Bitcoin For Dummies Cheat Sheet.
The information in this Cheat Sheet should help reduce some of the mystery and confusion so that you can begin your Bitcoin journey with confidence.
Learning the Bitcoin lingo.
There is no Bitcoin, actually. There’s nothing tangible, of course, but there’s not even some kind of digital representation of a coin. Rather, Bitcoin is represented by records of Bitcoin transactions in the Bitcoin "ledger," which is stored in a "blockchain" ― something else that few people understand.
It can all be a little confusing, so here’s a quick breakdown of a few important terms.
Blockchain : A blockchain is a special kind of database, a computer file that stores structured data. Actually, in the case of the blockchain, the database is distributed; copies of the Bitcoin blockchain are sitting on thousands of computers spread across the world. Because all the copies have to match up, this combination of blockchain copies is unhackable. The Bitcoin ledger : A ledger is a record of financial transactions. Ledgers were originally handwritten in books. Today, the Bitcoin ledger stores digital information about Bitcoin transactions in the Bitcoin blockchain. By the way, the Bitcoin ledger is not encrypted; it’s a public, open system that allows anyone to peer into the blockchain and see what’s going on, using a "blockchain explorer." Bitcoin : Initially, this is confusing for people, but unlike dollars, euros, pesos, and pounds, not only is there no physical Bitcoin, but there’s no digital Bitcoin either — nothing you can point at and say, "Look, there’s a Bitcoin." Instead, the Bitcoin is just represented by the ledger saying that the Bitcoin exists. In January 2009, information was added to the Bitcoin ledger — this is what’s known as the Genesis Block — saying, in effect, "50 Bitcoins were added to the ledger." From then on, Bitcoin existed because the ledger said so! The Bitcoin network : Just like the internet is home to an email network, and to the world wide web — a network of websites — there’s also a Bitcoin network. The Bitcoin network is made up of thousands of computers all communicating together across the Internet. Some of these computers are nodes, which hold a full or partial copy of the blockchain. Some are also involved in the "mining" process in which new Bitcoin is created. But most are the wallet software programs employed by Bitcoin investors and users. Address: Inside the blockchain, all the Bitcoin is associated with various addresses , which are long, unique numbers. You may own an address that, in the Blockchain ledger, is associated with, say, a tenth of a Bitcoin (or a thousandth, or five Bitcoins, and so on). You control the address (and associated Bitcoin) through the use of cryptography. Transaction : A Bitcoin transaction occurs when someone sends a message to the blockchain saying, in effect, "Take x Bitcoin from my address, and move it over to this other address." Let’s say you have half a Bitcoin, and want to convert it to dollars; you find someone willing to buy your Bitcoin — a Bitcoin exchange, for btc instance — and send a transaction to the blockchain moving the Bitcoin from your address to the buyer’s address. The ledger will show a transaction saying, "Half a Bitcoin was moved from address x to address y ." Wallet: No, a wallet is not where the Bitcoin
is stored. There’s no Bitcoin in a wallet! Rather, the wallet stores information that enables you to control the address in the blockchain with which your Bitcoin is associated. Software wallets allow you to send messages to the Bitcoin network and enter transactions into the Bitcoin ledger.
Do you understand money?
When you think of money, you likely think of paper bills and coins. However, the world’s major currencies do not have coins and bills for all of the money in circulation. Around 90 percent of a major currency has no physical representation! It’s just (to quote historian Yuval Noah Harari) "nothing more than entries on a computer server."
Money is merely a concept, a way for humans to store value and exchange it in the future for real goods and services. Money can be represented by polished shells, banknotes, gold, salt, barley, coins, large stone disks ― it can be many different things. If you believe in the representation, then whatever is being used to represent it can function as money.
Well, there’s another requirement. It can’t be too easy to make more of the representation. "Shells?" you say, "I can pick those up on the beach." Not so fast! Past cultures that used shells to represent money used a very particular type of shell, BNB required that it be worked extensively, and even used shells from an area far away. There was no simple way to flood the market with new money.
So, yes, Bitcoin can act as a form of money, or at least a "store of value." It’s in very limited supply; a fixed but ever-diminishing supply is "mined" each day. And millions of people believe in it.
How does this blockchain thing work? Well, buy bitcoin the blockchain is a form of database (like data stored in a spreadsheet or in a personal finance program). And it’s copied across thousands of computers across the Bitcoin network.
But there’s more. First, there’s the term block . This refers to blocks of data. Blockchains can be used for many different purposes, but in the case of the Bitcoin blockchain, each block contains records of transactions. A new block of data is added to the blockchain — and replicated across all the copies — every ten minutes or so.
Then there’s the term chain . A blockchain is, perhaps not surprisingly, a form of database in which blocks of data are chained together. How? Well, it’s a little complicated, but blocks are chained together using hashes .
A hash is a long number, and acts like a digital fingerprint. It uniquely identifies a block of data. So, you hash a block of data to create this digital fingerprint. Then that fingerprint — the hash — is stored with the block of data. When the next block of transactions is ready, the Bitcoin software grabs the hash from the previous block, then hashes all the data — the transactions along with the previous hash — to create the current block’s hash…which will then be added to the next block, and so on.
This chains the blocks together in a way that makes it impossible to change even a single character of text or a single number; if you did that, the edited block’s hash would change, which would change the next block’s hash, which would change the block after that, and so on.
The end result? The Bitcoin blockchain is essentially unhackable.
Cryptography ―the crypto in cryptocurrency.
Cryptocurrencies, such as Bitcoin, use cryptography — in particular, public-key encryption — to provide a way for owners to prove ownership. Here’s a quick rundown of how public-key encryption works:
Encryption: When you "encrypt" data, you scramble it. You take, for instance, a message that you want to keep private, readable by the recipient only, and scramble it up so that it’s totally illegible. It can only be read if it’s decrypted (unscrambled). The key or password: In order to encrypt the message, you use a key or a password. For instance, perhaps you use a personal finance program such as Quicken. In order to get into the program, you have to enter a password, which is used to unlock the program. In effect, you take the data you want to unlock, add the key or btc
password, pass it to the program, and the program uses the key to unlock the data file. Only that specific key will unlock the scrambled data.