Common Bitcoin Misconceptions

A number of Bitcoin misconceptions are seen in news stories, reports, and discussions.

Bitcoin is a currency, (pseudo) commodity, and a payment system.  Bitcoin is a currency that can be traded for goods and services.  It is also possible to invest in Bitcoin and trade for other currencies.  Since Bitcoin is essentially “programmable money,” and can be sent to someone through the Internet like and e-mail, it is also a payment system.  It is technically not a commodity since it has no value if the Bitcoin network were to cease to exist.  However, it has some aspects of a commodity and there is some consideration being given to regulate it as if it were a commodity.

Bitcoin is also an underlying protocol.  This protocol may morph into something that looks very different that what is seen today.  It has been compared to looking at the early Internet protocol in the early 1990’s.


Confusing Bitcoin wallet and Bitcoin address.  A Bitcoin address is a single address and any balance can be seen publically on the Bitcoin Blockchain ledger.  A wallet is normally a collection of Bitcoin addresses.  A wallet is not on the public Bitcoin Blockchain ledger.  The wallet compiles the balances of the Bitcoin addresses in the wallet but that is done of the local computer and not on the public Blockchain ledger.  There is no way to tell what addresses are in a wallet unless they are linked in some way.  This commonly happens when making a payment where the total is taken from more than 1 address in the wallet.


You don’t need buy or transact a whole Bitcoin.  Bitcoin has 8 decimal digits and can be broken down to 0.00000001 which is called a Satoshi.  MilliBitcoin or MillyBits will most likely be the common denomination used in the near future.


There are only 21 million Bitcoins to be produced and some think there are not enough to go around.  Bitcoin has 8 decimal digits and can be broken down to 0.00000001 which is called a Satoshi.


Bitcoin capitalization and plurality.  Bitcoin is capitalized when referencing the protocol or the system in general and not when referencing specific bitcoins.  Some users always use singular when identifying bitcoins even if it more than one, other users use plural when discussing more than one.  “My Bitcoin wallet has 3 bitcoin(s).”  None of the rules are formal since there is no central authority to set any rules.


The Market Cap is not the total number of Bitcoins multiplied by the current trading price.  When Bitcoin was new many users deleted their wallet or wallets were lost/destroyed.  A significant (but unknown) number of Bitcoins have been lost and cannot be recovered and are not in circulation.  Of course if large numbers of bitcoins were sold at once the price would drop (which is true of any commodity).

Here is a discussion of someone who lost 8,999 bitcoins  |  They can still be seen on the Blockchain ledger


Bitcoin protocol does not use encryption and no data is encrypted.  The Bitcoin protocol using cryptography, not encryption.  Each Bitcoin address has a “private key” that allows the owner to spend the bitcoins.  The is derived from public/private key cryptography.

The Bitcoin Blockchain ledger is not encrypted, it is fully visible to everyone as it must be in order to verify transactions.

Some of the data in the Blockchain ledger has gone through a cryptographic “hash.”  Sometimes this data is referred to as “encrypted” but that is technically not correct, it is “hashed.”  Encryption is a 2-way function where you can get back where you started if you have the key.  A “Hash” is a 1-way function and there is no key and no way to get back to where you started.

All Encryption uses cryptography.  However, cryptography is wider in scope so all cryptography does not use encryption.  Cryptography used hashes can be used to prove files/messages are not changed from the original.

A wallet that is stored on a local computer has private keys used to spend the bitcoins in the wallet.

A user should encrypt the wallet file for security so if someone gets a copy of it they cannot read the private keys without having the encryption password.


Bitcoin is not necessarily anonymous/all Bitcoin transactions cannot be fully tracked.   Many reports claim Bitcoin is “anonymous” and others say all transactions can be fully tracked and traced.  Neither one of those statements are true in many cases.   Sometimes Bitcoin is described as “pseudonymous” by saying that all transactions are traceable but not necessarily linked to an identity.  While that is technically true it does adequately describe the true situation to most readers.

Bitcoin addresses are long strings of letters and numbers.  A wallet can create as many of these addresses as needed.  However, Bitcoin does something under the hood that most users don’t realize.  The concept is called “change.”  Each Bitcoin transaction must total to zero.  If you have 4 bitcoins in an address and you send 1 bitcoin to someone you have 3 bitcoins left over.  What happens is that a second transaction is set up and 3 bitcoins is set to a new address in your wallet, a so-called “change address.” If someone tries to analyze the transaction from the public Bitcoin Blockchain ledger they cannot tell if the transaction is for 1 bitcoin or 3 bitcoins.  Transactions get split info fingers and it is often impossible to prove which transactions are connected.  Blockchain.info has a number called “taint” where they try to come up with a probability that addresses are linked but it is not conclusive.

change
“Change” Addresses Obfuscate Bitcoin Transaction Tracking

 


Bitcoins balances do not have to be consolidated.  In almost every discussion of tracing Bitcoin transactions consolidation was either done by the user or it was assumed that consolidation must be done.  For instance, it is assumed that web site that takes payments from different customers during the day must consolidate the payments at some point.  That is not necessary as the wallet program totals the balance of all the addresses.  Users may voluntarily consolidate or they make a large payment where the wallet automatically consolidates the payments.


Blockchain.info web site is not the Bitcoin Blockchain ledger.  They are a web site that compiled the data in the Bitcoin Blockchain ledger and they add several things to the data.  Just because you see something on Blockchain.info does not mean it is in the Blockchain ledger.

These features on Blockchain.info do not appear in the Bitcoin blockchain ledger:

  • Users can set up a vanity display for addresses.
  • Users can attach a message to a transaction,
  • An IP address and location is attached to a transaction (This is the IP of the node where Blockchain.info sees the transaction first, it may have nothing to do with the actual source)

Bitcoin mining is not useless work and cannot be easily converted to do other work.  Bitcoin mining records the transactions and provides security by bitcoins cannot be counterfeited.  Comparing this energy use to other forms of currency and payment systems is rather complicated.  There is physical aspects of traditional currency and fraud/counterfeiting procedures associated with payment systems.

The Bitcoin mining algorithm requires that:

  • The problem cannot be solved in advance (otherwise a fake Blockchain ledger could created offline),
  • The problem has to be hard to solve but easy to verify by home computers, laptops, etc.
  • The average time it takes to solve the problem must be known and controlled.
  • Problems with an unknown solution or something that is computationally hard to verify cannot be used.

Blockchain.info electricity calculations for Bitcoin mining are incorrect.  The site uses and old average based on using graphics cards.  This is no longer done and the newer generation of Bitcoin mining computers use significantly less electricity and it varies greatly between different generations of units.  There is no way to calculate total energy usage.


Merchants are not overly concerned about payment confirmation time.  Transactions on the Bitcoin network are processed immediately but are not “confirmed” until they are included in a “block” which is a section of the Bitcoin Blockchain ledger.  The more confirmations, the more certain a payment will not be revered.  A rule of thumb is to wait 6 confirmations which is 1 hour on average.  While it is possible that this payment could be reversed it is a rather complicated scheme to do so and will only work in a certain percentage of cases.

This issue is only important for transactions where the user is taking the product immediately, such as face-to-face transactions.  One way around this problem is to use “green addresses.”  This is where the merchant trusts the payer’s address.  For instance, a merchant could trust a major online wallet company and if the user sent the payment from their account at that wallet company it could be accepted immediately.


Bitcoin developers cannot autonomously change the parameters of Bitcoin.  Some reports indicate the Bitcoin developers can change the Bitcoin supply by simply changing the software.  The users/merchants decide which version of the software to use and if coins are produced that don’t follow the rules then they cannot be spent.  Developers are testing many variations of Bitcoin (see CoinChoose.com) with different supplies, different mining algorithms, and all sorts of variations.  They are called by different names because they cannot be spent as Bitcoins.


The Bitcoin Foundation does not set the Bitcoin price or peg it to anything.  The Bitcoin Foundation has no special authority over Bitcoin as it is a decentralized system with nobody in charge.  The Foundation was set up by entrepreneurs who run Bitcoin businesses.  The price is free market and is set by what people will pay at various exchanges.


Bitcoin Merchants cannot process transactions faster by mining the transactions themselves.   It is possible to make Bitcoin transactions and not broadcast them to the network.  This means that transactions will only be included in blocks mined themselves.  If the transactions are broadcast to the network then any miner can include the transaction in the next block.  Mining transactions yourself will significantly slow the processing of transactions.


More hashing power on the Bitcoin network does not mean transactions will confirm faster.  Bitcoin is designed so a block is found about every 10 minutes.  More hashing power means it is harder for someone to disrupt the Bitcoin network by mining their own, private Blockchain ledger (If this private ledger became larger that the official ledger it could be released and become the new “official” ledger.  this is a “51% attack.”).  This does not affect the time between blocks which is the confirmation time.


There are no usernames/passwords associated with Bitcoin transactions.  Web wallets will have usernames/passwords but that is not associated with the blockchain.  Wallets may be encrypted by the user for security and require a password but that is not associated with the blockchain.


A Bitcoin private key cannot be “brute forced” from the public Bitcoin address.  Each Bitcoin address has private keys that can be used to spend the funds at that address.  There is no known way to reverse the process to get the private key from the public Bitcoin address  There are way too many keys for modern day computers to be able to “brute force” the private key.

If someone gets a copy of a wallet file that contains private keys it may be encrypted with a password.   It may be possible to “brute force” this encryption password if the password is weak.  This cannot be done from data in the Bitcoin blockchain ledger, the wallet file must be obtained from the user’s computer.

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