Blockchain

Part 2
 Wallets for Crypto Currencies
Wallets are essential tools for accessing, sending and
receiving cryptocurrencies.
• A wallet is a physical medium, device, program or
service used by cryptocurrency holders to store
(multiple) public and/or private keys
• Wallets are used to track ownership and to receive and
spend cryptocurrencies
• The cryptocurrency itself is not “contained” inside a
wallet - the wallet interacts with a blockchain
• Wallets are used to store the private and public keys
needed for all types of transactions. There are different
types of wallets for different user needs that offer
varying degrees of security.
What is a Wallet
What is a Wallet
• A wallet is necessary to access cryptocurrencies such
as Bitcoin, Ethereum, Litecoin and other altcoins. A wallet
does not store the actual amount of cryptocurrencies a
user owns, but holds private keys and therefore allows
users to access their holdings more conveniently. It is not a
physical wallet.
• Wallets are used to store the private and public keys needed
for all types of transactions. Different types of wallets for
different user needs offer varying degrees of security.
• Instead, a wallet is more like a storage vault for your addresses, including your
public and private keys. Furthermore, this vault is needed to gain access to your
public address on the blockchain which actually contains your cryptocurrency
holdings, like Bitcoin.
• To be precise: a single wallet can hold multiple private keys. You can create as
many wallets as you want. In fact, most people who own cryptocurrencies use
several wallets in order to ensure maximum security in storing their
cryptocurrencies.
How does a wallet work?
• Don’t imagine the inner workings of a cryptocurrency wallet
like the leather wallet in your back pocket. Instead, imagine
a safety deposit box or a vault. To access your assets and to
withdraw them, you need a dedicated key or, in other
words, a password.
• Losing the keys to your wallet is a critical problem because it
means you are no longer able to access your own storage
box. If your keys are stolen, someone else will have access.
• Now imagine this safety deposit is theoretically accessible
by anyone who knows its location (public address) and
corresponding key (private key). Knowing the location is no
problem at all because the funds are safely locked away in
the blockchain.
• Losing the keys to your wallet is something you should
avoid at all cost. If you lose your keys, you are no longer
able to access your own storage box. If your keys are stolen,
someone else will have access to your funds. For this
reason be very careful and take the necessary safety
measures when you handle your wallet and your keys.
How do I get
a wallet?

There are many different

options out there
for storing
cryptocurrencies and users
are free to choose the one
that best suits their needs.
 Hot Wallet (Exchange / Broker)
• The most basic and easiest option you have is to store your
cryptocurrencies on the platform or exchange through which you
bought them.
• Hint
Bitpanda (wallet) stores user funds as safely as possible in secure
offline wallets using state-of-the-art technology. In addition,
accounts can be secured using Two-Factor Authentication. Users
see their active devices and sessions, can log out and close active
sessions using another device. Plus, Bitpanda also provides SSL
encryption and DDOS protection. It is generally recommended to
keep only a small amount of your funds on an exchange and store
the vast majority of your funds in a cold storage wallet.
 Hot Wallet (Exchange / Broker)
PROS
• Most basic way to get started
• No need to transfer assets if you wish to sell them
• Fast and cost-efficient
• High security standards on trustworthy sites like bitpanda.com
CONS
• Not every exchange offers state-of-the-art wallet security like
Bitpanda
• An exchange, by nature, is a single point of failure
• Convenience may tempt users to become careless about storage
safety
• You don’t have immediate access to your funds
Software Wallet (Desktop / Mobile / Online)
• A software wallet offers high usability and good security while storing your
funds on your computer desktop or mobile device. You have immediate
access to your crypto and complete control over your private keys. This
solution creates a single wallet file, where private keys are stored. For
added security, this file is also encrypted, which means that a customised
passphrase can be used to access it.
• Hint
You can choose between two types of software wallets: either you get a
separate one for each cryptocurrency you own or you use software wallets
that can store multiple cryptocurrencies.
• PROS
• Easy to set up and use
• Good security
• You control your private keys
• CONS
• Can be hacked if you lose your computer or mobile device
• Your funds are “hot” when your computer or mobile device is connected
to the internet
• Public WiFi is unsafe to use when accessing your funds
Hardware Wallet
Hardware wallets combine user convenience with a high level of security. They are
probably the best way to store cryptocurrencies for most people. Your private keys are
stored on a cryptographically-secured hardware device. Because keys are stored
directly on the device and can’t be read in plaintext, it is almost impossible for
attackers to obtain them, even if your computer is infected by a virus.
Hint
To ensure that hardware wallets have not been compromised in any way before you
buy them, you should never purchase used hardware wallets and always buy them
directly from trusted manufacturers.
PROS
• Easy to use
• Very high level of security
• Device can be safely stored away
• Convenient solutions to restore funds if hardware is lost or damaged
CONS
• Costs money
• Used hardware wallets may contain malware
• May seem inconvenient to use
• Device may get lost or stolen, then there is no way to recover your funds
Paper / Physical Wallet
The concept behind this solution is very straight-forward. There are
websites that let you generate a public address and a corresponding
private key within minutes.
Hint
You can easily create a paper wallet within minutes. Open source
services are available online but create the keys locally on your
machine, which means that they are not sent over the internet.
PROS
• Very high level of security (depending on how you create the
paper wallet)
• Cheap, convenient and fast
CONS
• If the sheet of paper with your private key is lost or stolen, there
is no way to recover it
• Could be compromised from the beginning if your computer has
malware on it
Public keys,
private keys
and wallet
addresses
Understanding addresses, public keys, and
private keys is critical to understanding how
cryptocurrencies work.

• A wallet address is a randomly generated set of numbers

and letters.
• This set usually consists of 26 to 35 alphanumeric
characters.
• A wallet address is ideally a one-time link generated by a
wallet .
• Wallet addresses are needed to send or receive digital
assets.
• Digital assets are not actually stored in a wallet Public and
private keys are needed to access a wallet address.
• A wallet is where a collection of addresses is stored Never
share your private key with others
In cryptography, a public key and private key are both needed to access
any encrypted information. In essence, cryptography is the practice of
encrypting certain information to keep it secret from third parties. It is
used to ensure that only a party with permission can decipher the data.
What is cryptography?
• The term “cryptography” has Greek roots and originally
meant “secret writing.” Over time, cryptography evolved
from intelligence agencies and the military writing and
decoding confidential messages and became a separate
branch of computer science. Similar to the internet, the
origins of cryptocurrencies can be traced back to
academic and military use cases, which eventually
expanded to the private sphere.
• People involved in this movement refer to themselves as
“cypherpunks” and have been advocating a shift to
greater privacy and control over our data since the late
1980s.
• The origins of cryptocurrencies can be traced back to
academic and military use cases, which eventually
expanded to the private sphere.
Why do cryptocurrencies such as
Bitcoin use a two-key system?
• The basic concept behind the two-key system is the
following: the public key allows you to receive transactions,
while the private key is necessary to send transactions. It
gets a little bit more complicated when we take a look at
how this ingenious system actually works.
• Using two different keys (a public and a private key) is called
asymmetric cryptography, which is a vital aspect of
a blockchain. The two keys are connected to each other in
mathematical terms.
• The unique public key has its origins in the private key. This
connection allows users to create unforgeable signatures,
which can only be validated by other participants of
the network who have knowledge of the corresponding
public key.
• Using two different keys - a public and a private key - is
called asymmetric cryptography.
 Difference Between An Address, A
Key, And A Wallet
Address
• An address is a randomly generated set of numbers and letters
which represent a type of unique number similar to a bank
account number. As an example, here is the Bitcoin genesis
address - the first Bitcoin address ever:
1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa.
• The difference is that an address can be created for free by
anyone and within a matter of seconds without needing a
third party. You can create as many public addresses as you like
or need.
• You can freely share your public address with others. That way,
people can send cryptocurrencies to your address.
• Because the Bitcoin or Ethereum networks are not anonymous
but pseudonymous, your holdings and transactions can be
viewed by anyone who knows your public address.
 Difference Between An Address, A Key, And A
Wallet
Keys
• There are two types of keys: public keys and private keys. Public
keys are comparable to account numbers. They can be freely
shared with everyone, and anyone can potentially send
transactions to them.
• Private keys, on the other hand, should be kept private, as their
name suggests. You can think of them as a kind of PIN or
verification code, which, together with its corresponding public
key grants you access to the actual funds on the blockchain.
• You should NEVER, under any circumstances, share your private
key(s) with any other person. It’s best to store them in the most
secure way possible (e.g. on a paper wallet or a hardware
wallet).
Note that the keys are not stored on a blockchain. Instead, they
can be kept in an (encrypted) file, which can be saved anywhere
and stored offline.
Wallet
• You can think of a wallet as a sort of encrypted virtual
keychain, containing all the information needed to access
your funds on the Bitcoin blockchain. A wallet combines and
contains both your address(es) as well as your digital key(s).
• The simplest form of a wallet is a file containing a database.
It can also be stored offline because it does not need a
connection to an actual blockchain.
Bitcoin Mining
 Mining is an essential activity in the Bitcoin
network. It is the way the peer-to-peer
network verifies transactions and reaches
common consensus without requiring a
central authority.

• Mining is essential to keep the Bitcoin network running

• Transactions in the network are verified by miners, as a
reward they get newly minted units
• Miners compete against each other in solving mathematical
puzzles
• Mining is an energy-intensive activity
• Special hardware is required for mining to stay profitable
What is the purpose of Bitcoin mining?
• Mining ensures that only legitimate transactions are
verified in the blockchain of any given cryptocurrency.
Mining is the process of providing a stable settlement
mechanism to the network of a cryptocurrency.
• “Miners” of cryptocurrencies such as Bitcoin are
computer owners who allocate their computing power to
the peer-to-peer network.
• Like gold miners using picks and shovels to extract gold, a
Bitcoin miner needs two things: mining
hardware and energy.
• Miners are computer owners who contribute their
computing power and energy to the network of a “proof-
of-work” based cryptocurrency like Bitcoin. The first
miner to validate a new block for the blockchain receives
a portion of the currency that is mined as a reward. This
remuneration is called a block reward.
 The process of mining Bitcoin work
• We already talked about how the Bitcoin blockchain works. Miners’
computers (called nodes) constantly collect and bundle individual
transactions from the past ten minutes (the fixed “block time” of
Bitcoin) into blocks. The computers then compete to solve a
complex cryptographic puzzle to be the first to validate the new block
for the blockchain.
• The goal of every miner in the network is to solve this puzzle first. As a
reward for their efforts, the first miner to find the solution gets a
specific amount of newly minted bitcoins.
• One miner is always the first to find the correct solution. This is then
broadcast to the entire network and the other nodes check if the
solution is correct. If everything is in order, the new block is added to
the blockchain.
• Block rewards give everyone in the network the incentive to participate
in the process and to keep it running properly.
• Without some form of mining, blockchain technology the way we
know it wouldn’t function.
• As more and more units of Bitcoin are mined, the difficulty of these
cryptographic puzzles increases. This means miners have to increase
their computational power to continue earning the same amount of
Bitcoin for solving puzzles.
 The process of mining Bitcoin work
• The puzzle-solving mechanism is necessary to protect the
Bitcoin network from being compromised by attackers. For
example, if anyone wanted to reverse transactions in the
Bitcoin blockchain, this would take 51% of the whole
network’s computing power (= 51% attack).
• However, such a heist would be quite an expensive and
fruitless endeavour because it would be very difficult to
modify transactions that were validated before the attack -
the older a transaction, the more difficult it would be.
• Further, the Bitcoin protocol stipulates that there will never
be more than 21,000,000 bitcoins. This means that the
Bitcoin supply is finite and the complete supply is fixed,
potentially adding to its value as a result of scarcity.
• When all bitcoins have been mined, miners will no longer be
rewarded with newly minted units but with a fraction of the
transaction costs paid by others using the network.
What happens after the entire
amount of 21,000,000 bitcoins is
mined?
This could still take a while. As of 28 August 2019,
17,901,575 Bitcoins have been mined. It’s estimated
that the last bitcoin will be mined around the year
2140.
 Mining Difficulty
• The mining difficulty of a cryptocurrency such as
Bitcoin indicates how difficult and time-consuming it
is to find the right hash for each block.
• Mining difficulty is a measurement unit used in the
process of Bitcoin mining
• Difficulty indicates how difficult it is to solve a complex
cryptographic puzzle
• The difficulty of mining new units increases or
decreases over time, depending on the number of
miners in the network
• Increases in difficulty are necessary in order to keep the
target block time
 Mining Difficulty
• As a cryptocurrency like Bitcoin becomes more popular, the
number of computers participating in its peer-to-peer network
increases. Miners compete against each other for limited block
rewards. With more participants and more computing power, the
so-called “hashpower” of the entire network increases
accordingly.
• This is also referred to as the mining difficulty or difficulty, which
is easier to understand once you grasp the basics of Bitcoin
mining. You already learned that Bitcoin transactions are stored in
blocks, which are added to the blockchain every 10 minutes (=
600 seconds).
• To maintain the time it takes to process one block at around 10
minutes, difficulty has to be adjusted periodically.
• Mining difficulty in the Bitcoin network is adjusted automatically
after 2,016 blocks have been mined in the network. An
adjustment of difficulty upwards or downwards depends on the
number of participants in the mining network and their combined
hashpower.
Mining equipment has evolved considerably
since the beginnings of Bitcoin
• In the early days, the first miners used the CPUs of their PCs to mine
Bitcoin.
• Miners eventually realised that graphics cards are better suited for
mining Bitcoin. However, graphics cards also need more energy.
• In recent years, special “ASICs” (application-specific integrated circuit
chips) have been developed specifically for Bitcoin mining.
• Presently, Bitcoin and other digital currencies are mined via mining
pools, where lots of miners join forces and combine their hash rates
in the quest for block rewards.
• Solving the mathematical puzzles for valid block creation requires
huge amounts of computational power. Because the difficulty is
rising continually, miners join forces in Bitcoin mining pools and
solve the mathematical puzzles together. The first individual miner
or the mining pool that finds the right hash gets the block reward.
Mining equipment has evolved considerably
since the beginnings of Bitcoin
• Usually, block rewards consist of new coins or tokens native to
a blockchain network such as Bitcoin. In a mining pool, block
rewards are split among participants in proportion to their
share of computing power in the mining pool. This way each
participant is adequately invested in the process.
• Bitcoin mining is like searching for a needle in a haystack.
Many hashes are created by Bitcoin code, but only one of
them is the right one.
• We already know that “mining” for digital currencies is like
searching for a needle in a haystack rather than actually
digging for gold. There are other differences, too.
• Unlike gold, of which there are still undiscovered deposits all
over the planet (and in space), Bitcoin has a limited and finite
number of 21 million units. As of now, more than 85% of all
bitcoins have already been mined, and it is estimated that the
last bitcoin will be mined by 2140.
 What happens to difficulty when
the last bitcoin has been mined?
After all 21 million bitcoins have been mined, miners will still
need to contribute to the Bitcoin network in order to keep it
running. New blocks will still be generated, but the rewards
will change. Instead of getting new coins as a block reward,
miners will receive a share of the transaction fees spent by
people who send transactions within the network.
 Pre-Minded Bitcoin
Bitcoin uses a process called mining to issue new coins
and to reward participation in the network. Other
cryptocurrencies such as Ripple, Cardano, Stellar, EOS or
NEO are pre-mined.
• The term “pre-mining” refers to coins being mined
before a coin has been made public, unlike Bitcoin,
which is distributed as it is mined
• Pre-mining is often criticised by users of
cryptocurrencies
• Sometimes distribution of pre-mined coins or a
percentage of coins to users is necessary in the scope
of a project and thus contained in a currency’s protocol
 Pre-Minded Bitcoin
• The term "pre-mined" means a portion of the coins has
been mined (and distributed) before the official launch date
of the coin.
• Ripple (XRP), for instance, was created as a cryptocurrency
for a centralised payment system that enables a cost-
effective and fast way to transfer funds in cooperation with
banks. However, a great portion of XRP is still owned by
Ripple who centrally control the output of coins.
• Unlike mineable cryptocurrencies such as Bitcoin, Ether or
Litecoin, pre-mined coins or tokens are often issued by a
centralised authority.
• There are cryptocurrencies that have been both pre-mined
and are being mined. The first Ether - the cryptocurrency
running on the Ethereum blockchain - was offered as a pre-
mined reward for people who funded the Ethereum project
during its ICO in July and August 2014.
 Pre-Minded Bitcoin
• In the case of pre-mined cryptocurrencies, a share of the
coin supply is created at launch in the first block of the
protocol and distributed to ICO investors, developers and
team members.
• At this point, pre-mining is already well accepted in the
greater Ethereum community, as numerous coins and
tokens are being distributed this way via Initial Coin
Offerings (ICOs) and other forms of token offerings. In
fact, quite a few notable cryptocurrencies right now have
been pre-mined, at least, to a certain extent.
• Some argue that it makes sense to pre-mine
cryptocurrencies to reward developers who took part in
its creation and did the work necessary to give the
cryptocurrency a certain momentum.
 Cryptocurrency - Bitcoin
Hacking or shutting down
• Bitcoin is considered hack-proof because the Bitcoin
blockchain is constantly reviewed by the entire
network. Thus, attacks on the blockchain itself are
very unlikely.
• Thanks to its decentralised, distributed nature,
blockchain technology is well suited to fend off hacker
attacks.
• One of these doomsday scenarios would be known as a
51% attack.
• Bitcoin itself has not been hacked since its inception.
• Interfaces, such as wallets, where cryptocurrencies are
handled are still vulnerable to attacks.
• Conversely, people and websites have been hacked as
they are much easier targets.
Why can Bitcoin be considered “hack-proof”?

• Bitcoin is considered hack-proof because the Bitcoin blockchain is

constantly reviewed by the entire network. Thus, attacks on the
blockchain itself are very unlikely. To add a new block containing a
collection of transactions, each participant (miner) who updates
Bitcoin’s ledger is continuously solving complex math problems.
• These complex math problems are created by the cryptographic
hash function of Bitcoin. If a specific block is added to the
database, every node in the network has to agree on the validity
of said block. Only if all nodes agree, is the Bitcoin ledger then
updated accordingly.
• To manipulate a cryptocurrency network is extremely difficult.
Erasing or overwriting a block of already spent Bitcoin, known as
“double spending”, is rendered impossible by the decentralised,
chronological and computing, power-intensive characteristics of
the Bitcoin blockchain
What happens when someone tries
to hack the Bitcoin blockchain?
• As you already know, there is not one single copy of
the Bitcoin blockchain. Instead there are thousands
of copies stored on nodes in a computer network.
These nodes are scattered all over the planet,
containing all the Bitcoin transactions that have
taken place so far.
• A hacker, who wanted to alter the distributed
ledger of Bitcoin or any other network based on
blockchain technology, would need to hack not
one, but more than half of the participating
computers (51% attack).
What is a 51% attack?
• A 51% attack is quite possibly the most significant
threat to blockchains. Such a scenario would look like
this: If a single individual or organisation were to
succeed in taking control of the majority of the
networks mining power (hashrate), the transaction
history of the Bitcoin network could, in theory, be
changed and overwritten.
• A majority (hence 51%) is always required to decide
which transactions to approve and which to decline.
This means that a majority of 51% could potentially
alter a blockchain’s distributed ledger in a way that
double spending (execution of the same transaction
multiple times) would be enabled. This situation,
however, is extremely difficult to achieve and highly
unlikely to happen.
Can Bitcoin get shut down / turned off?
• Just as Bitcoin has never been successfully 51% attacked, it has
also never been shut down, even for a short amount of time.
Many actors such as government institutions and banking officials
have proposed shut-downs of the Bitcoin network before but
Bitcoin has run with virtually 100%-uptime for almost ten years.
• Under really extreme circumstances, there are few scenarios that
could spell the end of Bitcoin as we know it. For instance, a
massive global power outage shutting down all communications
and the internet around the globe could prevent nodes in the
network from contacting each other, causing the system to fail.
• Scenario two: a Bitcoin update contains a critical bug which
remains undetected despite intensive testing and peer-review
inherent in the Bitcoin protocol. Such a situation would most
likely result in a temporary impairment of the network, and
consequently, a steep drop in Bitcoin price and a fork of the
blockchain.
• Just as Bitcoin has never been successfully 51% attacked, it has
also never been shut down, even for a short amount of time.
• As Bitcoin is decentralised, the network as such cannot be shut
down by one government. However, governments have
attempted to ban cryptocurrencies before, or at least to restrict
their use in their respective jurisdiction. Governments could still
try to jointly ban Bitcoin. Yet in the long term, it is much more
likely that governments will impose regulations to protect
individual investors and to collect taxes.
• Then there is also the (albeit unlikely) scenario of a 51% attack.
51% of network participants would have to join forces to
overthrow the Bitcoin network, thus endangering their own
profits. Since such a scenario would also require huge
investments into mining equipment, such a heist is also highly
improbable.
• Additionally, new and supposedly improved cryptocurrencies are
introduced into the markets on an almost daily basis. Such
developments bring the danger of market fatigue in terms of
investing. It means that if everyone has bought into an asset,
there are no more buyers to sell to when they want to sell, which
results in a decline in price.
• However, Bitcoin has been holding its own for almost ten years
and is highly likely to retain its reputation and store of value.
Why do bitcoins get stolen?

• Most security discrepancies in the cryptocurrency

space can be attributed to individuals and websites not
taking the correct precautionary measures. Stolen
funds are usually the result of storing cryptocurrencies
in places that are simply not secure.
• For example, a “hot wallet” is any cryptocurrency
wallet connected to the internet or “online” in some
way. Hot wallets are either wallets on desktops or
mobile devices as well as wallets hosted on exchanges
without state-of-the-art security measures in place. A
hot wallet may also refer to wallet private keys that are
carelessly stored on a compromised, hackable device.
• Stolen funds are usually the result of storing
cryptocurrencies in places that are simply not secure.
• The hack of Mt.Gox is probably the prime example of
poor security and the biggest theft of cryptocurrencies.
Mt. Gox was an exchange founded in Japan and
redeployed into a Bitcoin Exchange in 2010. Owing to
insufficient safety measures, hackers managed to steal
more than 850,000 BTC. The hack of Mt. Gox is the
largest hack since the emergence of Bitcoin and led to
the bankruptcy of the exchange in 2014.
• Luckily, other exchanges around the world learned from
this incident. Many exchanges have since implemented
watertight security features. Still, we recommend that
all users of cryptocurrencies practice safe habits and
read our article about securely storing your
cryptocurrencies.
• In any event, distributed ledger technology and the
blockchain are some of the most secure and powerful
innovations known to date. Blockchain brings an
unprecedented wealth of use cases, many of which are
still waiting for their inception.
 Price of Bitcoin
• Unlike fiat currencies, such as the Euro or the US-
Dollar, the value of Bitcoin (BTC) is not defined by a
single entity like a central bank. Instead the price is
defined by supply and demand, or in simpler terms,
by the price people are willing to pay for it.
• The Bitcoin price is defined by supply and demand
• When there is more demand for Bitcoin, the price
goes up, when there is less demand, the price goes
down
• The maximum Bitcoin supply is fixed at an upper
limit of 21,000,000 BTC
 Price of Bitcoin
• Simply put, the price of Bitcoin goes up when demand for
Bitcoin goes up, and the price goes down when there is less
demand for it.
• Demand depends on a number of factors, such as global
events including price declines and advances in prices of
stocks and bonds and economic developments on a global
scale, such as the ongoing trade war between the United
States and China.
• However, unlike monetary policy in countries with fiat
currencies, which are subject to change in line with political
and economic developments, the Bitcoin ecosystem is a fully
decentralised monetary system. No one central authority
regulates the monetary base, therefore the creation of
bitcoins follows detailed rules in a very strict protocol, which
we’ve detailed for you below.
 The rules the Bitcoin network
follows
• Transactions added to the Bitcoin blockchain are coded and set in
stone forever. Miners in the Bitcoin network compete to be the
first node to solve a complex cryptographic puzzle. The winner is
declared to be the first node to mine a valid block and receives
the associated block reward.
• A new block is added to Bitcoin’s blockchain every 10 minutes
after consensus in the network has been reached by all network
participants on the validity of a block.
• A new block is added to Bitcoin’s blockchain every 10 minutes
after consensus in the network on the validity of a block has been
reached by all network participants.
• All transactions in the Bitcoin network have been following a
precise and inalterable process since Satoshi Nakamoto created
the first block called the ‘Genesis Block’. The only provision in the
Bitcoin protocol that entails a change from time to time is the
block reward amount that miners get, in a process called “Block
Reward Halving”.
Why is the Bitcoin price volatile?
• Bitcoin has the highest trading volume among cryptocurrencies,
but it’s still a small market compared to other global markets. This
means that prices make bigger moves up or down with less
money involved. If Bitcoin were to have the same trading volume
as, for example, gold, then its behaviour would be very similar in
terms of volatility.
• As there are only a limited number of bitcoins in circulation and
the creation of new bitcoins follows strict rules with a consistently
decreasing output (because of shrinking rewards for miners),
demand would have to follow the deflationary behaviour of
Bitcoin to even theoretically keep prices stable.
• News events that are detrimental or beneficial to the reputation
of Bitcoin, uncertainty in the future intrinsic value of the
cryptocurrency as a store of value, currency risks for large holders
of Bitcoin regarding liquidation as well as security breaches may
also influence the Bitcoin price.
• If Bitcoin had the same trading volume as, for example, gold, its
behaviour would be very similar in terms of its average
volatility.
Could the Bitcoin price go to zero?
• Short answer: Yes.
• Fiat currencies which are not used anymore are worthless except to
collectors, who will probably still pay you good money for a 100 year-old
piece of paper or coin. The worth of a currency is based on its perceived
value.
• It’s worth noting that currencies that are no longer used usually failed as
a result of the introduction of successors or incidents like hyperinflation.
Such developments tend to significantly devalue affected currencies. In
the case of Bitcoin, hyperinflation is not possible as Bitcoin cannot be
created arbitrarily and its production is fixed to a certain amount.
• FUD: any type of news coverage that can potentially spread “Fear,
Uncertainty, and Doubt”
• In the end, the true causes of a decline in Bitcoin’s price are: political
pressure, technological failures, and all sorts of media coverage under
the umbrella term of FUD: any type of news coverage that can
potentially spread “Fear, Uncertainty, and Doubt.” Until Bitcoin really
reaches the majority of the world, we can keep expecting both
significant price increases as well as significant price declines to occur -
for now, volatility rules.
 The purpose of mining pools and
how do they work
• Miners to pool their resources together in mining
pools to get more consistent payouts. Rewards for
solving blocks are paid out according to how much
processing power someone contributed to the pool.
• Individual miners join their mining resources with other
miners to improve their chances of mining a block in a
mining pool
• The more hashing power a mining pool has, the better
its chances of mining a block
• Block rewards are shared in proportion to the mining
hash power contributed by individual miners.
• Satoshi Nakamoto dreamed of a world in which everyone
could act as a miner to secure the Bitcoin network and can
get freshly mined bitcoins as a reward. In reality, things
played out a bit differently. As the Bitcoin network grew,
individuals had to invest more and more into their
computing power to be able to actually get meaningful
rewards from the process.
• Simultaneously, the type of hardware needed to mine
became more and more complicated and, consequently,
hardware costs continued to rise for Bitcoin miners.
• As the Bitcoin network grew, individuals had to invest more
and more into their computing power to be able to actually
get meaningful rewards from the process.
• Slush, a user in the BitcoinTalk forum who was watching this
trend, realised that it would be a good idea to join forces
with other miners and form a ‘pool’ to increase the chances
of receiving block rewards. So he founded “Slush Pool,” also
known as ‘Bitcoin.cz Mining,” out of the Czech Republic on
November 27, 2010.
• Since the early days and the foundation of Slush Pool, Bitcoin mining has
actually turned into an own industry of its own. Today, it is no longer
possible to solve a Bitcoin block with a regular computer as the process
requires special ASIC units specifically designed for the sole purpose of
mining bitcoin and events such as Bitcoin halving highly affect miner
revenue and increase the significance of transaction fees.
• In a nutshell, ASICs stands for “application-specific integrated circuits”
that have been designed for one particular use, such as mining of
bitcoins.
• With this in mind, the chart above shows how the current
balance of power across the Bitcoin mining space plays out.
Note that each of those pools usually consists of thousands
of individual miners from across the world. The exact
number of individual computers contributing to the network
is hard to tell, but according to an estimate a Quora user
calculated based on performance in May 2019, there are
around 3,800,000 (3 million and 800 thousand) machines
involved around the globe.
• Therefore, it’s easy to see how the argument could be made
that the Bitcoin network is not perfectly decentralised. At
the same time, it’s reasonable to question whether true
decentralisation is even possible in any context. About ten
to fifteen mining pools run the vast majority of the
network.
• As Bitcoin was envisioned by Satoshi Nakamoto as a method
of processing transactions that would ensure financial
power would not become too concentrated in the hands of
a few, the network is a fair playing field for all participants as
long as decentralisation remains sufficient.
• Still, as long as the distribution of hashing power is
reasonable and individual pools remain well below running
51% of the network, this is good news. As Bitcoin was
envisioned by Satoshi Nakamoto as a method of processing
transactions that would ensure financial power would not
become too concentrated in the hands of a few, the
network is a fair playing field for all participants as long as
decentralisation remains sufficient.