Bitcoin Architect: Everything You Need To Know About Bitcoin

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Much has been written over the past year about the new digital currency Bitcoin – especially after its price skyrocketed 15x in just a few months, followed by a blow-off correction of over 50%.

But what exactly is it? How does it work? How secure is it? What are its advantages (and disadvantages) to sovereign fiat currencies? To precious metals?

In this week's podcast, Chris talks with Gavin Andresen, chief scientist of the Bitcoin Foundation and lead developer for its digital currency project.

On Bitcoin's Founding Concept

Bitcoin really is a new kind of money. It is a new concept in how you can 'do' money, in that it is a virtual or digital currency that isn't issued by a central bank. It isn't created by some central corporation. Instead, everyone who is participating in the Bitcoin network – so everybody who is running the Bitcoin software on their computer in communicating over the network with other people who are running the Bitcoin software – all of those people together collectively perform the functions that a central bank would typically perform. Those people all create the currency. Those people all make sure that the transactions that happen are valid and that invalid transactions are rejected. So collectively, together, everybody who is running the Bitcoin software makes the system work. And that makes it very resilient, really. It is resistant to central control. It is resistant to manipulating the money supply. It is resistant to censorship. It is resistant to a lot of other bad things that have happened with our traditional fiat currencies. 

On Bitcoin's Security

Bitcoin is also like cash. If you own some Bitcoins and you are holding some Bitcoins in your digital wallet then that is like holding physical cash in your physical wallet. If somebody steals that wallet, then they have got your Bitcoins.

You asked, will I lose all of my money if a server crashes? That is not an issue. All of the tens of thousands of Bitcoin miners looking for Bitcoin actually hold a record of all the transactions that have happened on the Bitcoin network. There is no one single server that can crash and take all of your Bitcoins away. It is very distributed and reliable in that way. But again, you are responsible for holding what I call your ‘private keys’ that let you spend your Bitcoins. And if you lose your private keys, either to a hacker attacker, or if your computer crashes and you didn't have a backup of your keys, then you can lose your Bitcoins.

On Bitcoin's Future

I think Bitcoin will be an answer. I still tell people, only invest time and money into Bitcoin that you can afford to lose. It is in early adopter stage. I would still consider it a high-risk investment, if you want to think of it as an investment. It could be really huge. I think there is no theoretical reason why Bitcoin couldn't grow as large as some of the major national currencies. There is really no technical reason why it couldn't and no theoretical reason why it couldn't. There is a huge network effect with money. The more people using a means of exchange, the more valuable it becomes to use that thing as a means of exchange. That is why gold is king, and not platinum or silver. There has been a huge network of people finding gold to be a great stored value, and in certain situations, a means of exchange. Bitcoin has a huge head start on any other alternative.

We are still really at the early adopter phase. We have been since Bitcoin started. Adoption is actually happening pretty quickly. Right now, all of the Bitcoins in the world are worth somewhere over a billion dollars. That gives you a sense of scale on how big the Bitcoin economy is. Last year I was doing some research and I was looking at how big is Bitcoin relative to some of the smaller, national fiat currencies. They assumed that Bitcoin was probably smaller than any other national currency. And to my surprise, I actually found out that there are some small nations where the national currency is worth less than Bitcoin 

Click the play button below to listen to Chris' interview with Gavin Andresen (35m:41s):

This is a companion discussion topic for the original entry at https://peakprosperity.com/bitcoin-architect-everything-you-need-to-know-about-bitcoin/

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Does bitcoin require encrypted connection?  Can governments block ports, service, etc to prevent users from using their bitcoins? 

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DId he say it? He did. "Bitcoins are created out of thin air." While I posit that Central Planning is an almost certain disaster waiting to collapse, the concept of viable alternatives are an absolute necessity, but this guy just revealed the big problem that makes BitCoin just as flawed as the FED; they 'print' them just as the guys at 33 Liberty & the Eccles Building are printing dollars.
If I am mistaken, please shine the light on me, I am very open-minded. 

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Karl denninger demolition job of bitcoin

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The community debunking Karl Denningers "demolition job":
http://www.reddit.com/r/Bitcoin/comments/1bd6ad/karl_denninger_analysis_of_bitcoin_which_i_have/
http://www.donkdown.com/karl-denninger-doesnt-understand-bitcoin/
 

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Since you claim to be open minded, I'll try.Bitcoin itself is, among other things, an electronic payment system, with some built-in rewards, or sentiments, for the peer-to-peer network to confirm the transactions.
This means that every 10 minuttes new bitcoins are "unlocked" as a reward to the peer (miner) that first confirms the transactions from the last 10 minuttes. In the beginning, in 2009, the reward was 50 bitcoins every 10 minuttes, that changed to 25 bitcoins last year. The reward will halving approx. every 4 years, thus the maximum amount of bitcoins ever will be approx 21,000,000. Right now approx 11,500,000 exist. However, each bitcoin is divisible by 100,000,000, so it's perfectly possible to buy, let's say, 0.005 bitcoin, which by the current exchange rate is about $0.5
In the future, as the reward deminishes, the peers (miners) will be rewarded by small fees from transactions.
 
Many people like to think of Bitcoin as Gold 2.0 as they have several similarities.
Here are some short videos and some educational classes, if you are further interested.
 
Short videos:
http://vimeo.com/63502573
https://www.youtube.com/watch?v=Um63OQz3bjo
https://www.youtube.com/watch?v=CdVVECKKSXo
 
Educational videos:
Khan Academy
https://www.khanacademy.org/science/core-finance/money-and-banking/bitcoin/v/bitcoin-what-is-it
Udemy
https://www.udemy.com/bitcoin-or-how-i-learned-to-stop-worrying-and-love-crypto/

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the whole idea is to get people to believe a concept is a real entity and having more of anything makes one wealthy.  what a crock
this is taking our current problems further into lala land. put your money here…the wizard of oz

to quote:

 I think a lot of people in Germany still remember the hyper-inflation that happened after WWI. And so a system like Bitcoin that cannot be hyper-inflated away really appeals to them

do the math: most people remember things/events by the age of say  5.  that means all of these "lots" of german people who remember were born between 1915 and 1925, so they would be 88-98 yrs old right now and that is if they survive ww2, and if still lucid, control how much money?

c'mon people…resilence calls for some common sense. bitcoin is another scam trying to float an idea that sets up a further scam.

 

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Bitcoin is money if a critical mass of folks agree that it is and start using it for trade.  This has happened.  Bitcoin does not take our, "currrent problems farther into Lala land"…   it is simply a form of money that will have a tendency toward deflation if/as adoption increases due to its algorithmically enforced scarcity … which is very different than the inflationary tendency of infinitely "printable" fiat currencies like the dollar.  You don't have to like Bitcoin, and you certainly don't have to use it, but your denigration of the concept suggests to me that you have no idea the corrosive nature of our current money system… the one that you show your bias toward when you say, "put your money here…the wizard of oz"… you are saying that you don't want to go wasting your precious US paper dollars on this silly Bitcoin, right?   We are all programmed from an early age to be paperbugs… and it is up to each of us to break through this and understand what money is, and what is money.


.   http://www.plata.com.mx/mplata/articulos/articlesFilt.asp?fiidarticulo=194
The Welfare State, funded with fiat money, has produced millions upon millions of humans who have grown accustomed to a good life based on credit and welfare.
…
Fiat money has destroyed humanity’s normal way of life; a way of life in which men and women could find their places and were thankful to have them. That old way of life is gone; the old attitudes toward life and work have been erased.
This is destruction many times worse than the worst destruction of any war. That is where we are today. This is what fiat money has brought to the world. Fiat money is the child of the arrogance of human intellect, which has sought to invalidate the laws of human nature which have regarded the precious metals as money for thousands of years, and sought to substitute an intellectual construct for the real thing. Now we are going to pay for that arrogance.

Bitcoin is not a scam.  It is free market money.  You can't just say something is a scam ... you need explain why it is, otherwise your argument has no merit.  Who benefits from this "scam"?  Bitcoin is decentralized, there is no beneficiary in your imagined scam.         
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If we combine Bitcoin's transaction trail with the NSA's ability to monitor electronic traffic worldwide, we would likely end up with a high degree of certainty as to what was spent, and where, and by whom.  As the currency becomes more popular, the incentive to track where it is spent increases - if not for tax purposes, then for the purpose of blackmailing and/or otherwise tracking the buyers.
Credit cards and paypal, of course, are much worse.

But if high-profile people go into this imagining that their bitcoin purchases are untraceable, and they engage in what might be for them risky transactions, then the transaction log seems like it could be an unpleasant surprise.  Gold, and paper currency do not have this behavior.  You can't look at a buck and see where it has been spent.  Most people don't care about this feature, which is why they're ok to use credit cards that track everything you do.

If your transaction volume falls below the radar of what governments care about, it likely won't matter.  Unless you're up before Congress someday for your confirmation to the Supreme Court.  Then all sorts of surprising things come out.  But that's not most of us.

If you treat bitcoin like a credit card and you assume the government (if sufficiently motivated) will be able to put the puzzle pieces together eventually and figure out it was you making the transaction, then - no worries.

If the currency were actually difficult to trace, the US intelligence community would likely be having kittens right now.  Their current approach of benign neglect is a strong indication (to me anyway) that this is a "honey pot trap" for those who imagine their activities are not traceable.   Imagine the same level of enthusiasm that is being applied to the Snowden situation focused on bitcoin.

Last point.  If the government is out to get you for something (say, your future activities in an Occupy Movement) then Income Tax Evasion is a pretty good substitute.  That's how they nailed Al Capone.

Once you are ok with being traced, then all you need to deal with is the currency's volatility.  As with anything that's not an established meme, it can fluctuate wildly.  However as with anything else that has perceived value, the longer it is remains in place providing its service, the less volatile it should become.

Just my thoughts.

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If I may polish them up a little.
I think that in essence everyone looks after numero-uno. Even the good folks at the Nefarious Spooks Association. If they, individually, see merit in this bit coin for their for their own private affairs there might be a lot of doing what we are designed for- rationalization and deceit.

There will be a lot of winking and nodding at a blind horse.

Edit: Personally I like to know the name and address of the person I am dealing with.

Edit 2 Having just looked at such a bitcoind record of transaction it would take a better geek than me to figure out what went where.

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HiLooking at 'KD doesn't understand Bitcon'
I have followed Karl for some time, and have some insight into his positions.
Karl D does not suffer fools lightly, well not at all actually. When Bryan tweeted Karl that he had mis-spelt Bitcoin in his article title as BitCon Karl would have instantly peged him as a fool, as his 'miss-spelling' was a deliberate slur BitCon as in a con job…
And if Karl read Bryna's post he would have held up  his "I told ya so" sign.
Bryan quoted Karl
""I want to first demolish the argument for using it that is going around in various circles and media these days — the idea that it is stateless (that is, without a State Sponsor) and this is somehow good, in that it allows the user to evade the tentacles of the State.
This is utterly false and, if you’re foolish enough to believe it and are big enough to be worth making an example of you will eventually wind up in prison — with certainty."
Bryan then said "This man is clearly against a stateless currency, which is a position I can understand. Saying that bitcoin is not stateless is just plain wrong by every measure."
Karl , in the above quote, does not state that bitcoin is stateless, but ridicules the idea that being stateless is good. ( he also later says "Third, because Bitcoin is not state-linked…" )
He makes it very clear that it will not enable the user to avoid the tenticles of the state despite any claims that it will. A clear warning to people who think that it will enable them to evade state tentacles. He would probably say ' feel free to try and use it that way, but dont act surprised when you find yourself behind bars… '
Bryan's failure to correctly interpret the bit of Karl's post would have again had Karl holding up his "told ya so" sign
For the rest of it, It is clear to me that Karl understands financial laws far better than Bryan, and has a deeper undrstanding of the technical aspects around bitcoin than bryan.
Cheers Hamish
 
 
 
 

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If tptb are allowing it to live, then it's not good for the public…period.  Think about it.  What has tptb allowed to thrive, that is totally out of it's control?  Not much.
Simple rule to live by stated above.

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 Bitcoin isn't an easy thing to understand. They are created by solving very complex mathematical problems, using a lot of computer power and electricity. So although they are created, there is a lot of computer power needed and they are limited to 21 million bitcoins. In many ways they mirror gold in rarity, difficulty to mine, and limited availability. Therefore they can't be just printed to infinity. There difficulty to mine goes up as there numbers increase. 
The main advantage of Bitcoin over gold is it's portability. It can be sent peer to peer anywhere in the world.It is completely de-centralised and because the transactions are held collectively it is almost impossible to control. There are some good explanations of bitcoin on You Tube.
 
 
 
 

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i'm saying money is a concept. it doesn't matter whether it be a feather , or shell, or paper that is traded, it in it's own self is worthless. people ascribe worth to whatever they want. i'm saying we need to remember that…that the shell or paper bill or digital ons and offs have value only by our believing minds… and therefore subject to fraility that is unpredictable and vulnerable to someone else declaring it is worthless or worth more for that matter… i'm also saying that the bitcoin is a lead in to having a complete digital economy controlled by even fewer humans with no accountability or having to back it up with any hard assets. i see the bitcoin as becoming further out of our control. when money was back by something tangible like gold, there were limits in place. once rulers had to make coins smaller or water them down with other medals to inflate. then the gold standard was removed,and a paper bill said it was a reserve note.(where are the reserves and reserves of what). now putting money on computers and digital cards and digital cell phones continues the ability of the powers that be to create more "money" out of nowhere with no accountability. it's easier to lie because who can really check it.? bitcoin takes it one step further into constructed lala land.or put another, now the money isn't back by anything, turn the electricity off and all records disappear. or add afew zeros and retire somewhere nice.
i said nothing about the us dollar at all. and you ascribed my thoughts to be there when they weren't just like the afore mentioned ascribing of value. it's construct. not real. i believe the us dollar too is worthless and one day the veil will lift on it . it is worthless because the belief of value given it by people is based on faith of the us gov't to make good.the us gov't is broke. who will pay up the bitcoin if it's only concept that backs it up?

i see the bitcoin as some concept conjure up out of thin air . yes our gov't's hadling of the us dollar is riddled with theft, fraud you name it. but i see the bitcoin as being easier to riddle with theft fraud etc.because it's on a computer , hidden from sight.  it's a concept like all the mortgages sliced up and resold into such a complicated mess that it becomes impossible to forclose or track the path. it takes the concept of money and makes it virtual…not even a shell to represent the value of my labor.

i do not what to trade my hard labor for any amount of a digital notion. i want something substancial back for my labor.

the bitcoin may be a new form of money but new does not translate in to better, safer trades. isee it as repackaging of the same old concepts only more vulnerable and cheaper to make out of thin  air. i haven't seen any consistent agreement as to how much money(in total in the world) is actually out there, but it's easy to see there are far more zeros on paper than actual hard assets to back it. there is a mismatch.

digital money makes it almost impossible to run the bank and with no run to call into account,  this after all means the myth can continue, that there is more money out there , it will never collapse, and it will always have be valued by the people.it's just not true. it's not backed, it's constructed and has to be believed in to obtain value.

people are free to believe what they want to.

the earth has too many people in it that it doesn't have enough resources to sustain them. the money has to inflate to keep up with the population increase and the only way to do that is to deflate the value of one manpower hour, or make the money virtual(constructed out of thin air) or both.

i see nothing stable or good about that.but that is why things are occurring right now as they are. things have to go virtual(pretend) to keep up with an exponentiated system of growth.

in short the bitcoin is no savior to a fraudulent system. if it makes one feel better to believe myth before going off the cliff then by all means believe away. i believe the cliff is there in sight. and the sheer momentum of the herd may just take me over too.

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Chris,
If you are reading this, I would like to ask if you would consider donations in bitcoins. I can see on your donation page that that's not currently an option.

https://peakprosperity.com/help-the-cause

It's very easy to create an online wallet, and later on, perhaps a desktop- or mobile wallet, if it's of interest. Alternatively you can set up a donation option through websites like www.bitpay.com, that will immediately convert your bitcoins into a fiat currency of your choice.

Cheers.

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You make some excellent and concise statements of the principles that drew many of us here in the first place, and I could not agree with you more;


the earth has too many people in it that it doesn't have enough resources to sustain them. the money has to inflate to keep up with the population increase and the only way to do that is to deflate the value of one manpower hour, or make the money virtual(constructed out of thin air) or both.

I am also with you in belief and action that I want Gold and Silver for now to represent my stored labor... not fiat, and for the most part, not Bitcoin either.  I do though think that Bitcoin is the best alternative that has ever existed... while very clearly a conjured, thin air (digital) construct... maybe I am just more comfortable with things in the digital realm having and deserving to have real value since I work in the computer industry.  Anyway, I just get testy when I sense that people are conflating Bitcoin with fiat currencies, and I see now that you were not doing that.   You said,
  but i see the bitcoin as being easier to riddle with theft fraud etc.because it's on a computer , hidden from sight.  it's a concept like all the mortgages sliced up and resold into such a complicated mess that it becomes impossible to forclose or track the path. it takes the concept of money and makes it virtual...not even a shell to represent the value of my labor.
I honestly don't think Bitcoin could be subject to the kind of fraud you are imagining because it is open source software, which means that the software is maintained and curated by programmers all over the world.  I have likened Bitcoin to being the Linux of money...   and any lack of blockchain (the digital DNA which contains the history) integrity is quickly picked up within the system.  I am not saying that Bitcoin is perfect..  If and when we get (real) quantum computers on the scene, the jig is up, along with anything else using this generation of cryptography.  As well, I always pay attention to our friend LogansRun, and I don't doubt that TBTP could in fact put hurt on the Bitcoin system via their friends in Congress and/or Treasury, or maybe inject some kind of digital mayhem... who knows.  But for now and the mid-term future, Bitcoin looks to me like a viable alternative for Stateless trade.   
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Regarding the block chain divergence that occurred.  The answer was enlightening for me in that I did not realize that there was developing, or ever would be a diversity of mining software versions in use.  My picture was that there was one dominant version and always would be… and I see how the diversity of versions would have the beneficial effect of limiting damage from future occurances of accidental bugs, while at the same time this seems to be a potential area of vulnerability as well for clever programmers who may want to harm the system, using a new version of mining software as their vector.  Are there enough community eyes on each of these new versions to insure that no rogue code exists in them?         

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Um, OK, here's a thought. If we assume that industrial civilization is collapsing, why would I want to put more energy into something that is going to fail along with everything else dependent on cheap energy?  I would rather put it in PMs, preps and in developing skills. Bitcoins, though an interesting concept, are based on the assumption that our technological society will continue. I guess I'm not confident that the internet will survive the Great Unravelling. Maybe it all depends on the timeline one has in mind.  It does seem like a smart techno -geek way of getting around our current fiat currency. But is it any better as a substitute as things continue to deteriorate?
Perhaps some will choose to pursue bitcoins with the thought that they will pull out when it looks like the tide is turning. But how will you know just when that is? It reminds me of those who think they can predict the timing of the market. I just don't trust something with that kind of risk. Someone less cautious might be fine with it though.

And I think Jim makes a good point that TPTB will step in should it conflict with their plans and profits.

Personally, I guess I'd rather have metals, food etc. in hand than ephemeral bits that could disappear when TSHF; I feel the same way about US dollars. It will be interesting to see how this plays out.

Joyce

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I don't see bitcoin as a con or a scam at all.  I think it's quite legitimate.  As long as you understand the risks, its all good.  Which brings me to…the risks.In most business plans, there's an entire section devoted to "risks".  That's the least fun section for the founders to write.  Who wants to get all depressed thinking about the downside?
Here's my top level cut of that for bitcoin.
Relies on a functioning Internet.  jdye51 feels that the internet might not survive the great unwind.  Bitcoin requires a functioning internet - distributed processing is a virtue, but without a functioning internet, its also an achilles heel.  Without transaction verification, you cannot validate bitcoin transfers.  If the internet crashes for any serious length of time, bitcoins will be worth zip.  "Oh yeah I remember back when the Internet worked, bitcoin was all the rage…"
Relies on a worldwide, mostly-connected internet.  The bitcoin system may not survive a major power war - and I'm not talking thermonuclear here, just a conventional one.  Like globalization, we've had a mostly-free (mostly unsegmented) internet since its inception.  Its taken as a given that everyone can talk with everyone else.  The Great Firewall of China is the exception, rather than the rule.  If hostilities break out - real hostilities between major powers - do we imagine that interconnectivity between countries will survive?  No way connectivity remains, it would be too dangerous.  Imagine a Japan/China conflict, with the US coming in on the side of Japan.  China bitcoin holders couldn't have their purchases verified by American bitcoin servers.  Vice versa true also.  And a segmented but still-functioning network is the best case outcome of that sort of scenario.
Relies on networked and functioning personal computing hardware and software.  During a major power (conventional) war that ends up "getting serious", the Internet as well as personal computing may well be the first casualty.  I'm…as certain as I can be that the major powers have a big enough stockpile of zero-day attacks on the popular OS versions as well as many routers that may end up effectively wiping out our computing environment as we know it today.  The equipment will still all be there, but the software (and likely files too) on some significant but effectively random percentage of equipment will simply be inoperative.  Systemic failure will be the result.  Of course, a lot of other stuff will go wrong because of that too, so perhaps your lost bitcoins are not your primary concern.  A well-funded terrorist group might be able to mount such an attack also.  I recall reading that our friendly CIA currently pays some not-insignificant amount of money for verified zero day attacks.  Certainly in the aftereffects of such an attack, networking will likely be substantially less popular.
Relies on the continued forbearance of governmental authority allowing conversion of bitcoins to local money as well as real goods & services.  A large power deciding to make such a conversion illegal would hammer the price of bitcoins. Fatally?  It depends on how big the power, and how enthusiastically they intervened.  Snowden was unable to leave Russia; if the US government felt the same way about bitcoin for whatever reason, bitcoin value would likely crash.  A massive loss in value might well destroy a still-delicate faith in bitcoins.  After the tulip bubble crashed, people still grew tulips, but nobody was interested in them as a trading vehicle or a store of value.  Motivation for government action might include capital control enforcement, or an increasing use of bitcoin as safe haven during a hyperinflationary situation.
Faith is a delicate thing for any currency.  The longer it has been around, the harder it is to shake.  Gold: thousands of years.  US Dollar: 200 years.  Bitcoin: a lot less.  Our Chief Bitcoin Scientist is right to call bitcoin a risky investment.  It relies on things going pretty much they way they've always gone - continued and relatively complete interconnectivity, network-connected hardware & software, no great power struggles, continued government forbearance, etc.
Full points to the Chief Scientist by the way.  He strikes me as a guy with his feet solidly on the ground, doing something potentially very interesting.  As long as we know what can go wrong, we can see where bitcoins might fit in to our personal strategy.
 

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Bitcoins are rewarded out of "thin air" according to rules of network and proof of work.https://en.bitcoin.it/wiki/Mining
Reward
When a block is discovered, the discoverer may award themselves a certain number of bitcoins, which is agreed-upon by everyone in the network. Currently this bounty is 25 bitcoins; this value will halve every 210,000 blocks. See Controlled Currency Supply.
Additionally, the miner is awarded the fees paid by users sending transactions. The fee is an incentive for the miner to include the transaction in their block. In the future, as the number of new bitcoins miners are allowed to create in each block dwindles, the fees will make up a much more important percentage of mining income.