Here you’ll find succinct answers to common questions about Bitcoin and Digital Currencies. Each answer is confined to one-sentence and can stand by itself, though further explanation follows each answer for those looking for more depth.
Q. What is Bitcoin Mining?
A. Bitcoin mining is the process by which bitcoin transactions are recorded into the permanent, global, bitcoin blockchain ledger.
More: As an incentive for this work, the bitcoin protocol awards bitcoin miners new bitcoins as well as bitcoin transaction fees. Mining is a competitive endeavor and thousands of computers around the world are all simultaneously competing for the right to record transactions and earn the bitcoin rewards that come with that effort. Additionally, this competitive computation effort put towards mining provides the bitcoin network overall with a massive amount of computational power and security.
Q. Are Bitcoin transactions anonymous?
A. No, Bitcoin is said to be “pseudonymous” since complete information about every bitcoin transaction is recorded in a publicly accessible ledger.
More: The information stored in the blockchain notes transactions between bitcoin “addresses”, which are random strings of letters/numbers used by bitcoin wallet software. No real-world identity information is stored in the blockchain, but full details in the form: “Address-ABC sent N bitcoins to Address-XYZ” for every single bitcoin transaction are recorded and viewable by anyone. It’s very difficult, to the point of being nearly impossible, to use bitcoin in such a way that this rich transaction data never touches a real-world identity in any way.
Q. Where does the value of a bitcoin come from?
A. The value of a bitcoin comes from the demand created by people who find the bitcoin system useful.
More: There is no central bank promising to guarantee the purchasing power of a bitcoin, nor is there any central entity offering to perpetually exchange bitcoin for some commodity. The price of bitcoin is therefore purely based on the system’s usefulness; or more accurately, the market’s collective assessment of that usefulness or potential therefor.
Q. Is bitcoin legal tender?
A. Bitcoin is not legal tender, but in nearly all jurisdictions in the world, it is a legal means of exchange.
More: Legal tender laws generally describe what asset or system *must* be accepted as currency is some jurisdiction. In the United States, other means of exchange are perfectly legal, though not required by law to be accepted.
Q. Can the creator of Bitcoin control the system?
A. Bitcoin is an open-source system independently run by thousands of individuals and businesses around the world, and Satoshi Nakamoto, the creator of Bitcoin, does not hold any special technical status or ability within the system.
More: Since Bitcoin is simply a protocol – ie, an agreed up set of operational rules – there are no “keys to the kingdom”. Thus, no individual, including Satoshi Nakamoto, can exert technical control of the system. Control is defined collectively by the majority of people operating Bitcoin protocol software.
Q. Is Bitcoin legal?
A. Bitcoin is fully legal to use in most jurisdictions around the world, including the United States.
More: While most jurisdictions do not significantly, if at all, inhibit Bitcoin use, there are a number of jurisdictions where Bitcoin either sits in a legal gray area, or has been explicitly limited. China, for example, forbid its banks from interacting with Bitcoin-based businesses, and Russia may enact laws that explicitly make Bitcoin illegal. But generally, Bitcoin use is unrestricted for consumers in nearly every jurisdiction around the world, and businesses must typically follow existing financial services regulations as applied to Bitcoin.
Q. Who/What are the Bitcoin Core Developers?
A. The small group of developers responsible for updating and maintaining the most commonly used Bitcoin protocol software are referred as the “Core Developers”.
More: Specifically, the original Bitcoin codebase released by Satoshi Nakamoto in 2009 has evolved over the years and been contributed to by hundreds of developers. The group of less than 10 individual developers who manage these contributions (in recent years via github.com/bitcoin) became known as the “Core Dev Team”. More recently, the codebase they maintain – by far the most popular Bitcoin full-node client – has been renamed “Bitcoin Core”, making the “Core Dev” moniker all the more apt.
Q. What is a Bitcoin address?
A. A Bitcoin address can be thought of as an account number to which bitcoins can be sent.
More: The Bitcoin system keeps track of who has what bitcoins by logging every transaction in a global ledger of transactions called the bitcoin “blockchain”. This ledger keeps entries of sending and receiving parties, where these parties are Bitcoin addresses. Real-world users control addresses by using Bitcoin wallet software which stores the necessary keys to “unlock” bitcoins that have been sent to these addresses.
Q. What is a Bitcoin wallet?
A. A Bitcoin wallet is typically a software program that manages addresses to which bitcoins can be sent, and the associated “keys” required in order to send bitcoins from those addresses.
More: Bitcoin wallets vary greatly in their format and features. Some wallets are simply strings of numbers (representing cryptographic keys) which are printed on paper and locked in a safe. Other wallets are sophisticated software applications that manage multiple users, complex funds management arrangements, detailed logging, and even tax-accounting. But at minimum, a Bitcoin wallet manages sets of Bitcoin cryptographic keys.
Q. How many transactions can the bitcoin network handle?
A. Currently, the Bitcoin network can handle a maximum of 7 transactions per second, but updates are planned to increase this into the thousands of transactions per second range.
More: There is currently a hard-coded limit in place in the main Bitcoin Core software which defines the transaction throughput capability of the network. Key developers on the “Core Dev” team, and other members of the community, support raising this limit significantly over time, and are developing a timeframe and plan to roll out these changes. But given that Bitcoin is a global consensus network wide agreement must be obtained before any critical update can be successfully implemented, and this process is ongoing.
Q. How much computational power is dedicated to bitcoin mining?
A. It is estimated that the raw computational power of all Bitcoin miners exceeds the compute power of the world’s top 500 supercomputers by more than 1000-fold.
More: In absolute terms, the bitcoin network as a whole executes about 300 quadrillion SHA-256 “hashes” per second. This is a very specific and narrow type of computational work. State of the art bitcoin mining equipment can do nothing other than bitcoin mining. Thus, the comparisons to more general-purpose supercomputers is something of an apples-to-oranges comparison, though it does give an accurate sense of the scale and raw power consumed by the bitcoin-mining network.
Q. Where do bitcoins come from?
A. New bitcoins are released on the network every 10 minutes, on average, according to preset and universally agreed upon rules set forth in the Bitcoin protocol software running on computers around the world.
More: The Bitcoin protocol defines a number of key properties of the Bitcoin system, including how new bitcoins come into existence. Specifically, when a bitcoin-miner earns the right to add a new block of transaction information to Bitcoin’s global “blockchain” ledger, the protocol allows the miner to reward him/herself with new bitcoins. Right now, this reward is set to 25 bitcoins, and some miner on the network earns this right roughly every 10 minutes. Additionally, roughly every 4 years, the reward amount is cut in half – this is another rule specified at the protocol level in the Bitcoin system. These rules combine to form a diminishing release schedule of bitcoins, with no more than 21 million bitcoins ever scheduled for release.
Q. Is there a purpose to the work miners do?
A. The work Bitcoin miners do, and the electricity they expend doing it, is critical for the security and credibility of Bitcoin transactions, but the work output of miners cannot be repurposed for anything else.
More: At first glance, the electricity spent on Bitcoin mining appears wasteful. But it turns out that the effort is critical for maintaining Bitcoin’s extreme levels of security and ledger integrity. The fact that Bitcoin’s mining computations cannot be used for any other purpose means that would-be attackers must bear a large and unrecoverable cost (ie, electricity) to attack the Bitcoin network. Put another way, a would-be attacker faces a choice of using electricity to contribute to the network and earn money (by mining), or attack the network and earn very little or none. This balance has arguably led to the rapid growth in the mining-power of the Bitcoin network as economically-rational actors choose to contribute.
Another by-product of this dynamic is that Bitcoin’s blockchain ledger is highly credible. The more power spent mining on the Bitcoin network, the more irrefutable and secure the network’s transaction history becomes.
Q. How long does it take for a bitcoin payment to complete?
A. Bitcoin payments are broadcast globally within seconds, but it takes about an hour before most people consider the transaction 100% permanent.
More: In contrast to other payment networks, Bitcoin transactions do not have explicit “settlement” periods. Whereas a bank transfer may settle in 3-5 business days, a Bitcoin transaction simply becomes more irreversible as time goes by. It turns out that after about an hour, in most cases, the amount of energy necessary for a malicious actor to invalidate the transaction is so high that it’s infeasible for all practical purposes.