Bitcoin Wallets and Transactions Guide 2020

Bitcoin Wallets and Transactions Guide 2020

There is a huge amount of information about Bitcoin on the Internet, but almost nowhere is there an answer to such a simple question: what exactly does a person get possession of when he decides to buy this cryptocurrency. The purpose of this article is to fill this gap. In addition, we will understand several key concepts related to the Bitcoin system, as well as the security measures in it.

About Bitcoin

Let’s start by stating that Bitcoin is a unit of account, exactly the same as a liter for measuring volumes and grams for mass. It is impossible to touch it with your hands, say, like a dollar, but this is not necessary. In this cryptocurrency, something else is important:

  • It can be possessed.
  • It can be transferred from one owner to another.
  • It is impossible to forge it.

The presence of these three qualities enables Bitcoin to become an active participant in the distribution system of global wealth. And they also make Bitcoin useful and intrinsically valuable. If you think about why the US dollars have become the optimal tool for helping to distribute wealth, then we also come to the above three qualities.

And this currency can be possessed, transferred to someone or paid for by it for something. These bills are very difficult to counterfeit, although, in fairness, the security level should be significantly lower than that of Bitcoin. That is, we can conclude that both of these currencies are ways of redistributing values. Crypto currency – conventional zeros and ones in the account of their owner, which do not have a physical form, and therefore they need their own original version of accounting. And the way that is used in Bitcoin, of course, has the right to be considered as not only the newest, but also the most sensible solution aimed at overcoming this problem.

Bitcoin is a Decentralized Network

It is well known that this system does not have a central real server designed to record all transactions carried out. However, this does not mean at all that this information is not stored anywhere. In reality, the movement of Bitcoin is recorded on several thousand different servers, called full nodes, acting as virtual accountants operating in an automatic mode. Almost any user can install them.

Each individual node saves a complete copy of the Open registry, in which all transactions performed since the start of the system are recorded. Today it contains about 30 million operations. To copy it, there must be room on the PC disk to accommodate thirteen gigabytes of information.

Anyone wishing to use crypto currency should have a Bitcoin wallet. This is the name of an application that can be installed both on a computer and on a cell phone. In addition, a large number of websites offer a so-called cloud wallet. Using a wallet, you can add transactions to an open list by sending data to some network node. With its help, information regarding the transaction is transferred to other nodes. It takes no more than seven seconds to disseminate information about a money transfer over the network.

How a Bitcoin Rransaction is carried out

So what we found out is that when you send Bitcoin, there is really no actual transfer happening. Instead, virtual currency is transferred from the sender’s wallet to the recipient’s address. And the transaction is added to the Open registry. Each of them has input (Bitcoin to be sent) and output (crypto currency is rewritten to the recipient’s address).

Each input is a digital reference to a prior input from another transaction. The rule applied to outputs is extremely simple: each of them can be used as input in the next transaction, but this is done not more than once. The used conclusion is assigned the title of spent, which excludes the possibility of carrying out subsequent operations with it. Any attempts to use it again (in fact, to use the money spent again), will stumble upon the opposition of the Bitcoin network. It is because of this that crypto currency counterfeiting is impossible.

The unspent withdrawal actually displays the amount of crypto coins in the account of a particular user. Combining all unspent findings available to open the registry will enable to determine how much Bitcoin is actually there. To some extent, unspent conclusions are Bitcoin in circulation. We would like to remind you that all transactions are carried out without mentioning real names. This gives the network of this crypto currency the right to be called anonymous. The role of names is played by, for example, wallet addresses like this one: 2PreshX8QrHmsWbSs9pHpz4kLRcj1kdPy3. They are actually virtual analogs of bank account numbers, only they are much easier to use, and their opening for any person does not take much time. In addition, each user can have as many addresses as he wants.

How Bitcoin Addresses are Created

If a person wants to earn or just receive Bitcoin from someone, then he needs to get an address. The installed wallet program will easily generate the required combination of numbers and letters. What it looks like, we said above. In the process of creating an address, the program initially generates a secret key. It looks like a number in the range from 1 to 2256. To reduce the number of characters, the number is encoded so that it becomes a character sequence.

Then the private secret key is converted into a Bitcoin address, for which a function is used that the computer can easily implement. If someone knows the secret key, then it will not be difficult for him to get to the address. Some Bitcoin wallets support a function that allows you to import keys. Its peculiarity is that such an operation can be carried out only in one direction. That is, there is no problem with obtaining a Bitcoin address if the secret key is known, but this mechanism does not work back. Therefore, even if only one address has become known to the attackers, they will hardly ever be able to obtain the key. This became the reason that the transfer of the address is not prohibited, but the private key should be hidden as securely as possible. Participants generally don’t have to use Bitcoin keys. Most often, wallets are used to save them:

  • Encrypted files
  • PC hard drives
  • Servers

However, at the request of the user, they can be saved on third-party independent media.

How the Transaction is Confirmed

First, we will have to remind you of the importance of keeping private keys secret, because with their help the attacker gets the opportunity to dispose of the user’s coin at his own discretion. A digital signature can protect against this. Its presence is accepted by the virtual currency network as confirmation of the fact that the transaction is carried out by the owner of the address. And this measure is an absolute guarantee of security: just as it was impossible to generate an address in the absence of a secret key, in the same way, without it, it is impossible to obtain a valid digital signature for a transaction.

The network will only recognize a cash payment request if it contains the correct Bitcoin address, prior withdrawal details and the true digital signature of the wallet owner. That is, every time the system receives data on the next transaction, it verifies the authenticity of the electronic signature. The node does not have information about who owns the key that was used to activate the signature, but it does not need to know this if there is confirmation of the signature’s authenticity. The basis for the development of digital signatures is a well-known technology called public key cryptography. Bitcoin is not the only crypto currency technology using this encryption method. However, it was in it that it first began to be used without linkage to a single main server. And this was definitely a breakthrough.

What are Bitcoin Wallets?

Today there is a fairly large number of different wallets, but most often they are designed for the same purposes:

  • For storing private keys.
  • To complete a transaction.
  • Generate Bitcoin addresses to receive crypto currency from other users.
  • To access historical transaction data.

For PCs on which Linux, Windows or MacOS are installed, it is most often recommended to install desktop wallets. Local files located on the hard disk are used to store the keys. They are assigned the name of the type wallet.dat and the security of the crypto coins available in the wallet directly depends on their safety. But Bitcoin is an exception, as it turns a PC into a Bitcoin node, which requires a large amount of free disk space and a supply of Internet connection resources.

Another variety is web wallets. Here you can call Coin base or Youhodler. When operating such wallets, the servers of the website are used to store private keys, and they are pre-encrypted. Sometimes web wallets are also exchangers, where it is possible to convert crypto currency into bills of any fiat money systems. A mobile wallet is an application that is installed on a smartphone or tablet. Most mobile wallets are a web wallet interface, which means the site server will be the place to store the keys. An exception to this rule is the Bitcoin Jack for Android, which stores the keys on the mobile device itself.

Almost all modern smartphones have a built-in camera, which made it possible to use QR codes as a common method of Bitcoin communication. To send crypto coins to someone, it is enough to scan the recipient’s QR code. They are very easy to generate and can serve as carriers of additional information. Thanks to this, mobile wallets can be used to carry out trade operations. There is also an option called “paper wallet“. It can only be used to store private keys.

Some of the above wallets have the ability to print the user’s private secret keys, but the function of generating an address and a private key is also available to him, even if there is no wallet as such. Access to such a service can be obtained, say. While the printed keys can be locked in a safe deposit box and erased from the computer’s memory. This method has come up with the name cold storage.

The perfect openness of the Bitcoin protocol makes it possible to use a variety of devices and applications, if possible their combination with the system. Almost the entire ecosystem includes attracted assets a large number of innovations have already been inspired by this concept: today, there are significantly more Bitcoin wallets on the Internet than mentioned in our article. The format of this publication simply does not allow continuing enumeration.

Unfortunately, the openness of the network structure makes it possible for all sorts of fraudsters to use it. This must be borne in mind when choosing a wallet. It is recommended that you consult several sources to select the most reliable one. If the user settled on a web wallet, then it is necessary to seriously approach the issue of choosing a trusted site.

Using a desktop wallet, you can independently manage your account, but this does not exempt you from the need that the wallet operates in the mode specified by the provider. The best option is to choose a wallet that has an open source code that is used to write it and has positive reviews on authoritative forums. Today the question becomes more and more urgent protect Bitcoin from hacker attacks. Therefore, a significant number of companies are taking various steps to help users protect their digital savings. As a result, various variants of wallets called hybrid ones began to appear. Variants that use several different signatures look very promising today.

Above reliable safety can only be above safety

If we were asked what protects Bitcoin, then we would not hesitate to answer: private keys. Of course, every single component of the network has connections with other elements. Because of this, each transaction made using the corresponding private key makes it all the more valuable.Therefore, attempts to kidnap him almost never stop. Fraudsters make a titanic effort to find private keys. In doing so, they use a variety of methods. A large number of malicious codes have already been created aimed at penetrating the Bitcoin wallet.

To fully disclose this topic, you would have to write an entire article. Therefore, we will simply say that to ensure security, the user should always remember the password to access their electronic wallet. In addition, you should make constant checks on your computer to find malicious codes. The user must be sure that his Bitcoin wallet is not accessible to either spyware or viruses.

Final Thoughts

So, back to the question from which this article began: what does the user get possession by buying Bitcoin. Each owner of this crypto currency gets an exclusive opportunity to add a transaction to the public register. There is virtual currency as unused withdrawals from the final money transfer recorded in the register. Provided that it was produced at the address generated by the user’s wallet. They are waiting for the next transaction. Exclusively for the user’s wallet, it is possible to sign further entries, since only it stores a key that is unknown to anyone else.

A large number of copies are used to store the complete public register, for the placement of which they resort to the help of several thousand nodes scattered throughout the earth. Therefore, Bitcoin cannot be banned or regulated according to accepted standards. Do not unconditionally trust too simple schemes and explanations that the Internet is literally flooded with. So, advertising frames in which one of the users transfers a handful of Bitcoin to another is absurd as well as a large number of photographs of real coins with Bitcoin logos. We hope that our article has helped every user to understand bitcoin wallets and transactions.