident and maintained Bitcoin’s integrity.
Chain Fork Incident (20 March 2013)
The chain fork incident occurred when Bitcoin was trying to upgrade from
version 0.7 to version 0.8.[47] This update was intended to replace a database
library software in the Bitcoin codebase from Berkeley DB to LevelDB.
During the software upgrade, the Bitcoin developers accidentally removed an
unknown 10,000 database lock limit in the new version 0.8. As a result,
blocks created in version 0.8 contained unusually large amounts of
transactions that were not compatible with version 0.7.
The incompatibility caused the Bitcoin blockchain to split with miners on
version 0.7 rejecting the abnormal new blocks on version 0.8 and forming its
own new blockchain.
Fortunately, the chain split was detected very quickly. Two major mining
pools, BTCGuild and Slush, took the lead to downgrade their mining
software to the older version 0.7 despite potential losses in revenue. With
most miners downgrading back to version 0.7 soon after, the chain split was
soon resolved in 6 hours and 20 minutes.
Immediately after the incident, version 0.8.1 was released to fix the bugs on
version 0.8 with some additional rules. The rules set the block size limits to
500,000 bytes and rejected blocks with more than 10,000 locks. Miners were
then urged to upgrade and mine on version 0.8.1, which had the new
standardized rules.
Fun Fact
As of time of writing, Bitcoin has been declared dead 393 times.[48] Despite the
numerous times various figures and media calling Bitcoin dead, it has yet to
happen.
You can track bitcoin’s ‘death’ at Bitcoin Obituary, a satire website which
collects and aggregates news articles and blogs that announced bitcoin as
“dead”.
PART 2: BITCOIN & YOU
CHAPTER 4: KEEPING YOUR BITCOINS SAFE
This chapter will go through the various types of Bitcoin wallets and the steps
needed to keep your bitcoins safe and sound. When you store your fiat
currencies in your bank account, the bank is responsible for storing those
funds safely. However, when it comes to cryptocurrencies, you are
responsible for your own funds.
As the name suggests, a Bitcoin wallet is a software where you can store,
send, and receive bitcoins. A Bitcoin wallet helps you with the management
of your private and public keys. Private keys are used to sign transactions to
send any bitcoin that you own while public keys are derived from the private
keys to generate Bitcoin addresses.
Using your email inbox as an analogy, you can think of your Bitcoin private
key as the password to your email account and the bitcoin address as the
email address to which people can send things to.
There are various intricate and interesting mathematics that goes behind these
keys and addresses.[49] However, for the sake of simplicity, here’s what you
need to know about keys and addresses.
With the private key, one can easily generate a public key.[50] Using the
public key, one can then generate a bitcoin address where bitcoins can be sent
to. However, doing the reverse is nearly impossible mathematically.
Your private key is something that you must guard closely because this gives
access to your entire Bitcoin wallet and balances. Anyone with access to your
Bitcoin private key can take your entire bitcoin balance just like how anyone
with access to your email password can read all your emails and impersonate
you.

Private Key
The private key is used to digitally sign any transactions that will spend one’s
bitcoin. An example of a Bitcoin private key can be seen below. It contains
64 characters:
a966eb6058f8ec9f47074a2faadd3dab42e2c60ed05bc34d39d6c0e1d32b8bdf
Bitcoin’s public key is mathematically derived from the private key. It is
currently close to impossible to use reverse mathematics in order to derive the
private key from the public key.
Essentially, creating a bitcoin private key is the same as picking a random
number between 1 and 2256 (2 multiplied by itself for 256 times). To give you
a sense of scale, 2256 results in a number that has 78 digits, and on your
calculator 2256 should look something like:
115,792,089,237,316,195,423,570,985,008,687,907,853,
269,984,665,640,564,039,457,584,007,913,129,639,936
Or, for a more readable one:
1.158 x 1077
(that’s 1.1 with 77 zeros behind)
This is a mind-bogglingly large number. In comparison, if we were to count
the seconds since the universe theoretically first began, that number (13.7
billion years[51]) would approximately result in 435,075,697,224,000,000
seconds (or 4.35 x 1017, nowhere close to 1.158 x1077). Another mind-
blowing comparison is with another estimate which puts the number of atoms
of the observable universe at 1080 atoms, that is 1 with 80 zeros behind.
In short, private keys are extremely hard to guess and close to impossible to
brute force. The difficulty is likely analogous to choosing a single grain of
sand on a beach and later asking a friend to find that exact same grain of sand
among all the beaches on earth.
Private keys might be hard to guess, but you can still lose them through other
means.
It is important that you absolutely do not reveal your private keys to
anyone. Do not upload your private keys to the internet and always have
a non-digital backup of your private keys somewhere. Your private keys
are used to spend your bitcoin and losing it will result in the loss of your
bitcoin forever.

Public Key and Bitcoin Address

Public keys are derived from private keys. It is created by applying elliptic-
curve cryptography to the private key.
It is useful to understand that a public key is not the same as your bitcoin
address. Public keys, like private keys, are used to generate bitcoin addresses.
In fact, a public key can generate multiple bitcoin addresses using the BIP32
Hierarchical Deterministic wallet standard.
Just like private keys, it is recommended that you do not share your Public
Key with anyone unless absolutely necessary. Fortunately, a non-technical
user will seldom come across the need to know or use public keys. Your
bitcoin wallet software will do the technical stuff for you.
You will, however, need to be familiar with the next concept to be a better
Bitcoin user—Bitcoin Addresses.
Think of your bitcoin addresses as your computer’s IP addresses where the
internet can send data to you.[52]
Bitcoin addresses look something like the following:
12rBqcTDCai3MHE3HMie4whkf9X8odffkH
Bitcoin addresses begin with a 1, 3, or bc1 followed by a string of random
characters. While all three address types can send and receive bitcoin, it is
worth noting the difference among them.
The address type which begins with 1 is known as a P2PKH address. P2PKH
stands for Pay-to-Pubkey Hash, which means to pay to a hash of a recipient’s
public key. This is the original address format for Bitcoin and although they
are still in use today, they are considered legacy addresses. These address
transactions are larger in size and may incur higher network fees.[53] They are
also not compatible with SegWit.
The next address type which starts with 3 is known as a P2SH address, or
‘Pay-to-Script Hash’ address. P2SH addresses allow for greater functionality
compared to P2PKH addresses. The script function in P2SH is most
commonly used for multisignature addresses (multisig for short), which
requires multiple signatures before a transaction is executed. This address
type can be used to send funds to both SegWit and non-SegWit addresses.
The final type of address begins with ‘bc1’ and is known as a Bech32
address. Bec32 addresses are native SegWit addresses. These SegWit native
addresses are naturally more efficient with the use of block space, resulting in
lower transaction fees.[54] Bech32 addresses are longer compared to the
previous two address types. As it is relatively new, some wallets and
exchanges may not accept sending or receiving bitcoins to this address type.

Wallets
Bitcoin wallets can generally be classified into two broad categories, namely
hot and cold wallets. There are several types of wallets available within these
categories such as mobile, desktop, hardware, and paper wallets.
Although they are called wallets, they basically function like personal bank
accounts for your bitcoins where you can transfer and receive bitcoin in your
wallets. Wallets are either custodial or non-custodial.
Custodial wallets are wallets which you do not control the private keys.
Rather, the private keys are controlled by third parties on your behalf. These
wallets are similar to traditional bank accounts where the accounts are in your
name but are ultimately controlled by the financial institutions on your
behalf. Because the funds are not directly under your control, these
institutions may freeze or seize your funds at any time.
Non-custodial wallets are wallets where you control the private keys. These
are wallets that you have full control over and no one can take your funds
away from you without your permission—you are essentially becoming your
own bank. Therefore, you must take full responsibility and precautions to
secure the funds from thieves and hackers. Losing control of your private
keys will most likely mean the loss of all your funds with no recourse.
There are no right or wrong wallets to use when it comes to storing your
funds. Each person will have to choose a wallet which he or she is
comfortable with and take all precautions to store it safely. It is generally a
good idea to split your funds across a few wallets.
We will be going through the differences between all these wallet types. By
the end of this chapter, you will get a better idea of the types of wallets that
you should use.
Hot Wallets
Hot wallets are cryptocurrency wallets that are connected to the Internet,
therefore funds stored in such wallets are much more accessible. However, it
is less secure compared to cold wallets as there are more attack vectors
available to hackers.
There are two main types of hot wallets available, namely desktop and
mobile wallets. As the terms suggest, desktop wallets are available on
computers and laptops while mobile wallets are available as apps
downloadable on smartphones.
Below, we will go through some of the most popular desktop and mobile
wallets.
Desktop Wallets
Full Node Wallets

Bitcoin Core
The first Bitcoin wallet created was a desktop wallet known as Bitcoin Core,
previously known as Bitcoin-QT. In order to use it, you have to download the
entire Bitcoin blockchain. You would need a large hard disk to use this wallet
as the Bitcoin blockchain is currently about 300 GB.[55] Due to the large
blockchain size, it may take a few days to download and sync the full
blockchain.
Steps to setup a Bitcoin Core wallet is in Chapter 7.
Simple Payment Verification (SPV) Wallets
The large disk space required to download and use Bitcoin Core may prove a
hindrance for many. Thus, Simple Payment Verification (SPV) wallets were
soon developed. SPV wallets do not require you to download the Bitcoin
blockchain. Instead, the state of the blockchain is synced via a remote node.
Some SPV wallets which are widely used include Electrum, Exodus, and
Atomic Wallet.

Electrum Wallet
Electrum is one of the oldest desktop wallets to
exist, supporting multiple operating systems and
 integration with hardware wallets. In terms of
crypto assets, it only supports bitcoin. Electrum
allows you to tag addresses, customize
transaction fees for each transaction and also
provides encryption. Although the user interface
is not very beginner-friendly, it is still a decent
wallet for amateur and veteran Bitcoiners.

Exodus Wallet
With UI built for beginners in mind, Exodus
supports more than 30 cryptocurrencies besides
bitcoin. For transactions made using the wallet,
fees are paid to the network and not to Exodus.
Network fees are automatically calculated, but it
may cost more than required for the sake of
speed.[56] However, security is rather lackluster as
it does not support multi-signature addresses and
two-factor authentication (2FA).

Atomic Wallet
Supporting over 300 coins and tokens, Atomic
Wallets allows users with a diverse portfolio of
 cryptocurrencies to manage their assets in a
single interface. With their Atomic Swap feature,
users can exchange between different currencies
without going through an exchange. It does not
take any fees but network fees are still required
for verifying transactions.[57]

Mobile Wallets

Blockchain.com
Blockchain.com is one of the most popular mobile wallet providers. It
supports multiple cryptocurrencies and offers Swap, an in-wallet crypto-to-
crypto exchange. With up to three tiers of advanced security features and an
intuitive UI, Blockchain.com has a high level of privacy and is easy for
beginners to use.
Steps to setup a Blockchain.com wallet is in Chapter 6.

Samourai
The Samourai wallet considers itself as a wallet that takes security to another
level. It has numerous privacy features such as the “stealth mode” which
completely hides any trace of Samourai’s existence on your device.[58]
However, it only supports Bitcoin and only available on Android devices.
Steps to setup a Samourai wallet is in Chapter 7.

Coinbase Wallet
With support for various cryptocurrencies, digital collectibles and over 50 fiat
currencies, it is easy to use and available on most devices. It has two-factor
authentication, which boosts security. While network fees remain, there are
zero fees for transactions between other Coinbase wallets.[59]
Steps to setup a Coinbase wallet is in Chapter 5.

Cold Wallets
Cold wallets are cryptocurrency wallets that are useful for storing large
amounts of Bitcoin. Because they are not connected to the Internet, they are
more secure and are harder for hackers to attack.
There are two main types of cold wallets available: hardware and paper
wallets. Hardware wallets are physical devices used specifically to store
cryptocurrencies, while paper wallets are materials printed with the Bitcoin
private keys.
Below, we will go through some of the most popular hardware and paper
wallets.
Hardware Wallets
A hardware wallet is a physical device solely for storing cryptocurrencies—in
this case, bitcoin. Hardware wallets keep private keys separate from internet-
connected devices, reducing the chances of your wallet being compromised.
In hardware wallets, the private keys are maintained in a secure offline
environment even if it’s plugged into a device infected with malware. While
hardware wallets can be physically stolen, it is not accessible if the thief
doesn’t know your passcode. In the unfortunate event that your hardware
wallet is damaged or stolen, you will still be able to recover your funds if you
had created a secret backup code prior to the loss.
The top manufacturers of hardware wallets at the moment are Ledger and
Trezor, though more have been emerging lately. In this book, we will be
covering the models produced by Ledger and Trezor.
Hardware wallets can be costly, with prices ranging from $50 to over $300.
Some hardware wallets contain a screen, allowing you to check on important
wallet details. Below are some of the most popular hardware wallets available
for purchase. Note: All prices are correct as of the time of writing.

Ledger Nano S
Made of stainless steel yet still light in weight,
the Ledger Nano S supports multiple
cryptocurrencies and is compatible with many
software wallets and decentralized
applications (dApps). Coming in at a price of
$59, it is an affordable wallet for beginners
and uses a micro USB connection.

Ledger Nano X
Similar to the Nano S, this hardware wallet
supports more than 1,500 cryptocurrencies
and can store up to 100 applications. The
main difference is the Ledger Nano X comes
with Bluetooth connectivity, making it even
easier to manage your Bitcoin on the go.
Unlike the Nano S, it uses a Type-C USB
connection. With a price tag of $119, this
wallet would be a viable option for future
upgrades.
Trezor One
One of the first hardware wallets to exist on
the market, the Trezor One is a decent choice
for beginners and veterans alike, with support
 for over 1,000 crypto assets. Built with a
different form factor, similar to a car key
rather than a thumb drive, it can fit in your
pocket with ease. The Trezor One can be used
as a two-factor authentication key and uses a
micro-USB connection.[60]

Trezor Model T
With a coloured-LCD touchscreen display and
a magnetic dock, the Trezor Model T is one of
the high-end options available for hardware
wallets. It supports more crypto assets
compared to the Trezor One and comes with a
microSD slot.[61] However, these features do
not come cheap. At $170 per unit, it is
suitable for more experienced users rather
than newcomers.

Paper Wallets
At its core, paper wallets give you complete ownership and access to your
bitcoins. As long as you have the private key to a Bitcoin address, you can
move the bitcoin in it. So long as you and no one else owns the private key,
you are the rightful owner of the bitcoin.
Paper wallets can easily be passed to friends and family without the need for
any computer or software setup. Imagine getting a paper wallet loaded with
some bitcoin as a Christmas present. That would be quite a gift!
However, the safekeeping of paper wallets is important—whoever that has
access to a paper wallet will be able to take control of any bitcoin stored by
moving the bitcoin to a private key that they control.
Paper wallets are best generated on a brand new computer that has not been
connected to the Internet. It is not recommended that you use a paper wallet
hosted on any website as the website may be compromised and a hacker may
then detect your private key and sweep all the bitcoin that is sent to it in the
future.
Paper wallets are not recommended in general because you will still need to
print the wallet, opening it to another layer of attack by hackers. Any printed
paper wallets are also subjected to wear and tear. Imagine waking up one day
to discover that your paper wallet has been damaged by insects, water, fire or
other natural elements!
Common Bitcoin Risks
When you store money in your bank account, the money is meant to be
secured by the bank. Additionally, some governments provide additional
guarantees against bank failures with a Federal Deposit Insurance Scheme
which insures your money in the bank up to a certain threshold. In the United
States, the Federal Deposit Insurance Corporation (FDIC) insures deposits up
to $250,000 per depositor on a member financial institution.
However, when it comes to storing bitcoin, you are fully in charge of keeping
it safe. While it is possible to store your bitcoins in an exchange or in a
custodial wallet (like a bank), there is no guarantee that it will be kept safe.
Unfortunately, many hacks have taken place throughout the years.
Here are some of the common risks prevalent in the Bitcoin ecosystem.
Centralized Exchange Hack
When you store your bitcoin on a centralized exchange, you are essentially
trusting the exchange to safeguard your bitcoin for you; you do not keep or
have access to your private keys. However, this may not be the best idea,
especially given the number of hacks that have taken place since the
inception of Bitcoin.
The majority of exchanges keep some funds in hot wallets, which are
constantly under attack by hackers. The largest hack to have occurred is the
infamous Mt. Gox hack in early 2014; it resulted in the loss of 850,000
bitcoins worth approximately $450 million during the time of incident.[62]
Since then, multiple other hacks have taken place at other centralized
platforms.
Remember this phrase: if it’s not your keys, it’s not your crypto.
Phishing
Phishing is one of the most common methods used by attackers when
attempting to steal bitcoin or other cryptocurrencies.[63] It’s a method in which
targets are contacted by an attacker who poses as a representative of an
institution. They then attempt to convince the victim to provide confidential
information such as private keys, seed phrases, and passwords.
Some things to look out for to avoid being phished are:

1. If the offer is too good to be true, it’s likely a scam. One of the
more popular ones is: send 1 BTC to this address to receive back 2
BTC.
2. “Project representatives” requesting your private keys or seed
phrases in order to help you out with an issue. Representatives of
projects will not approach you directly to send funds to an address.
3. Phishing websites. Attackers may copy popular websites with a
very similar hyperlink to get their victims to key in sensitive
information. Always be sure to double-check the URL before
 proceeding with it.

The Basics of Bitcoin Security

To better safeguard your bitcoin, it is important for you to practise good
security practices. Here are some precautions and steps that you can take.
Password Manager
Hacking incidents amongst online web portals have been occurring with
increased frequency in the past few years. In the dark web, hackers frequently
sell passwords of online accounts obtained from hacked web portals.
Because most people use the same passwords on multiple online accounts, a
breach on one web portal may compromise your accounts at other web
portals. For example, if you store bitcoin on a crypto exchange and reuse the
same password, it would be easy for a hacker to access your exchange
account and withdraw your bitcoins.
You can use the website Have I Been Pwned (https://haveibeenpwned.com/)
to check if your account has been compromised in a previous hacking
incident. In this website, you may see a list of past hacking incidents. If you
find your email address listed, it is best to change the password of all the web
portals using similar passwords.
To minimise your risk, it is a good idea to use different passwords for each
online account—if one of these services were hacked, it would not
compromise the security of your other online accounts.
Password managers like 1Password or LastPass can help you manage the
hundreds of different passwords required for each online account. Not only
can they help you generate strong and unique passwords for all your online
services, they can also store and encrypt all your unique login information.
All you need to remember is one strong master password to access your
entire password vault.
Two-Factor Authentication (2FA)
To further increase the security of your online accounts, consider turning on
two-factor authentication (2FA) where possible.[64] 2FA is an extra layer of
security that one has to undergo during the login process. It usually comes in
the form of a 6-digit code generated on a second device, usually your mobile
phone.
With 2FA, if a hacker were somehow able to figure out your account
username and password, the hacker would still not be able to access your
account unless he or she also has your 2FA code, which resets every few
seconds. It is highly imperative that you never share your 2FA code with
anyone else.
2FA codes can be generated via SMS or an authenticator app like Google
Authenticator or Authy. SMS-based 2FA is generally regarded as a weaker
form of 2FA as it is subjected to SIM-swap attacks where the hacker will
misrepresent himself or herself as you to get your telco company to swap
your SIM to a different device so that the hacker can receive the 2FA code.
2FA is compulsory for most exchanges due to the high rates of hacking
incidents. Although 2FA adds an extra, inconvenient step during the login
process, it helps to secure your account better.
Remove Unused Browser Extensions
Many web browsers allow you to add features and personalize your browsing
experience by installing extensions. On Google Chrome, these small
programs are known as Chrome Extensions.
Although Chrome Extensions enhance our web browsing experience, we
have to be careful as some of them may be malicious and used by hackers to
alter or steal data from your devices. These malicious extensions may be
keyloggers or phishing tools designed to steal passwords and private keys.[65]
If it is necessary to use an extension, it is a good idea to install the extension
on a different Chrome user profile that is separate from your day-to-day
browsing experience. That way, if the extension is malicious, it is tied to one
specific Chrome account. It is also useful to review the permissions requested
by the extension to ensure what is requested is within the parameters of what
is needed to perform its tasks.
Do Not Click on Ads
Numerous phishing websites exist to trick users into visiting them via
advertisements on Google, Youtube, Facebook and other popular platforms.
Many ads look legitimate but are designed to extract your private keys,
allowing hackers to steal your bitcoin.
Here’s one example—if you search for Blockchain.com in Google Search,
phishing links disguised as ads show up above the real website.

Although it is easier, it is extremely risky to click on the first result on

Google Search for cryptocurrency-related terms. Bitcoin websites that you
use frequently such as your exchange or wallet websites should be verified
and bookmarked to make sure that you are at the correct website at all times.
Remember, there is no need for these websites to know your private keys for
any reason whatsoever. As such, you should never disclose your private keys
to anyone, even if you are prompted to do so.
Metal Storage Backup Tools
If you have some bitcoin stored in a non-custodial wallet, then chances are
that you are the only person that has access to your private keys and seed
phrase. As such, proper storage of the sensitive information is amongst the
first steps needed in keeping your funds safe.
You may choose to write your seed phrase on a piece of paper and store it in
a secure location, but this may not be ideal due to the natural wear and tear of
the material.
To keep the seed phrase secure against natural elements, you may want to
consider storing your seed phrases on a stainless steel metal tool that will
protect against fire, water, insects, acid, and other natural elements.
Some popular companies that produce these metal devices include
Cryptosteel, Cryptotag Zeus, and Cobo Tablet. Fashioned in the shape of
capsules and cassettes, these products allow you to lock your seed phrase into
a highly resistant shell that ensures maximum longevity.
Summary
Hackers are always on the lookout for potential targets to score an easy
payday. As such, it is important to keep your Bitcoin wallets safe and secure.
Hardware wallets such as Trezor or Ledger are highly recommended for
bitcoin storage since your funds are stored offline. This significantly reduces
the risk of getting attacked and should be the primary method for you to store
most of your bitcoin.
It is also recommended that you backup the seed phrase used to generate the
hardware wallet using a metal storage backup tool such as Cryptosteel. These
products have been designed specifically to store your seed phrase in a more
protective way.
Although we have recommended some wallets over others, it is not necessary
to restrict yourself to using only one wallet. In fact, it may be better to use a
few different wallets instead of putting all your funds in one wallet.
For example, you may choose to put the bulk of your funds which you don’t
intend to use on a day-to-day basis into a cold wallet like Trezor. Funds
earmarked for active use, such as trading, may be placed in hot wallets such
as your account at a centralized exchange.
Ultimately, choosing which bitcoin wallets to use depends on your own
comfort level and preference. You should evaluate your use case and
consider the pros and cons of each type of wallet to make the best possible
decision.
CHAPTER 5: GETTING YOUR FIRST BITCOIN
Now that you know the basics behind how Bitcoin works, it’s time to learn
how to get your first bitcoin and how to store them safely. There are three
broad ways to get bitcoin: buying, earning and mining. We will look into
each of these methods in deeper detail in this chapter.

Buying Bitcoins
The easiest way to get your first bitcoin is to buy it directly. You could buy it
from a friend, or from a cryptocurrency brokerage, exchange or peer-to-peer
(P2P) marketplace.
Cryptocurrency brokerages, exchanges and P2P marketplaces are websites
that allow you to buy or sell bitcoin. You can think of them as online money
changers which facilitate the conversion of fiat currencies such as US Dollars
into bitcoin and vice versa.
Cryptocurrency brokerages make it simple to buy or sell bitcoin as it
abstracts away the orderbook concept and shows just the current buy and sell
price. The simplicity that cryptocurrency brokerages offer comes at a cost of
higher transaction fee compared to cryptocurrency exchanges. The most
popular cryptocurrency brokerage is Coinbase.
Cryptocurrency exchanges, on the other hand, are cheaper but more complex.
Users will need to interact with an orderbook to make buy or sell orders, a
process which can be daunting for most beginners. Some popular exchanges
that cater to sophisticated investors are Coinbase Pro, Kraken, Gemini, and
Bitstamp.
Orderbook
An orderbook is an electronic list of buy and sell orders. It lists the number of
units available for sale (ask) or requested to be purchased (bid) at each price
point. An orderbook aggregates all the buy and sell orders currently available on
the exchange.
 You can buy or sell at the best price currently available (market order) or set a
price you are willing to buy or sell (limit order). When you make a market
order, you are known as the maker while if you buy at the best price currently
available, you are known as the taker. Exchanges usually charge a lower fee for
makers compared to takers.

P2P marketplaces operate more similarly to eBay—users are free to post the
price they are willing to buy or sell bitcoin. Unlike cryptocurrency exchanges
which aggregate all the buy and sell orders in an orderbook, P2P
marketplaces do not aggregate these orders and you will have to choose the
person you would like to trade with. The reputation system on P2P
marketplaces is extremely important as the reliability of the seller in
delivering the bitcoin or fiat currencies once the trade is done is a key
consideration. Some examples of P2P marketplaces are LocalBitcoins,
Remitano, and Paxful.
Generally speaking, buying your first bitcoins from a regulated
cryptocurrency exchange is recommended over other options. Its regulated
nature means that it has gone through strict due diligence by the financial
regulators with stringent processes in place. Additionally, the customer
support is usually better and if anything goes wrong, you can always report
them to regulatory bodies.
Cryptocurrency Brokerages
This section will show you how to buy your first bitcoin from Coinbase. The
platform allows bitcoin purchase via bank transfers and credit cards, with fees
ranging between 1.49%-3.99%.
Buying bitcoin requires you to go through a Know-Your-Customer (KYC)
process, where you are required to verify your identity by submitting various
personal information such as your legal name, address, driving license or
passport, and utility statement. The verification process may take a few days,
but once you are verified, you are free to purchase bitcoins using your local
fiat currency.
Cryptocurrency brokerages are not as widely available compared to
cryptocurrency exchanges. We will explain further in the next section.
Coinbase
Step 1: Register for a Coinbase account.
Step 2: Verify your email address.

Step 3: Set up two-step verification using your mobile phone.

Step 4: Verify your identity (ID documents required).

Step 5: Click on your profile picture in the top right corner and head to
‘Settings’ to enable two-factor authentication.
Step 6: Add a payment method to your account.
Step 7: Click on ‘Trade’ in the top-right corner of the dashboard and
choose the cryptocurrency you would like to purchase.
Step 8: Confirm the purchasing details and click on ‘Buy Now’ to
complete your purchase.
Cryptocurrency Exchanges
Many cryptocurrency exchanges are available in most countries, which each
exchange supporting different fiat currencies. Depending on the jurisdiction,
some cryptocurrency exchanges are regulated and some are not. You will
need to do your own research by checking regulatory resources and assessing
your risk tolerance level before proceeding with a cryptocurrency exchange.
Similar to cryptocurrency brokerages, you will need to go through the KYC
process before you can purchase your first bitcoin on an exchange. A few
notable platforms include Coinbase Pro, Kraken, and Gemini.
Let’s walk through the process of buying bitcoin from Kraken.
Kraken

Kraken is one of the largest cryptocurrency exchanges in the world, serving

over 170 countries and supporting more than 40 different coins and tokens. In
2020, Kraken became the first crypto exchange to obtain a bank license in the
United States.[66]
Kraken has extensive trading pairs for each of their supported fiat currencies
and hosts different types of accounts, so that you can choose the one that best
suits your needs. Here, we will show you the steps needed to buy bitcoins on
Kraken.
Step 1: Go to www.kraken.com and click on Create Account button.
Step 2: Activate your account with the code emailed to you.
Step 3: To buy Bitcoin with fiat, you will need to select the Intermediate
account and verify your identity by uploading a government-issued ID
and proof of residence. It may take up to 24 hours for your account to
be verified.
Step 4: Next, set up Two-Factor Authentication (2FA) to secure your
Kraken account.

Step 5: Once you have set up your Two-Factor Authentication, you are
all set to buy bitcoin. Click on the “Buy Crypto” button to move on
with the next step.
Step 6: To buy bitcoin with fiat currencies, such as the US dollar, you
must first deposit some funds into your account.
Peer-to-Peer (P2P) Marketplaces
If you live in a country without a feasible cryptocurrency exchange, you
might consider using a peer-to-peer (P2P) marketplace. Similar to brokerages
and exchanges, P2P marketplaces will also usually require you to go through
a KYC process.
However, instead of buying bitcoin directly via cryptocurrency exchanges,
P2P marketplaces connect buyers and sellers of bitcoin directly to each other.
This means that you can choose which buyer or seller you would like to trade
with.
Some well-known P2P marketplaces are LocalBitcoins, Binance P2P, Paxful,
Remitano, and Hodl Hodl.
LocalBitcoins
Founded in Finland in June 2012, LocalBitcoins is one of the largest P2P
marketplaces in the world. It has facilitated bitcoin transactions between
buyers and sellers in over 248 countries and 16,000 cities.[67]
Its simple user interface and support for many payment options have helped it
garner a reputation for being accessible and easy to use. Let’s walk through
the steps to get started with buying your first bitcoin on LocalBitcoins.
Step 1: Register your account by filling in your username, email and
password.
Step 2: Read through the Terms of Service and Privacy Policy. Scroll
down and click “I Agree”.

Step 3: Check your email and click on the confirmation link.

Step 4: Next, fill out your first name, last name and mobile phone
number. They are needed for KYC and mobile verification processes
in later steps.

Step 5: A verification code will be sent via SMS to your mobile number.
Input the code and click ‘Submit’.
Step 6: You will be redirected to the trading dashboard. Before buying
your first bitcoin, you will need to complete the KYC verification. Go
to ‘Profile’ followed by ‘Settings’ and then ‘Verification’.
In the box below, you will notice that you’re at Tier 0. Most sellers
require at least a Tier 1 verification level. Click ‘Proceed to the next
level’ and follow the on-screen instructions.
Step 7: After submitting your address and identity verification, you will
be upgraded to Tier 1. With this upgrade, you can now buy your first
bitcoin!
Return to the trading dashboard. Here, you can browse through the
advertisements of numerous bitcoin sellers. Input the amount you are
willing to spend, country and payment method to filter your options.
Once you have chosen an ad, click ‘Buy’.

Protip: Look for sellers with a good reputation. You can identify them by
looking at the number and coloured dot next to their name. Traders with
better reputation will have a higher number and a green dot next to their
names.
Step 8: After clicking ‘Buy’, you will be redirected to the payment page.
Input the amount you’re willing to spend and carefully read the Terms
of Trade specified by the seller. If everything looks agreeable, click
‘Send trade request’.
Step 9: You will be requested to make your payment. Follow the on-
screen instructions and complete the transaction within the payment
window. Once done, click ‘I have paid’ and you should receive your
bitcoin soon!
Step 10: To keep your bitcoin safe, you should transfer it to a wallet that
you control. Click ‘Wallet’ on your dashboard and then ‘Send
bitcoins’. Copy and paste your wallet’s address in the ‘Receiving
bitcoin address’ field and set the amount you wish to transfer in BTC.
After that, you are all set!

Earning Bitcoin
Bitcoin is money. Similar to money, you can earn bitcoin through various
means.
While the most straightforward way to earn bitcoin is to ask your employer to
pay a part (or all) of your salary in bitcoin, other alternative methods allow
you to earn your bitcoin on the side.
Earn bitcoin cashback using Lolli
The Lolli bitcoin cashback program is identical to other cashback programs
currently available. The way cashback programs work is that the cashback
companies will share a percentage of the affiliate fees earned from purchases
made from online retailers.
Most cashback companies pay in fiat currencies and directly to your bank
account. In Lolli’s case, your rewards are paid in bitcoin instead.
Lolli partners with many popular brands such as Nike, Sephora, Microsoft
and Expedia. By using Lolli, you can start earning bitcoin while you go about
your daily online purchases. Lolli pays anywhere from 1% up to 27% of
cashback from the hundreds of merchants on their site. This is one of the
easiest ways to earn bitcoin.
*Do note that Lolli is currently only available in the United States.
Here’s a step-by-step guide to get started with Lolli:
Step 1: Register for a Lolli account at https://www.lolli.com/

Step 2: Once you have registered for an account, you can earn bitcoin as
you shop by clicking the merchant’s tracking links from the Lolli
platform
Step 3: Do remember to claim your SatsTag.

Step 4: For an easier shopping experience, you can download the

Chrome browser extension.
Provide services in exchange for bitcoin
If your employer does not want to pay you in bitcoin, you can trade your
skills for bitcoin using crypto freelance platforms. Whether you are an
accountant, website developer, social media manager, or copywriter, you can
be compensated with bitcoin in exchange for the services that you provide.
Some of the more popular crypto freelance platforms include:
● Crypto.jobs – Website for blockchain jobs
● Cryptogrind – Dedicated bitcoin freelance platform
● Bitfortip – Website that tips you in bitcoin for being helpful
● MicroLancer – P2P task listing board where you can apply to
published tasks and get paid in bitcoin using Lightning Network-
supported wallets
Play to earn via bitcoin faucets
One of the more entertaining albeit slow way to earn free bitcoin is via
bitcoin faucets. Bitcoin faucets give out tiny fractions of bitcoin every few
hours for performing certain tasks, such as playing mobile or online games.
These bitcoin faucets make money by showing ads to users and reward users
for interacting with them. They are usually not worth your time, unless if you
currently live in a developing country.
Disclaimer: CoinGecko is not affiliated with ANY of these games or products
in any way. Please use at your own risk.
● Bitcoin Blast
Bitcoin Blast by Bling Financial is a fun puzzle game available for
Android users. You will be rewarded with Bling Points for every
gameplay. With Bling Points, you can redeem bitcoin cashed out to
your Coinbase wallet. The more you play, the more Bling Points that
you will earn. Bling Financial also offers four other mobile games that
reward users with Bling Points that can be converted into bitcoin.
 ● Bit Fun

Since its inception in 2017, Bit Fun is a classic bitcoin faucet website
that allows users to claim bitcoin every few minutes. There are
browser games available to play on their website whilst you wait for
the next claiming cycle. Besides the games, users can also earn extra
bitcoin by completing surveys and other offers available on their
website.

Mining Bitcoin
All bitcoins were originally created through a process known as mining. In
the early 2010s, mining was feasible for anyone with a computer as it can be
done with a regular Central Processing Units (CPU).
As more people started mining bitcoin, the difficulty rate increased.
Eventually miners needed more specialized machines to mine bitcoins. Some
researchers found that Graphics Processing Units (GPU) and soon Field-
Programmable Gate Array (FGPA) can be used to mine bitcoin more
efficiently.
Eventually, this was quickly replaced by the more efficient machines known
as Application Specific Integrated Circuit (ASIC). An ASIC miner is a device
designed for a specific type of work which is to solve the complex Bitcoin
mining puzzle at breakneck speed.
These days, it is no longer possible to mine bitcoin using CPU, GPU, or
FGPA—only the most efficient ASIC miners can be used to mine bitcoin.
You also need scale to be able to mine profitably.
For most beginners, it is not recommended that you get your first bitcoin
through mining as it is very capital intensive and involves a lot of work. You
will need to spend a lot of capital upfront in acquiring the latest ASIC miners,
getting it delivered to a mining facility, setting it up, paying for electricity,
maintaining the miners and so on.
It may take roughly 12 to 15 months before you earn enough to pay back the
upfront investment made to purchase the ASIC miner and your return is also
highly volatile due to fluctuating bitcoin prices and difficulty level. ASIC
miners also go obsolete fast as newer and more efficient machines are
released.
Cloud Mining
As you go around your research, you might come across providers who claim
that they can help you mine bitcoin via cloud mining. Cloud mining is a service
that allows you to outsource the work needed to mine bitcoin.
The cloud mining operators will lease the ASIC miners to you and do all the
work to maintain these machines. All you need to do is pay a fixed monthly fee
to purchase some cloud mining contracts. These contracts typically provide a
fixed amount of hashes per second where you will get to keep the bitcoin that is
mined.
Although the contracts offered may sound tempting, there are a lot of risks with
cloud mining as it assumes bitcoin price and difficulty will stay constant. As we
covered in earlier chapters, bitcoin difficulty will go up over time and it is very
hard to predict its price.
In most cases, you can only turn a profit if the bitcoin price goes up and you are
lucky enough to sell it at a high price. Most cloud mining operators charge a
high monthly fee and you will most likely not be able to turn a profit from
your cloud mining ventures!

Similar to gold mining, Bitcoin mining is also a highly complex process and
it is not recommended if your objective is to have an initial exposure to
bitcoin. It is usually more straightforward to buy bitcoin over an exchange as
opposed to mining it. We at CoinGecko recommend that you skip mining
until a later stage when you are more familiar with the pros and cons of
Bitcoin mining.
 CHAPTER 6: STORING YOUR BITCOIN
SAFELY
After purchasing your first bitcoin on an exchange or a peer-to-peer
marketplace, you should consider moving it to a non-custodial wallet that you
control. In an earlier chapter, we explained the concept of bitcoin custody and
why a non-custodial wallet may be a safer option for storing your bitcoin
long-term.
We at CoinGecko recommend the use of hardware wallets to store your
cryptocurrencies. There are several hardware wallet providers in the market.
In this chapter, we provide step-by-step guides to help you set up some of the
more popular non-custodial bitcoin wallets such as Trezor and Ledger.

Hardware Wallet: Trezor One

Purchasing a Trezor One hardware wallet will set you back around $100-200
depending on the model and location for delivery. Remember, always buy it
from the manufacturer’s websites directly as you do not want to take the risk
of your devices being tampered with by a hacker from a non-reputable shop.
Do not click on any Google Ads when navigating to the manufacturer’s
websites either because some of these ads could be scammers impersonating
the real manufacturers’ websites.
Let’s go through the setting up of a Trezor One hardware wallet. It is
currently retailing for $57 on the Trezor website[68].
Step 1: The Trezor Bridge is an application that is needed to facilitate
communication between the Trezor wallet and the web browser.[69] To
install it, head to https://wallet.trezor.io/#/bridge and download the
latest version of Trezor Bridge. Simply select your operating system
to get the latest version.
Step 2: Choose a destination folder and tap on “Install”. Once complete,
you can start the setup of your Trezor wallet.
Step 3: Plug in your new Trezor to your computer and navigate to
https://wallet.trezor.io/. Click on the “Create a wallet” button.

Step 4: Once you have created a new wallet, you will be requested to
backup your wallet.
Step 5: On the next screen, you will see a warning for you to store your
recovery seed safely. Do not take pictures of it nor store it on your
computer. This is important because the data stored on your phone or
computer may not be secure—hackers may get access to it, thus
compromising your entire balance on Trezor. The best way to store
your recovery seed is to use a metal device like Cryptosteel.
Step 6: Once you understand and agree, check the box and begin writing
down your seed. Each word will appear on the screen of the Trezor,
and after writing down each word, you will need to reconfirm. The
recovery seed is 24 words-long.
Step 7: After backing up your Trezor, set a strong PIN for your wallet.
The numbers will appear on the hardware wallet in a random order.
Select the numbers on the web interface.
Step 8: Next, you will be prompted to name your wallet. We named ours
“How To Bitcoin”. You can change the name in the settings page.
Step 9: When available, you may need to update the firmware version to
the latest version. Simply disconnect your Trezor and then connect it
back while holding both buttons down. Ensure that your recovery seed
is backed up, and proceed with the update.
Step 10: Your Trezor is now ready! To receive bitcoin, simply tap on the
“Receive” tab and select “Show full address.” Cross-check the
address and confirm it on the Trezor device. You can use this Bitcoin
address to receive bitcoin.
Step 11: If you would like to send bitcoin instead, tap on the “Send” tab.
Then, paste the address and key in the amount. The fee can be
changed as well, with speeds ranging from Slow to Fast. The higher
the fee, the faster the transaction will go through.

Step 12: Once done, hit the Send button and confirm it on your Trezor. You
have just sent bitcoin on your Trezor! You can also Enable labeling on
your Trezor to put notes on your transactions. It will connect with a
cloud storage tool like Dropbox to store notes of your transactions.
Pro Tip: Adding a 25th word to your passphrase
Adding a 25th word can be thought of as a way to extend your recovery seed.
This word can be chosen by you, and will further encrypt your recovery seed. If
your 24 word recovery seed is compromised, the person holding those words
will need the 25th word to access your funds.
However, it should be noted that adding a 25th word will generate an entirely
different root key which will derive a different private key, public key, and
address. If you forgot your 25th word, you will lose access to your funds.

Pro Tip 2: Shamir Backup

Shamir Backup allows you to split your seed into multiple shares.[70] In order to
recover your wallet, you will need a certain number of these shares. The number
of shares generated ranges between 1 and 16, which you can determine. Each
share consists of a sequence of 20 or 33 words.

When recovering your wallet, there is a threshold that needs to be reached. This
is the predetermined number of shares needed to recover a wallet. For example,
if your Shamir Backup consists of 10 recovery shares, and you set the threshold
to be “5 out of 10”, you will need to key in any five of these 10 shares to
recover your wallet.

Note: Shamir Backup is currently only available on Trezor Model T.

Blockchain.com Mobile Wallet
Step 1: Head to Google Play or the Apple App Store to download the
app.
Step 2: Create your wallet by filling in your email address and entering a
strong password.

Step 3: Tap on the “Create Wallet” and follow the instructions on-screen.
Once done, you will be greeted with a welcome message.
Step 4: After the welcome message, you will be transported to the
dashboard. To transfer funds to your wallet, tap on ‘Transfer’.
Step 5: On the ‘Transfer’ page, tap on ‘Receive’. You will see a list of
wallets for assets supported on Blockchain.com. Tap on Bitcoin.
Step 6: Transfer your assets to the specified address or simply scan the
QR Code. Be sure to double-check the address before you proceed to
the next step.
Step 7: To send assets, tap on ‘Transfer’, then on ‘Send’—you will see a
list of your assets. If you do not have any funds, you can tap on ‘Buy
Crypto’ to make a purchase.
Blockchain.com Browser Wallet
Step 1: To get started, go to Blockchain.com and click on the “Get
Started” button.

Step 2: Once logged in, the dashboard will show you coin balances in
your wallet. To begin transferring funds to your Bitcoin wallet, click
on ‘Request’.
Step 3: Your bitcoin address will be shown. Be sure to double-check the
address before making transactions

Step 4: To send bitcoin, click on the ‘Send’ button on the top menu bar.
Insert the address you would like to send your funds to as well as the
amount. You can also select the type of Network Fee. Regular is
cheaper but slower while Priority is more expensive but results in
faster confirmations.
Lightning Network Wallets
Lightning wallets are essentially bitcoin wallets except that when you send
and receive bitcoin, the transaction does not occur on the Bitcoin blockchain.
Rather, it is routed through a second layer network built on top of the Bitcoin
blockchain to facilitate instant and lower fee transactions. We will discuss
further about Lightning Network in Chapter 8.
Lightning wallets are meant for instant and low-value transactions. One of the
most user-friendly Lightning wallets you can try out is Phoenix Wallet by
ACINQ, one of the pioneer firms in Lightning Network development.[71]
One very important point to note—Lightning Network is still considered
experimental. Unlike the main Bitcoin blockchain that has been battle-tested
for over a decade, bugs and software vulnerabilities may still exist.[72]
Due to the possibility that funds may be lost while transacting with Lightning
Network, most Lightning wallets have implemented a limit on how much
bitcoin you can store in them.
That being said, if you are looking to “buy coffee using bitcoin”, a Lightning
wallet is perfect for such a task. You would be surprised at just how seamless
and instant it is to make transactions using Lightning Network.
Phoenix Wallet
Upon app installation, choose “create new wallet” and follow the steps
provided in the app.

After the wallet is set up, you will be prompted to backup your wallet.
Backing up your wallet ensures that you can still have access to your bitcoin
in case you lost your smartphone or Lightning wallet app. Like any other
bitcoin wallet, backing up involves writing down a set of random English
words in a specific order—this is called the seed keys.
Important note: DO NOT store your seed keys online or even digitally. Write
them down physically with a pen and notebook and store them in a place only
you would know.
Once you have fully backed up your wallet, it is time to deposit your first
bitcoin on the Lightning Network. Tap on the “Receive” button on the app to
bring up the receive page and tap on “Show a Bitcoin Address”. You can
deposit funds to the newly generated bitcoin address.
Note that a small 0.1% Channel Opening fee will be applied to “migrate”
your bitcoin onto the Lightning Network. You should not send too much
bitcoin—anywhere between 0.0001 to 0.001 BTC (10,000 – 100,000
satoshis) should be more than enough to experiment with Lightning Network
before trying out an even larger amount.
There is a hardcoded limit of 0.16 BTC at most Lightning wallets. Be careful
not to reach the amount—if you need to send bitcoin above that quantity, it
may be wise to use a standard bitcoin wallet instead of a Lightning wallet.
Step 4: To receive bitcoin via Lightning Network, let your sender scan the
LN-URL QR code for them to initiate the transaction. You can also
send the raw LN-URL link to the sender to initiate the transaction.
Fun Fact:
LN-URL always starts with lnbc followed by a long string of characters.

To send bitcoin, simply tap on the “Send” button to bring up the in-app QR
scanner. When an LN-URL code is scanned, the payment page will pop up
for you to set the amount of bitcoin you wish to send. Simply tap “Pay” once
you are done and the funds will be sent immediately.
Lightning wallets are perfect for making small instant transactions using
bitcoin when there is no need for your transaction to be mined and
permanently stored on the blockchain forever.
If you would like to move your bitcoin from the Lightning Network back
onto the Bitcoin blockchain, you can do so via an operation called “Closing
channels”. To do so, tap the “Settings” icon on the app and tap on the “Close
all channels” option to bring up the close channel page.
You will need to prepare a destination bitcoin address when closing the
channel. Simply tap “Empty my wallet” once you have pasted the bitcoin
address to empty out your Lightning wallet fully.
Alternative Lightning Wallets
Wallet of Satoshi
Wallet of Satoshi is another easy, out-of-the-
box lightning wallets. Simply download the
app and start sending and receiving
Lightning Network payments. You are not
required to create an account. Instead, your
device acts as your ID, and as long as you do
not delete the app or lose your phone you can
continue using the wallet. There is also an
option for you to sign up with an email
address in order to back up your account.
Breez
Breez wallet is an open-source, non-custodial
mobile wallet available on iOS and Android.
It can help you open up a Lightning Network
channel and it gives you full control over
your funds.
Bluewallet
Bluewallet is a full-service user-friendly
bitcoin wallet with Lightning Network
support. This means you can both store
regular on-chain Bitcoin as well as Lightning
Network bitcoin in one app.
 CHAPTER 7: ADVANCED BITCOIN WALLETS
If you made it this far, congratulations! But wait, we are only getting started.
This chapter introduces some advanced Bitcoin topics such as running a full
node and using special privacy techniques such as CoinJoin to send
transactions.
This is not a chapter meant for beginners as it features very technical
material and references.

Bitcoin Core Full Node

To really immerse yourself in the “Bitcoin experience”, you might consider
running a Bitcoin full node.
A full node is a program that fully validates transactions and blocks.[73] A
Bitcoin full node keeps a complete copy of the Bitcoin blockchain and helps
the network by accepting transactions and blocks from other full nodes,
validating those transactions and blocks, and then relaying them to other full
nodes.
You can think of the process of running your own Bitcoin full node as
operating your own bank, where you are in charge of not only your own
funds but also actively puts on a check and balance role to ensure other banks
are not involved with foul play. This is what bitcoin enthusiasts mean with
the tagline “Be your own bank”.
Full Node Requirements
Running a Bitcoin full node requires hardware of a certain specification for it
to run smoothly. If your computer meets the following requirements, there
should be no issue with running a full node:
● Desktop or laptop running recent versions of Windows, Mac OS X, or
Linux.
● At least 400 GB of free hard disk space, accessible at a minimum
 read/write speed of 100 MB/s.
● At least 2 GB of RAM
● An Internet connection with upload speeds of at least 400 kilobits (50
kilobytes) per second
● An unmetered connection, or at the very least a connection with high
upload/download quota. You need to download the whole 300-400 GB
of blockchain data upon first installation, and may relay at least 20-30
GB of network data a month as a full node.
● At least 6 hours a day where your full node can be left running in the
background. Ideally, you should run the full node continuously at all
times.
When running a Bitcoin full node, you may want to obscure your digital
footprint and increase your network privacy by using a Virtual Private
Network (VPN) service or other network obfuscation techniques.
If you are not careful, a full node that regularly broadcasts network
information to other nearby nodes may expose your identity and location.
You may also want to consider operating a full node using a dedicated device
solely for this purpose.
Download
For the purpose of demonstration, we will install the most widely used
Bitcoin full node implementation—known as Bitcoin Core, on a Windows
Operating System.[74]
The quickest way to download the software is via the link at Bitcoin.org. It
may be helpful to compare the versions in Bitcoin’s Github repository as that
is where the bitcoin full node software will be first released with every new
update before being made available from other download sources.[75]
In this case, we will download the “bitcoin-0.20.1-win64-setup.exe” version
of the installation file.
Once you have downloaded the software, it is highly recommended that you
verify the digital signature of the software before installing it.[76] You can do
so via the “Verify release signatures” link which will let you download an
ASCII file with the signatures encoded.
Take note of 3 things:
● The hashing algorithm used, from the “Hash” property
● The version of the installation software that you have downloaded
● The digital signature itself, which appears as a string of random
numbers
To verify the digital signature of the software, right-click on the installation
file to click “Properties” and open up the properties page and click
“Security”. Copy the “Object name”, also known as the “file path”, of the file
in full.
In this case, it should look like
C:\Users\pc-name\Downloads\bitcoin-0.20.1-win64-setup.exe
“pc name” would be the name of your computer, whereas “Downloads”
would be the Downloads folder where your downloaded files are stored.
Your file path may differ depending on how you have set up your computer.
Next, open up Windows Command Prompt terminal. In the Command
Prompt, enter the following commands
Certutil -hashfile C:\Users\pc-name\Downloads\bitcoin-0.20.1-win64-
setup.exe SHA256

Fun Fact:
“Certutil” refers to Microsoft’s own preinstalled digital signatures software.
“-hashfile” refers to the command to cryptographically hash the file you
inserted, which will result in a digital signature.
“SHA256” refers to the hashing algorithm you instruct the software to hash the
file with.
You might notice the algorithm has the same name as the one used in the
Bitcoin Protocol. This is because they indeed are the same hashing algorithm.

Finally, compare the resulting hash within the command prompt with the one
provided from the website. If the digital signature is the same, the software
has not been altered in any way from the source as it downloads into your
computer.
Installation
Installation of Bitcoin Core is fairly straightforward. Follow the instructions
on the screen and wait for the installation to proceed. Once the installation
has been completed, you will be greeted with Bitcoin Core’s welcome page.
This where you can customize the settings for the full node—where the
blockchain data is stored in your computer and whether you want to prune the
blockchain data (deleting the data after your full node has verified them, this
will no longer deactivate Bitcoin Core as a full node on your computer).

Once you have clicked on the “OK” button, the initial download of
blockchain data will immediately commence.
Note: Downloading the initial blockchain data is a very demanding task for
your hardware. Not only will your computer need to download the data via
Bitcoin’s P2P network (similar to torrenting), your computer will verify the
downloaded data independently—a task heavy in calculation.
Downloading the Bitcoin Blockchain
Now comes the waiting game. Bitcoin Core will now proceed to download
the entirety of bitcoin’s blockchain, block by block, into your computer. This
is known as “Initial Block Download”.[77] It is wise to leave your computer
running for the download while you are not using it.
It is fine to shut down the Bitcoin Core program while it is still downloading,
if you need to use your computer for something else. The block download
will resume the next time you open the program.

Network Traffic Chart

Clicking on “Window > Network Traffic” opens up the Network Traffic
Chart, which shows live upload/download statistics while the Bitcoin Core
program is running. It may be helpful to monitor your internet data usage if it
is a concern to you.
Note: Synchronizing the blockchain is a time-consuming activity. You are
downloading up to 350GB of data from peer-to-peer nodes that are connected to
you.
Using Bitcoin Core Full Node as a Wallet
Some time may have passed before the initial block download. Once it is
done, congratulations! You are now part of a global network of Bitcoin nodes
and actively making the Bitcoin Network more robust.[78] [79]

Now that you have fully downloaded the bitcoin blockchain, you can start
sending and receiving bitcoin using Bitcoin Core. Using the Bitcoin Full
Node is the most baseline way of sending and receiving bitcoin. In the very
early days of Bitcoin, this was the only way to send and receive bitcoin.
Receiving Bitcoin
To receive bitcoin on your full node, simply click on the “Receive” button.
You can generate a new bitcoin address by clicking “Create a new receiving
address”.
You can label the address, enter the amount requested, and even attach a
message in the address. Doing so will generate a request payment QR code
for your sender to easily scan and send the bitcoin to.
 Important note: Always generate a new bitcoin address every time you want to
receive payment. Reusing an address presents a privacy risk to yourself as
hackers may be able to trace your transactions and cause harm to you.

Sending Bitcoin
To send bitcoin, simply open up the “Send” page and enter the bitcoin
address and amount you want to send to. Labeling the bitcoin address allows
for easier reference the next time you want to send bitcoin to that same
address.
You can also adjust the transaction fee you wish to pay (valued in sats per
bytes) for the transaction. Do note that the less you pay, the longer your
transaction will likely take to be mined by miners as miners tend to prioritize
transactions with higher transaction fees.
 Fun Fact:
You can see the latest fee estimates for making bitcoin transactions on
statoshi.info.[80] You can set your fees according to how soon you want the
bitcoin transaction to be mined and confirmed.

Not every bitcoin transaction needs to be confirmed immediately.

Using the Bitcoin Full Node Console

As the name suggests, a Bitcoin Full Node does more than just sending and
receiving bitcoin. Because a full node stores the entirety of the bitcoin
blockchain, you can query all sorts of blockchain data to get the latest
information about the bitcoin blockchain.[81] Simply access the Bitcoin
console by clicking “Windows > Console” to open up the console.
Some of the example data you can query includes the latest bitcoin mining
statistics, data in a certain block, network information on the bitcoin full
nodes that are connected to you, and even all the pending transactions that are
currently queued for mining by the miners.
Here is an example of one of the queries you can call with the console named
gettxoutsetinfo.

Fun Fact:
Even though gettxoutsetinfo is a relatively basic query, there are already a few
very useful pieces of information presented. Here are what some of the data
means:
Height = number of the latest bitcoin block
Transactions = number of transactions made on the blockchain
Txout = number utxo currently on the blockchain
Disk_size = The size of the blockchain in bytes
Total_amount = circulating supply bitcoin

Samourai Mobile Wallet

To fully experience bitcoin’s privacy features and capability on the go, you
can consider using the Samourai Wallet as part of your bitcoin toolkit.
While there is a laundry list of bitcoin-dedicated mobile wallets out there—
and even bitcoin-supported crypto wallets, none of them can rival Samourai
Wallet in terms of features.[82]
Unlike typical mobile wallets that send bitcoin transactions in a
straightforward manner, Samourai Wallet is developed with the philosophy
towards “creating the software that Silicon Valley will never build, the
regulators will never allow, and the VCs will never invest in”.[83]
Various features such as Paynym[84], Stonewall[85] and Whirlpool[86] makes
bitcoin transactions much more resilient to stalkers who track your
transactions. One highlight is its CoinJoin capability, which we will describe
in Chapter 8. Even if you do not plan to use these features, knowing the
options readily available is always a good thing.
Installation
Step 1: The best place to find the download link for Samourai Wallet is
via their official website’s download page.[87] You can either
download the APK files directly or head to the Google Play Store
page. If you choose to download the APK files, be sure to also verify
the digital signature with the ones provided by the Samourai team.
Setting Up
Step 2: Install the app on your Android smartphone and follow the set-
up guide. Samourai Wallet comes with an in-built TOR (the onion
router) anonymity network to allow you to broadcast your bitcoin
transaction on the TOR network.[88]
Enabling TOR when using Samourai offers another set of anonymity
advantages on top of the privacy tools you will use within the app.
Step 3: Write down your passphrase, PIN and the 12-word mnemonic
keys.
Receiving Bitcoin
Step 4: You have now successfully completed the set-up for the
Samourai mobile wallet and be able to view the main screen, where
various functions are available. Tapping on the menu at the bottom
right of the screen will bring up Whirlpool, PayNyms, Send, and
Receive.
Step 5: To receive bitcoin, simply tap on the “Receive” icon and send
your address to the sender. Alternatively, get them to scan your QR
code.
Step 6: To customize your receiving address, tap on the “Advanced”
icon, which will let you choose the type of bitcoin address you want to
generate or even create a bitcoin payment request for a specific
amount.
Note: “SegWit native” addresses are typically the best option for bitcoin
payments due to lower fees and more flexibility to apply privacy features
through Samourai Wallet.
Sending Bitcoin
Step 7: Sending bitcoin through Samourai Wallet gives you great
flexibility in choosing the types of on-chain privacy features that you
want for your transaction. Tap on the “Send” icon from the main page
to go to the Send page.
Here’s a quick primer of the various privacy features and how they affect the
transaction:
● Ricochet = Several “fake transactions” or Hops will be made before the
bitcoin reaches your destination address. This feature is to fool outside
observers into thinking the bitcoin has passed many hands, breaking
the linkage between the sender and receiver.
● Staggered delivery = A modification of Ricochet, where there will be a
time delay between each Hop to further trick outside observers.
● Stonewall = A “fake” CoinJoin transaction between the sender and
receiver to make it harder for an outside observer to determine which
address sends how much bitcoin. This transaction tricks the stalker into
thinking the transaction involves more than two parties.
● Cahoot = Collaborative Transaction,[89] These transaction types require
both the sender and receiver to actively set up a CoinJoin transaction.
Samourai Whirlpool (CoinJoin)
At its core, CoinJoin is a trustless method for combining multiple Bitcoin
payments from multiple spenders into a single transaction to make it more
difficult for outside parties to determine which spender paid which recipients.
CoinJoin transactions do not require a modification to the bitcoin protocol,
meaning it can be done on the bitcoin blockchain itself.
Samourai Whirlpool is one such CoinJoin implementation that allows users
to execute a CoinJoin transaction in an easy-to-use manner.
Step 1: To perform a CoinJoin, tap on the menu button followed by
“Whirlpool”.
This will bring you to the Whirlpool screen. Since no CoinJoin transaction
has been performed, the balance is null. Tap on the “Whirlpool” icon on the
bottom right to continue.
Terms Recap:
UTXO = your bitcoin (basically)
Premix = bitcoin that has not gone through Whirlpool mixing.
Postmix = bitcoin that has already been mixed through Whirlpool.
You will now be prompted to either “Mix UTXOs” or “Spend Mixed
UTXOs”. Tap on the “Mix UTXOs” button to proceed.

The balance in your wallet will be displayed. You can select which UXTO set
you will want to add into the mix.
Due to Samourai Whirlpool’s implementation limits, mixing bitcoin on
Whirlpool’s Coinjoin is limited to a set of fixed numbers (0.01, 0.05 and 0.5).
Every participant must put in the same amount of bitcoin for Coinjoin to
work.
Think of it as buying a ticket for fresh money where the ticket price is the
same as the money you will receive at the end of the day. Therefore, every
participant who wishes to join the mixing must pay the same amount as per
the price of the ticket.
Select the pool you would like to join depending on your balance. In this
example, we went with the 0.01 BTC pool. The cycle priority will determine
the speed of the mixing.
Once you have selected the pool, you may begin the CoinJoin process.
Keep in mind that you only need to pay a one-time fee to begin the Whirlpool
cycle. However, once your bitcoin is mixing, you can enjoy infinite amounts
of mix as long as you do not withdraw from the Whirlpool.

Just before the process begins, a popup notification will prompt you to block
the “Doxxic Change” from being spent in your wallet. It is a good idea to tap
“YES” to allow Samourai wallet to tag the Doxxic bitcoin.
Important note: “Doxxic”, a portmanteau of “dox”[90] and “toxic”, are
“remainder” bitcoin from the addresses where you originally draw the bitcoin
from. Because the bitcoin comes from the same address, it is possible for outside
observers to link your postmix bitcoin to your original premix address[91]. This
will defeat the purpose of the CoinJoin.
The transaction will enter the queue and start mixing. Due to current
limitations of Whirlpool implementation, the Samourai wallet app can only
proceed while it is running on your smartphone.[92]
Imagine Whirlpool as a laundry machine which only runs if it is online. As a
rule of thumb, it is best to leave the whirlpool running as long as possible for
maximum effectiveness. Whirlpool will continue to mix with each incoming
participant into the pool, which further increases the anonymity of your
postmix bitcoin.
Mixing is now complete and is ready to be spent. There’s also the option to
add notes to the transaction. We labelled ours “Mixed BTC”.
To access your “Mixed BTC”, simply head to the home screen and tap on the
Samourai icon on the top left corner.

This will be your mixed balance that you will be able to send to other wallets
by tapping on the bottom right corner icon.
Congratulations, you have successfully performed a CoinJoin transaction.
PART 3: THE FUTURE OF BITCOIN
 CHAPTER 8: BITCOIN’S IMPROVEMENTS
Despite being the most well-known and valuable cryptocurrency in the world,
Bitcoin is not without complications. Scalability issues arising from code and
hardware limitations plagued the network since inception, hindering it from
becoming a highly efficient and viable global payment system.
Conversely, Bitcoin community members and developers have worked
together over the years to improve the Bitcoin protocol in various ways. In
this chapter, we will take a closer look at some of the main problems faced by
Bitcoin users and the solutions devised to solve them.

Scalability
Bitcoin’s scalability issues is one of the most-frequently debated topics by
bitcoin developers and community members. Compared to Visa’s payment
network which can allegedly handle approximately 24,000 transactions per
second, Bitcoin’s network can only handle an average of 7 transactions per
second.[93] This represents a major obstacle in its path to global adoption as an
alternative payment system.
Two commonly cited efforts solutions to improve Bitcoin scalability are
Segregated Witness (SegWit) and Lightning Network (LN).
Segregated Witness (SegWit)
By removing some data out of each Bitcoin transaction, you
can pack more transactions into each block (every 10 minute)
and therefore achieve higher transaction throughput.
Bitcoin was programmed with a block size cap of 1MB per block. With each
transaction taking up roughly 250 bytes of space, the only way for more
transactions to be processed every 10 minutes is by increasing block size or
reducing transaction size.
The SegWit proposal sets out to reduce transaction size by segregating digital
signatures outside of the block on the Bitcoin blockchain. This would free up
roughly 60% of a Bitcoin’s block space, allowing more transactions to be
packed in a block. The SegWit proposal was given the green light by the
community as per the New York Agreement (NYA) and included as part of
BIP 141.[94]

Removing the digital signature outside of each transaction does not affect a
transaction, as the effect of each transaction is determined by the output, or
how much and where it is spent. The digital signature is only required to
validate the transaction on the blockchain, but not to determine it.
With that in mind, Dr Peter Wuille, a Bitcoin developer, proposed an upgrade
of the Bitcoin protocol known as Segregated Witness, or SegWit for short.
Digital signatures take up more than half the space in a transaction and
SegWit attempts to segregate the signature from the input by moving it
towards the end of the transaction. This reduction in required block space per
transaction allowed for an increase in maximum theoretical block capacity
from 1MB to 4MB.
On 24 August 2017, SegWit was successfully included into the Bitcoin
protocol as a soft-fork and the throughput for the Bitcoin network increased
from 3 transactions per second to 7 transactions per second.
Additionally, SegWit also fixed what is known as transaction malleability,
where transactions can be tweaked to “look” different without actually
affecting the underlying amount transacted. Resolving this paved the way for
the development of layer two protocols like the Lightning Network, which
we will be covering next.
Lightning Network (LN)
By processing transactions on a second layer which allows
for faster and cheaper transactions without burdening the
main Bitcoin layer, Lightning Network has the potential to
solve Bitcoin’s scaling issues. Note that Lightning Network is
still a work in progress initiative as of December 2020.
Although SegWit has improved Bitcoin’s capabilities in processing
transactions, it is just one of the many solutions that have been proposed to
allow the network to compete with the incumbent payment giants. One of the
more interesting features that have received much attention is Lightning
Network (LN), a proposed and experimental scalability solution to address
some of the potential problems on the Bitcoin Network as more users
inevitably use and congest the network[95].
By design, bitcoin transactions are overwhelmingly immutable and secure.
Once a transaction is broadcasted to the Bitcoin Network, thousands of
miners and nodes will compute, hash, and store the data immutably on the
blockchain. However, this also makes it inconvenient for simple payments
like buying coffee or giving tips to online content creators.
Simply put, the Lighting Network was envisioned as a second-layer
settlement network built on top of the Bitcoin Network. It is a scalable,
instant and efficient payment system focused on small transactions that can
be consolidated into fewer transactions before being broadcasted onto the
Bitcoin Network.
With Lightning Network, transactions are processed on the second layer
network and ultimately verified on the main blockchain. Not only does this
help reduce the on-chain traffic, it also helps to reduce inflated fees caused by
overloaded transactions, since numerous transactions can now be recorded as
a single transaction on the main blockchain. It has been said that Lightning
Network can theoretically handle up to 1 million transactions per second,
miles ahead of Bitcoin’s 7 transactions per second.
The philosophy that creates Lightning Network was as old as Bitcoin itself.
In fact, Satoshi Nakamoto drafted the codes for what would eventually be a
way to move bitcoin between the Lightning Network from the Bitcoin
blockchain.

A code blob in the Bitcoin Code originally written by Nakamoto that would be the basis for Lightning
Network. Source: historical repository of Satoshi Nakamoto’s original bitcoin source code

Lightning Network payments are nearly instantaneous and have extremely

low fees, opening up many possibilities and is one of the many qualities
required to be a viable global payments system.
One very interesting experiment that was done earlier was the Lightning
Torch, where an amount of satoshis would be sent to a trusted user, or
‘torchbearer’. It would continue on and on until a malicious actor decides not
to pass on the torch. Experiments like this quickly became a testing ground
for the earliest versions of Lightning Network. The most popular variation
was started by a pseudonymous Twitter user called hodlonaut, which quickly
grew into a global phenomenon.[96]
However, as of December 2020, the LN is still considered to be in
development and not yet fully operational. Teams such as ACINQ,
Blockstream and Lightning Labs are still hard at work to develop their own
versions of LN, but no one can ensure that they would be fully functional and
bug-free so users will still have to wait.

Privacy
Another major concern for Bitcoin is privacy. While addresses themselves do
not contain any personally identifiable information, all transactions are
public, traceable, and stored permanently on the Bitcoin blockchain.
Since users have to reveal themselves when they transact, they may be
putting their entire transaction history for people who want to look into it.
While good practices such as using a new address for each payment can help,
it does not fully solve the problem and Bitcoin payments are still not quite
private.
CoinJoin
Although Bitcoin has been known for allowing users to make transactions
anonymously, it is not entirely private to parties who know what to look for.
Transactions can still be tracked using your Bitcoin address and therefore
users do not remain completely anonymous.
This is where CoinJoin becomes a privacy game-changer for the Bitcoin
protocol. Proposed by Greg Maxwell, a Bitcoin Core developer,[97] CoinJoin
merges multiple payments from different spenders into a single transaction,
making it indistinguishable from regular transactions.[98] This makes it more
difficult for external observers to determine the recipients of a specific
payment. As an added bonus to utility and convenience, CoinJoin does not
require any upgrade of the existing Bitcoin protocol.
PayJoin
CoinJoin does not have to be limited to one-way transactions—two parties
can pay each other through a special CoinJoin transaction known as PayJoin,
which has different and perhaps better privacy features. This is because
PayJoin transactions would not have specific outputs of equal value, thus it
would not be as easy to spot compared to a regular CoinJoin transaction with
equal outputs.[99]

However, one issue with CoinJoin is that you will require a counterparty
looking to transact with CoinJoin as well—which can be a hassle. This is
where JoinMarket is useful.
JoinMarket
CoinJoin can be a hassle to use, as it only works if the right quantity is
available in the right place, at the right time. Built as an improvement to the
CoinJoin feature, JoinMarket helps solve this problem by creating a market
for CoinJoin transactions to be executed in the most optimal way.
The way this works is by allowing CoinJoin transaction services to be
supplied and demanded by two main participants—market makers and
market takers. Market makers refer to CoinJoin participants who want to earn
fees for allowing others to create CoinJoin transactions with them. On the
other hand, market takers are CoinJoin participants who want to make
transactions as soon as possible, paying fees to the market makers for this
privilege.

Example of JoinMarket Orderbook

JoinMarkets makes use of multiple application scripts for different specific
purposes. The “Yield Generator” script collects income for market makers
while the “Send Payment” script acts as a market taker. The “Tumbler” script
enhances privacy by automatically creating CoinJoins at random.[100]
With the creation of JoinMarkets, users can now send up to 200 BTC worth
in equal-amount transactions at any time. Imagine how difficult it would have
been to find that many participants at the same time to join you in making a
transaction of that size, if JoinMarkets did not exist.
Taproot
Bitcoins are essentially stored in “scripts” which are within a transaction and
dictate how the coins could be spent in future transactions through certain
conditions.[101] When the recipient chooses to spend the funds, they must
reveal the entire script and its solution. Through this method, anyone can
verify that the supplied script was indeed the original script and that the
specified conditions were met.
However, the current flaw here is that users have to reveal all existing
conditions—even those that have not been met. This leads to two major
complications: the amount of revealed conditions would constitute a lot of
data and therefore represents a risk to privacy.
A proposed solution came in the form of the Merkelized Abstract Syntax
Tree (MAST). Through this process, each spending condition is hashed
separately and included in a Merkle tree to produce one single hash called the
Merkle root, which locks up the funds. The value here is that if any of the
Merkle tree data is revealed, only the Merkle root and Merkle path is required
to verify that the particular data is really there, while the rest of the Merkle
tree stays hidden. In short, only the fulfilled condition has to be revealed with
MAST.[102]
The Taproot soft-fork was inspired by MAST and its possibilities, where it
always includes a condition for all participants to cooperate and spend their
funds. Combined with the usage of Schnorr signatures in the Bitcoin
protocol, the group can remain concealed as a single entity. Schnorr
signatures allow multi-signature and single-signature transactions to remain
identical on the blockchain, masking them from observers.
Using the Schnorr signature algorithm, joint owners of multi-signature
wallets can produce a cumulative public key and then sign it together with
one signature, compared to individually publishing each key and signature for
a particular transaction.[103]
Taproot promises to increase Bitcoin’s fungibility, improve the functionality
of smart contracts, and boost privacy by making all transactions appear the
same to blockchain observers.[104] Besides that, the aggregation of multiple
private keys into one “master key” to perform transactions may potentially
reduce transaction fees and lower node operations costs, both vital for the
long-term scalability of the network.
Note that as of December 2020, the Taproot upgrade has not yet been
deployed. Until then, Taproot functionalities will not be usable.

What’s Next?
Despite being 12 years old as of time of writing, Bitcoin still has endless
room to grow, subject to operational and security limitations. One can expect
to see many more proposals, improvements, and ideas being worked on
Bitcoin in the coming months and years.
Initiatives that promise to improve scalability and privacy features on Bitcoin
will most likely continue to be the main focus for the Bitcoin developers in
making it a truly viable global payments system.
 CHAPTER 9: BEYOND BITCOIN
The world of blockchain technology and cryptocurrency goes beyond bitcoin.
There are now many different cryptocurrencies that run on various
blockchains and have a multitude of functions. These coins are commonly
referred to as alternative coins to bitcoin or ‘altcoins’. In this chapter, we will
be looking at some of the largest and most popular cryptocurrencies in use
today.
As we have seen previously, Bitcoin has many challenges to overcome before
it can be universally adopted as a legitimate form of currency. However,
other cryptocurrencies are also racing against them to reach a similar goal, by
attempting to solve the problems that Bitcoin has posed. While other
platforms and cryptocurrencies may adopt high-risk, light-speed approaches
to development, Bitcoin’s progress is relatively slower and more stable, in an
attempt to mitigate the risk of things breaking within the platform.

Bitcoin Forks
Bitcoin forks occur when there are changes made to the current protocol and
are usually conducted to add new features. It is also used to undo any
devastating hacks or bugs. In these cases, a consensus is required before the
changes are implemented. Otherwise, the blockchain may be permanently
split, resulting in the birth of new blockchains such as Bitcoin Cash and
Bitcoin SV.
Bitcoin Cash
Although it has ‘bitcoin’ in its name, Bitcoin Cash is a different
cryptocurrency and should not be mistaken for bitcoin. Bitcoin Cash was
created when some developers wanted to increase the amount of transactions
in a block by increasing the block size to 32MB, thereby effectively speeding
up transactions by almost 21 times and lowering costs.
To implement this change, a hard fork was initiated in 2017, splitting the
bitcoin blockchain into the original and new Bitcoin Cash network. After the
fork, users who had some bitcoin before the block would also end up having
an equal amount of Bitcoin Cash.
Although there are only a few key differences between Bitcoin Cash and the
original bitcoin, the prices of both assets tell a different story. Bitcoin Cash
has a much lower value compared to bitcoin. Although users may be more
tempted to use Bitcoin Cash, it has become very centralized in the hands of a
few mining pools, which goes against bitcoin’s decentralization ideals. Paired
with the existing popularity and utility of bitcoin, it is even more difficult for
Bitcoin Cash to truly dethrone its predecessor. Additionally, the team behind
Bitcoin Cash has been identified whereas Bitcoin’s creators remain
anonymous.
On 15th November 2020, Bitcoin Cash underwent another fork, caused by a
dispute between two camps of the Bitcoin Cash community, namely Bitcoin
Cash ABC (BCH ABC) and Bitcoin Cash Node (BCHN). The rift began
when a group of developers which makes up BCH ABC proposed an update
to charge 8% tax on profits earned by miners to finance the future
development of Bitcoin Cash. This was heavily opposed by the Bitcoin Cash
Node community. With heavy support from miners, Bitcoin Cash Node
inherited the BCH ticker while BCH ABC diverged away into a separate
blockchain.
Bitcoin SV
Bitcoin Cash ABC and Bitcoin Cash Node was not the first hard fork within
the Bitcoin Cash community. The first hard fork of Bitcoin Cash was in
November 2018, splitting the network into the original Bitcoin Cash and the
new Bitcoin SV blockchain, which was created to strictly follow Satoshi
Nakamoto’s original vision for Bitcoin. A major difference between the two
networks is block size. While Bitcoin Cash can handle up to 32MB of
transactions per block, Bitcoin SV quadruples that amount, boasting a block
size limit of up to 128MB.
However, the developers were far from done. On 24 July 2019, Bitcoin SV
received the ‘Quasar’ protocol upgrade, which increased the block size limit
from 128MB to 2GB. However, miners have signalled their intention to set a
lower hard cap at 512MB, which is still much larger compared to its
predecessors.
A few weeks after the implementation, miners struggled to process a 210MB
block of transactions, which prevented them from relaying transactions to the
network.[105]

Smart Contract Platforms

Smart contracts are programs which can be written to perform highly specific
and sophisticated actions when certain conditions are fulfilled. Although the
Bitcoin protocol facilitates a “weak” implementation of smart contracts, it is
difficult to expand upon the idea due scripting language limitations that
Bitcoin uses.[106] This is where platforms like Ethereum and Polkadot step in
to fill the gaps to produce more advanced smart contracts for a myriad of
applications such as finance, healthcare, and entertainment.
Ethereum
Ethereum is a decentralized platform for making digital payments, or pretty
much a world computer—accessible from anyone and anywhere. It is also the
second-largest cryptocurrency by market capitalization behind Bitcoin.
The Ethereum blockchain makes use of its own native currency called ether,
which is generated by mining, similar to how bitcoins are created. However,
the similarities end there as Ethereum is capable of so much more as it allows
the users on the network to publish and interact with smart contracts. Smart
contracts have become the basis of many decentralized applications (dApps)
that currently operate on the Ethereum network.
Ethereum’s protocol allows for different projects and tokens to be launched
on the network. Since the launch of Ethereum, many other tokens have been
launched on top of the Ethereum network by complying with certain
standards. These standards, such as ERC-20 and ERC-721 have been
established to allow these tokens to operate seamlessly within the Ethereum
ecosystem.
The ERC-20 token standard is used to create fungible tokens that have been
adopted by many cryptocurrency projects. These tokens are interchangeable
and can be freely exchanged with each other.
The ERC-721 token standard, on the other hand, is used to create non-
fungible tokens (NFT). These tokens are used to represent unique or one-of-
a-kind assets that have different characteristics and values. Non-fungible
tokens have been used as limited edition digital art, collectible cards, and
many more.
You can easily purchase ether through most cryptocurrency exchanges.
Although Ethereum mining is an option, it has become industrialized over the
years and may not be recommended for individuals.
Polkadot
Polkadot is a blockchain protocol designed to support multiple purpose-built
blockchains under one unified network. A brief rundown on some of the main
issues that Polkadot aims to tackle:

1. Scale – With multiple interoperable blockchains built on top of it,

transactions can be processed in parallel across different chains
while maintaining connectivity, greatly increasing throughput and
scalability.
2. Specialization – Blockchain protocols are typically built for
specific use cases, and it can be very difficult to have a one-size-
fits- all solution (think Bitcoin not being able to handle smart
contracts too well, or Ethereum struggling to handle Cryptokitties
at its peak). On Polkadot, each blockchain—also called
“parachains”—can be optimized for specific use cases such as file
storage and transaction processing, for maximum efficiency.
3. Governance – Having separate blockchains also means that each
parachain can self-govern and upgrade their protocol as required
without affecting the rest of the network. This potentially allows
for quicker iterations, fixes or changes compared to existing
single-blockchain networks.

Polkadot’s infrastructure begins with the relay chain, which acts as the central
chain. Each chain that runs on Polkadot is called a parachain as they run
parallel to the main relay chain, and is built on top of the relay chain.[107]
Besides blockchains built on top of Polkadot’s own relay chain, it is also
interoperable with blockchains that have vastly different technology stacks
such as Ethereum and Bitcoin through bridges.

Stablecoins
Stablecoins are a form of cryptocurrency that aims to have its value pegged to
a national currency such as the US dollar or a commodity such as gold. US
dollar stablecoins are the most popular form of stablecoins and have gained
popularity in recent years.
US dollar stablecoins provide traders with the ability to have a stable
portfolio pegged to the US dollar instead of a volatile portfolio held in
bitcoin. Tether and Dai are some of the more widely used stablecoins.
Tether
Originally known as Realcoin in 2014, Tether is the undisputed leader of
stablecoins. Tether is meant to represent the value of the US dollar, where 1
unit of Tether is equivalent to 1 US dollar. Tether has mostly maintained a
stable value throughout its history pegged to the US dollar.
On 6 October 2014, the first Tether stablecoins were issued on the Bitcoin
network using the Omni Layer protocol. In order to uphold its peg to the US
dollar, Tether claims that each token is backed by an equivalent amount of
US dollar in its bank reserves.
However, Tether is not without controversy. There have been allegations that
Tether is no longer fully backed by bank reserves and that a portion of its
reserves includes affiliate company loans.[108]
Despite the controversies, as the first stablecoin, Tether is still extremely
popular with traders. It is listed on almost all cryptocurrency exchanges as a
trading pair against cryptocurrencies. Its popularity has seen it become one of
the top 3 largest cryptocurrencies by market capitalization.
Dai
Contrary to Tether, Dai is not backed by fiat currencies but is instead backed
by cryptocurrencies. Dai is a form of debt that is taken out based on the
amount of underlying assets deposited as collateral.[109]
Dai functions as one of the major stablecoins used on the Ethereum platform,
where its peg is maintained due to over-collateralization of cryptocurrency
assets. In other words, to get $1 worth of Dai, users have to deposit at least
$1.50 in ether or other cryptocurrencies.[110]
The current version of DAI, also known as multi-collateral Dai, is an updated
iteration that supports multiple cryptocurrency assets as collateral to create
Dai. The previous version, now known as Sai is called single-collateral Dai
because it can only be generated using ether as collateral.

Privacy Coins
Many people think that Bitcoin transactions are totally anonymous and are
not traceable. However, this is not entirely true. Bitcoin promises some
pseudonymity where some information is private and protected, but not all of
it.
Anyone with the proper technical know-how and understanding of the
Bitcoin protocol can track down transactions with some effort. This is where
privacy coins are favored, as they allow users to achieve a higher degree of
anonymity when making transactions through a blockchain.
Dash
Widely considered as the first privacy coin to be created, Dash was a fork of
the original Bitcoin code but with an interesting twist—an optional form of
privacy through their own modified version of CoinJoin called PrivateSend.
[111]
PrivateSend masks various transactions by mixing them together and it is
then verified on the blockchain as one single transaction.
Monero
One of the top privacy coins in use today, Monero is built to be private by
default, making use of stealth addresses and ring confidential transactions
(RingCT). Stealth addresses are single-use addresses that are created for each
transaction by a sender.
Payments sent from the original address are routed through these stealth
addresses to prevent any linkability to the recipient that can be observed on
the blockchain. However, this poses another challenge, as it is not entirely
private if the senders can trace a recipient’s set of transactions based on the
amount sent to them. Therefore, ring signatures are used to mask the output
amounts so that total untraceability is ensured.
 CLOSING REMARKS
First of all, give yourself a good pat on the back! If you are reading this, it
means that you are now up-to-date with Bitcoin, one of the most fascinating
forms of money the world has ever seen.
Thank you for your time and we hope you have enjoyed reading the How to
Bitcoin book as much as we had fun writing it. The cryptocurrency rabbit
hole is deep and we have just only scratched the surface here. We hope that
you will be inspired to join us on this journey.
If you would like to learn more about what comes next after sound digital
money, check out another one of our publications on Decentralized Finance
(DeFi). Our How to DeFi book will give you further insights on what the
future of finance will look like.
Welcome to the world of cryptocurrencies!
 APPENDIX
CoinGecko’s Recommended Bitcoin Resources
Reads
Grubles – https://notgrubles.medium.com/
Jameson Lopp’s Bitcoin Resources – https://www.lopp.net/bitcoin-
information.html
Jameson Lopp’s Lightning Network Resources –
https://www.lopp.net/lightning-information.html/
Jimmy Song – https://jimmysong.medium.com/
Pierre Rochard – https://www.pierrerochard.com/
Unchained Capital – https://unchained-capital.com/blog/
Newsletters
Bitcoin Optech – https://bitcoinops.org/
Podcast
Stephen Livera – https://stephanlivera.com/
Unscrypted Podcast – https://aantonop.com/category/podcasts/unscrypted-
pod/
What Bitcoin Did – https://www.whatbitcoindid.com/
Lightning Junkies – https://lightningjunkies.net/
Videos
Bitcoin Beginner’s Important Videos – https://www.youtube.com/playlist?
list=PLeEqJMaPXEpryW67EIvIDs0UzHA_cyL-V
Andreas Antanapolous – https://www.youtube.com/c/aantonop/videos
Robert Breedlove – https://www.youtube.com/c/RobertBreedlove22
Other Books We Recommend
Mastering Bitcoin – https://www.goodreads.com/book/show/21820378-
mastering-bitcoin
The Bitcoin Standard – https://www.goodreads.com/book/show/36448501-
 the-bitcoin-standard
Thank God for Bitcoin – https://www.goodreads.com/book/show/56049234-
thank-god-for-bitcoin
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Chapter 3: The History of Bitcoin

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Chapter 4: Keeping your Bitcoin Safe

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Chapter 5: Getting your First Bitcoin

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Chapter 6: Storing your Bitcoin Safely

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Chapter 7: Advanced Bitcoin Wallets

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Chapter 8: Bitcoin’s Improvements

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 GLOSSARY
Index Term Description
A Altcoins Alternative to Bitcoin—all
cryptocurrencies that was launched
after Bitcoin
B Blockchain Split A blockchain that diverged into
two paths
C Centralized A trading platform that is operated
exchange by a central party
Consensus A majority agreement within a
group
Cryptography A method to secure and protect
information through codes
Custodial Refers to a third party having
control over your assets
D Decentralized Applications built on decentralized
Applications network, where the underlying
(dApp) software is open-source
Distributed A cybersecurity attack that disrupts
Denial-of-service the normal traffic of a server or
(DDoS) network
Derivatives Financial contracts that derive
value from the underlying asset
 Difficulty The complexity in solving the
cryptographic algorithm

F Fiat Currencies issued by a government

Fork A hard fork is the permanent
divergence of a blockchain into
two, while a soft fork is a
backward-compatible update to a
decentralized blockchain protocol

Fungible The property of an item which has

interchangeable units. For example,
a $1 note is interchangeable with
another $1 note, hence it is
fungible. In contrast, a place ticket
assigned with a unique name and
seat number is not interchangeable
with another ticket, hence it is non-
fungible
G Genesis Block The very first block of a blockchain
H Halving The event when the block rewards
for mining is halved

Hashpower The power required by a computer

to run and solve the mathematical
hashing to successfully mine a
block
Hashing Cryptographic hash function that
Algorithm returns a string of fixed length
K Know-Your- The process of requiring users to
Customer (KYC) perform an identity verification
L Ledger A record of financial transactions
M Mint The process of issuing new coins or
tokens

O Oracle Services which provide real-world

data onto blockchains and smart
contracts
Orderbook An electronic list of buy and sell
orders

P Peer-to-Peer A network where each node has

(P2P) equal permission to validate data. It
allows two individuals to interact
directly with each other without the
need for a third party
Private Key Secret key that allows the user to
spend cryptocurrencies in the
wallet
Protocol A set of rules and procedures for
transmitting data between
computers
Proof-of-Work A consensus algorithm in which a
(PoW) block is validated via work done in
the form of mathematical hashing
S Seed phrases A group of words that allow access
to cryptocurrency wallets
Smart Contracts Digital contracts that are powered
by code
T Two-factor An additional layer of security
authentication added to the authentication process
Tokens A unit of digital asset, usually coins
 issued on existing blockchains
W Wallet An interface that is used for
cryptocurrencies storage. It is
usually the interaction bridge
between a user and the blockchain.

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