Bitcoin: Security and Privacy

By Lexie M

As an electronic currency, Bitcoin is often presented as both anonymous and perfectly transparent. Where the truth really lies depends on how you use it, and using Bitcoin properly requires you to know how it works.

Each Bitcoin transaction is recorded on a distributed global ledger called the Blockchain, which anybody can download after connecting to the Bitcoin network. Bitcoin accounts are not registered with any authority, and users can pseudonymously create as many accounts as they want without cost. Digital signatures can reveal who controls each account, and these signatures may be tracked back to your legal identity.

Bitcoin hacks have received global attention for hacks and thefts. It took the industry years to develop sound practices and properly take security into account. Unlike traditional financial networks which rely on trusted custodians, Bitcoin users can only rely on themselves to secure their assets.

A security conscious approach starts with properly setting up Bitcoin wallets, and backing them up. Depending on the user’s profile, a hardware wallet, paperwallet or mobile app may be appropriate. In theory, Bitcoins can even be ‘carried in your brain.’

But security concerns are not exclusively of technical nature. When buying and selling Bitcoin physical security aspects may need to be taken into account, and trading Bitcoin requires an assessment of counterparty and regulatory risks.

An entirely distinct set of idea are systematic risks. Can Bitcoin collapse on its own? How could someone conspire to destroy Bitcoin?

• Language: English
• Publisher: Lexie M
• Release date: Mar 21, 2018
• ISBN: 9781370230198

Lexie M

I write about information security, bitcoin, and privacy @expressvpn. I'm excited about empowerment through technology, space travel, and blueberry pancakes.

Book preview

Introduction: Welcome to Bitcoin

Bitcoin has grabbed headlines over the past year for its massive spike in value and the ensuing rush to regulate it. However, the real story is the degree to which Bitcoin democratizes global financial systems.

While Bitcoin may often be referred to as anonymous money, its blockchain is also perfectly transparent and may be inspected by anybody at will. That apparent contradiction makes it a revolutionary way for people around the world to realize greater financial freedom: Bitcoin does to money what the internet did to information by providing indiscriminate access to a decentralized financial system.

What is Bitcoin?

Bitcoin is not just a cryptocurrency, but also a new financial system comprised of many components. It was invented in 2008 by the mysterious Satoshi Nakamoto and released shortly after to the public. Most importantly, Bitcoin is not controlled or owned by any individual, corporation, or government. It extensively uses cryptography and relies on a peer-to-peer network.

The Bitcoin protocol lays out the rules of this financial system, including how many Bitcoins can exist, and how they are created and transferred between participants. This protocol is incredibly difficult to change, as any change requires overwhelming consensus from its participants.

Bitcoin software refers to programs that use the Bitcoin protocol to verify its rules and individual transactions. These programs act as nodes in the distributed Bitcoin network. Nodes can also act as miners, meaning they will use cryptographic proofs of burned electricity to secure the network, for which they are rewarded with newly minted Bitcoin.

Bitcoin as a currency or commodity can be used to settle debt, remit money, or conduct online payments. While some participants will rarely hold on to Bitcoin for long in order to not be exposed to volatility in value, others exclusively use it to store value and speculate on its future uses.

Legally, Bitcoin holds a different status in countries around the world. While some governments regard it as a virtual currency, others have gone so far as banning its citizens from using it. As Bitcoin takes away a state’s power to arbitrarily print money, freeze accounts, and censor transactions, it is often seen as a significant threat to authoritarian regimes.



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What is blockchain?

Blockchain is Bitcoin’s accounting ledger. Unlike other systems, where data is amended and deleted continuously, the Bitcoin blockchain only allows participants to add data, and only once every ten minutes in average.

Each block is linked to the previous block through a cryptographic link called a hash. All blocks create a chain back to the first block, the Genesis Block which was minted by the creator of Bitcoin, Satoshi Nakamoto in January 2009. The cryptographic linkage ensures that nobody can add or remove any kind of data from previous blocks without this becoming apparent.

Each block contains several things:

1. Reference to the previous block. This makes it impossible to later reorder transactions.

2. Proof of work. Miners solve mathematical puzzles, which costs them electricity. To prove that they have worked enough, they include the solution to the puzzle into the block.

3. Coinbase. As a reward for their work, the miner is allowed to send themselves Bitcoin from nowhere in what is called the Coinbase transaction. Currently this reward is at 12.5 bitcoin, but gets halved every four years, until all Bitcoins are created.

4. Transactions. Each miner can include a number of transactions into the block. The amount is currently limited at 1 MB, which is roughly 2000 to 3000 transactions.

Note how the blockchain does not contain the balances of the accounts themselves. Software is required to calculate the balance of each address by summing up its incoming and outgoing transfers. This is usually done by your Bitcoin wallet.

It might feel like we don’t need Bitcoin, or we may be unsure about what we might need it for. Similar to the early days of the world wide web, Bitcoin seems to mainly attract dubious characters, facilitate drug trading, or conceal other financial crimes. However, Bitcoin has the potential to transform society and build a truly digital economy in which everyone on this planet will be able to participate, free from coercion, censorship and debasement.

Banks, payment processors, and financial services remain inaccessible to the majority of Earth’s population. These people may be able to look into the digital economy that the internet has enabled, but they are unable to  take part in it as entrepreneurs, producers and consumers.

With Bitcoin, they are suddenly given a tool to transmit monetary value with the same ease as sending a text message. They can support family members abroad, get paid for work online, and find cheaper alternatives to the products they consume.

Essentially, Bitcoin has the potential to challenge the status quo digital economy. That’s because it’s radically different from other forms of electronic payment:

1) Your Transactions cannot be censored

When sending Bitcoin to somebody, nobody is able to block your transaction. You alone decide who to transact with. This also means that nobody is able to take back money that has been sent to you if they change their mind about the payment.

However, this also means that there is no central authority to take care of your dispute, like if the merchant does not deliver the goods.

2) Your Bitcoin cannot be seized

Your savings are safe from arbitrary seizures by corporations or governments. Unlike with banks and saving accounts, nobody can order the Bitcoin network