Welcome to Crypto for Beginners. In this book, we will explore together the exciting and ever-changing world of crypto. If you are anything like me, then crypto will blow your mind. You will discover it is a bottomless rabbit hole, perhaps one that will not be fully explored in our lifetimes, certainly not by the end of this modest text. Yet, crypto is exciting, awe-inspiring, complex, and simultaneously liberating. There are also risks, many unavoidable but some of which can be sidestepped with the right approach.

This book is not done, and it likely never will be as it aims to be an evolving and comprehensive guide to understanding and navigating the world of cryptocurrency which seems to grow like the big bang on steroids. We will, however, quickly master the basics of blockchain technology, the various types of cryptocurrencies, the advantages and disadvantages of using crypto, and the potential future of this fascinating technology. By the end, you will have a solid understanding of how cryptocurrency works, how to use it, how to stay up-to-date, and how it could shape the future of the world.

At its core, this book empowers readers to decide about their futures. Cryptocurrency is an exciting, rapidly evolving space, but it can confuse and intimidate newcomers. That’s why I’ve written with the beginner in mind, breaking down complex concepts and providing real-world examples to help you navigate this exciting new landscape. Despite the intended audience, I am confident that you will quickly find your knowledge expands and I will up the pace of learning accordingly.

Crypto allows us to transact without going through a centralized third party; we can lend, borrow, and trade without signing up to a regulated institution, express our culture, and appreciate others using NFTs for music and art while maintaining ownership of our work. We can play video games, own the treasures we find throughout the game world; and maybe, just maybe, begin to fix our broken systems of money. This may seem like a far-fetched claim but by self-custody of transparently issued money instead of the out-of-control supply of government money it is a real possibility. I’ll explain why I think government money is broken in Chapter 1: Money and Chapter 2: Fiat Vs Bitcoin. Unfortunately, I will go on to explain why things might be set to get even worse in the afterword and at various appropriate points throughout.

Although crypto, cryptocurrency, and blockchain may have slightly different meanings, they are frequently used interchangeably in the rapidly evolving decentralized crypto world, which is mathematically secured. However, have you ever wondered why some are so enthusiastic about crypto while it is so heavily criticized, even mocked, and targeted by governments, mainstream media, and international organizations?

This book will explore and explain; What crypto is and how it works. Who owns and controls it? What can you do with it? How to use it and, perhaps most interesting, why they don’t want you to.

There are more than 30,000 cryptos and thousands more projects that utilize them. But, unfortunately, most of them are worthless. Some are even criminal scams or frauds. However, some enable you to transact with someone, anywhere on the planet, instantaneously, 24 hours a day, for almost nothing, without a controlling intermediary; but this is the best bit – nobody can stop you!

Some cryptos act as a decentralized, un-censorable, potential replacement for the international banking system – like Ethereum. Some cryptos enable the ownership, transfer, and sale of digital goods, like art, music, movies, and video games. Almost unbelievably, there are crypto projects already launched that plan to decentralize and replace the global mapping system, international telecommunications, and Internet connectivity.

Other crypto projects disintermediate and decentralize video, music, and movie streaming, give users back control of online identity, decentralize and replace corporate and social governance structures with DAOs, and some are building the metaverse where people can work, play and own property.

More projects want to disintermediate and rewrite the rules for cloud storage, distributed computing, and secure passwords, decentralize and bring user ownership of data to social media, move the Internet of Things onto the blockchain, and perhaps the ultimate goal; to replace the world’s reserve currency, the US dollar, with Bitcoin.

By understanding and using crypto, you can own an entire, diverse, robust portfolio, secured in your mind, untouchable by governments or foreign powers, and uncensorable by corporations. You can send money to those facing tyranny, undetected by malicious actors, bank the unbanked, and escape the rat race of ever-inflating fiat currency. You can help force governments to be responsive to democracy, behave responsibly, and above all, stop inflating away the hopes and dreams of future generations.

You could also lose your life savings or make life-changing wealth. I will try and guide you on avoiding the former but make no promises about the latter.

Every industry, government, and powerful organization on the planet faces a potential revolution by decentralization, secured by cryptography, and owned by us. It’s happening now! The only questions are, why don’t you hear a fair account of it, can they stop us, and how do you harness it for the good of your family, community, country, and the world?

Who this book is for

This book is for you if you don’t know anything about Bitcoin, cryptocurrencies, blockchain, DeFi, or NFTs. Even if you have never even heard of some of the terms. I start right at the beginning and assume zero previous knowledge. However, I will steadily take the explanations of how all this crypto stuff works and how it is connected to the “real” world deeper and wider. By the end of just the first quarter of the book, my guess is that you will know more about Bitcoin than most people who currently own Bitcoin and definitely more than 99% of the government and media in most countries. By the end, you will fully understand and be able to hold in-depth discussions on those terms I mentioned at the start of this paragraph and even have an insight into the computer code and mathematics that makes the whole thing work.

Furthermore, the book intends not to tell you to “get into” crypto and even less to tell you which crypto projects will succeed but to leave you able to watch the crypto space and make your own assessments. This book could also be for you if you have had a cursory introduction to any of the topics but want to get into the weeds and have a guided hands-on experience. This book is for anybody who wants to start fresh and get detailed without bias for or against specific projects and particularly if you want to learn by doing! At least half the content in this book is hands-on, step-by-step tutorials where you will interact with crypto and all the related technologies. It is important to point out that all the tutorials also feature numerous and detailed screenshots so you can learn from them even if you do not wish to interact with them. Often a tutorial will involve spending a few dollars on crypto tokens or blockchain fees and part of the guidance will be how to spend as little as possible. But as I said, there is no requirement to spend any money whatsoever! To see exactly what you will do and what you will learn, read the table of contents at the start.

Financial and legal warning to all readers

Before we go any further, an important warning is that nothing in this book is financial advice. Any investment can go down in value; crypto investments can go to zero in a second and often do. The author is a crypto enthusiast, not a financial advisor. If you choose to buy some crypto, you do so at your own risk. You do not need to buy any crypto to follow my tutorials, but if you choose, this book will show you how. Before investing money you are not prepared to lose, you should do your research in addition to this book. All the information in this book is about understanding how crypto works, its potential, and risks rather than about how to make money. In addition to the dangers of using and investing in cryptocurrencies, the author advises you to study the general and tax laws in your nation/state and ensure you always comply with them. Some websites, services, software, and smart contracts might not be legal in your jurisdiction.

This book is a work in progress.

I intend to keep adding to and updating this book to be a complete explanation and hands-on tutorial for all things crypto as the crypto world expands and evolves. I have made this free version of the book because I want as many people as possible to understand what is happening. If you want to help support my work you can buy the book from Amazon.

Cut the waffle and tell me about crypto.

If you want to understand why crypto is not just a random revolution but a well-thought-out and necessary one, then the first two chapters and the afterword make it clear. However, if you want to understand crypto ASAP, skip to Chapter 3: Cryptography & The Cypherpunks. If you just want to get your hands on some bitcoin without further delay then skip to Chapter 4: Using Bitcoin.

Formatting

This book will try and stick to some rules about language and formatting. For example, when referring to Bitcoin, the network, or the software system, I try to use a capital B as in Bitcoin; when referring to the currency, I will try to use a lowercase b as in bitcoin; and when referring to trading for another crypto or regular currency, I will try to use the ticker symbol BTC. However, these terms are somewhat interchangeable; hopefully, the context will always be clear.

New terms will be introduced formatted like this new term. I thought green was good for introductions. On-screen text in a tutorial that might need to be clicked, will look like this on-screen text in bold. Text that you need to type will be highlighted like this text you need to type. Orange is nice as it is associated with learning.

Previous: Table of Contents

Next: Money

To understand the problems we face that Crypto & Bitcoin might solve, we first need to understand money. This first chapter is a brief glimpse at money throughout history, then we can take a more detailed look at today’s money known as fiat, and how it is different from crypto and more importantly, Bitcoin.

In economics and civilizations more generally, a currency should serve three main purposes: unit of account, medium of exchange, and store of value. A unit of account is a standard monetary unit used to measure the value of goods and services. A medium of exchange is an agreed-upon item used to conduct transactions between individuals or businesses. A store of value is an asset that can be saved, retrieved, and exchanged later for goods or services and is expected to hold its value over time. In other words, a currency must be widely accepted, easily traded, and maintain its value in order to fulfill these three purposes effectively.

Over this chapter and the next, we will see how important this really is. In our exploration of money, we will cover all the following money-related topics:

Money can seem strange if you think about it too much. We are handing over pieces of paper, coins, or bleeping a plastic card and swapping it for food, clothes, etc. A quick summary of how we got where we are today will be helpful before we learn about Bitcoin.

Barter

Legend has it that in ancient China, during the Han dynasty, a man named Bian He found a beautiful piece of jade and presented it to the emperor, hoping to be rewarded for his discovery. However, the emperor accused him of fraud and had his left foot amputated as punishment. Years later, Bian He discovered another jade and again presented it to the emperor, only to be accused once more. After three attempts, he finally proved the authenticity of the jade by sacrificing his own life to cut it in half and reveal a jade figurine inside. The emperor, recognizing his mistake, apologized and had Bian He buried with honors. Bian He hoped to exchange his discovery for a reward but instead had to prove its worth through a series of trades and negotiations.

In ancient civilizations, humans used to barter, although not exclusively. This system was vital and widespread, yet Imperfect because it relied on the parties wanting something of equal value and more challenging, accepting and agreeing that things were of equal value. For example, how many sheaves of wheat is a cow worth? Does the person selling the cow want that many sheaves of wheat?

While some societies had high trust and would allow for later settlement when only an imperfect barter was available, it was more difficult to trade at a distance- potentially for more desirable goods because you would have to trust someone you knew less or not at all. When ancient peoples bartered, it was slow, sometimes risky, and almost always restrictive. The solution was currency.

Currency

Throughout the history of civilization, significant widespread types of currency include salt, shells, gold and silver, livestock, corn, and decorative beads. The specific reasons a currency was chosen usually involved the properties we mentioned previously:

• It could retain/store its value.

1. It was more easily divisible than most bartered goods.

1. Its value was universal and, therefore, widely accepted.

In the past, many things have been used as currency. In medieval England, edible eels could be used for trade.

In medieval England, eels were a commonly traded commodity and were considered a valuable source of food. The River Thames was particularly famous for its eel population, and eel fisheries were established along the riverbanks. Eels were sold live or preserved in vinegar, and they were often traded for other goods or used as a form of payment for debts.

The eel trade was so important that laws were passed to regulate it. For example, in the 13th century, a law was enacted that required eel fishermen to pay a tax on their catch, which was then used to maintain the river and the fisheries. Eel fishing was also restricted to certain times of the year, typically between Michaelmas (September 29) and Christmas (December 25), to allow the eels to breed and ensure their population remained stable.

Eels were also an important part of the diet of medieval England, particularly during Lent when meat was forbidden. They were typically served roasted, stewed, or baked in pies and were considered a delicacy. The trade in eels continued for centuries, with London becoming a major center for eel sales and distribution. Eels remained a significant form of sustenance, especially for Londoners, and were commonly sold in fish and chip shops in a jellied form.

Eels were easy to catch compared to more desirable fish; they had a low value and could therefore be used for small transactions singly or larger trades in quantity, and their snake-like form made them easier to carry and count than a typical fish. Parmesan cheese was used in Italy. Parmesan cheese was valuable yet could be sliced into small or large sizes, and it stayed edible for months.

Let’s explore some less quirky, more widespread examples in detail and how they measure up to the properties of money.

Salt

Our first example of a widely used currency is salt. Salt was used widely for many centuries. The Romans, Egyptians, and others used it – often alongside other forms of currency like precious metals. As an interesting aside, the word salary comes from the word salt.

There is a story about the city of Venice in the Middle Ages, where salt was particularly valuable because it was used to preserve fish, a staple of the Venetian diet. The Venetian government established a monopoly on the salt trade, which made it even more valuable. However, some Venetian merchants managed to smuggle salt into the city and sell it on the black market. To catch the smugglers, the government set up checkpoints and searched boats entering the city, but the smugglers found a clever way to hide their salt. They would mix it with dirt and shape it into cakes that looked like ordinary building materials, then transport them into the city without being detected.

When they arrived at their destination, they would soak the mixture in water to dissolve the salt, leaving the dirt behind. The water would then be evaporated to recover the salt crystals, which could be sold on the black market for a high price.

This process of dissolving salt in the water to separate it from impurities is called “brine washing” and was commonly used during ancient times to extract salt from rock salt deposits or salt water sources. While it was a labor-intensive process, it was worth the effort, as salt was a highly valuable and sought-after commodity in many cultures.

This practice became so widespread that eventually the government lifted the monopoly and allowed anyone to trade salt openly, leading to a thriving market for the valuable commodity.

Let’s compare salt to the three properties money should have.

1. Salt doesn’t perish unless wet or mixed with other substances and as we have learned, is often still recoverable. Therefore, it retains/stores its value.

1. Salt can be divided into a handful, buckets, or even cartloads and is therefore highly divisible compared to barter goods.

1. Salt can preserve food and make it taste nicer. These universal utilities made it widely accepted. Everybody needed to keep food, so it had universal value.

It is evident, however, that despite the properties of salt: nonperishable store of value, divisibility making it a unit of account, inherent utility so universally valued; it wasn’t ideal. For example, it could perish if the cart collapsed in a puddle, and it was bulky to carry a significant amount.

Perhaps most significantly, it is possible that there could be an oversupply of salt, and therefore its value, other than as a preservative, could diminish. The price of goods relative to salt would increase, meaning it wasn’t always reliable as a long-term store of value.

This is monetary inflation. The only difference to what we are experiencing today is the format of the money, salt instead of paper, coins, and numbers on a bank spreadsheet.

Monetary inflation refers to a sustained increase in the overall level of prices in an economy, resulting in the loss of purchasing power of a given amount of money over time. This typically occurs when there is an increase in the supply of money in circulation, without a corresponding increase in the supply of goods and services. When there is more money chasing the same amount of goods, the prices of those goods tend to go up, resulting in inflation.

Decorative beads

The use of beads in ancient times was extensive and widespread. Ancient manufacturing sites were found in multiple centers around South America, the Philippines, and West Africa. However, there were likely many more sites because beads were used as currency in the Indo-Pacific region, dating back to before recorded history. Another example of manufacturing in West Africa dates to as early as 1100 AD.

Beads came in all shapes, sizes, and colors. Tubular in West Africa, oval and round in the Philippines. Not only were these beads used locally, but they also spread internationally. They were an excellent currency for trade because they looked nice and were universally accepted as holding value; furthermore, to a greater extent than salt, they took time and skill to produce and therefore had good scarcity. As a result, they were commonly used not just for trade but to store spare wealth.

The variety in size, shape, color, and scarcity meant that some beads were assigned more significant value than others. This was perfect for enabling trades large and small. Like coins of different denominations, beads were more helpful than barter goods.

Western explorers like Columbus and Magellan traded in these beads; African beads were used in the Philippines and vice versa. Eventually, European manufacturers started making beads, becoming a top commodity sold to civilizations around the globe, including in exchange for enslaved people in West Africa. African Kings were happy to exchange wealth for surplus human capital, and Western slave traders were pleased to give away what was almost worthless to them for a valuable commodity of the era.

Like precious metals in Europe, beads were also a status symbol. If you had excess wealth, you could wear it to show the neighbors you were more affluent than them, which would confer status and power. Although beads don’t buy anything like the commodities they used to, they are still worn by many cultures today.

Over time, in West Africa, rulers amassed so many beads, primarily manufactured in Europe, which they circulated amongst the population for goods and services that the beads slowly became less valuable until they became almost worthless and were not accepted for barter anymore.

This is another example of monetary inflation.

Are you seeing something of a theme developing here? Would it have been beneficial to much of the ancient world if there had been some way of limiting the production of beads or the gathering and storage of salt? Let’s look at another quick case study.

The Rai stones of Yapp

Some isolated communities had to be even more creative to devise their currency. On the Island of Yapp in Micronesia, they used stones for money, fancy disc-shaped objects with a hole made in the center. These stones came in many sizes, from small 4-6 inches to giant stones about 3.5 meters in diameter. The heaviest stones weighed several tonnes. The currency was called Rai and was shipped from a neighboring island called Palau.

The considerable effort to collect, ship, and fashion the shape made Rai scarce, especially the large sizes. Some of the Rai was so heavy it would need an effort by the whole village to move them. The larger stones were often displayed in the center of the town for all to see. Even when they changed ownership as the fortunes of villagers ebbed and flowed over the years, they would remain in the village center, but everyone would know to whom it belonged and gaze in awe at their prosperity. The largest, publicly held Rai discs could be used for trading desirable plots of land or large purchases like ships, perhaps to acquire more Rai stones on Palau.

The beauty gave them universal value, the variation in size made them a suitable unit of exchange, and the scarcity made them a good store of wealth and, for a while at least, inflation resistant. You can still visit Yapp today and see the ruins of ancient villages with Rai stones still displayed in the jungle areas that were once home. I have never been, but some fascinating videos on YouTube go into more detail.

You can probably guess what happened next. In the 19^th century, an Irishman named David O’Keefe was shipwrecked on Yapp – along with his modern mining and crafting tools. Unfortunately, he churned out Rai stones at a great rate, monetary inflation ensued, and the Yapp economy was significantly disrupted. Although legend has it, the Irishman lived with many paramours on a neighboring island until some years later; he decided to visit his wife and died on the journey home.

You might be interested to know that when you own bitcoin, it is never actually “in” your wallet. All the existing bitcoin is “on” the blockchain, the digital, globally replicated financial ledger. So if you own one bitcoin, the wallet app that shows your balance and allows you to spend it doesn’t contain any bitcoin! Instead, it simply holds the unique unbreakable cryptographic key, which gives you access and ownership to the specific instance of one bitcoin on the blockchain. This has parallels with the most prominent ancient Rai stones on Yapp.

It is said that provided you trusted the seller, the Yapp people would even accept payment in Rai stones that were lost at sea. This is not the case with bitcoins. Lost bitcoin is unusable. Never lose your cryptographic key! We will discuss safely storing your crypto over much of the book.

A cryptographic key is a piece of information used to encrypt or decrypt data in a cryptographic system. It is essentially a string of characters that is generated by an algorithm and is used to scramble and unscramble data in a way that only authorized parties can access it. We will go into depth about all things cryptographic in Chapter 3: Cryptography & the Cypherpunks.

Precious metals

Metals like gold, silver, copper, and electrum were used alongside these other forms of currency and alleviated the problems of perishability, and portability, to some extent. Metals also largely solved the problem of oversupply because they were finite in quantity, and you either had to earn it, trade for it, or go and dig it up. Creating or minting new bitcoins is called mining because it is synonymous with digging up precious metals. The mining system is called proof of work because if a bitcoin miner manages to “mint” some new bitcoin, it proves he has been hard at work securing the network. This raises questions, and we will go into great detail in Chapter 5: How Bitcoin Works. But let’s get back to precious metal.

However, the early metal currencies had the problem of value opacity. This is because traders must constantly weigh and check the purity to assess the actual value. This made metals more suited for more significant transactions because not everybody would have the knowledge and equipment to trade in them accurately.

The Lydian empire, situated in what is now modern-day Türkiye, was the first to introduce a centrally issued coin that made the currency transparent in value. The Lydian stater was made of gold, silver, and copper, stamped, and of a fixed weight. This lessened the problem of verification. It is uncertain, perhaps unlikely, that the ordinary Lydian citizen used the stater because of its high value. Still, historians agree that they were used by merchants, along with the wealthy and King Croesus, as a store of value and a unit of exchange. King Croesus was burned to death by the Persians and relieved of his kingdom and his staters.

The idea of centrally issued coinage spread to Greece, and later incarnations of coinage solved the high-value problem of the stater by using cheaper metals like copper. And usually, a combination of copper, gold, and silver would complement other currencies like salt and barter items.

Precious paper

The Chinese used an interesting form of currency during the Tang dynasty from the 7^th century AD to the 10^th century AD. During this time, they introduced centrally issued paper money. This was a different concept to the paper money we have today and significantly different, even from the early paper monies used in European nations much later.

The most crucial feature of flying cash, as it became known, was that the paper money obtained its value in much the same way as a metal coin, not through its imprinted value but through its scarcity. The paper money was printed using revolutionary woodblock printing, which was impossible to counterfeit. Even the authorities controlling the printing presses had limitations on what they could print because of the speed, process, and cost of printing. If you wanted flying cash, you would have to work or trade for it.

Woodblock printing is a printing technique that involves carving an image into a block of wood, inking the block, and then pressing it onto paper to create a printed image. The carved areas of the block leave the paper blank, while the raised areas transfer ink onto the paper. Woodblock printing was also used for printing books, artwork, and textiles.

Unfortunately for the Tang folk, as the printing process got cheaper and the woodblock presses more widespread, flying cash, like beads, salt, and our modern currencies, devalued to become worthless. However, unlike modern money, the flying cash decline took hundreds of years. We will explore the modern monetary inflation phenomenon in the next chapter.

Official metals

The Romans had the most widespread use of official metal coins, and they were used for centuries. The general availability, universal acceptance, divisibility through a range of values, and store of value through inherent worth were all reasons for the success and longevity of the Roman Empire. Conversely, the debasement of the Roman-issued coinage was a significant factor in the decline.

Roman coins were debased by shaving metal off. The citizens were not stupid; they realized the coins were getting lighter and insisted on more when they bartered. This caused prices to rise, markets to collapse, and decline to be reinforced. Europe eventually went into the period known as the Dark Ages. Having reliable money is essential to a healthy society and a thriving civilization.

Around the 12^th century onwards, the gold Italian florin came into use. The florin was accepted across borders, and by the seventeenth century, other nations were following suit issuing their official gold and silver coins. Most potent was that centrally issued gold and silver coins from one country were often accepted and recognized as holding a clear specific value in others. International trade became much faster and safer. Other examples than the Italian florin include the Spanish silver dollar, and the gold doubloon, followed by the British pound and then the American eagle.

But even official metals had their drawbacks, mainly regarding security, storage, and transportation, because people kept on stealing them. How rude. However, the gold standard significantly improved the problems – at least for a while.

The Gold Standard

In 1816 the introduction of the gold standard in England allowed for paper notes to be created, but they weren’t just printed to please; each note would back an amount of actual physical gold that could be redeemed. Later, in 1900 the United States past an act linking the value of banknotes to an amount of gold.

Although, as we have seen, notes of various types had been used before, notes issued backed by a gold standard ushered in an era of unprecedented commerce and growth. Individuals, merchants, corporations, stock markets, and governments could trade globally without lugging around tons of precious metal coins and bars.

At this point in history, it could be argued that perfect money was in use, although trade was not as fast as today’s electronic systems. However, this money had divisibility, a store of value, and universal acceptance. As a result, prosperity grew throughout the 18^th and 19^th centuries, within and across borders, where the gold standard was in use.

Although the system wasn’t perfect as there were loopholes in the Gold Standard system that allowed wiley traders to profit from the difference in gold prices between countries. They would buy gold at a fixed price in one country, then sell it in another country where the price was higher, making a profit on the difference. This practice became known as “gold export arbitrage,” and it was technically legal at the time, although it was seen as a shady practice. So, while the Gold Standard was a widely accepted monetary system, it was not immune to clever exploitation by those looking to make a quick profit.

In my opinion, the one remaining significant problem – other than not having enough of the stuff – was the centralized control of the system. Banks were the first to run the system and issued promissory notes backed by gold. But there were plenty of examples of bank runs when notes were issued without the gold to back them up. This malpractice would end in severe punishment for the bank owner, and the system overall worked.

Then central banks were formed, and governments controlled the supply of the notes. Governments weren’t keen to punish themselves for printing too many notes for some reason. The beginning of the 20^th century would usher in the first wave of free money for governments. The flaw of centralization leading to inflation should be obvious at this point – but not to almost every major government on the face of the planet – apparently.

Summary

At this point, I ask you to consider the possibility of a system where the currency is secured by the most tangible commodity on the planet, with complete transparency of issuance and ownership, backed by provable work having been undertaken, outside the control of a centralized authority, with minimal and fixed inflation, in addition to instant digital transferability. We’ll come back to these properties of Bitcoin soon.

In this chapter, we have seen that having reliable, trusted money is essential to a civilization. It enables transactions between people who do not trust each other to come back another day to fulfill the agreement made in a barter. However, when money is not backed by anything, the only thing giving it value is scarcity. But, as we have seen, monetary inflation can undermine scarcity with civilizational scale consequences. So, is this the end of the story of money? Has the gold standard fixed everything? Unfortunately, governments discovered another property that can give money value. That property is authority or fiat. And it comes with some big problems, as we will see.

Previous: Preface
Next: Fiat Vs Bitcoin

In 1984 Nobel prize-winning economist Frederick Hayek said,

On 1^st November 2008, a Cryptography mail group member, a mysterious figure known only as Satoshi Nakamoto, posted: “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.” The announcement contained a link to the Bitcoin: A peer-to-peer electronic cash system whitepaper. This was the birth of cryptocurrency, a new digital asset that promised to revolutionize how we transact, invest, and store value. I think it is possible that this then-obscure post marked the beginning of a new era for Hayek’s “good money.”

Here is what we will discuss while learning about fiat currency and comparing it to Bitcoin:

Boom Boom Boom went the guns – Brrr went the money printer

The cynical and hilarious take on World War 1 portrayed by the Black Adder Goes Forth series was in some ways exaggerated. For example, many historians disagree that the leaders were as incompetent and cowardly as they were made out to be but in some ways, the evil was understated too.

In 1914 the need to pay for soldiers and to produce the materials for war saw almost all the European nations drop the gold standard. The Swiss kept their system intact, and we will compare the Swiss currency to the US Dollar soon. The European countries dropped the link to gold because if the notes weren’t backed by gold, then the governments could print whatever they wanted, and they did.

For example, the British issued war bonds to the public. Because, at the time, no such mechanism as quantitative easing existed, the Bank of England issued a credit line to two of its employees who dutifully spent all their borrowed money on war bonds. The employee’s purchases account for two-thirds of all the war bonds issued. This was a propaganda victory and a financial scam because not only did the British manage to magic up enough cash for a big war, but they also led the British public to think that private individuals had bought all the bonds implying overwhelming support for the war.

At this point, the notes only had value because governments said so – this is known as fiat currency. Fiat means authoritative decree, sanction, or order.

This money was used to mobilize armies and weapons on a scale that had never been seen before and, in terms of pure human resources, has never been seen since. The men that went to their terrifying deaths in the mud and the blood were paid with fiat – government decree. The world’s nations slammed into one another without regard for their citizens until one side capitulated.

There is a compelling argument that if there had been some way of mandating the whole planet to stay on the gold standard, it would have greatly limited the scope and duration of the war, perhaps even prevented it. As a side note, the US suspended its Gold Standard in 1862 to finance the Civil War. If governments had to borrow – and therefore repay, everything they spent, they would need to tax citizens more, and there would be more resistance to military mobilization. Just like since the rise of digital communications, governments have found it harder to go to war, although arguably, they have become experts on the propaganda of pre-justification.

The argument for the worthiness of what was then known as the Great War was that it was the war to end all wars. But, of course, most agree it was the direct cause of the next one. If you want to consider the idea that a universal, mandated gold standard is an instrument of peace, as well, I will argue, an instrument of prosperity; then I encourage you to find out more about it. The viability of war without fiat and the whole story behind those dodgy British war bonds can be explored in the book The Pity of War by Niall Furgeson.

The US went back to then held out with the gold standard until 1971 when President Nixon announced that dollars would no longer be backed by gold. So American citizens were left holding pieces of paper, not promises of gold. This decoupling of gold from the dollar was meant to be temporary, but more than half a century later, you can probably stop holding your breath; the gold standard is gone forever.

As we will see, this decision was arguably the most significant in modern monetary history and, the US only managed to stay on a gold standard as long as it did by stealing gold from its citizens. In January 1933, U.S. citizens were given until May of the same year to give all their gold to the government. They were paid for the gold but significantly under market value. The punishment for not doing so was a huge fine or up to 10 years in prison. In addition, people who resisted were prosecuted under legacy World War 1 law initially designed to prevent trading with enemies.

I have already alluded to a system where the currency is backed by the most tangible commodity on the planet, with 100% transparency, outside the control of a centralized authority, in addition to instant digital transferability. I am referring to crypto or, more specifically, a decentralized, cryptographically secured system underpinned by Bitcoin. Bitcoin has been referred to as a digital gold standard, sound money, or, optimistically, The Bitcoin Standard. I will let you make your mind up over the course of the book if this is or could be so, but I will argue that if Bitcoin isn’t the digital gold standard, what else could be?

The deciding factor will be how fast crypto and, more importantly, Bitcoin is adopted. For example, suppose you are concerned about being mandated to use a central bank-issued digital currency one day. If enough people adopt Bitcoin, we can issue our governments a mandate – a mandate for sound money.

Today we mostly spend and exchange money digitally, with bank transfers and credit and debit cards, either in person or online. Still, the vital thing to note is that this money’s value is not backed by gold or any other scarce resource, as we have discussed. So why is it worth anything at all? It is because the government says so – fiat. And as authority and scarcity decline, so does the value of fiat currency.

Central control of money

In this centrally controlled fiat environment, with money constantly losing value, people are implicitly encouraged to speculate, perhaps as the reader and the author are doing, at the expense of innovating, producing, or saving, all more wholesome activities that benefit more people and create genuine wealth.

The problem with stopping fiat money printing is that there will always be people in society who need assistance. The government would need to be much more discerning about whom they pay welfare. The argument for stopping printing is that a society that doesn’t print money and over-speculate would become more wealthy and better able to help the nation’s needy in the long term.

Would there be an awkward transition where the needy might go without? I don’t have any answers to this, but rushing headlong to monetary collapse isn’t viable either. Perhaps a period of transition to sound money alongside fiat-based money printing would work? If you want to consider the fiat system versus a Bitcoin sound money system, get The Bitcoin Standard by Saifadean Ammous and Bitcoin: The Future of Money? by Dominic Frisby.

We know that fiat value comes from government authority. This is backed up by the strength of society internally and the power of the military externally. Fiat means we must entirely depend on the efficiency and intentions of government and the success and stability of the economy. A weak nation or incohesive society will equal a weak currency. A strong country and confident, cohesive community will equal a strong currency, albeit a potentially abusive currency. Therefore, it could be argued that even a “successful” fiat currency is wrong for some of the world.

If we overlook the effect a fiat currency can have external to the nation, the weakness or strength of fiat currency is that it relies on the central authority’s reputation, integrity, and policies. Therefore, if you live in a weak nation, the money and worth you derive from work or risk-taking will not keep its value; it will depreciate. In fact, since 1971, even the most robust economy that has ever existed has a fast-devaluing currency. A good representation is to show the change in the US dollar price against the Swiss franc.

US dollar devaluation since 1971

Additional devaluation metrics are the consumer price index compounded. This is shown in this next image since 1914 when the Federal Reserve was founded to control the US dollar.

US CPI since 1914

The first chart represents a near 80% devaluation in the dollar since 1971 when Nixon took the U.S. off the gold standard. The second chart shows a nearly 97% devaluation against itself over a century.

This would be a good point to introduce you to the first of dozens of tools and data sources that will prove useful on our crypto journey.

Introduction to TradingView & Bitcoin Volatility

TradingView is a free charting tool that like most free tools also has a premium version with extra features. I don’t recommend investing in the premium features until you have exhausted the free features. Traders use TradingView to evaluate the trades they are in or may enter and crypto investors like it because it is one of the few pro tools that covers nearly all the cryptocurrencies. You can use TradingView by downloading their free desktop app which works in almost exactly the same way as the website we will now briefly explore. In Chapter 11 we will go a bit deeper into how to use TradingView to help assess specific crypto investments. Here we will do a quick analysis of the Bitcoin price compared to the US dollar just to see some of the simplest TradingView features.

Visit https://tradingview.com and you will see the homepage. BTC which is the ticker symbol that represents Bitcoin can usually be seen on the home page as shown in the next image.

TradingView home page

To get used to using the TradingView interface, click on Search markets here. You will see the TradingView search interface as shown in the next image.

TradingView search UI

If you type BTCUSD in the search box, TradingView will show you all the charts related to comparing Bitcoin – BTC with the US dollar – USD. There are many to choose from. We are looking for a chart that has the complete Bitcoin history as it is quite interesting. Look for the entry BTCUSD BITCOIN ALL TIME HISTORY INDEX as shown in the next image.

Bitcoin chart in search results

Click BTCUSD BITCOIN ALL TIME HISTORY INDEX to bring up the chart information page. In the bottom left corner, click 1Y to display the BTC price over one year. This is what the chart looks like at the time of writing. Yours will obviously look different depending on when you are reading this.

BTC 1-year chart

Notice in the top-left of the preceding image we can see that 1D is highlighted indicating that each vertical line on the graph represents one day. Next, click on ALL to reveal the entire BTC price history going back to 2009. The next image shows this data.

All-time view of BTC

At first glance, the chart might not appear particularly interesting because it is just a long flat horizontal line from the left  – 2009 – to over halfway along – approximately 2017  – but we will dig a little deeper next. First of all, note in the preceding image in the top-left that the chart was changed to monthly lines as indicated by the highlighted M. The reason there is just a long flat line is that the chart represents values ranging from zero in 2009 up to the BTC all-time high in 2021 of nearly $70,000. What we want to see is the percentage change over time. After all, if an asset you hold doubles from 1 cent to 2 cents this is just as nice as when it doubles from $20,000 to $40,000. Equally, it is just as terrible when the price halves. To explore this further, click on the log link in the bottom right.

Click the Log link

This shows the logarithmic view which scales the vertical lines based on percentage change. So, $20 is twice as high as $10, $40 is twice $20, all the way up to $70,000 dollars. Note also that you can zoom in and out by hovering your mouse over the chart and scrolling the mouse wheel. If all this zooming and adjusting leaves your chart in a muddle you need to reset the chart and try again. To do so, click the auto link next to the log link. This next image shows the weekly time interval after I have switched to a logarithmic view.

All-time logarithmic view with the monthly timeframe

Ignore the red and blue lines for now I will come back to them. Here we see a different picture one that is generally trending up over time. If you zoom in on some of the peaks and then examine the troughs (which ALWAYS follow) you will see that Bitcoin although tending up is exceptionally volatile. The next image examines some of the most notable peaks and troughs.

Bitcoin peaks and troughs

The first thing to note is that the three images are not on the exact same scale. I had to adjust the chart to capture the screenshots, but the following is what they show. In the image on the left BTC was 56 cents in April 2011. By June of the same year, it was nearly $32. If you had invested $1000 in April, you would have had nearly $64,000 in June – but not for long. By October, within 5 months, it was back around $2. If you had been excited by the hype in April and invested $1000 you would have around $62 left over – a devastating loss.

In the second image, we see March 2017. At this point in time BTC was $898. By December 2017 it was nearly – but not quite – an historic $20,000! You could have multiplied your money by 20x! However, if you had held your BTC for another year, or worse, bought at the peak, BTC was back to $3100 a year later in December 2018. Another marriage-ending loss.

The third image shows BTC in April 2020 just as the Covid-19 lockdowns were being announced. It went as low as $3,900 but only fleetingly. By November 2021 the price was fractionally below $70,000 – another potential life-changing gain. But then (you are probably beginning to see the pattern by now) by November 2022 after the collapse of the FTX centralized exchange it was back to a bit less than $16,000.

The point is that BTC is devastatingly volatile! Since 2009 BTC has had the equivalent of at least four 1929-style Wall Street crashes. Each down cycle in the price was way worse than the dot-com bubble popping. So why would you ever put a cent into BTC? You would have to accurately time all the bottoms to buy and all the tops to sell. This isn’t possible. However, look back at that first logarithmic chart. Here it is again for convenience.

Logarithmic chart

Despite the record-breaking volatility, the price has consistently gone up since Satoshi mined those first 50 Bitcoins in 2009. Please note that the past is not a guarantee of the future, but the past is very interesting especially where Bitcoin is concerned. Why might the BTC price behave like this?

Notice in the preceding image I have shown the red and blue vertical lines again. The red lines are simple to explain; they are the high points of the BTC price before the enormous declines. The blue lines are the most interesting. They mark the dates of the Bitcoin halvings.

The halvings are the point in time when the Bitcoin software, located on tens of thousands of independently run nodes, spread across every country on the planet, simultaneously agree to cut the new supply of BTC in half. These tend to be approximately four years apart, but the timing is much more technical and is connected to Bitcoin mining. Note that the halving does not predict the exact bottom of the BTC price, but it does tend to mark the beginning of the rise to new all-time-high prices. The exact formula for the halving and the reasons will be fully explained in Chapter 5: How Bitcoin Works when we explore how Bitcoin works and then in Chapter 6: How to Run a Bitcoin Node, we will see how to run a node for yourself should you wish to.

You can try to predict when the next Bitcoin halving will be by visiting https://www.nicehash.com/countdown/btc-halving-2024-05-10-12-00. This next image shows the countdown at the time of writing.

The Bitcoin halving countdown

The point I want to make in this chapter is simply that not only is the BTC inflation controlled, but it is also fixed, and always decreasing, until 2140 when there will be no more bitcoins – ever. There will only ever be 21 million. Putting that into perspective; Burkina Faso is just the 59^th most populous country but there will never be enough Bitcoins in existence for each citizen to own just one even if Burkina Faso owns all the Bitcoin in the world. If knowledge and adoption of Bitcoin increase over time – the BTC price can only go up – albeit with massive volatile swings. Be sure to realize, however,  there are ways that the BTC price as well as any other cryptocurrency can go to zero! We will discuss these possibilities throughout the book and specifically for Bitcoin in Chapter 5: How Bitcoin Works. I would therefore suggest not rushing out to buy any Bitcoin until you have done some more research.

Now we have taken our first detailed look at Bitcoin let’s finish talking about regular money.

Back to the central control of money

At the time of writing, everyone is talking about the US dollar’s strength. However, this strength is only relative to other currencies, like the British pound, the Euro, or the Japanese Yen, which are even weaker, with even higher inflation. So, make no mistake; if you have US dollars, UK pounds, Eurozone euros, or Japanese yen, you will be poorer when you wake up tomorrow, the next day, and the next.

The dollar’s devaluation started with the Federal Reserve in 1914, and the decline rapidly accelerated in 1971 with the dropping of the gold standard. So much has changed since 1971 that a new book about the changes could be written. But think, if a family is financially insecure, they are weaker as a family unit and each as an individual.

There is a saying that correlation is not causation. Just because two or more things happen simultaneously doesn’t mean one or more of these events were caused by the other, but when so much happens to coincide, you must stop and think about it.

Since the end of World War 2, the world had, until 1971, been getting richer overall. Since 1971 income inequality began from an all-time low to a current all-time high, as has obesity, especially in children, the prison population in Western countries, especially the US, and average wealth per person calculated against GDP is an all-time low. The divorce rate is near all-time highs and has likely only dipped because marriages are at an all-time low. Debt, STDs, domestic violence, birth out of wedlock, and single-parent families. All these statistics can be explained in other ways, laws, societal change, etc., but the correlation to 1971 is extensive and quite convincing. Yet, GDP is near an all-time high. This is because GDP is measured in nominal US dollars – not what those US dollars can purchase. If the essentials of life cost more, GDP will rise, or the people will starve. GDP per person is a better measure of wealth, but even that doesn’t consider inflation.

GDP stands for Gross Domestic Product, which is a measure of the total value of all goods and services produced within a country’s borders over a year. It is a widely used indicator of a country’s economic performance and is calculated by adding up the total value of all final goods and services produced, including consumer goods, government spending, investments, and exports while subtracting imports. GDP provides a snapshot of a country’s economic activity and is used to gauge economic growth, living standards, and overall economic health.

The World Economic Forum was founded in 1971, and we will discuss them in the afterword section at the back of the book. Of course, the correlation may not be causation, and probably the world’s problems today have multiple causes – but they all started to gather fast growth, from a healthy low, in 1971.

We have seen how humans have used money tied to something with genuine scarcity throughout the centuries. In the current system, money has no value other than what the government decrees and the more it prints or digitally creates, the less your previous labor, savings, and risk-taking are worth. This forces people to speculate to try and keep their wealth rather than engage in virtuous activities like saving, producing, and innovating. So why do we still crave these devaluing fiat junk currencies?

The idea that money today is genuinely scarce is a myth. The restrictive issuance of money perpetuates the myth. What do I mean? Restrictive issuance of money refers to a monetary policy approach where the central bank or monetary authority limits the supply of money in circulation in order to combat inflation and maintain the value of the currency. This can be done through various means, such as increasing interest rates, selling government securities, or increasing reserve requirements for banks. The goal of restrictive monetary policy is to decrease demand for goods and services, which can lead to a decrease in prices and inflation. In short – this is when the government artificially controls you to get poorer.

When you spend money in a shop, your bank balance is debited, and the shop’s bank balance is credited, but the fiat was printed or digitally magicked into existence for way less time and labor than it took to create the goods the shopkeeper has yielded or it took you to earn. However, to get more of this otherwise worthless fiat, we must give up more of our time and energy, risk something of what we own, or be one of the government’s preferred citizens and wait for the next free top-up. Yet as soon as we have earned more, the devaluation continues apace. If there was something else we could all use, something the government couldn’t control, then we could stand a chance that a day’s pay today might be worth a day’s pay in ten years.

In 2020 and 2021, the US printed more money than in the previous 150 years! And the inflation statistics at the end of 2022 bear this out. And many say the inflation statistics don’t show the actual cost of living. There is a reason many economists call the CPI (the measure of inflation) the CP-Lie. If you want to see how the U.S. financial authorities manipulate inflation statistics, look at this website: http://www.shadowstats.com/alternate_data/inflation-charts. And if you think I am picking on the U.S. because I don’t like it or something, think again; the U.S. is doing better in inflation terms than just about every other country on the planet.

Inflation and the economic cycles

Inflation is a stealthy tax, the most unfair tax, and yet as we have seen a deliberate tax. When you go to work, you earn money, are taxed, and keep what is left over, but inflation takes away from what you have saved. Inflation forces you to spend. This, in turn, means that people need to find something to buy, which increases demand – and inflation. And round and round it goes.

It is possible to have a thriving economy without inflation; it has already happened under the Gold Standard. Productivity doesn’t cause inflation; free government money does. You can watch politicians saying they have succeeded in reducing the inflation rate, pretending they are making things cheaper. They haven’t made anything cheaper; the prices have kept increasing from the new highs, just a little more slowly. And even then, this modest reduction in the squandering of earned value is measured by the government’s preferred, manipulated metrics.

I am not suggesting that investing in cryptocurrency to get huge returns is the solution to beating inflation; you can do that, but you must make suitable investments at the right time, and if you get it wrong, you will lose even more than the rate of inflation, perhaps you will lose everything!

Some might say to invest in property, but most people can’t afford to buy the property they live in, let alone a second or third investment property. Furthermore, property investment has a very high barrier to entry and is illiquid and vulnerable to legislation. Some would say invest in gold, and there is an argument for that; gold has been a reasonable inflation hedge, although even gold has had significant highs and lows over time, and having your gold securely stored is expensive for small amounts and potentially risky to self-custody, not to mention that in 1931 the US government confiscated everyone’s gold; could it happen again?

Some people argue that time in the market is more important than timing the market. This argument is statistically correct. The idea is that if you keep investing regularly into diversified investments like a stocks index fund, then, historically, over a significant timeframe, provided you don’t need the money during a dip in price, you should win, maybe even beat inflation. The problem with this is that your investment is relatively illiquid. By definition, you can’t spend it whenever you want or aren’t in the market. What if you need a new car, an operation, or baby clothes and accessories right now? Your long-term portfolio might not be in a good place. You would lose.

The argument I am trying to make and will continue to make for a half-dozen more pages is that the system needs to change because not only are the poor staying poor – all but the very richest are getting poorer. So isn’t it reasonable that everybody, rich, poor, and in between, should be able to expect after they have worked for some money and contributed to society through taxes, that they are able to keep their money without it stealthily depreciating?

I heard it said once on Twitter, and I can’t find who to attribute it to but it is apt so I will repeat it here. “The fact that billions of working men and women must sacrifice 40+ years of their time, energy, health, and focus to gain access to fiat currencies that central bank entities can replicate with a keystroke is injustice on the largest scale humanity has ever seen. It is theft.”

As implied during our brief divergence into TradingView and Bitcoin, the way that cryptocurrencies inflate is handled in the code, which provides economic certainty. While the code of some crypto can be modified by the developers, some projects cannot be altered. For example, Bitcoin mints new bitcoins to pay the miners who secure the network every ten minutes. There are currently around 19.7 million bitcoins in circulation, with about 1.3 million left to mine. So there will always be, at most, 21 million bitcoins. Let me rephrase that: the supply of bitcoins is fixed forever! The government and the central banks can’t change it, the United Nations can’t, and even Satoshi Nakamoto can’t.

In addition, it is estimated that more than three million bitcoins were lost, some through user error, but mainly because some early holders didn’t realize what they had would be so valuable. Approximately 80 million bitcoin wallets exist; a few wallets hold hundreds or thousands, most have less than one bitcoin, and nearly 1 million hold one or more. There are not enough bitcoins for the world’s 60 million millionaires to have one each! What happens if Bitcoin gets global adoption? Would you like to own just one bitcoin? Just in case. Satoshi Nakamoto once said of his creation, “It might make sense just to get some in case it catches on.”

And yes, cryptocurrencies might hold the solutions to systemic change. Change in a way where we don’t have to lurch into dangerous, radical political systems that promise a utopia and are more likely just old, failed ideas repackaged that are bound to make things worse. After all, ideology is just nostalgia in reverse.

How about a simple, steady, safe change? Just change where people get to keep some of the money they earn – and everybody can participate, without permission, wherever they are. That’s it; people should be able to make and keep the value that they earned.

The Global Financial Crisis, DeFi, and the Compartmentalization of risk

In the 1930s, the U.S. experienced the Great Depression, and this had consequences around the globe. It was in large part triggered by the Wall Street Crash. The Securities and Exchanges Commission was formed, which led to financial regulation and forced decompartmentalization of institutions. Institutions couldn’t get too big to fail. They would succeed or fail on their own merits – within their compartment, like the doors on a ship that are sealed after a leak occurs. This was good for financial stability but bad for regular citizens’ getting easy access to the financial system. It is possible to argue that restricting everyday people from the system was justified based on the calamity of the Wall Street crash, which had just occurred, but what’s that saying about the road to hell being paved with good intentions? Nearly fifty years later, deregulation would take things back in the other direction.

In the 1980s, the Reagan administration started deregulation, and Clinton and Bush senior continued this. The UK copied then other nations followed suit when they saw the wealth created. Financial firms went public and consolidated with other financial firms. The consolidation of the financial companies was a compartmentalization of the system. I.e., the re-interlinking and dependence upon each other.

Don’t worry; I will not suggest we return to the 1930s, just that we find a way to deal with compartmentalization without shutting out regular citizens from the financial system.

In the late 1990s and early 2000s, financial and technical innovation saw rapid developments in ITC infrastructure, enabling complex financial derivatives. One of the few acts of financial regulation in the US was to ban financial regulation itself. The 2000 Commodity Futures Regulation Act prohibited the regulation of financial derivatives.

Derivatives are products derived from others. A simple example is an option. An option allows an investor, speculator, or business to take a position on whether a commodity, say corn, will rise or fall in a specific period. An option is a contract detailing under what circumstances, timeframe, and price a trade will happen. This is extremely useful for a supermarket, baker, or farmer. You can hedge and make predictable the price the supermarket will pay for bread and the baker will pay for corn. But, of course, derivatives didn’t stop there.

Derivatives got highly complex, so complex that literally, nobody could understand some of them. I argue that derivatives are okay, even highly complex ones. Still, when they are opaque, they are potentially dangerous to investors. When they exist in a highly compartmentalized financial system, they are hazardous to society, perhaps the entire planet. If you don’t understand something, you shouldn’t invest in it – but you should be allowed to if you want to.

U.S. and UK Investment banks were the most significant creators of complex, opaque derivatives in the 2000s. The biggest names were Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, and Bear Stearns. Other traditional financial banks, including Citigroup and JP Morgan, were also involved. They facilitated exposure to derivatives, often without being aware of their composition to regular, non-Wall Street folk – like us – how kind.

When these complex derivatives were sold, they were often insured against loss by companies like AIG, MBIA, and AMBAC. For the insuring institutions to be confident they were charging enough to cover the insurance pay-outs, they turned to the rating agencies who would give packages of derivative products a rating. AAA, or triple-A, was the best, supposedly safest rating. Moody’s, Standard and Poor’s, and Fitch were the top rating agencies.

So, banks like Citi Bank and JPMorgan lent their customer’s money to derivatives issuers like Goldman Sachs, Morgan Stanley, Lehman Brothers, and Merrill Lynch. The banks were confident to do so because their products were insured by companies like AIG, MBIA, and AMBAC, who in turn were relying on the credit ratings issued by the likes of Moody’s, Standard and Poor’s, and Fitch, who usually said the investments were safe and could be insured relatively cheaply.

Note that the above explanation is a gross simplification but hopefully serves as an overview of the facts. Next, we will go into more detail, but considerable simplifications remain to make a point or two at the end.

Investment companies make packages out of loans called collateralized debt obligations CDOs and sell them to investors. Rating agencies gave investment ratings to various CDOs. As many CDOs were given good ratings like AAA, they became popular with retirement funds that are usually risk averse. Retirement companies have more capital than most institutions. Things were about to get big.

House mortgage lenders had reduced incentive to worry about whether their lender would be able to repay the loan and started making riskier loans. Investment banks made money from the CDO sale, not the homeowner’s repayments, so they didn’t care if their customers repaid the loans. In addition, the rating agencies had no legal obligation to give correct ratings. This might sound ridiculous, but it’s true.

The rating agencies got away with this because they called the ratings their opinion – free speech – and the U.S. Constitution’s 1st Amendment protected this. In addition, the investment banks paid them directly, which needed good ratings to sell the CDOs.

This process is sometimes called the securitization food chain. The ease of getting a mortgage meant more mortgages and more house buying, which led to higher house prices. Lenders specialized in selling risky loans known as subprime loans. At the peak in 2007, 700 billion dollars in loans were made, approximately ten times as much as ten years prior in 1997.

Regulators knew that CDOs were opaque and that ratings were likely inflated if not dishonest. Alan Greenspan, chairman of the Federal Reserve, said as much but refused to act based on principle. The principle that regulation was wrong.

The money the investment banks used to buy the loans they created the CDOs from was borrowed. This was exacerbated because back in 2004, the rules about the money an investment bank could borrow relative to how much of its own money it had were relaxed further. This meant that the loan providers took on more of the risk to the investment bank rather than the shareholders of the investment banks. This increased potential return without increased capital investment is known as leverage and is an excellent example of the compartmentalization of risk. A chain reaction was waiting to happen, but it got worse with the use of credit default swaps.

Credit default swaps CDSs allowed investors to insure the returns on their CDOs, and they also allowed traders to speculate on the value of CDSs. One firm offering these insurance services was AIG. They charged a fee for the CDSs but were not obliged by regulation to hold the funds to cover the value of a CDO in full. To make things worse, investment banks could hedge their CDO exposure by shorting CDSs via AIG. So effectively, they were betting against the same investment products they created – and making money doing it!

Shorting is taking a position where you make money on a falling investment. Shorting can be explained as follows:

1. Borrow an asset and pay a fee for the service

1. Immediately sell the asset

1. Wait for it to go down in price

1. Repurchase it for a lower price than you bought it for

1. Return the asset to the lender

1. Profit from the difference in the selling price minus the buyback price less the fee to the lender

This is all well and good as well as a common practice, but if you knew that the same person who recommended the investment to you was also shorting it, you would probably feel cheated.

As house prices fell and mortgage payments weren’t met, on March 16, 2008, Bear Stearns went bust and was purchased by JP Morgan Chase at a significant discount but only after the US government, via the Federal Reserve, gave 30 billion dollars of guarantees. Hence, JP Morgan was guaranteed not to lose.

On September 7, 2008, the US government bought mortgage lenders Fannie Mae and Freddie Mac to avoid them collapsing. These were probably the most directly affected by the subprime loans as they were obliged, even coerced to give risky loans by an earlier law designed to make mortgages available to people who previously would have been ineligible – and were more likely not to be able to afford it.

On September 12, 2008, Lehman Brothers ran out of money, and the Federal Reserve met with banks to try and rescue them. It became apparent that Merril Lynch was also on the verge of bankruptcy. Bank of America bought Merril Lynch, and Barclays in the UK wanted to buy Lehman Brothers, but the UK Chancellor of the Exchequer Alistair Darling blocked it. Lehman Brothers went bankrupt. At this point, AIG owed more than ten billion dollars from the CDSs (insurance) they had issued. They didn’t have it – of course.

On September 17^th, the US government bought AIG, which cost another 150 billion dollars – much of which was paid to investment banks holding AIG CDSs.

At this stage, the most likely outcome was a contagion that would bring down even solvent banks and corporations.  Every bank would need to be guaranteed; otherwise, every bank could not trust every other bank. This would be expensive, enter the US taxpayer and the money printer.

On September 18^th, the Federal Reserve asked the US Congress for 700 billion dollars to bail out the banks. Perhaps surprisingly, in nominal dollar terms, the taxpayer got their money back. However, 700 billion new dollars was unleashed on the economy- just in the United States and similar cash splurges occurred around the globe. This changed the economic ecosystems of the entire planet.

The global and even local economic ecosystems are like tens of millions of tightly intertwined cogs, some big, some tiny, some massive; they turn and interact, push others, and get pushed by still others. Most importantly, these cogs disengage when necessary. Each market, business, individual, whole industry, yes, the government and its institutions act on one or more cogs. The point is that the operator of each cog is the best place to decide the extent to which it interacts or doesn’t interact with the other cogs. You know when something is of value or overpriced to you. A raw material to one business is output to another, and they are both experts in what they want to pay because they are both experts in what it costs them and what they can get from the raw material. They are also experts on their own circumstances – what they can afford. When 700 billion dollars oil the cogs, irrational interactions inevitably occur.

When government uses the levers of the central bank, it is like they are flipping a speed-up switch to the whole system, and when the money printing stops, it is like jamming a wrench into some of the cogs, removing others, and adding new cogs in willy-nilly while making vital disengagements harder. Indeed, the government finds itself in circumstances where it seems something must be done, but this is only because we have unsound inflationary fiat money. And each time the government “fixes” the economy, it sets it up for a bigger problem in the future. So some economists are saying that the “fixing” of the 2008 crash and the “fixing” of the pandemic lockdowns with money printing will finally cause something that cannot be fixed.

So, what can be done, and how could future financial crises be avoided? Tighter regulation in Western democracies might have saved the world – but what about all the pre-2008 people who bought homes (that they could afford), the small businesses that got loans they might not otherwise have obtained? We don’t want to deprive people of homes or businesses of cash flow.

Allowing deregulation and these exotic financial instruments but mandating transparency could have saved the world—clear decompartmentalization of institutions. If the system hadn’t been dominated by a few big, interlinked banks, insurance companies, and rating agencies as it was then and is again today, each smaller company would have had to have been responsible for each exotic instrument they purchased because they would know they wouldn’t be bailed out because they would have been expendable. And the responsibility could have been achieved through transparency – easily knowing precisely what was in each of these CDOs. At the time of editing, we seem to be going headlong to more centralization. As smaller banks get into trouble they are being merged into the bigger banks.

In the excellent movie The Big Short, which documents the 2008 crash, Michael Burry, played by Christian Bale, spends much time digging into the details of the individual loans, corrupt sales practices, and lax governance on which the CDOs were built and then made a fortune shorting them as they crashed. So it was possible to demystify the details, although, as the movie showed, it wasn’t straightforward.

And without the bailouts, we avoid money printing or at least one of the excuses for it.

First, the need for risky returns on money, for regular savings and retirement at least, is only necessary because of inflation. Sure, Wall Street would likely still take risks with everything. Still, if you knew your dollar would buy the same amount in 10 years as it does now, you would seek out a guaranteed safe custodian of your money rather than a bank that promises overly optimistic returns.

If institutions were transparent about their derivatives and decompartmentalization, sensible investors would know what to avoid or if they wanted a high-risk investment they would know what they were getting involved with.

Cryptocurrency and its financial system, called DeFi or decentralized finance, certainly does have a wild west, and there is very little clear regulation – although that’s coming.

Decentralized finance (DeFi) refers to a system of financial applications built on blockchain technology that operates without intermediaries and provide open access to financial services.

DeFi is also susceptible to crises and asset collapses due to contagion. For example, the Terra (UST) token crash on 8th February 2022 was likely due to various factors, including technical issues with the Terra blockchain, market speculation, and investor sentiment. The crash details may never be fully understood, but it highlights the risk of contagion in any market.

I am getting to my point; however, although every other cryptocurrency crashed with it to a much lesser extent, the financial losses had knock-on effects taking down centralized exchanges and other centralized institutions.

The critical point here is that although anyone invested in the Terra Luna ecosystem lost big, and the confidence contagion spread and affected prices throughout the entire market, Terra Luna as a technical entity was entirely compartmentalized. Even the other blockchains connected to the Terra ecosystem, the Cosmos networks, kept processing transactions throughout the affair. All the other critical failures were at centralized institutions and exchanges, not decentralized blockchain networks.

DeFi is the most compartmentalized financial system that has ever existed, each person is the bearer of risk individually, and simultaneously, there is no barrier to entry. No qualification or level of wealth is required to get started. A small child with a dollar could have risked it all on Terra Luna or put his hard-earned dollar into a low-yield stable investment on AAVE.

Most small children probably wouldn’t know how to do so, and you probably agree that we would want most participants to choose the safe investment option. Education, therefore, is the only missing component to this solution to the ills of the current financial system.

Furthermore, as well as unrestricted participation and significant compartmentalization, there is a high level of transparency, as I will now explain.

Anyone can see who (more on anonymity and privacy as we proceed) and how much and under what terms (contract) investment is made. If a participant wants to get involved in a high-risk, high-return, leveraged, rehypothecated adventure, they can – and should be allowed. But, on the other hand, if they would rather be more cautious and stay in a dollar-based lending and borrowing scheme for just a few percent per year returns, they can do that too. The participation contract is immutable and more critical than anything; nobody controls it except the computer code that defines it. Immutable means the state of something is unchanging or unchangeable.

And with Bitcoin specifically, nobody can print it beyond what was decided more than a decade ago and it is fixed for another 120 years until finally, there will be no more, ever, period. So sure, you can use bitcoin for charity or social welfare, but you must earn it first. You have to care about whom you give it to genuinely. And nobody can give your bitcoin money away on your behalf via inflation.

While the 2008 banking crisis played out and dominated news headlines, the unassuming group who became known as the cypherpunks were talking, planning, and exchanging ideas; Satoshi Nakamoto was coding, refining, and testing a new project called Bitcoin.

On the 3rd of January 2009, the genesis block of 50 bitcoins was mined. This is what it would have looked like on Satoshi Nakamoto’s Windows computer screen.

The first Bitcoin block

If you look at the right-hand side of the preceding image, you can see that the text of a newspaper headline was embedded in this first block. The text reads, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks,” as it appeared in the Times of the UK newspaper below.

The Times UK headline

Globally the consequences of 2008 were enormous. In addition to inflation, it caused a recession, unemployment, corporate failure, mortgage foreclosures, homelessness, suicide, property markets collapsed globally, and a raft of knock-on failures worldwide. Mainly, bank customers were made whole, although some countries like Iceland and Cyprus left customers to fend for themselves with the world’s first “bail-in” instead of bail-out.

As an aside, but important, did you know that the Federal Reserve, the Bank of England, and the European Central Bank now plan bail-ins where returning customers’ money after any future crisis is likely conditional and limited? Returning any future lost funds would probably depend on using a central bank digital currency CBDC—more on CBDCs in the afterword.

But what happened next was even more world-changing than the global financial crisis or the crises of the Covid responses.

The Occupy Wall Street movement was a global protest movement that emerged after the 2008 global financial crisis. It was promoted and helped by much of the international media. Its stated intention was to address wealth inequality, corporate greed, and the influence of large financial institutions on government policy. There was some truth to that, but I suspect many of the protestors just saw an opportunity to bring forth their long-awaited socialist utopia.

However, considering what had just happened, the protestors had a point and significant traction this time – and they knew it. The movement started in September 2011 with a demonstration in New York City’s financial district. It quickly spread to other cities worldwide, with protesters setting up encampments in public spaces to draw attention to their cause.

The movement was characterized by its decentralized and leaderless structure, with participants using social media and other forms of communication to coordinate their actions. Although there were leaders, typically from left-leaning parties, getting involved and joining in the almost universal media support. Yet, the following year, the movement lost momentum. I found it surprising that one day, they were on every news channel in every Western country, and then they were gone. Why? It’s not like we have achieved financial equality yet. Don’t the protestors want to keep on to victory?

The Woke Pivot

Corporations and their politician friends realized that they needed to act, or they would be swept away in a tsunami of socialism. So, what about if they joined forces with the protesters and coopted the movement? Hey, what about if they went even further than the protestors? So much so that they, the corporations, the money managers, the politicians, and the globalist institutions joined forces and out-protested the protestors. They would need a strategy that didn’t hurt them; even better, a process that benefited them would be excellent and, most importantly, make them seem virtuous to their current detractors and make their detractors financially dependent on them. What am I talking about?

In the afterword, we will find out who runs the financial system and maybe the political system too, by learning about the giant corporations, banks, fund managers, BIS, IMF, World Bank, FATF, UN, WEF, and most importantly, how they worked together to pull off the biggest confidence trick ever – What I call The Woke Pivot—a reinvention of morality, reality, and truth itself.

The Woke Pivot was when all the governments, corporations, and institutions became activists to side with the radical left. They intend to control all businesses and society, specifically to implement the United Nations SDGs, or Sustainable Development Goals, at any cost. You do not need to understand the details before discovering crypto, but I cover it in the afterword at the end of the book if you want to know more. And if you are concerned, it is my view that crypto is the best, perhaps the only chance we have of pushing back.

Summary

In the preceding chapter, we saw how devastating inflation has been throughout history, and in this chapter, we have seen that the latest example of mass money printing has left us where we are today. I have argued that compartmentalizing the financial system and transparency can prevent financial crises, but that compartmentalization can restrict access to ordinary folk. I made the rather bold claim that cryptocurrency might be the answer to allow full participation with excellent compartmentalization and transparency. The rest of the book will enable you to make up your mind. In the next chapter, we will begin to see how cryptography can secure our money, decentralize control, and guarantee access for all to the new world of crypto.

Previous: Money

Next: Cryptography & The Cypherpunks

Ever wonder how secret messages are sent? Cryptography is the science behind it all! It’s the math that makes sure secrets stay hidden, and it’s also what makes cryptocurrencies like Bitcoin possible.

In this chapter, we will look at three different cryptography methods so you can better understand how cryptocurrency works. The following chapters will focus on Bitcoin. We will then be able to use our Bitcoin knowledge as a reference point to begin understanding other crypto projects. Here are the topics we will cover:

Cryptography is extremely neat yet complex, but we’ll keep it simple. We won’t need to learn advanced math – that’s not what this website is about. But if you’re mathematically inclined, I’ll give you some resources for further reading.

Cryptography has already changed the world on more than one occasion.

Cryptography in history

During World War II, breaking the Enigma code was a monumental task undertaken by the British codebreakers at Bletchley Park. One fascinating anecdote involves the mathematician Alan Turing, who played a crucial role in deciphering Enigma messages.

Turing developed a machine called the “Bombe,” which helped decrypt Enigma-encrypted messages faster. One day, as the story goes, Turing and his team encountered a seemingly impossible situation. They had intercepted a message indicating an attack was imminent, but they lacked the specific details needed to prevent it.

In a stroke of brilliance, Turing realized that the Germans often used predictable phrases at the beginning of their messages, such as “Heil Hitler” followed by weather reports. Using this insight, he instructed his team to search for the phrase “Heil Hitler” in the Enigma-encrypted messages.

Their breakthrough came when they found a pattern: the message “Heil Hitler” was always followed by a string of letters representing the weather conditions. By analyzing these weather reports, the codebreakers were able to deduce the daily settings of the Enigma machine, allowing them to decrypt other intercepted messages and gain valuable intelligence.

This anecdote highlights Turing’s innovative thinking and how his team leveraged patterns to break the seemingly unbreakable Enigma code, making significant contributions to the Allied victory in World War II.

Cryptography is powerful and governments have often tried to control it.

In the 1990s, there was a notable attempt to ban or restrict the use of strong cryptography apps, primarily in the United States. The main concern behind this effort was that the widespread availability of strong encryption could hinder law enforcement and intelligence agencies ability to access communications for investigative purposes.

In 1993, the Clinton administration introduced the “Clipper Chip” initiative. The Clipper Chip was a government-developed encryption device that included a built-in “key escrow” system. This meant that while individuals could use the chip to encrypt their communications, a copy of the decryption key would also be held by the government. The intent was to provide law enforcement with a backdoor to access encrypted information when needed.

The proposal faced significant opposition from privacy advocates, civil liberties organizations, and the tech industry. Critics argued that such a system would undermine the security and privacy of individuals and create a potential vulnerability that malicious actors could exploit. The debate intensified, and ultimately the Clipper Chip initiative did not gain widespread acceptance or adoption.

Additionally, during this period, the U.S. government attempted to regulate the export of strong encryption software. The Arms Export Control Act categorized encryption as a weapon, subjecting it to strict export controls. This meant that American companies were limited in their ability to export encryption technology, and the software had to be deliberately weakened for international distribution. These export restrictions were also met with criticism from the tech industry, as they hindered the global adoption of strong encryption.

Over time, the concerns surrounding the ban on cryptography apps started to shift. Recognizing the importance of secure communication in an increasingly digital world, the U.S. government and other countries gradually eased export restrictions and revised their stances on encryption. Today, encryption is widely recognized as a crucial tool for protecting privacy and securing digital communications, although debates about lawful access to encrypted data for law enforcement purposes continue to this day.

Cryptocurrencies are currently battling the US administration and hopefully, they will come to realize that crypto is a force for good.

A straightforward and much older example of cryptography is the Caesar Cipher, which is said to have been used by Julius Caesar to send secret messages to Cleopatra. It’s easy to understand and easily cracked with a computer program. But it is effective as it can slow down someone trying to decrypt messages by hand. To break a Caesar Cipher, you first need to figure out that it’s a Caesar Cipher and then use a simple mathematical formula to shift the letters of the message to a certain number of places in the alphabet.

On the other hand, the SHA-256 method that Bitcoin uses is impossible to break with current computer systems. Let’s look more closely at the Caesar cipher before we move on to SHA-256.

The Caesar cipher

The Caesar Cipher works by shifting a message’s characters by a specific number of positions. If we know the number of positions the characters have been moved, we can decrypt the message, so we call this number the key. For example, below is the word Hello. Each letter has been shifted by two characters in the alphabet to produce the encrypted word known as the ciphertext.

Message = “hello”

h shifted two positions = j

e shifted two positions = g

l shifted two positions = n

o shifted two positions = q

Therefore, the ciphertext is jgnnq, and the key is +2.

You could use repetition to decipher the ciphertext. You could first shift all the letters back by one position to get ifmmp. Moving back by one character has failed. You could then shift all the letters in the cipher text back by two and arrive at hello. Of course, if he were clever, Caesar would use a higher number than two but not too high in case the enemy started their repetition tests from 26. It is called the brute force method when you attempt to break/decipher a ciphertext by repeatedly trying random values within the range of possibilities.

If you want to play with Caesar ciphers, you can do so with a pen and paper or explore it more visually with this handy web app: https://www.dcode.fr/caesar-cipher. As we have seen with the Caesar Cipher, cryptography can be simple. We can also see that it is mathematical. Now let’s see what cryptography can do when we raise the difficulty a little.

Today we have the advantage of using powerful computers and thousands of years of mathematical advances. First, let’s look at SHA-256, which is one of the cryptographic functions that Bitcoin uses.

The SHA-256 cryptographic function

SHA stands for Simple Hashing Algorithm. The -256  refers to its data length but more on that soon. It is from a family of mathematical/cryptographic functions. For example, SHA-256 is from the SHA-2 family. As shown in this next image, we can think of a function as a black box.

A function is like a black box.

It is called a black box because the user doesn’t need to know what happens inside it. Sometimes the function is a secret; sometimes, as in the case of SHA-256, the user can learn how the black box works if they are interested enough and intelligent enough.

We don’t need to know what happens inside the black box of the SHA-256 function. However, we care about what goes in and comes out and will fully explore its uses and properties to understand it thoroughly. If you want to know the complex math inside the SHA-2 family, please read more here: https://en.wikipedia.org/wiki/SHA-2.

What the SHA-256 function does

The SHA-256 function takes any data, regardless of size, and produces a fixed-length output of 64 characters. It is called SHA-256 and not SHA-64 because the 64 alpha-numeric characters are represented by 256 bits of computer data, 256 ones, or zeroes. The characters are Hexadecimal numbers. Hexadecimal is the base 16 number system where the numbers go from zero through f.

Crucially, SHA-256 is a one-way function. One-way means the mathematics that arrived at the fixed-length output cannot be reversed. To make this critical point another way, you cannot take the output of the black box and derive the input. This fixed-length output is called the hash. Another commonly used term for a hash is a fingerprint. It is often called a fingerprint because it almost uniquely identifies the data it is derived from; a bit like a human’s fingerprint almost uniquely identifies the person. You cannot derive a person if you have their fingerprint, but if you have a person and a fingerprint, you can reliably verify if it belongs to that person.

We verify and match fingerprints to people using a microscope. Likewise, we can verify and match SHA-256 hashes/fingerprints to the original data with mathematics, another function, or a black box. Another essential feature of SHA-256 is that despite its complexity it is fast for a computer to calculate. Let’s keep going; we will soon understand and demonstrate the power and utility of SHA-256.

One property of SHA-256 is that it is collision-resistant. Collision is the term used to describe when two different pieces of data produce the same hash. This means it is highly improbable that the same hash will be found for any two inputs to the function.

As we know, we often refer to hashes as fingerprints. This is because a hash can be used as an identifier for a digital file like a fingerprint can identify a person. Therefore, it is worth explaining further the immense extent to which SHA-256 is collision-resistant. There are some great analogies to help with this explanation, and here is my favorite.

A deck has 52 cards in it. If you thoroughly shuffle them, likely, nobody in history has held the same deck! This is because there are more ways to arrange a deck of cards than atoms on Earth. According to McGill University, there are about 8 x 10 ^ 67 possible permutations.

The number 8 x 10^67 can be represented as 80 octodecillion in words or 80,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 in standard notation.

The chance of collision with SHA-256 is 2^256, a number with 78 zeroes! However, the number with the deck of cards example was just 67 zeroes. So a collision is so unlikely you could bet your life on it – there is much more chance that a giant meteorite will land on your home – but – having said this – collision is possible.

You might think that randomness is involved because SHA-256 has such wildly varying and unique outputs. However, this is not the case. If you enter the same data repeatedly, it will always return the same 256-bit, 64-character output. The technical term for this type of consistent output from a function is deterministic.

There are many hashing algorithms, and some are even more secure and collision resistant than SHA-256. Bitcoin uses SHA-256 as a tradeoff between efficiency (fast to process) and security (unlikely to collide).

At this point, you might think that SHA-256 is impressive, but what use is it apart from some mathematical amusement? First, we know that SHA-256 can take any digital content/file and return a unique 64-character hash. Moreover, it does so with the level of certainty discussed.

Look at this next image, and then we will discuss it.

Fingerprint examples

As we can see from the preceding image, the SHA-256 function can create a fingerprint from a digital image, an entire book, a short phrase, a single word, or even a single character but will always return a unique 64-character hash. In the preceding image, I have faked the hashes for demonstration purposes and shortened their lengths with ellipsis … for presentation purposes.

The point is that they are all different. And as we will see, if you were to put in very similar data, perhaps, Secret message 2, the hash would be entirely different from the hash produced by Secret message, just as near-identical twins have different fingerprints. In the next section, we will demonstrate actual hashing with real data.

In summary, SHA 256 has the following properties:

1. SHA-256 is deterministic. It is consistent. A given input will always produce the same hash/fingerprint.

1. SHA 256 is very easy to compute and therefore verify. A budget laptop might calculate 2 million hashes per second. Hardware designed specifically for Bitcoin mining can compute around 119,000,000,000,000 (that’s 119 trillion) hashes per second. We will learn more about how this helps keep Bitcoin secure in Chapter 5: How Bitcoin Works.

1. SHA 256 is a one-way function. Therefore, it cannot be reversed. This means the input cannot be derived from the output.

1. SHA-256 outputs are almost impossible to collide. Therefore, it is extraordinarily improbable that two different inputs will ever produce the same hash.

1. Even a tiny change in the input dramatically changes the output. I.e., If the input was ‘a’, the output will be indistinguishable from the output derived from an input of ‘b’. This is called the avalanche effect.

SHA-256 is used in multiple ways in the Bitcoin network. We will cover all the uses in Chapter 5 when we discover how Bitcoin works. But, first, to demonstrate SHA-256 in action, let’s look at a practical example.

A SHA-256 demonstration

To see SHA-256 in action, visit the following website. This is an application written by Anders Brownworth and kindly made freely available. I take no credit for this excellent app. https://andersbrownworth.com/blockchain/hash.

On the website, type Hello, SHA-256 into the input field labeled Data:. Type the text precisely, including uppercase, lowercase, a hyphen, and space. This is shown in the following image.

Hashing some text

If you type the text precisely, you will have the same 64-character, 256-bit hash as I got.

A quick and relatively safe way to verify that a hash is the same is to compare the characters from the beginning and the end. Taking the first and last five characters, the hash I generated was 2e631…7b97c.

The chances of the first and last five characters being verified correctly when a different text is typed in the Data: field is tiny – but more error-prone than checking the whole 64 characters. The reason that checking the beginning and end is an often-used technique is that it is likely that you would copy and paste a hash, not type it. Therefore the most likely error is to miss a character or two at the start or the end. The level of caution you wish to take will depend on the circumstances.

For example, in Chapter 4: Using Bitcoin, we will copy and paste 64-character hashes representing where some bitcoin will be sent. If you send a small amount of bitcoin to a regular address, you could check a few characters at the start and a few at the and that will likely be sufficient due diligence. However, if you are paying for a sports car or transferring your life savings, you would probably scrutinize the details more carefully.

Let’s play with the hashing app some more. First, change just one detail in the Data: field. I have changed the uppercase H in hello to a lowercase h. The following image shows the app with the changes highlighted.

A minor change to the text

After this small change, a quick inspection of the hash will show it is entirely different. We could not have predicted the hash just because the change was slight. If we examine the first and last five characters, the first of the original hash, followed by the hash from the text with the change, we will see no similarity or observable pattern.

2e631…7b97c   Vs fc35e…d848d

For fun, let’s put a much more significant amount of text in the Data: field and see what happens. In the image below on the left, I pasted the entire Jane Austen classic Pride and Prejudice text into the Data: field. Next, I changed the text, as shown in the image below on the right, by adding a period after the author’s name. That’s just a single period difference between the book’s entire text.

Even more minor changes to the text

In the previous image, observe the completely different hashes, even from such a tiny change in a sea of identical data. The start and end of the two hashes are shown next for clarity.

A6f07…2316d   Vs  6b377…c535e

We can also confirm that no matter how much data is entered, the algorithm always returns a 64-character, 256-bit hash. Furthermore, notice how quickly the hash is calculated if you conduct the same or similar experiment. If you want to try this out, the text file is available here: https://www.gutenberg.org/files/1342/1342-0.txt provided by Project Gutenberg.

Real-world uses for SHA-256

One everyday use for SHA-256 is for hashing passwords for a website. When you enter your password into a website, it will hash it and compare it to the hash in the database. Therefore, the database should not store your password in plain text as you typed it when you created an account on the website. Then, if the website is hacked, the passwords can’t be stolen as the password cannot be derived from the hash.

If you have ever downloaded a software application, perhaps an open-source app, the download website will often show a hash of the downloadable file. This enables you to get a hash of the downloaded file and verify that you have the genuine one.

The most exciting thing that SHA-256 is used for (in my opinion) is in securing the Bitcoin network. First, let’s move on to another area of cryptography that Bitcoin uses; then, we will be nearly ready to start using Bitcoin in the next chapter.

Public key cryptography

The precise algorithm Bitcoin uses for public key cryptography is ECDSA which stands for Elliptic Curve Digital Signature Algorithm. If you love math and want to understand it, read here: https://en.wikipedia.org/wiki/Elliptic_Curve_Digital_Signature_Algorithm.

In public key cryptography, there are a pair of keys. The owner should keep one private key secret and one public key that can be shared.

There are multiple combinations of uses for this pair of keys. We will look at two, and in the next chapter, we will see Bitcoin in action with key pairs.

Sending a secret message to the owner of the private key

First, you should know that each key pair are mathematically related. For example, the public key can encrypt some data, perhaps a secret message and only the private key can decrypt that message. This would mean that anybody could write and encrypt a secret message for the owner of the private key, but only the owner of the private key could read(decrypt) the message.

The public key encrypts – private key decrypts.

Note that the encrypted message format is for demonstration and is not a real ciphertext.

This usage is made possible because there is a one-way mathematical relationship between the private and the public key. The public key is mathematically derived from the private key, but the private key cannot be discovered from the public key.

This is powerful as a secret message could be left publicly, but only the private key owner can read it. Anybody who takes the trouble to discover the public key could write a message, encrypt it using it, and broadcast it to the whole world, but only the holder of the private key could read it.

Let’s look at a demonstration of encrypting and decrypting with key pairs.

Demonstrating encrypted messages with key pairs

Visit https://www.kerryveenstra.com/cryptosystem.html. The part of the web page that we will use is on the second half of the page. Scroll down to the heading Public-Key Encryption and click the Generate a Public/Private Key Pair button.

Generate a key pair

Note that the algorithm used by this demo app is a far less secure version of ECDSA, and the numbers are much smaller. However, the principles are the same, and we will see a real ECDSA example in the next exercise.

Next, scroll down the web page to Step 2b Optional Encrypt a Message. Type Hello World in the Plaintext or Signed Message: field. Type the public key from the previous step into the Recipient’s Public Key: field. Click the Encrypt Using Recipient’s Public Key button. This step is shown in the following image.

Enter a message and the public key.

Copy the generated ciphertext in the Ciphertext field by highlighting it and pressing the Ctrl–C keyboard combination.

Scroll down the web page to Step 3a: Decrypt a Message. First, paste the ciphertext into the Ciphertext field using the Ctrl-V keyboard combination. Next, enter the private key into the Recipient’s Private Key field and click the Decrypt Using Recipient’s Private Key button.

Use the private key to decrypt the ciphertext.

The preceding image shows that the original message “Hello World” has been revealed, indicating that the generated public/private key pair has a mathematical relationship. Feel free to play with the steps we skipped over on this web page, but we will soon move on to explore some more aspects of public key cryptography anyway.

This process can also be used in reverse to allow the private key to encrypt a message and anyone with the public key to decrypt the message. It is often a surprise to newcomers that Bitcoin data on the network is not encrypted. We will learn why this is a benefit and not a problem in a moment. But first, let’s discuss what Bitcoin uses public and private key pairs for in more detail.

Verifying a message was sent by the owner of the private key

The private key owner can encrypt a message, and anybody with the public key can decrypt it. At first, this might seem pointless, but let’s keep going. The most significant part of this relationship, where Bitcoin is concerned, is that anybody with the public key can also mathematically verify that the message’s sender is the private key’s owner. This is how anybody can verify that transactions on the Bitcoin blockchain are genuine.

The following diagram might at first appear to demonstrate the same encrypting and decrypting properties in the previous image. However, to be clear, in the following diagram, the public key is not encrypting the message; the message is open and in plain text for the world to read. What the private key is doing is creating a signature of this message. Then the public key can verify that the message’s signature can only have been generated by the holder of the private key. Therefore, anybody in the world can prove that the message is from the owner of the private key. This system of the private signing of messages and public verification enables transactions to be sent and verified on the Bitcoin network.

Signing a public message

Note that the format of the message’s signature is for demonstration purposes only.

Let’s look at a demo for signing and verifying with key pairs.

Demonstrating signing and verifying messages with key pairs

Public and private key cryptography can also be used to sign and verify a message. The message could be encrypted or just in plain text. In the Bitcoin network, all transactions are in plain text; they are public.

The private key can be used to sign a message. Then anyone with the public key can verify the signer’s authenticity using the public key and the message’s signature (created with the private key). By “verify the authenticity,” I mean mathematically guaranteeing that the transaction/message was signed with the private key.

Put another way, the owner of a private key can send a transaction including a signature, and anyone with the public key can mathematically verify that the signer was the owner of the private key. The tens of thousands of nodes on the Bitcoin network use signatures to prove that a transaction that spends some bitcoin came from the owner of the private key. Anyone on the network can verify that the transaction is genuine, but only the private key holder can initiate the transaction. This is security for the bitcoin owner and trust through verification for everyone else.

As we will explore in Chapter 5: How Bitcoin Works, Bitcoin uses unencrypted plain text messages that are public, to record transactions. Bitcoin is not a secret network. However, all transactions must be signed by the private key and can therefore be verified using the public key, guaranteeing ownership of any funds being spent. Exactly how this works will take some more explanation, but to solidify the idea of signing and verifying using key pairs, let’s play with these ideas in an app.

Visit https://andersbrownworth.com/blockchain/public-private-keys/keys, and we will explore a practical example of signing and verifying with key pairs. On the app, click the Random button to generate a new key pair, as shown in the following image.

Generate a new key pair.

Note that the private key is generated first because the public key is mathematically derived from the private key. Also, note that the public and private keys are way longer, more secure, less guessable, and less likely to collide with another randomly generated key than in the previous example.

Now click the Signatures link in the website’s top right-hand corner to navigate to the next app. In the app that appears, type a message. For example, I typed, Signatures are neat! Notice that it has saved the private key that you generated previously. Next, click the Sign button and notice in the Signature field that a new signature has been generated. This signature is based on the private key and the message. I have shown these steps in the following image.

Sign a message

Now click on the Verify tab located next to the Sign tab. Notice that the public key and the message are already filled in for you. If you click the Verify button, the app’s background will turn green, indicating that the public key has verified the signature generated by the private key from the message. This is shown in the following image.

The public key has verified that the private key signed the message

Try changing anything in any field, Message, Public Key, or Signature – even the tiniest detail, and the verification will fail, as demonstrated by the app showing a red background. For example, this is shown in the following image.

Verification failed

The only thing I changed was removing the exclamation mark from the message. As the message was changed, it was unverified. We will see this powerful algorithm in action when we see how the Bitcoin network verifies that transactions are valid in Chapter 5.

Bitcoin didn’t come out of nowhere; a small but dedicated group of cryptographers has been discussing and attempting solutions for a digital currency for some time. This next section talks about the projects that didn’t make it, but they wind an interesting technological path to Bitcoin.

Pre-Bitcoin technologies

Bitcoin wasn’t the first shot at digital/cryptocurrency. Let’s briefly examine the attempts before Bitcoin and why they didn’t get the same adoption and value that Bitcoin now enjoys.

DigiCash

DigiCash by David Chaum, a Berkley graduate student, thought controlling people’s information was vital, and he wanted people to keep control of their own information. So Chaum came up with the idea of digital cash in 1982.

Sharing a cubicle with Eric Schmidt (Google) (slightly ironic), he founded DigiCash in 1989. Unfortunately, it failed because all transactions needed to be validated by the company that controlled the currency. DigiCash indeed used the Internet but probably couldn’t be considered an application of the Internet because of the centralized need for validation.

I have watched many interviews with David Chaum. He is very impressive, talented, and probably honest but can you trust the validation of a global currency with just one company or individual? You probably shouldn’t.

Having just criticized DigiCash by comparing it to modern cryptocurrencies, it is worth saying that DigiCash did have some relative successes, at least commercially, with lots of interest from banks and software companies in the late 1980s and early 1990s.

David Chaum still works in cryptography and has recently released a quantum secure messaging app called XX Messenger, which is well worth checking out.

HashCash

HashCash was developed by Adam Back. HashCash was first proposed in 1997, the first proof of work system, and was designed to prevent email spam. A digital hash would be added to each email. As the hash required processing work, sending many spam emails would be costly and time-consuming. As we will see in Chapter 5, the proof of work (PoW) concept is used by Bitcoin to decentralize the verification of transactions on the Bitcoin network helping Bitcoin to become a decentralized application of the Internet, not just on the Internet. You can read more on HashCash.

Bit Gold

Bit Gold by Nick Szabo, proposed in 1997, was also fundamental to the evolution of Bitcoin because it recognized the concept of digital scarcity. Think about the problem of inflation. As we have discussed, the more you make of a currency, the less valuable it becomes. The same is true for digital currencies.

For example, Dogecoin, the cryptocurrency created by Billy Markus and Jackson Palmer as a joke, has a supply of approximately 132 billion. Also, roughly another 5 billion Dogecoin will be minted each year. Conversely, Bitcoin has a maximum supply of 21 million that will be gradually reached by 2140.

Just because something is a cryptocurrency doesn’t mean it automatically solves the inflation problem. In addition, critics of Bitcoin will say it is overly deflationary. The Bit Gold proposal had many similarities to Bitcoin, although it never got past the proposal stage. With compelling but circumstantial evidence, some suggest that Nick Szabo is Satoshi Nakamoto. Nick Szabo denies he is the legendary creator.

Nick Szabo said of Bit Gold in 2005, “The problem, in a nutshell, is that our money currently depends on trust in a third party for its value…all money humanity has ever used has been insecure in one way or another. This insecurity has been manifested in various ways, from counterfeiting to theft, but the most pernicious of which has probably been inflation…Bit Gold may provide us with a money of unprecedented security from these dangers.”

Nick Szabo was aware of the problems that needed to be solved, centralization, trust, and inflation. Still, he never got around to implementing the solution – unless he’s telling lies and he is Nakamoto. Here is a link If you want to learn more about Nick Szabo. He also had the idea for smart contracts which much of this website is dedicated to exploring.

Having just criticized Dogecoin for being inflationary, it is fair to point out that Dogecoin has a fixed inflation rate of a little under 5%. At the time of writing, this is below/better than most fiat currencies Western nations use. In addition, Dogecoin has the support of an entrepreneur, the world’s richest man, Elon Musk, a big group of fans known as the Doge Army, and perhaps most importantly it has a really cute dog as its emblem.

Image from https://dogecoin.com

At the time of writing, Dogecoin is the 11^th biggest cryptocurrency when measured by market capitalization. Market capitalization is the number of coins in circulation multiplied by the price.

As stated at the start of the chapter, I offer no financial advice on this website, just a practical exploration of cryptocurrencies. Just because something is exciting, interesting, or cute doesn’t mean it is a good investment. The previous text was not advice to buy dogecoin, bitcoin, or anything else.

B-Money and RPoW

B-Money was a paper written in 1998 by Wei Dai. It featured a Proof of Work (PoW) system used to create money, and a distributed community of users that verified transactions. The list of transactions – the ledger was also maintained by a whole community in a distributed way. B-Money was never completed but Wei Dai had many other achievements in the field like writing reusable cryptographic programming libraries. Dai’s work (specifically PoW) was referenced by Satoshi in the Bitcoin Whitepaper although it is thought the similarities were a coincidence and Satoshi was just being polite to credit Dai.

The smallest unit of one bitcoin is called a Satoshi named after Satoshi Nakamoto and the smallest unit of the Ethereum cryptocurrency is called a wei named after Wei Dai.

The first usable project was Reusable Proof of Work (RPoW) by Hal Finney in 2004. RPoW solved the double spending problem that we will discuss further in Chapter 5. The fundamental problem is how you stop a user from spending the same digital coin twice. The problem with RPoW was that it ran on highly specific, centralized hardware. In addition, it lacked financial incentives to secure the system – so why would anyone who wasn’t an RPoW enthusiast get involved?

Hal also worked on the coding and received the first peer-to-peer Bitcoin transaction – 10 Bitcoin – on 12th January 2009. Some believe he is Satoshi Nakamoto, but he denies it. Either way, he had significant involvement. Hal was also a cryptography entrepreneur involved with the PGP corporation during the time when the US Government where fighting against cryptography, and interesting to me was that Hal was a game developer who made the Intellivision game The Adventures of Tron amongst others.

Hal was diagnosed with a neurodegenerative disease which caused him to become paralyzed and he died in 2014. A fascinating detail is that he was cryopreserved. If Hal gets a second shot at life sometime in the future and he was Satoshi, I hope he has his private key safe and sound.

The Bitcoin ethos

Satoshi Nakamoto had the same views as Szabo regarding the problems of the fiat monetary system. Nakamoto said, “The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We must trust them with our privacy, trust them not to let identity thieves drain our accounts.”

Nakamoto then outlined the solution, “…With e-currency based on cryptographic proof, without the need to trust a third-party middleman, money can be secure.”

On 1^st November 2008, Satoshi Nakamoto revealed the Bitcoin whitepaper outlining how the system would work. Less than three months later, Hal Finney received that first transaction. We will soon see how to make what is perhaps your first Bitcoin transaction.

Bitcoin, in the beginning

The Bitcoin whitepaper is titled Bitcoin A peer-to-peer electronic cash system. It was met with enthusiasm but also noted imperfections, such as scalability, that we will discuss more in Chapter 5. A little over two months later the 3^rd of January 2009, the first block was added to the Bitcoin blockchain, and the first 50 bitcoins were mined(minted) into existence. A block is a collection of transactions, and a blockchain is multiple ordered blocks, a financial ledger. Therefore, mining is competing to produce the next block while securing the network. We will understand these terms better as we proceed.

More developers joined forces with Satoshi to improve the code and port the code to run on more operating systems. Moreover, Bitcoin was soon being promoted through Websites like Bitcoin.org.

Initially, Bitcoin was valued by counting the cost of the electricity needed to generate – mine – a bitcoin and resulted in a value of a small fraction of 1 cent. However, the value of bitcoin soon soared into the multiple cents ranges as early exchanges appeared, starting with BitcoinMarket.com in early 2010, valuing one bitcoin at 3 cents. Silk Road, the highly controversial and illegal marketplace accepting bitcoins, also started trading in 2010, and the legal but ill-fated MtGox Bitcoin exchange launched in 2011.

Around this period, near the end of 2010, Satoshi Nakamoto made his penultimate public comments as multiple WikiLeaks scandals raged, and it was proffered that Bitcoin might be the solution to WikiLeaks funding.

WikiLeaks publishes classified information and leaks from anonymous sources. It was founded in 2006 by Julian Assange and has gained international attention for its controversial releases of classified documents related to government and corporate activities. It regularly caused senior politicians significant embarrassment or revealed atrocities. Some praise it for promoting transparency and holding those in power accountable. In contrast, others criticize it for endangering national security and the lives of individuals connected to the leaked documents.

Satoshi then disappeared from all online communication channels in 2011, at the time of writing, never to be heard from again until a brief reappearance years later to inform the press that they were wrongly attributing his identity to someone else.

Bitcoin was not used to fund WikiLeaks, but Satoshi was shrewd to bow out of the fast-growing storm.

Many have hypothesized who Satoshi might be, and some even claim they are Satoshi, but it would take a few chapters alone to have a thorough discussion. Unfortunately, it still wouldn’t yield any conclusions, so I will leave it to the reader to decide if they want to investigate further.

As we will see as we progress, the absence of a known founder is part of Bitcoin’s strength because if the government wants to prosecute someone or demand Bitcoin is shut down, who will they go to?

Summary

We have seen that cryptography has enormous potential to mathematically guarantee that a specific person sent a message. This is known as a trustless system. Trustless systems enable us to interact with anyone, even those we might otherwise not trust, and be sure they act within the system’s rules because cryptographic verification and certainty remove the need for trust. Finally, in this chapter, we looked at a few attempts at digital currencies that didn’t quite make it for one reason or another. In the next chapter, we will get to purchase and transact with the first successful, and at the time of writing, biggest market capitalization cryptocurrency, Bitcoin. I thought I would break up the technical discussion with some hands-on action using bitcoin. If you want to continue with the technical explanation of how Bitcoin works, you could skip to Chapter 5: How Bitcoin Works and return to buying and using some bitcoin in Chapter 4 another day.

Previous: Fiat Vs Bitcoin

Next: Using Bitcoin

In this chapter, we will install the Exodus wallet app, learn how to purchase a small amount of bitcoin, and send it directly to our new wallet. We will take personal responsibility for it by backing up the wallet and keeping it secure. We will then set up a second wallet app, Muun wallet, and move on to see how to send and receive bitcoin between our wallets over the Bitcoin peer-to-peer network. How this apparent magic works behind the scenes will be explored in the next chapter.

Let’s get going because then we can own a tiny fraction of the 21 million Bitcoin that will ever exist.

Exploring wallets

In its most common form, a Bitcoin wallet is a software application. Typically, it will show you how much bitcoin you have and enable you to send it and to receive it from other people’s wallets. The sending of Bitcoin will always involve a software application, but as we will now learn, the narrower act of receiving and storing your bitcoin can be fulfilled in other ways. What follows is a summary of the types of Bitcoin wallets, some information about them, and a few pros and cons for each type.

Before we dive into the wallet types, it is essential to realize that the idea of a bitcoin wallet is just an abstraction of reality. No Bitcoin wallet holds any bitcoin at all. All the bitcoin that exists and will ever exist is on the Bitcoin network. The software known as a wallet reads the network and identifies what belongs to the wallet user via their private cryptographic keys – which are stored on the user’s device by the wallet app.

The range of Bitcoin wallets stores your access to the bitcoin on the network that belongs to you. This is achieved through public and private key pairs, as we discussed in Chapter 3: Cryptography and the Cypherpunks. You hold the private keys, identifying the public keys, which are Bitcoin addresses. To explain further, your Bitcoin addresses (public keys) are generated from your private key. A private key can generate many Bitcoin addresses, and reversing the process to glean the private key from an address is impossible. Therefore, Bitcoin addresses can be safely shared, although some privacy implications will become apparent as we continue our discussion.

Most Bitcoin wallets can hold multiple private keys, and many can handle numerous cryptocurrencies. That is a slightly simplified explanation, but you will fully understand it by the end of the next chapter. For now, it’s worth getting to grips with the different wallet types before we start using wallets in the next section.

I will reiterate this next point several times throughout this chapter and the rest of the book, but this is a crucial learning point:

If someone knows your private key, they can control/spend/steal all your bitcoin from anywhere on Earth and, one day, perhaps, the universe, with an Internet connection. Therefore, you must keep your private keys private! Also note, we will soon introduce the concept of a seed phrase or mnemonic phrase. This, for now, can be thought of synonymously as the same thing as a private key and should be guarded with the same attention.

Now we can look at the different wallets, including how they help you protect your private key(s).

Hot wallets

Hot wallets are connected to the Internet via a desktop computer, laptop, or mobile device. Sometimes they are standalone applications, and sometimes they might work with other software like a Web browser. If a wallet is connected to the Internet, it is less secure than one that isn’t. This is obvious; if it is on the Internet, it could be hacked or tracked by a keystroke logger, or your entire OS might have been hijacked. To be clear about this – the Bitcoin network can’t be hacked, but your private key has the potential to be revealed/stolen, just as any data on any device might be.

To give a sense of perspective, it is not likely that your keys will be compromised and your bitcoin stolen; how often have you been hacked in the past, for instance? It is just essential to know it is a possibility. The much more common danger to your private key is a phishing attack that fools you into thinking you should reveal it. There is never a need to share your private key with anyone.

If you store the same amount of money, you would typically keep cash in a regular wallet in your pocket; this might be about the right level of risk for a hot wallet. If, on the other hand, you store your wages, college fund, or life’s savings in bitcoin, then a hot wallet is likely a little reckless.

As we will see, hot wallets are arguably not the most insecure as they are better than leaving your bitcoin on a centralized corporate-run exchange that can be hacked or become insolvent. The trade-off for the insecurity of a hot wallet is that you can take it with you or have it at your fingertips, ready to send bitcoin or share your public address most easily.

Paper wallets

Paper wallets are 100% un-hackable – electronically speaking; they are a piece of paper that contains your private key for making transactions and your public key for sharing with somebody who wants to send you bitcoin. The keys are often in the form of a QR code that can be scanned. Note that you can receive bitcoin when you share your public key and remain 100% un-hackable; however, as soon as you scan your private key to spend some bitcoin, the application you are using is then the same as a hot wallet. So paper wallets are suitable for long-term savings. A critical point that might be obvious but is so important I will bring it up anyway is that paper can be seen and photographed or copied; it can burn or be destroyed by water, too.

If someone copies or steals your paper wallet, they can access all your funds. If your paper wallet is destroyed and it is the only copy, your funds are lost forever! Paper wallets are often laminated and stored in a fireproof safe in a discrete place.

A Bitcoin paper wallet

The preceding image is a paper wallet. The QR codes and the text of the private and public keys have been altered to make them unusable. You can see the Bitcoin address in QR and text format on the left for receiving bitcoin. Because the Bitcoin network is entirely public, you could read the address’s contents (had I not altered it) or send bitcoin to it from the public key. If you try to send bitcoin to the address on the left, your wallet software will likely detect that the format is invalid. If your wallet allows you to send bitcoin to the address, it will be lost forever. So don’t send bitcoin to the above address. You can see the private key on the right in QR and text format. Had I not altered it, you could spend all the bitcoin held in the public address using almost any hot wallet.

Hardware/cold wallets

Hardware wallets generate and store your private keys and can sign transactions. This means that your private keys never need to be on an Internet-connected device and are, therefore, not hackable over the Internet. Anyone wishing to steal the bitcoin for which the private keys are on a hardware wallet, and only a hardware wallet, will need to steal the device itself and gain access to it via its PIN or password. As I implied, if you store your private key in a hardware wallet and a hot wallet, the hardware wallet offers no extra security beyond what the software wallet offers. If you use a hardware wallet, don’t use the same private key in a hot wallet. Here are two standard hardware wallets that are available at the time of writing.

Ledger and Trezor hardware wallets

Choosing a hardware wallet is nuanced and subjective as they range widely in price, features, and ease of use. The two pictured above are Ledger (on the left) and Trezor (on the right). These are my two favorites. Ledger is cheap and easy to use. Trezor is a little more expensive and clunky to operate but has the advantage of using open-source software that has been widely scrutinized.

If you decide to dive deeper down the Bitcoin rabbit hole, you should read and watch reviews of hardware wallets, make a choice, and purchase your favorite. Do so directly from the manufacturer before buying a significant amount of bitcoin to ensure you are not being sold a compromised device. Never buy second-hand on sites like eBay or from random sellers on Amazon. It will almost certainly be a scam.

In this book, we will buy $10 worth of bitcoin. I assume you are financially prepared to risk losing $10 if something goes wrong. Please only proceed if this is the case. Suppose you decide to hold a significant amount of bitcoin one day; in that case, you should research and choose a hardware wallet, set up the associated application, and keep your bitcoin private keys on the hardware wallet. What counts as a “significant” amount will differ for every reader. A good rule of thumb is that if it is too much to carry around as cash in your back pocket, it should be on a hardware/cold wallet, not a hot/software wallet.

Multi-signature wallets

Multi-signature or MultiSig wallets can be hot or cold, requiring two or more private keys to send a transaction. Using MultiSig wallets is beyond the scope of this book, and it is recommended that you become proficient with the basics of Bitcoin before venturing into this field. It should be noted, however, that securing your bitcoin with multiple signatures requiring more than one private key, provided you trust all the holders, is the most secure.

There are many wallets of each type to choose from, varying in complexity, features, and price. Next, we will explore a simple, reliable, reputed wallet called Exodus. However, Exodus is not a hardware wallet. It is a hot wallet. Please don’t put your pension fund in it.

Seed phrases

A seed phrase, or mnemonic – pronounced nem-on-ic recovery phrase, is a sequence of words used to create or recover a cryptocurrency wallet/key pairs. It consists of 12 or 24 randomly generated English words that can be used to restore access to the wallet with its key pairs in case of loss, damage, or theft of the device or the login credentials.

A seed phrase is mathematically generated for us when we create a new cryptocurrency wallet. We must always write down the seed phrase and keep it in a secure place, preferably offline, such as a piece of paper or a hardware wallet. The hot wallet software uses the seed phrase to generate our private key, or in the case of a hardware wallet, the seed phrase is generated entirely offline on the hardware wallet device.

Most of the time, we never need to see our private key(s). This is because a seed phrase can mathematically derive multiple private keys, and as we learned in the previous chapter, the private keys can each derive numerous public keys. Furthermore, generating private keys from a seed phrase is deterministic; therefore, knowing the seed phrase will always return the same private keys. It blows my mind how clever this is every time I think about it.

The seed phrase acts as a backup that can be used to restore the private keys if we lose access to a device or want to set up the same wallet with the duplicate private keys on another device. Therefore, the seed phrase is access to all our funds held by the derived private keys.

In the early days of crypto, users would be required to record the long string of hexadecimal digits that was the private key. Mnemonic seed phrases are a fantastic development that avoids this inconvenience.

Brain wallets

This new knowledge about seed phrases enables the introduction of another type of crypto wallet called a brain wallet. A brain wallet is where the seed phrase, and therefore, the private keys, are not recorded anywhere except in your memory. Using a mnemonic phrase comprised of 12 or 24 English words is much easier to remember than a long string of hexadecimal digits – although still challenging. This will be impossible to hack until science can read human thoughts but has the obvious danger that your money is untouchable if you forget the phrase. You can use mental strategies to remember your seed phrase.

For example, consider the following: Once upon a time, there was a tech-savvy individual named Bob who decided to invest in Bitcoin. Excited about their new venture, Bob diligently researched wallet security and discovered the importance of mnemonic phrases.

To ensure the safety of their Bitcoin, Bob generated a unique 12-word mnemonic phrase. Determined to remember it, Bob came up with a story that used the words.

The mnemonic phrase was: “elephant banana taco spaceship monkey unicorn rainbow pizza dragon laptop.”

Bob imagined an elephant wearing a banana hat while eating a taco. Suddenly, a spaceship piloted by a monkey and a unicorn appeared in the sky, creating a rainbow. Out of nowhere, a pizza-loving dragon flew by, carrying a laptop.

Whenever Bob needed to recall the mnemonic phrase, they simply pictured this ridiculous scenario. The vivid mental image not only made them chuckle but also ensured they never forgot the order of the words.

For people of regular intelligence, like me, using a brain wallet is a skill that can be practiced as a backup to other methods of securing your seed phrase.

Exodus wallet

I chose Exodus because it is easy to use, has a good reputation, works on most platforms, and enables multiple options in multiple countries to buy Bitcoin and have it sent directly to your wallet. Therefore, your bitcoin is never stored on an exchange that could fail, lose your bitcoin, or even, as has happened more than once, steal your bitcoin. The whole point of Bitcoin is that it is self-custody. Of course, Exodus is one of many wallets, but I had to pick one to do the following tutorial.

Visit https://www.exodus.com/download/, and you will see three options for downloading the Exodus wallet. First, there is a version described as a Web3 wallet. This is a browser extension for either Chrome or Brave browsers. There is also a version for desktop and mobile devices. This tutorial will focus on the desktop version, but the steps are nearly identical should you prefer the mobile version for Apple or Android devices. The Web3 version is unsuitable for this tutorial and has a few setup and operational differences, and I recommend not using this version at this stage of learning about crypto.

Suppose you are curious about the Web3 wallet. Web3 refers to the ecosystem of distributed applications dApps for interacting with crypto, of which Bitcoin is not a part– yet, at least.

At the time of editing, the Stacks ecosystem is rising in popularity. Stacks allows you to use your bitcoin in decentralized finance activities. However, it involves locking your bitcoin in a wallet controlled by someone else and using their receipt tokens. A future version of the book might include coverage of Stacks, but we will skip over this possibility for now.

Should you wish to run the Exodus wallet on both desktop and mobile, you can do so by first completing this following tutorial and then installing the mobile version of Exodus and reusing the seed phrase you will generate in this tutorial. You will then have a wallet on your desktop and mobile, which is synchronized.

Installing the Exodus wallet

Let’s get going and create our wallet and secure the seed phrase.

1. Click the Download Exodus link for the desktop version appropriate for your operating system.

1.  When the download is completed, run the downloaded file.

1.  Once the installation has been completed, run the app as usual for your operating system.

1. You will be greeted with the Exodus home screen, called the Portfolio, which looks like this next image.

The Exodus wallet home screen

On the Portfolio screen, you can view the top cryptocurrencies’ current prices and see your balances, which will be zero now. At the top of the Portfolio screen, you are prompted to either Make Your First Deposit or Restore from Backup.

We could buy some bitcoin and send it to our Exodus wallet. But let’s say you send a significant amount of bitcoin to your Exodus wallet, and then your device breaks down or gets stolen. If this happens, you will lose everything. Nobody can assist you. Exodus can’t help; buying a new device and reinstalling Exodus won’t get your bitcoin back, and no crypto expert can recover your Bitcoin. We must create a recoverable backup and secure the app in case the device is lost, stolen, or malfunctions.

Setting a password and recording the recovery phrase

Setting a password and recording the recovery phrase is part of the same process. The Exodus app won’t let you do one without the other. Note that the password is just for the app. You can install Exodus on as many devices as you like and choose a different password for each installation. You could then use the recovery phrase with each installation to access your bitcoin. Therefore, forgetting the password will be inconvenient, but if you forget your recovery phrase, your bitcoin is gone forever!

1. Click the Settings icon in the top right corner of the app, then select the Security tab.

1. Click Backup your wallet to enable this feature.

You will see a rather stern but essential warning.

The Exodus password warning

It is vital to heed the warning and ensure you record your password or are sure you will remember it, as it can never be recovered.

•  Type your password in the appropriate field and click NEXT.

• On the next screen, the app asks you to repeat your password to check if you have recorded or remembered it. Retype your password, click NEXT, and you will see the following message.

View the secret phrase

• The step we must perform is to record our secret phrase. This mnemonic phrase is a mathematical marvel that allows the software to generate multiple public and private key pairs for you on various blockchains. All you need to do is remember the mnemonic phrase, and Exodus or many other similar applications will find and manage your bitcoin and many other cryptocurrencies for you. That’s why keeping it secret is so important. Get a piece of paper and a pen, make sure you are not being watched, and click the VIEW SECRET PHRASE button to reveal the secret phrase shown obfuscated (by the Exodus app) next.

Write down your secret phrase.

• Hover over to reveal and record each of the twelve words. The order matters and each word must be recorded accurately, or you cannot recover your wallet. Double-check that you have written the secret phrase correctly, then click DONE.

• A question-and-answer check follows where the Exodus app will attempt to confirm that you have written down your secret phrase correctly. Note that the question asked is not fool-proof, just a cursory check of one of the positions of one of the words. I expect this is just in case a user didn’t bother. For example, I was asked to verify the accurate recording of the 5^th word of my phrase. I have obfuscated the image to guarantee the security of my wallet. I will emphasize again; you need all the words correctly ordered to recover your wallet. Click the answer to the question you are asked and then click DONE.

Check the secret phrase.

• You are done. Go and store your password and seed phrase somewhere secure. A hidden fireproof safe is ideal. You can keep more than one copy of your seed phrase, perhaps in another building or a different floor of the same building, or with another person if you are confident that they are 100% trustworthy.

Congratulations your wallet backup is ready to use, and your password securely locks the app.

It is essential to state again that the password only secures access to the app! However, the app remembers your seed phrase for you. Therefore, if somebody finds your seed phrase, they can use it in almost any wallet app to take all your funds. Try this out by downloading the mobile version of Exodus, selecting Recover an existing wallet, and entering your seed phrase.

You can test the password feature by closing Exodus, rerunning the app, and notice that you will be asked to enter your password.

How to get some bitcoin

There are many places we can buy Bitcoin. One of the reasons I chose to introduce you to the Exodus wallet was because it has a built-in option to purchase various cryptocurrencies, including bitcoin.

I strongly recommend starting with only a minimal amount of bitcoin because you may lose it if you make a mistake. The next problem is that Exodus and its partners charge a fee for buying bitcoin. When writing, it is between 2 and three US dollars. So if you only buy 10 US dollars worth of Bitcoin, this fee is very high as a percentage (20 to 30 percent).

Once you are confident with the process and have thoroughly researched bitcoin, should you decide to buy more, the fee will be less significant as a percentage. Therefore, getting experience before risking substantial money is worth the uneconomical cost.

Moreover, there are issues regarding the availability and legality of different exchanges in various countries. So I wanted to keep it straightforward, wherever you are.

The conclusion I came to was to suggest you let Exodus have their extortionate profit just this once while we are learning about Bitcoin.

Buying some Bitcoin

This section will show how we can use Exodus and its partners to buy some bitcoin. Note that buying bitcoin is not the end of the matter. We will also automatically receive the bitcoin in our wallet. Exactly how this apparent magic happens behind the scenes will be explained in Chapter 5: How Bitcoin Works.

To prepare for this tutorial, you will need some ID and a credit or debit card with enough credit to buy a small amount of bitcoin. For example, I will spend 10 British pounds. In the UK, a passport was sufficient for my ID.

If you cannot risk losing money, you can still follow along with the rest of the book and return to buying bitcoin another day.

Let’s buy some Bitcoin!

1. Start the Exodus app and log in.

1. Click the Buy Crypto button in the top center of the app. This is shown in the following image.

Click the buy crypto button

• Observe the screen where we will buy some bitcoin. I have annotated the following image to make the next steps as straightforward as possible.

Choose the amount of bitcoin.

• Choose your nation and currency in the drop-down selector labeled 1. I have selected British pounds (GBP). In the drop-down selector labeled 2, make sure BTC (Bitcoin) is selected. If you buy anything other than Bitcoin, then the tutorials in the rest of this chapter won’t work.

• In the amount field labeled 3, type a value of your currency you are comfortable losing should something go wrong. I suggest an amount approximately equivalent to 10 US dollars. As you can see in the image, I chose 10 British pounds.

If you cannot risk losing money, you can still follow along with the rest of the book and return to buying bitcoin another day.

• When you are comfortable with your selections, click the Continue button, and the next step will open in your web browser. This screen might vary from the following image depending on the partner Exodus uses in your country. The important thing is to confirm the details of the transaction before you proceed. The following image is annotated so I can quickly point out a few pieces for you to compare and consider with your details.

Exodus ramp details screen

• In part 1 of the preceding image, you can see the number of units of your nation’s currency that will be debited from your bank account. In part 2, you will see the tiny fraction of a bitcoin you will receive. In part 3, you can see a breakdown of the fees you are being charged. Note that this is not on top of the amount you have chosen to pay – instead, it is subtracted from the amount of bitcoin you would have received if this was a free service. The fee is broken down into two parts. In my case, the charge from the Exodus partner – Ramp is much larger; the much smaller cost is the amount the Bitcoin network charges for Ramp to send the bitcoin from their wallet to yours. Take some time to review the details before proceeding.

• When you are satisfied that everything is correct, click the PROCEED button. You will be asked for your email address to accept the terms and conditions and optionally sign up for newsletters. When you are ready, click PROCEED.

• You will be asked to confirm your email address by entering the code Ramp will send to your email address. Enter the code. You will now be asked to verify your Bitcoin address. This will be important, although it should be auto-filled for you, as shown in this next image.

Ramp auto-filled Bitcoin address.

1. You could probably click CONFIRM AND PROCEED with reasonable confidence of success but let’s see how we can be 100% sure the address is correct first. If the Bitcoin is sent to the wrong address, it will be impossible to recover, and Exodus/Ramp will not take any responsibility for your loss. Navigate to the Exodus app. Be sure not to close the web browser or click the back button in the web browser; this would likely cancel the transaction. Click on the Portfolio button in the top portion of the Exodus app, as shown in the following image.

Click portfolio button

1. On the Portfolio screen, find the Bitcoin entry shown in the following image; it is probably above all the other cryptocurrencies, and click on it.

Exodus bitcoin entry

1. Now click on the RECEIVE button and observe your Bitcoin address. Mine is shown below. Yours will be completely different characters apart from the bc1… at the start.

Exodus bitcoin address

1. We need to check that the address that our purchased bitcoin will be sent is the same as in your Exodus wallet. You could check the full address, which would be awkward and error-prone. Instead, I will select four numbers from the end and four from the beginning. Also, note that all modern Bitcoin addresses start with bc1… so I exclude the bc1. This makes my Bitcoin address start and end characters as follows. qzgf…ghgv. Now compare your start and end characters to the address that your bitcoin will be sent. You can see from the previous images that my bitcoin is being sent to the same address as my Exodus wallet.

Please do not make the mistake of comparing my address in the image to your address. Your address will be very different – that doesn’t mean it is wrong. If the address your bitcoin is being sent to is the same as the Bitcoin address you retrieved in steps 12-13, you are good to continue. If the addresses don’t match up, the correct address is the one you saw in step 12 when you clicked the RECEIVE button. You can click on your address in the Exodus app to copy it and then paste it into the Your Bitcoin (BTC) address field in your web browser. Note that something probably went wrong if you need to do this step. Consider closing your web browser to cancel the transaction and starting again.

1. When you are confident the bitcoin is being sent to the same address as your Exodus wallet, click the CONFIRM & PROCEED button in the web browser.

1. Next, you will be given options for how you want to pay. They will vary depending on your nation, and you need to consider what services your bank provides you. The most straightforward option, and the one I chose, was Card. Make your choice and click PROCEED. What follows is the process of registering your credit card. This is the same as any other online retailer you might have signed up for in the past, and I have not documented the steps for privacy reasons. Furthermore, depending on the laws in your country, you might need to verify your identity with an ID verification process.

1. Check the annotated image below. On the Portfolio screen, click the Portfolio tab (1) above the list of cryptocurrencies, as shown in the following image. Notice that once the process is complete, your Bitcoin balance can be seen (2). I have 0.00041509 bitcoin. This process could take between a few seconds and a few minutes. Your Bitcoin should be spendable in around ten minutes. The details behind this are explained in the next chapter. As a quick explanation, the delay is the time the Bitcoin network takes to finalize the transaction and make it a permanent part of the blockchain.

Your bitcoin has arrived.

1. Why not take a little time to explore some of the features and screens of the Exodus app, as it will help familiarize you? The app features you might like to look at include the Wallet tab to view your new balance and the History button (in the top right of the screen) to see a review of transactions you have made.

Congratulations, you are the owner of some bitcoin. Nobody can take it from you (without your secret seed phrase and the derived private key). Nobody can reverse the transaction or stop you from spending it. However, Bitcoin transactions are not private. More on all these ideas in the next chapter, How Bitcoin Works. The ID verification process might have been awkward, but you only need to do that once for each platform you want to use. If you purchase through Exodus via Ramp again, it will be faster and smoother. Furthermore, we didn’t get a good deal on our bitcoin this time, but if we buy more in the future, we can buy a more viable, cost-effective amount. In Chapter 8: Trading on Centralized Exchanges, we will see how to purchase bitcoin and other cryptocurrencies for a fraction of the fees of Exodus/Ramp.

Sending and receiving bitcoin

Let’s learn how to send and receive bitcoin. There are many ways to approach this. If you have a friend or family member, they could create a wallet with Exodus. Or you could create a new Exodus wallet on your mobile device with a new seed phrase. Another option is to use the Exodus portfolios option to allow you to manage multiple portfolios with one seed phrase and then send Bitcoin between portfolios. This might be something you want to explore, perhaps to differentiate between long-term and short-term investments. You can try the Exodus portfolios options by clicking Settings – Enable Portfolios. Yet another option is to create another wallet on the desktop version of Exodus with a new seed phrase. However, this last approach would mean you would constantly be entering different seed phrases to swap between wallets, which is cumbersome. So the path we will take in this following tutorial is to create a new wallet, with another wallet app, on a mobile device.

We will use Muun – pronounced moon. It is a mobile-only wallet but will run on Android or iPhone. It is a wallet specific to and only for Bitcoin. Like Exodus, Muun is a hot wallet and is not meant for significant amounts of bitcoin to be stored on it. Remember to treat it like a regular wallet/purse, and don’t put more bitcoin into your Muun wallet than you would cash into a regular wallet.

If you want to read more about Muun wallet, head to https://muun.com/. Muun is designed to be short on features and, therefore, easy to use and also provides seamless access to the Lightning network. We will discuss the Lightning network in the next chapter.

Installing Muun wallet

This is so straight forward it doesn’t need a tutorial. You can search for Muun on the Apple App Store if you have an iPhone or iPad or search Google Play if you have an Android phone/tablet. Alternatively, visit https://muun.com/ and click the App Store or Google Play link. This next image shows the Muun application on the Google Play store.

Muun wallet on app store

Notice on the app page and highlighted in the image above that the company is Muun. This means this app is provided by Muun and is not a fake app designed to steal your Bitcoin. Install the Muun wallet the same way you install any app on your mobile device, and then we can step through the setup process before sending some bitcoin from Exodus to Muun.

Setting up Muun wallet

Maybe I am a little simple-minded, but I get a thrill whenever I send bitcoin to someone. It is because of a sense of freedom. I am not asking the bank to do it, I just decided to do so, and nobody can stop me. However, just as sending a small amount of bitcoin is a bit of a thrill but sending a large amount of bitcoin still provokes a slight sense of unease – for the same reason – nobody can stop me, and nobody shares any responsibility for it going wrong. If I get it wrong, the bitcoin is gone! The bank won’t care, and I can’t ring the Bitcoin Co. LLC or Nakamoto Enterprises – they don’t exist, and even Muun or Exodus will not share any responsibility whatsoever.

With this in mind, let’s set up Muun wallet and take the trouble to make a reliable backup.

1. Open the Muun app by tapping the Muun icon on your device screen. You will see the Muun starting screen shown in the following image.

Muun start screen

• Click the CREATE A NEW WALLET button at the UI’s bottom.

• You are prompted to create a PIN on the next screen. Note that this secures access to the app; this is not the same as the seed phrase we will see soon. If your seed phrase falls into criminal hands, your funds can be stolen without knowing the PIN. When prompted, enter your PIN to confirm it. Congratulations, you now have a Muun wallet. Click LET’S GO, and we will proceed.

Muun wallet, let’s go

• The main Muun wallet UI will now greet you. You might notice how clean and uncomplicated it is compared with Exodus. Notice that in the center of the UI, underneath the SEND and RECEIVE buttons, there is a prompt to Back up your wallet. Click Back up your wallet, as shown in the following image.

Muun, back up your wallet

• In the next screen labeled Security Center, click Back up your wallet.

• You are now faced with a choice of methods to back up your wallet. Muun prompts you to use an email and password to back up your wallet. If you choose this method, you will be guided through a straightforward process, and the folks at Muun wallet will hold your backup details, and you will be able to retrieve them using an email and a password. If you only ever put small funds in this wallet, you could say it doesn’t matter and use the email backup method. I encourage you to get used to self-custody of all your crypto, which is what this tutorial will proceed with. At the bottom of the UI, as indicated in the following image, click I DON’T WANT TO USE MY EMAIL.

Don’t use email

• When asked, are you sure you don’t want email recovery click, I’M SURE.

• As shown in the following image, click Create an alternative backup

Muun create an alternate backup

• Click START to reveal your recovery code and copy it to a piece of paper, then click Continue.

• Retype your recovery code in the next screen to verify that you have recorded it correctly. This is boring but worthwhile. I prefer a full check like this to a partial one like Exodus.

Muun, confirm your recovery code

1. When you have typed the recovery code click CONTINUE.

1. Be sure to read the next reminder and click the checkboxes to confirm that you understand that you alone are responsible for securing the recovery phrase.

Muun confirms user responsibility.

1. Click FINISH, followed by EXCELLENT.

Congratulations your Muun wallet is ready to use and can be quickly recovered if you lose your device, decide to install Muun on another device, or uninstall the app for some reason. Note that this recovery code is in a different format from the code used by the Exodus wallet. Therefore, it can only be used in the Muun wallet app.

Sending bitcoin from Exodus to Muun wallet

Now for the fun bit. Open Exodus on your desktop and Muun on your mobile device, entering the Exodus password and Muun PIN as required. If you installed Exodus on mobile, these instructions should be easy to interpret. If your Muun wallet is still open from the setup tutorial, you can click the Wallet icon at the bottom to return to the same screen you would see had you just started the app.

1. In the Muun wallet app, click the RECEIVE button. On the Receive screen shown in the following image, notice two tabs at the top of the screen. One tab says BITCOIN, and the other says LIGHTNING. Select the BITCOIN tab.

Muun receive bitcoin

• We must share the Muun wallet address shown in the image with our Exodus app. If you click the COPY button and paste the address into an email to an email address, you can access it on your desktop. If you had been sharing the address with another mobile device, you could have let the wallet app on the other device scan the QR code. This is great for sending to other Bitcoin users.

• Copy the Muun wallet Bitcoin address from the email when you receive it on your desktop. Be careful not to add any extra spaces or characters at the start or end of the address, although Exodus should warn about any wrongly formatted addresses.

• From the Exodus app’s home screen, click the wallet icon, followed by the Bitcoin entry in the list of cryptocurrencies. Next, you will see your bitcoin holdings. Mine has decreased in value compared to the US dollar since I wrote the Exodus tutorial and purchased £10 worth of bitcoin.

Send bitcoin from Exodus to Muun

• As highlighted in the image above, click the Send button.

• In the next screen, paste your Muun wallet address into the Send to Bitcoin address field. Click the Half button to send half your bitcoin to your Muun wallet. Note the green check mark at the end of the address showing that the format is correct. Note that it is still possible for you to enter the wrong address. The green checkmark confirms that the address is valid, not that it belongs to you. All the information from this step is shown in the following image.

Paste Muun wallet address into Exodus

• You are ready to send the bitcoin, but before you do, check the details underneath the address and amount details. The following image shows the fee that will be charged by the miner that wins the block – in my case, 0.43 dollars worth of bitcoin, and how much the remaining Bitcoin will be worth in dollars. Note that the fee is in addition to the amount you are sending. Confirm that you are happy with the fee, which can vary significantly.

Bitcoin miner fee

• Confirm the address by comparing the starting and ending characters of the address you are sending to. When you are ready, click Send. You will then get one more opportunity to check the details. If you are happy, click Send. The bitcoin is on its way to your Muun wallet.

Congratulations! Your Bitcoin will appear in your Muun wallet somewhere between instantaneously and a few minutes. However, as with when we purchased bitcoin for our Exodus wallet, it will likely be up to ten minutes before the bitcoin is spendable. The next chapter, How Bitcoin Works, will cover precisely why this is so.

In the following image, you can see that the bitcoin has arrived in my Muun wallet.

Muun wallet received bitcoin from Exodus.

Note that the exact Bitcoin and fiat equivalent values vary because of the time lag between writing and taking screenshots at the different stages. Also, the Internet price feeds used by the various software applications differ.

If you click on the tiny upside-down V-shaped icon at the bottom of the Muun UI, you can see the transaction as shown next.

Muun show transaction

If you click on the transaction, you can see more details next.

Muun transaction details

If you click on one of the Bitcoin addresses, you can see a whole raft of information in your web browser, including that the transaction is unconfirmed. We will understand more about this in the next chapter. This screen is shown in the following image.

Mempool.space

Hopefully, you got a sense of satisfaction from that last step. It is liberating if you think about it.

Summary

Congratulations, you have purchased, sent, and received your first bitcoin. Next, we had better find out how it worked. Then, we will soon understand how this apparent magic is happening behind the scenes. Hopefully, understanding how the Bitcoin network works is even more fascinating than using it.

Previous: Cryptography and the Cypherpunks

Next: How Bitcoin Works