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 your 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 a 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 vulnerable. 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 have under $1000 worth of bitcoin. You can make your own bespoke hardware wallet with a Raspberry Pi Zero, some attachments, some computer skills, 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 surviving… surviving 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 paid 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 exchange it to pay his tax and debt. That’s why foreign currency exchanges exist. 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.
SPY MINING may also contribute. Explained here.
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 physical 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. The address is like a purse with 2 coins in it.
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.
EG you can take the 0.235 coin and melt it down, and split it into two smaller coins – 0.1 and 0.135 (that “melting” 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 though – for security reasons, beyond the scope of this article, never reuse an address.)
In summary, a wallet is like a purse with a digital display of the total of all the coins in all the wallet’s addresses. Inside there 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 an excellent explanation here.
Question 12 – Can’t one person run for example 100,000 Bitcoin nodes and overtake the Bitcoin network and consensus rules with extra votes?
Question 13 – Does hashrate follow price or does price follow hashrate?
Question 14 – What is the point of Blockchain, PoW, and Nodes?
Question 15 – What if another crypto “flipped” Bitcoin?
Question 16 – In the future will the masses use Bitcoin in a non-custodial way?
No, probably not. And that’s OK. There will be a mix of both. Some people will be sufficiently skilled and confident to store their own Bitcoin securely (Be their own bank), and others will not want that, and will store their bitcoin across a variety of services. These services will compete for business and in a free market (which is expected), will provide an excellent service. Some people who self custody may even keep a portion of their bitcoin in custodial services for the quality service/speed/ease, or to diversify where their coins are secured.
In the fiat world, banks have done this, but they have exploited us. They have provided terrible service. In a bitcoin world, this will not happen. We are traumatised by this fiat banking experience and tend to think that custodial services in a bitcoin world must be avoided at all costs. This is simply untrue.
Question 17 – What’s wrong with privacy coins?
Privacy coins do not solve the problem of privacy without accepting a damaging trade-off. If they did, Bitcoin would copy the solution.
Instead, they accept the trade-off and cover it up. With privacy comes a lack of auditability of the total supply. This allows an inflation bug to go unnoticed, or even maliciously introduced.
AweeDeaterBob puts it well…
Fixed capped supply from day one and complete transparency is what enables Bitcoin to bring down central banking.— AwyeeBitcoin🧡🧡🧡🧡🧡🧡 (@AwyeeDeaterBob) July 12, 2021
If addresses can be blinded then it renders bitcoin merely digital gold…. removing transparency.
Dark ledgers enable central banking.
Question 18 – When will network fees larger than the block rewards, and will Bitcoin’s security be at risk?
See my reply to this Tweet…
yo @parman_the random question:— bitcoin is freedom. (@abellusc) July 14, 2021
what year will mining costs outpace block rewards? if we keep halving every 4 years, then eventually won’t the reward eventually become 0 sats?
asking for my grandchildren’s grandchildren
Question 19 – What is the basis of how the Lightning Network works
This is not a complete explanation, but really useful to understand lightning. It’s not easy to find this information. I’ve explained in a Tweet thread…
Question 20 – What is fractional reserve lending and is it possible in a Bitcoin world?
There is a common misconception that lending money creates money. A correction:— Parman🗝 The Bitcoin Private Key Whisperer (@parman_the) October 21, 2020
If I give $1 to a bank in a term deposit for 90 days, I am not allowed to spend it or have access to it. When the bank lends it out to you, you now hold my $1 and no money has been created…
Question 21 – How should I back up my seed phrase?
Duplication and separation are key. Don’t mind the pun. Expensive metal solutions are not necessary if you do this. Metal is fireproof. But is that necessary if you have the key in two different safes in two different homes? No, it’s overkill but I do it. Two simultaneous fires in two homes are unlikely. Commercial options are acid-resistant. I draw the line here. Just etch your key into 2 cheap kitchen knives. Even paper is fine if you duplicate and separate. With multisig, the backup needs to be more elaborate. There are more keys and more locations needed. This conversation explores the options…
Question 22 – what’s wrong with splitting a key (using Shamir’s secret share, or storing a passphrase separate to the mnemonic phrase) compared to a multisignature wallet?
Splitting or a passphrase, stored separately is not necessarily bad, if done right, it’s better than storing a full key in one place. It’s NOT, however, equal to multisignature. Multisignature is far superior, explained here…
Easy— Parman🗝 The Bitcoin Private Key Whisperer (@parman_the) August 5, 2021
When you spend, all pieces of a single signature come together in one place, ready for attack. Single point of failure
With msig, keys can remain distributed, even with different holders, never coming together, because of partially signed Bitcoin transactions. It's special
Question 23 – Are air-gapped computers safe for Bitcoin private keys?
Some say air-gapped computers can be compromised, particularly hardware wallet manufacturers (They have a natural conflict of interest). This is true if someone gets access to your device and tampers with it without your knowledge. This is not a good enough reason to avoid air-gapped computers – just know about it and mitigate the risk. One way is to have 5 $10 Raspberry Pi Zero air-gapped computers, make one private key on each device, at a different time for each, and use each to sign as part of a multisignature setup.
Note, the air-gap is only as good as the security of the USB drive you connect to it. Solution? Don’t. Use QR codes to transmit transaction data.
If the device gets infected with software, it can hijack components of the device to transmit data without you realising. Eg through the speakers or magnetic waves. Solution? Don’t break the air gap. And don’t let anyone get access to the device physically – this allows them to tamper with it and create weaknesses.
What about attacks that don’t involve access to the device? There are theoretical attacks, like measuring the voltage fluctuations in your power supply can give away some of the data the computer is processing. That’s just a ridiculous thing to be concerned about. Just make sure there is no black van parked outside your house connecting cables to your power supply.
Probably the biggest weakness would be the peripherals. Do reduce the attack vectors – Don’t use Bluetooth devices; use a wired keyboard and mouse; don’t connect a “smart” monitor, just a regular HDMI monitor.
If someone clever gets access to the device, the private key stored on there is not as secure as a hardware wallet, in theory. Solution? Protect your device as though your seed was written on paper. Don’t treat it like a digital safe. You can still put your key in a HWW if you want to; the air-gap computer is for seed generation and signing in a multisignature setup. Keep them separated and keep them hidden.
Question 24 – How hard is it to guess the final word in a BIP 39 mnemonic?
Question 25 – Why does my node give me unknown version warnings of blocks it verifies?
Bitcoin headers have a space for miners to record the version of bitcoin being used. It may have been designed that way for some sort of signalling. Miners may be placing random numbers there and still producing valid blocks, or they are mining with a new version of Bitcoin and your node is out of date.
Question 26 – If miners don’t have power over changing consensus rules, as shown in the Block Size Wars (Segwit 2x, Bitcoin Cash fork), then why were miners required to signal for Taproot soft-fork activation?
The reason was to prevent a split of the network. A smooth transition is always preferred. If miners rejected what nodes wanted, the nodes can still force the change, as they are in power, but it would be messy.