BitCoins and Mining


Question 1 What is a BitCoin?
Question 2 What is the Blockchain
Question 3 What is mining?
Question 4 How does a bitcoin compare with an Euro?
Question 5 What is a wallet
Question 6 In the Bitcoin community is there a Bank?
Question 7 In the Bitcoin environment can a bank create money?



The purpose of the questions are to explain in simple language what a bitcoin is and the difficulties involved in the concepts of cryptocurrency, bitcoins, blockchain and mining.
There are also two programs available to simulate mining: VB bitcoin and VB201 bitcoin PP. The first program is written in Visual Basic 6.0 and the second in Visual Basic 2010, which also includes Parallel Processing.

Answer question 1 - What is a BitCoin

A BitCoin is a currency. It is not a physical currency. It a an electronic currency created and maintained in a Database of transactions stored in a network of computers. This Database is what is called a blockchain.
The reason why it is a currency is because you can pay using bitcoins for the goods and services you buy and sell from other owners of bitcoins.
The first thing that you do is you open an account next you buy a bitcoins or a fraction there off. Now you are ready to perform transactions and pay for the goods and services you buy and sell. All these transactions are stored in the database.

Answer question 2 - What is Blockchain

The blockchain is a guargantuan database subdivided in blocks of data. All these blocks are linked to each other in the sense that each block points to the previous block and to the next block. As such they are forming a chain. All the blocks are identified with a very specific number.

Answer question 3 - What is Mining

Mining is the process of creating new bitcoins. This process of mining is called a puzzle. When you solve the puzzle you get a reward and this reward are 50 bitcoins. This reward becomes less untill it is zero. Than mining stops.
The puzzle in fact is a mathematical calculation to find a number. The rules are relative simple. When you have found this number the next problem is the same with only one constraint: the number has to be smaller. The problem is: how smaller the number, how longer it takes to calculate this number.
The idea behind the calculation is to code a message. Each message consists of a sequence of letters. Inside a computer each message is a sequence of bits. For example a message like ABCD, written in bits looks like: 01000001 01000010 01000011 and 01000100.
In hexadecimal notation the message ABCD looks like: 41,42,43 en 44.
The message ABCD contains 23 zero's and 9 one's and consits of 4 bytes of each 8 bits
When you code a message you follow a strict recipe of operations.
As explained above the whole idea is to code a message ABCD using a strict recipe of operations. This strict recipe can be a sequence of for example 30 exchange or replace operations. When you do that the final result will be a sequence of 32 bits ie a number. The whole idea is that some one else who also starts with the message ABCD and follows the same sequence of 30 operations will get the same result. In fact any body can check if what you have calculated is correct. That is the type of security that is build in the Blockchain technology.
In the above the operations are explained at bit level i.e. only individual bits are involved. In reality the operations are more done at byte (level) level i.e. between different bytes or at register level (groups of bytes). This makes everything code process slightly more complex, but the idea stays the same: everyone does the same.

When you start message is ABCD that is not the whole message you use. In reality the message you are going to code is ABCD0001. That means a combination of the Message ABCD and number 0001 (order number). The result (using the recipe of 30 operations) is value #1. Next you increase the order number with 1 i.e becomes 0002, you code again and you get value #2. Next you use 0003 and you get value #3 etc etc.
The whole idea is that each of these values starts with a certain number of zero bits.
What this explains that in general it takes more and more calculations to calculate a smaller number. The number of calculations increases with a power of 2. The power is the number of zero bits.

The following table shows the result of a simulation based on 664 calculations.
   bits            hex    limit              # calc    expect  deviation 
1  01		   4      0,5	   	       2,05	1,02       1,38
2  001		   2      0,25	               3,94	0,98       3,19
3  0001		   1      0,125	               7,28	0,91       6,39
4  00001	   08     0,0625	      15,73	0,98      15,59
5  000001	   04     0,03125	      31,84	0.99      32,27
6  0000001	   02     0,015625	      65,80	1,03      68,19
7  00000001	   01     0,0078125	     138,04	1,08     134,06
8  000000001	   008    0,00390625	     275,20	1,07     272,60
9  0000000001	   004    0,001953125	     544,09	1,06     530,72
10 00000000001	   002    0,000976563	    1034,60	1,01     952,78    
11 000000000001	   001    0,000488281	    2032,00	0,99    1902,55
12 0000000000001   0008   0,000244141	    4025,24	0,98    3792,76
In the above text it is explained that a high number always starts with a 1 bit. A higher number starts with two 1 bits and an even higher number with three one bits i.e. 111
For the low number the same logic applies. A low number always starts with a zero bit. A lower number with two zero bits and an even lower number with three zero bits i.e. 000
You can also express each number as a fraction between 0 and 1. That means any number that starts with a one has a value equal or higher than 0.5. Any value that starts with one zero has a value lower than 0.5 Any value that starts with two zero's has a value lower than 0.25 Any number with starts with three zero's has a value lower than 0.125 etc

Each line shows the results of the simulations how many calculations (on average) are needed to calculate a value that is smaller than a certain limit. This limit is shown in column 3 and the # of calculations in column 4

The real lesson is that if you want a value smaller than "00000000" or 8 zero's in hexadecimal notation you need 2^32 calculations or 429497296 calculations. To calculate a value starting with 44 bits you need 2^44 or 17592186044416 calculations

Answer question 4 - How does a bitcoin compare with an Euro

The Euro is a currency issued (in some way) and controlled by the Europian Central Bank. One of the task of the ECB is to control the total amount of Euro's. This total amount is huge. These Euro's are then available to the Central Banks of to its member countries. Each country can then transfer Euro's their local banks, which there after are available to companies and individuals.
For the Bitcoin there exists not such an organisation. The final maximum number of Bitcoins is fixed. The number of bitcoins (the initial number was 50 only increases as a result of mining. The price in Euro's is completely controlled by demand and supply.

To get a better insight about the difference between conventional currency versus crypto currency select the following two links:
1. A World with one currency. 2. A World with two currencies
The emphasis is on bitcoins.

Answer question 5 - What is a Wallet

A Wallet is a different name for an account. When you want to handle in bit coins the first thing you have to do is to open or create a wallet on your iphone or PC. Next you buy bitcoins. When you have done that you are ready to make transactions.

Answer question 6 - In the Bitcoin environment is there a Bank ?

In principle any Bank can have a Bitcoin account (also called a wallet). That means banks can trade in bitcoins. That means banks can sell and receive bitcoins between other banks and individuals. Banks in bitcoins can also sell and receive euro's using an exchange rate.
For more detail see the next question.

Answer question 7 - In the Bitcoin environment can a bank create money?

The underlying question is: if Banks in bitcoins can do the same as a regular bank
What a regular bank can do is that it can create money. Creating money means that when one individual deposits money in a bank the bank can use that as a reserve. Using that reserve as a security the bank can lend money to any other third party. In fact a bank can lend more than what is has in reserve.
The tricky part is that in this case the lending party does not physical owns the coins. This is much more a paper excercise. It is a deal made on trust between two parties.

  1. Suppose you have a bank X who has an empty account of bitcoins.
  2. Suppose you have customer A who has a wallet which contains a certain amount A of bitcoins.
  3. Next customer opens a bitcoin account with bank X and transfers all his bitcoins to Bank X. Now Customer A has zero bitcoins in his Wallet and bank X has A bitcoins.
  4. Suppose you have customer B who wants to lend B bitcoins. In that case bank X opens a bitbank account for customer B, which contains B bitcoins. The bank still has A bitcoins.
    As a safety measure the bank will ask customer B to give something as security i.e. cash in Euro's or a house.
  5. Suppose customer A wants to buy or sell something from customer B. This is trading between different accounts of bank X and has no effect on the number of bitcoins.
  6. Suppose customer B wants to buy something from customer C (a house) who has no bank account. In that case the bank X has to actual transfer bitcoins to customer C. In that case the number of bitcoins owned by bank X will deminish.
What a bank wants is customers similar as customer A. This are the customers who have a job. Are paid in Euro's. With this money they buy bitcoins and transfer them to their bitcoins accounts of bank X. As long as these customers don't spend more bitcoins as they own there is no problem.
Customers like B can become a problem for a bank because they are have a debt to the bank. This total amount can be larger as the number of bitcoins owned. This is no problem as long as all these customers don't spend their bitcoins. This becomes a problem if they are going to spend more bitcoins that the number of bitcoins owned by the bank . In that situation the bank has than to buy bitcoins (on the free market) against Euro's. The price of the bitcoins will increase.
Customers like B have to pay interest to the bank. In order to do that they have to buy bitcoins on the free market.

Reflection part 1 - Litterature

The graphic on the right side shows the mining results.
  • The blue line at the bottom shows the individual results of 18 companies of roughly 2000 block chains.
  • The magenta line shows the Accumulated results.
What the data shows is that 5 companies control 76% of the market.
See also: . In that document the value 75% is given for 6 companies as of 2013. This implies a certain concentration is taken place.



Created: 12 February 2018

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