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
 
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or
transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or
otherwise, except brief extracts for the purpose of review, without the prior permission in writing of
the publisher and copyright owners. It is also advisable to consult the publisher if in any doubt as to
the legality of any copying which is to be undertaken.
 
“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
PART 1: WHAT IS BITCOIN?
CHAPTER 1: BITCOIN AND MONEY
Government Money
2008 Financial Crisis
The Birth of a Financial Alternative
Characteristics of Bitcoin
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
Bitcoin vs Gold vs Fiat Currencies
Use Cases of Bitcoin – Can bitcoin be our new money?
Medium of Exchange
Store of Value
Unit of Account
Closing Thoughts
CHAPTER 2: ANATOMY OF BITCOIN
The Bitcoin Ledger
Start of the Monopoly Game
How are the Pages Generated?
Understanding the Blockchain Structure
The Chains of a Blockchain – Hash Functions
The Blocks in a Blockchain
Putting it All Together
Mining on the Blockchain
What exactly does a miner do?
Bitcoin Mining Difficulty
What if two miners find the answers at the same time?
Bitcoin Transactions
Unspent Transaction Output (UTXO)
How does Bitcoin Prevent Double-Spending?
What if Miners Collude to Double-Spend?
CHAPTER 3: THE HISTORY OF BITCOIN
Bitcoin Key Events
The Mt. Gox Hacking
Silk Road Shutdown
Block Reward Halving
New York Agreement (NYA)
Lightning Network
Bugs
 Value Overflow Incident (15 August 2010)
Chain Fork Incident (20 March 2013)
PART 2: BITCOIN & YOU
CHAPTER 4: KEEPING YOUR BITCOINS SAFE
Private Key
Public Key and Bitcoin Address
Wallets
Hot Wallets
Desktop Wallets
Full Node Wallets
Simple Payment Verification (SPV) Wallets
Mobile Wallets
Cold Wallets
Hardware Wallets
Paper Wallets
Common Bitcoin Risks
Centralized Exchange Hack
Phishing
The Basics of Bitcoin Security
Password Manager
Two-Factor Authentication (2FA)
Remove Unused Browser Extensions
Do Not Click on Ads
Metal Storage Backup Tools
Summary
CHAPTER 5: GETTING YOUR FIRST BITCOIN
Buying Bitcoins
Cryptocurrency Brokerages
Coinbase
Cryptocurrency Exchanges
Kraken
Peer-to-Peer (P2P) Marketplaces
LocalBitcoins
Earning Bitcoin
Earn bitcoin cashback using Lolli
Provide services in exchange for bitcoin
Play to earn via bitcoin faucets
Mining Bitcoin
CHAPTER 6: STORING YOUR BITCOIN SAFELY
Hardware Wallet: Trezor One
Blockchain.com Mobile Wallet
Blockchain.com Browser Wallet
Lightning Network Wallets
Phoenix Wallet
Alternative Lightning Wallets
CHAPTER 7: ADVANCED BITCOIN WALLETS
Bitcoin Core Full Node
Full Node Requirements
Download
Installation
Downloading the Bitcoin Blockchain
Network Traffic Chart
Using Bitcoin Core Full Node as a Wallet
Receiving Bitcoin
Sending Bitcoin
Using the Bitcoin Full Node Console
Samourai Mobile Wallet
Installation
Setting Up
Receiving Bitcoin
Sending Bitcoin
Samourai Whirlpool (CoinJoin)
PART 3: THE FUTURE OF BITCOIN
CHAPTER 8: BITCOIN’S IMPROVEMENTS
Scalability
Segregated Witness (SegWit)
Lightning Network (LN)
Privacy
CoinJoin
JoinMarket
Taproot
What’s Next?
CHAPTER 9: BEYOND BITCOIN
Bitcoin Forks
Bitcoin Cash
Bitcoin SV
Smart Contract Platforms
Ethereum
Polkadot
Stablecoins
Tether
Dai
Privacy Coins
Dash
Monero
CLOSING REMARKS
APPENDIX
CoinGecko’s Recommended Bitcoin Resources
Reads
Newsletters
 Podcast
Videos
Other Books We Recommend
References
Chapter 1: Bitcoin and Money
Chapter 2: Anatomy of Bitcoin
Chapter 3: The History of Bitcoin
Chapter 4: Keeping your Bitcoin Safe
Chapter 5: Getting your First Bitcoin
Chapter 6: Storing your Bitcoin Safely
Chapter 7: Advanced Bitcoin Wallets
Chapter 8: Bitcoin’s Improvements
GLOSSARY
  
 
 
 
 
 
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:
 
Fiat
Traits of Money Gold Bitcoin
Currencies
 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
Low High High
Transactable
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:
 
000000000000000000064b9fcad14d747b725552005db1a77e6344a7c672a9
bf
 
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