Question 1: What does holding your own bitcoin mean?
It means having access to your private key. Andreas Antonopoulos coined the phrase, “Not your keys, not your bitcoin”. It’s like not having the key to a safe that stores your gold.
The key that gives you access to move bitcoin from one “safe” (eg your bitcoin address) to another “safe” (eg paying someone else to their bitcoin address) and record that on the public ledger which is the Bitcoin Blockchain.
Question 2: What actually happens behind the scenes when you move bitcoin from one exchange to another exchange?
What actually happens is that Exchange 1 uses THEIR private key to move funds from THEIR stash of bitcoin to the stash of bitcoin owned by Exchange 2. Then, after the bitcoin has been moved, each exchange updates their own private ledger which records which customer owns what. When you log in, you see your balance is updated. You don’t see the data on the blockchain. What you see is a promise that the exchange will hand over your bitcoin to your safe (or anyone else’s safe you might pay) when you ask for it.
Similar to a bank account — the cash is not in your hand, but in the bank’s vault.
Question 3: What is a bitcoin wallet exactly?
I’ve noticed the word “wallet” used in two different ways.
First usage: A wallet is a collection of bitcoin addresses that you can control by owing a private key. The private key itself generates all the (seemingly infinite) addresses. With the key, you can spend bitcoin from any of those addresses. When you want payment, you provide an invoice with one of the addresses, and the other person pays bitcoin to your address. To get more technical, the private key produces a public key (xPub, yPub, or zPub), and that public key generates all the addresses, but still, the private key is responsible for it all from the beginning.
Second usage: A piece of software can manage you key or keys and all the addresses, and provide you with a graphical interface to make and receive payments or check your balance. This software is also called a wallet. It uses your private key to regenerate all your addresses. A software wallet can also function with only the public key. Using that, it can generate all the same addresses as though you had entered the private key, but you will not be able to spend with the wallet. You can only watch the balance or receive payments.
Question 4: What are the advantage/disadvantages of hardware wallets (HWW)?
The main advantage of a HWW is that you can connect them to a computer, and the private keys NEVER are communicated to the computer – the transaction is passed from computer to HWW, signed in the hardware wallet, then the transaction is returned to the computer for broadcasting over the internet to the bitcoin network.
Imagine – a computer writes a physical cheque and gives it to the HWW. You are inside the HWW, and have pen, and sign the cheque, then pass the signed cheque back to the computer, and then the cheque is sent. The pen stays in the HWW. THAT is the essence of the HWW.
The hardware wallets also generate private keys, but there is an element of trust involved there. There are ways to generate your own private keys, and you should, and import the keys into the wallet. Here is how: Link
One generally under-appreciated weakness of HWWs is that the private key (the 12 or 24 word seed) is vunerable. You must store that in the same way as any type of bitcoin wallet. If you lose the seed, and the hardware wallet, you lose your bitcoin.
Hardware wallets are also expensive, and it may not be justified to spend $200 USD if you you have under $1000 worth of bitcoin. You can make your own bespoke hardware wallet with a Raspberry Pi Zero, some attachments, some computer skill, and my guide: Link. It costs around $50 USD for all the parts.
If buying a HWW, I recommend a ColdCard. I think that’s the best. If making a multi-signature wallet, use different brands for any additional HWWs. Trezor is probably second best, I’ve heard. Avoid Ledger, it is clunky, connection via USB is poor, it forces you to connect to public nodes (Ledger Live), their database of customer details has been hacked so they can’t be trusted generally, and the wallet supports altcoins, suggesting they are not 100% focused on doing bitcoin security well. If adding a third HWW to a multi-signature wallet, make your own one with a Pi Zero using the link above.
Question 5: Why do foreign currencies, and FX exchanges, exist? Does this not contradict the one money theory?
Foreign currency exchanges survive because government money is surving… suviving because it is law to use it. People borrow and spend the money they are forced to use. They are incentivised to accumulate debt by central planning (manipulation) of interest rates and price inflation. This creates growing debt – debt must be payed back, so the poor currency grows in demand, to pay back the debt, and tax. Tax payments, by law, must be in the local government money.
Bitcoin is FREE market money. There is no law or force to use it. To trade with a foreigner, you need to pay him in his currency. Or in yours, and he needs to exchage it to pay his tax and debt. That’s why foreign currency exchanges exists. On top of that, people gamble on these markets, and this provides market liquidity.
Question 6 – Why do Bitcoin exchanges exist?
Bitcoin exchanges exist because miners make bitcoin, and need to sell some to pay for costs of production. On top of that, people gamble and provide market liquidity.
One day, when miners pay for electricity in Bitcoin, there will be no fundamental reason for exchanges to exist and they will eventually collapse and disappear. People will use Bitcoin peer-to-peer, they will not need to trade it for government money.
Question 7 – Why are there sometimes empty blocks on the blockchain?
When any miner finds a valid nonce and adds the block to the blockchain, that miner, and all the others, then do two things simultaneously:
1) Start mining an empty block immediately. 2) Start an alternative block and fill it with transactions (and verify each transaction).
This new block creation takes time, and during this time it is efficient to hash an empty block. Winning an empty block in the first few seconds before the other block is filled and verified might luckily happen.
Once a full block is made, miners switch to hashing that.
Note: It is dangerous to prepare a block in advance, because it is not known which transactions will be valid.
Question 8 – How do I trade Bitcoin?
First thing to know is that KNOWING about Bitcoin is not necessarily knowing how to TRADE Bitcoin. You don’t have to know how to trade, and in fact you really shouldn’t trade or look at charts. Just accumulate it because it is going to become world money and it is grossly undervalued at the moment.
It does take a little effort to get started but I guarantee you it is absolutely worth it and you will not look back.
Use my website, it will be a good resource. What you need to start with is this overview.
Then move on to the syllabus of various articles and also explore the site from time to time.
Question 9 – What is a UTXO?
A UTXO stands for unspent transaction output. Don’t worry about those unnecessarily complicated words. Just use “UTXO” and understand the concept of what it is…
For each UTXO, imagine it is like a physical coin. For example, imagine I send you 0.235 bitcoin. Imagine that is a coin with that number written on it (0.235 bitcoin). Then I send you another 1.0 to the same address. That’s a separate coin with “1.0 bitcoin” written on it. Your address balance is 1.235 bitcoin. But if you look deeper at the address, there are 2 coins being held by it. Two coins of different sizes.
Now if you want to spend 0.1 bitcoin to someone else, you take one of these coins and spend it. You have to choose one of them. Similar to having a 20 cent coin and a 50 cent coin. You need to spend 8 cents. You don’t have an 8 cent coin, you must choose one of the coins you have.
EG you can take the 0.235 coin and break it into two pieces – 0.1 and 0.135 (that happens within the transaction). 0.1 bitcoin gets sent as a payment, and 0.135 goes to a new address that belongs to you, back to your wallet (Not back to the same address, for security reasons beyond the scope of this article. Never reuse an address.)
A wallet is like a purse with a digital display of the total, but inside here are coins of different sizes, each “attached” to an address; preferably one UTXO per address.
Question 10 – Does Bitcoin need to scale?
Bitcoin base layer doesn’t need to scale. Just like how cash payments don’t scale across borders (or gold).
Cash scales with layer 2 (VISA, PayPal, Swift etc).
Bitcoin scales with any of cash’s layer 2 systems, but best with the decentralised Lightning Network.
The money is broken, not payments.
Question 11 – Why is Free Open Source Software important (FOSS)?
Vlad Costa provides a excellent explanation here.