Unraveling Bitcoin basics

The founding fathers wisely separated church from state – is it now time to separate money from state?

On Oct. 31, 2008, a mysterious person using the pseudonym Satoshi Nakamoto published a whitepaper entitled, “Bitcoin: A Peer-to-Peer Electronic Cash System.”

He described a technological discovery that will likely prove to be the most significant of our age: A new digital money based on absolute mathematical scarcity, highly decentralized and governed by the consensus of tens of thousands of self-interested participants who don’t know or trust each other. The system is near anonymous but completely transparent. It has no boards, no executives and no intermediaries. It is the first money where it is impossible to counterfeit or spend more than is owned (“double-spending”).

Bitcoin is the world’s first money system available to anyone with an iPhone. For the first time, over two billion unbanked people across the globe (including eight million in America) will have a secure place to receive their pay and store their savings.

Bitcoin is entirely ethereal – just an idea – it can’t be seized or confiscated – it’s both everywhere and nowhere, with no central authority to litigate, intimidate or incarcerate.

Contrary to what you may have heard, the system has never been hacked. It is estimated that the time required to hack a single Bitcoin address is greater than the remaining life of the sun. And, by the way, because Bitcoin leaves behind a digital trail, criminals are better off sticking to their traditional money, the U.S. dollar.

Unlike gold, silver or government-issued currency, it can be stored in the human brain’s memory. Thus, it can be transported anywhere and everywhere at any time. The real essence of Bitcoin is freedom.

I first encountered Bitcoin in 2016. It was so intriguing, and I read every Bitcoin book and article I could find. Quickly, I sensed that it is reminiscent of the natural world, where the ecosystem constantly evolves in a quest for equilibrium.

People ask me if they can trust it. My standard reply is, “not until you understand it.”

On the surface, the transaction cycle of Bitcoin is very simple. It goes something like this :

To acquire it, you either “mine it,” “buy it” or “receive it” from someone else. But, by far, it is most commonly “bought” on public exchanges. The minimum denomination is a “satoshi” (called a “sat”), which is one one hundred millionth of a whole coin – worth a small fraction of one U.S. penny today.

All transactions are broadcast out on the Bitcoin network, where tens of thousands of computers, called “nodes,” serve as auditors, checking and validating all transactions.

After validation, transactions are placed into a holding pen, called a “memory pool” (mem-pool), where they are held until they are selected by high-speed computers, called “miners,” and grouped with other transactions into what are called “blocks.”

Then, using encryption software developed by the U.S. NSA, miners go to work “hashing” the data over and over until it is superencrypted. The result is one-way encryption (hash), where the same input will always yield the same output, but the output cannot be unencrypted to get back to the input.

After hashing, the new block is recorded on the “blockchain.” It becomes history that can never be deleted or tampered with.

Imbedded in the hash of every block is a hash of the block before it, which, as in nature, creates a kind of DNA which links every block to every other block in the chain. The result is an immutable and ineradicable history.

Unlike government-issued “fiat” money and even precious metals, only a fixed maximum number of Bitcoins will ever be produced. The absolute limit is 21 million. Today, there are only about two million yet to be mined. However, included in the maximum 21 million are two million (currently valued at $88 billion) that have already been lost, never to be recovered.

Miners create new Bitcoin by verifying each block and entering into a fierce computing competition with each other. The competition requires miners to take the hash of the new block and perform an astronomical number of calculations in an attempt to be the first to arrive at a pre-defined numeric “target.” Nakamoto called these calculations “proof of work” because no computer could win the competition without doing a massive amount of work. He knew that money that can be created without hard work would become corrupted.

Currently, a winning miner is awarded 6.25 new Bitcoin (currently worth $275,000), plus all transaction fees applicable to the block. A