Bitcoin Study Guide

📖 Core Concepts Bitcoin (₿, BTC) – First decentralized cryptocurrency; a digital cash system without a central authority, using a peer‑to‑peer network. Blockchain – Public, ordered list of blocks; each block contains a SHA‑256 hash of the previous block, creating an immutable chain. Proof‑of‑Work (PoW) – Computational puzzle miners solve; the hash of a block must be lower than the difficulty target. Guarantees consensus and security. Private/Public Keys & Addresses – Private key signs a transaction; public key is hashed to produce a Bitcoin address that receives funds. Units – 1 BTC = 100 000 000 satoshis (sat). The satoshi is the smallest divisible unit. Block Reward & Halving – Reward started at 50 BTC, halves every 210 000 blocks, capping total supply at 21 million BTC (2140). Transaction Structure – Inputs reference previous UTXOs; outputs create new UTXOs. Excess input becomes change; leftover satoshis are the transaction fee. Consensus & Security – Byzantine fault tolerant; 51 % of hash power could censor or double‑spend, but is infeasible at current scale. 📌 Must Remember Symbol: ₿, Code: BTC. One block ≈ 10 minutes; difficulty adjusts every 2 016 blocks (2 weeks). Satoshi = 0.000 000 01 BTC (10⁻⁸ BTC). Block reward schedule: 50 → 25 → 12.5 → 6.25 → … BTC. Supply cap: 21 million BTC; 20 % of existing coins are considered lost. SegWit (2017) ↑ block capacity, enables Lightning Network. Taproot (2021) adds Schnorr signatures, better privacy & smart‑contract support. Mining pool concentration – > 39 % is a red flag (e.g., Ghash.io 2014). Energy impact – ≈ 0.5 % of global electricity; 0.08 % of GHG emissions. 🔄 Key Processes Transaction Creation Select UTXOs → create inputs. Define outputs (recipient address + optional change address). Sign each input with the corresponding private key. Block Mining Gather pending transactions → form candidate block. Set nonce; compute SHA‑256 hash of block header. If hash < difficulty target → block is valid. Broadcast block; other nodes verify and add to chain. Difficulty Adjustment (every 2 016 blocks) Compare actual time taken for last 2 016 blocks to the 2‑week target. Increase difficulty if faster, decrease if slower, keeping 10‑min block time. Halving Cycle Every 210 000 blocks → block reward = previous reward ÷ 2. 🔍 Key Comparisons Full‑node wallet vs. Lightweight wallet Full‑node: stores entire blockchain, validates locally. Lightweight: relies on remote servers for verification. Hot wallet vs. Cold storage Hot: private keys online → vulnerable to hacks. Cold: keys offline (hardware/paper) → immune to network attacks. SegWit vs. Legacy (pre‑SegWit) transactions SegWit separates signature data → larger effective block size, lower fees. Legacy bundles signatures in the transaction → higher size, higher fees. Bitcoin vs. Bitcoin Cash Bitcoin: 1 MB block limit (now effectively larger via SegWit). Bitcoin Cash: increased block size (8 MB+) to boost on‑chain throughput. ⚠️ Common Misunderstandings “Bitcoin is fully anonymous.” – It is pseudonymous; addresses are public and traceable via chain analysis. “All bitcoins are fungible.” – Protocol treats them equally, but services may refuse “tainted” coins. “Mining rewards are unlimited.” – Fixed supply; reward halves every 210 k blocks, ending around 2140. “Lightning Network replaces the blockchain.” – It is a second‑layer solution for fast payments; settlements still settle on‑chain. 🧠 Mental Models / Intuition Chain as a linked list of “boxes” – each box (block) holds a snapshot of recent transactions and a lock (hash) that only the previous box can open. Mining as a lottery – each hash attempt is a ticket; the difficulty sets how many tickets you need to buy on average to win. UTXO = digital cash bill – you spend whole bills (UTXOs) and get change back, just like real cash. 🚩 Exceptions & Edge Cases 51 % attack – Theoretically possible on small PoW networks; Bitcoin’s massive hash rate makes it practically impossible now. Transaction fee market – When mempool is congested, miners prioritize higher‑fee transactions; low‑fee txs may be delayed or dropped. Dust outputs – Very small UTXOs (below fee threshold) become uneconomical to spend. 📍 When to Use Which Choose SegWit address (bech32) when: you want lower fees & compatibility with Lightning. Use a cold hardware wallet for: long‑term storage of large balances. Opt for Lightning Network payments when: transaction amount is small‑to‑medium and you need instant settlement. Select a full‑node wallet if: you require maximum privacy & validation independence. 👀 Patterns to Recognize High fee + large mempool → likely a network congestion event (e.g., after major news or upgrade). Sudden hash‑rate drop → possible regulatory crackdown or mining ban (e.g., China 2021). Address reuse → reduced privacy; look for fresh change addresses in good‑practice wallets. Block size approaching 1 MB limit → expect fee spikes; may indicate upcoming SegWit or Lightning adoption. 🗂️ Exam Traps “Bitcoin’s supply is unlimited.” – Trap; the protocol caps at 21 M BTC. Confusing “Satoshi” with “Sat” (stock ticker). – In Bitcoin context, satoshi = 10⁻⁸ BTC. Assuming all PoW coins adjust difficulty every block. – Bitcoin adjusts every 2 016 blocks only. Mistaking “Taproot” for a scaling solution only. – It primarily adds Schnorr signatures & privacy; scaling benefits are indirect (better Lightning compatibility). Believing a 51 % attack would create new coins. – It only enables censorship/double‑spend; supply rules stay unchanged.