A Guide to Bitcoin Terms

ASIC

Application Specific Integrated Circuit - ASICs are an integrated circuit
customized for a specific use, in the BTC space they are now used for mining
bitcoins.

Address

Similar to an email address and generated at no cost, this string of 27-34
characters represents the destination for a Bitcoin payment.

BTC

Most common unit representation of the Bitcoin currency, similar to USD with
dollars.

Bitcoin

A payment network (“Bitcoin”), the currency unit used on that network
(“bitcoins”). As digital/virtual currency, it uses peer-to-peer technology to
facilitate instant payments. Bitcoin is an alternative currency known as a
cryptocurrency, which uses cryptography for security, making it difficult to
counterfeit. Bitcoin issuance and transactions are carried out collectively by
the network, with no central authority. The total number of bitcoins that will
be issued is capped at 21 million to ensure they are not devalued by limitless
supply. Users store their bitcoins in a digital wallet, while transactions are
verified by a digital signature.

Block

Data is permanently recorded in the Bitcoin network through files called
blocks. A block is a record of some or all of the most recent Bitcoin
transactions that have not yet been recorded in any prior blocks. Blocks are
links in a chain of transaction verifications. Outstanding transactions get
bundled into a block and are verified roughly every ten minutes on average.
Each subsequent block strengthens the verification of previous blocks. Each
block contains one or more transactions.

Blockchain

A public record of Bitcoin transactions in chronological order. The block
chain is shared between all Bitcoin users. It is used to verify the permanence
of Bitcoin transactions and to prevent double spending.

Cold Storage

Keeping bitcoins safely offline through a USB or other drive, paper wallets or
a physical coin.

Cryptography

The branch of mathematics that creates mathematical proofs to provide high
levels of security. Online commerce and banking already use cryptography. In
Bitcoin, cryptography is used to make it impossible for someone to spend funds
from another user’s wallet or to corrupt the blockchain. It can also be used
to encrypt a wallet, so that it cannot be used without a password.

Deflation

Reduction of prices in an economy over time. It happens when the supply of a
good or service increases faster than the supply of money, or when the supply
of money is finite. This leads to more goods or services per unit of currency,
meaning that less currency is needed to purchase them. This carries some
downsides. When people expect prices to fall, it causes them to stop spending
in the hope that their money will go further later.

Difficulty

Every 2,016 blocks, Bitcoin adjusts the difficulty of verifying blocks based
on the time it took to verify the previous 2,016 blocks. The difficulty is
adjusted so that given the average estimated computing power of the whole
Bitcoin network, only one block will be verified on average every 10 minutes
for the next 2,016 blocks.

Double Spending

When a malicious user tries to send his bitcoins to two different recipients
at the same time. Bitcoin mining and the blockchain are there to create a
consensus on the network about which of the two transactions will be confirmed
and considered valid.

Escrow

Holding funds in a third-party account when two parties are engaged in a
transaction. Advisable when making a transaction via a Bitcoin account with an
unknown party, or when transacting high value items.

Exchange

A central resource for exchanging different forms of money and other assets.
Bitcoin exchanges are typically used to exchange the cryptocurrency for other,
typically fiat, currencies.

Fiat Currency

Currency that a government has declared to be legal tender, despite the fact
that it has no intrinsic value and is not backed by reserves. Historically,
most currencies were based on physical commodities such as gold or silver, but
fiat money is based solely on faith.

Halving

Refers to reducing reward every 210,000 blocks, approximately every four
years. Due to reward halving, the total supply of bitcoins is limited.

Hash Function

A computer algorithm which takes an arbitrary amount of input data and
deterministically produces fixed length output, known as the data’s “hash.” It
can be used to easily verify that data has not been altered. If you change any
single bit of the original data and run the hash algorithm, the hash will
completely change. Because the hash is seemingly random, it is prohibitively
difficult to try to produce a specific hash by changing the data that is being
hashed.

Hash Rate

Measuring unit of the processing power of the Bitcoin network. The Bitcoin
network must make intensive mathematical operations for security purposes.

Inflation

When the value of money drops over time, causing prices for goods to increase.
The result is a drop in purchasing power.

KYC

Know Your Customer rules require financial institutions to vet the people they
are doing business with, ensuring that they are acting in good faith and
adhering to all applicable regulations.

Mining

Process of using computer hardware to do mathematical calculations for the
Bitcoin network to confirm transactions and increase security. As a reward for
their services, Bitcoin miners can collect transaction fees for the
transactions they confirm, along with newly created bitcoins. Mining is a
specialized and competitive market where the rewards are divided up according
to how much calculation is done.

Paper Wallet

Method of storing bitcoins offline on a physical piece of paper that holds
both the private key and the public address.

Private Key

A secret piece of data that proves your right to spend bitcoins from a
specific wallet through a cryptographic signature. You can think of this as
your PIN number. Your private key(s) are stored in your computer if you use a
software wallet; they are stored on some remote servers if you use a web
wallet. Private keys must never be revealed as they allow you to spend
bitcoins from their respective Bitcoin wallets.

Public Key

An alphanumeric string which is publicly known, and which is hashed with
another privately held string to sign a digital communication. You can think
of this as your bank routing number. In the case of Bitcoin, the public key is
a Bitcoin address.

QR Code

A two-dimensional graphical square containing a monochromatic pattern
representing a sequence of data. QR codes are designed to be scanned by
cameras, including those found in mobile phones, and are frequently used to
encode Bitcoin addresses.

Reward

When a block is discovered, the discoverer is awarded a certain number of
bitcoins agreed upon by everyone in the network. Currently this bounty is 25
bitcoins; this value will halve every 210,000 blocks.

Satoshi

Smallest unit of Bitcoin currency (1/100,000,000 BTC or 0.00000001 BTC). This
unit has been named in collective homage to the founder of Bitcoin.

Satoshi Nakamoto

Anonymous creator and founder of the Bitcoin cryptocurrency.

Signature

A cryptographic signature is a mathematical mechanism allowing proof of
ownership. In the case of Bitcoin, a Bitcoin wallet and its private key(s) are
linked mathe- matically. When your Bitcoin software signs a transaction with
the appropriate private key, the whole network can see that the signature
matches the bitcoins being spent.

Transaction

A specific section of data that is broadcast to the network and then collected
into Blocks.

Transaction Fee

Possible with any transaction of bitcoin, fees are processed and received by
the Bitcoin miner. Transaction fees are voluntary but can help speed
confirmation times.

Best Bitcoin Cloud Mining Contract Reviews

bitcoin cloud mining

What is Bitcoin Cloud Mining?

Bitcoin cloud mining enables people to earn Bitcoins without bitcoin mining hardware, bitcoin mining software, electricity, bandwidth or other offline issues.

Bitcoin cloud mining, sometimes called cloud hashing, enables users to buy the output of Bitcoin mining power from Bitcoin mining hardware placed in remote data centres. Then all Bitcoin mining is done remotely in the cloud. This enables the owners to not deal with any of the hassles usually encountered when mining bitcoins such as electricity, hosting issues, heat, installation or upkeep trouble.

What are Bitcoin Cloud Mining Advantages?

  • No excess heat to deal with
  • Quiet because of no constantly humming fans
  • No electricity costs
  • No bitcoin mining equipment to sell when bitcoin mining is no longer profitable
  • No ventilation problems with hot equipment
  • No preordered bitcoin mining hardware that may not be delivered on time by bitcoin mining equipment suppliers

What are Bitcoin Cloud Mining Disadvantages?

bitcoin cloud mining scams
  • FRAUD!!!
  • Unverifiable or otherwise shady Bitcoin cloud mining operations
  • No fun! If you like building your own Bitcoin mining systems.
  • Lower profits – Bitcoin cloud mining services or operators have expenses
  • Bitcoin mining contracts may have the ability to cease operations or payouts in the contracts if the Bitcoin price is too low
  • Lack of possession of the Bitcoin mining hardware
  • Lack of ability to change the Bitcoin mining software
  • Best Bitcoin Cloud Mining Services

    Being listed in this section is NOT an endorsement of these services. There have been a tremendous amount of Bitcoin cloud mining scams.

    • Genesis Mining - is the largest scrypt cloud mining provider that offers several features that are unique among all cloud Bitcoin mining services.
    • Bitcoin Cloud Mining - supposedly has been mining Bitcoin since mid-2013. All Bitcoin miners are located in a state-of-the-art data centre in Australia and they have direct access to high quality equipment and 24/7 support.
    • NiceHash - claims to bring an innovative easy-to-use and risk-free cloud mining service. You can mine the vast majoritiy of popular coins, based on SHA-256 (Bitcoin, etc.), Scrypt (Litecoin, Dogecoin, etc.), Scrypt-N (Vertcoin, etc.) and X11 (DarkCoin, etc.).
    • Eobot - claims to be the easiest, cheapest, and best cloud mining solution. Start with as little as $10 using PayPal and choose between any cryptocurrency including Bitcoin, Litecoin, Peercoin, Namecoin, Feathercoin, Dogecoin, NautilusCoin, and Vertcoin.
    • CloudHashing - has been featured in The Bitcoin Uprising documentary on CNBC. They have also appeared in the New York Times article “Into the Bitcoin Mines”. At Cloud Hashing, they are dedicated to fast, efficient Bitcoin mining services. Cloudhashing was founded in February 2013 to take all of the hard work and complexities out of Bitcoin Mining.
    • 808 Mining - claims to their customer support team ensures the entire process of renting Bitcoin mining equipment is a pleasant experience and that understanding customer satisfaction is paramount. They also monitor the Bitcoin miners provided by our vendors to ensure you receive the full work that is due your Bitcoin mining contract terms.
    • MineOnCloud - was launched on November 2013. They offer Bitcoin mining contracts for SHA256 using a very stable ASIC 28nm chip. They have two bitcoin mining contract options: (1) Day pass and (2) Year contract. Customers can choose the Bitcoin mining pool and change every month for free with year contract.

    Best Bitcoin Cloud Mining Contracts

    Bitcoin cloud mining contracts are usually sold for bitcoins on a per hash basis for a particular period of time.

    For example, Pay per GHash/s would be 0.0012 BTC / GHs for a 24 month contract.

    Contracts vary from hourly to multiple years. The major factor that is unknown to both parties is the Bitcoin network difficulty and it drastically determines the profitability of the bitcoin cloud hashing contracts.

    Bitcoin network difficulty is a measure of how difficult it is to find a hash below a given target.

    The Bitcoin network has a global block difficulty. Valid blocks must have a hash below this target. Bitcoin mining pools also have a pool-specific share difficulty setting a lower limit for shares.

    The Bitcoin network difficulty changes roughly every two weeks or 2,016 blocks.

    Bitcoin Cloud Mining Scams

    There have been a tremendous amount of Bitcoin cloud mining scams like the possible $500,000 Bitcoin cloud mining ponzi scheme that was uncovered. Potential buyers should be extremely guarded and careful before purchasing any bitcoin mining contracts.

    Services to beware of:

    • Scrypt.cc - allows purchase of KHS in a matter of seconds, start mining right away and even be able to trade your KHS in real time with prices based on supply and demand! All KHashes are safely stored and maintained in 2 secured data-centres.
    • PB Mining - Claims to operate Bitcoin mining ASIC hardware. When customers buy a bitcoin mining contract then they will begin earning Bitcoins instantly. At Piggyback Mining, they cover the electricity costs and all Bitcoin mining pool fees. The Bitcoin mining contract is 100% insured because they want customers to succeed.
    • Bitcoin Cloud Services (BCS) - Appears to have been a $500,000 Ponzi scam fraud.

    What is Bitcoin Mining Difficulty?

    What is Bitcoin Mining Difficulty

    The Computationally-Difficult Problem

    Bitcoin mining a block is difficult because the SHA-256 hash of a block's header must be lower than or equal to the target in order for the block to be accepted by the network.

    This problem can be simplified for explanation purposes: The hash of a block must start with a certain number of zeros. The probability of calculating a hash that starts with many zeros is very low, therefore many attempts must be made. In order to generate a new hash each round, a nonce is incremented. See Proof of work for more information.

    The Bitcoin Network Difficulty Metric

    The Bitcoin mining network difficulty is the measure of how difficult it is to find a new block compared to the easiest it can ever be. It is recalculated every 2016 blocks to a value such that the previous 2016 blocks would have been generated in exactly two weeks had everyone been mining at this difficulty. This will yield, on average, one block every ten minutes.

    As more miners join, the rate of block creation will go up. As the rate of block generation goes up, the difficulty rises to compensate which will push the rate of block creation back down. Any blocks released by malicious miners that do not meet the required difficulty target will simply be rejected by everyone on the network and thus will be worthless.

    The Block Reward

    When a block is discovered, the discoverer may award themselves a certain number of bitcoins, which is agreed-upon by everyone in the network. Currently this bounty is 25 bitcoins; this value will halve every 210,000 blocks. See Controlled Currency Supply.

    Additionally, the miner is awarded the fees paid by users sending transactions. The fee is an incentive for the miner to include the transaction in their block. In the future, as the number of new bitcoins miners are allowed to create in each block dwindles, the fees will make up a much more important percentage of mining income.

    What are Bitcoin Mining Pools

    Bitcoin mining pools are a way for Bitcoin miners to pool their resources together and share their hashing power while splitting the reward equally according to the amount of shares they contributed to solving a block.

    A "share" is awarded to members of the Bitcoin mining pool who present a valid proof of work that their Bitcoin miner solved. Bitcoin mining in pools began when the difficulty for mining increased to the point where it could take years for slower miners to generate a block.

    The solution to this problem was for miners to pool their resources so they could generate blocks quicker and therefore receive a portion of the Bitcoin block reward on a consistent basis, rather than randomly once every few years.

    Network Consensus

    bitcoin network consensus

    If you solo-mine, meaning you do not mine with a Bitcoin mining pool, then you will need to ensure that you are in consensus with the Bitcoin network. The best way is to use the official BitCore client.

    If you participate in a Bitcoin mining pool then you will want to ensure that they are engaging in behavior that is in agreement with your philosophy towards Bitcoin.

    For example, some rogue developers have threatened to release software that could hard-fork the network which would likely result in tremendous financial damage.

    Therefore, it is your duty to make sure that any Bitcoin mining power you direct to a mining pool does not attempt to enforce network consensus rules you disagree with.

    Bitcoin Mining Pools

    There are many good Bitcoin mining pools to choose from. Although it's tempting to pick the most popular one, it's better for the health of the network to mine with smaller pools so as to avoid potentially harmful concentration of hashing power.

    The hash rate distribution is best when split among more Bitcoin mining pools.

    Bitcoin Mining Pool Hash Rate Distribution

    Bitcoin Mining Pool Options

    For a fully decentralized pool, we highly recommend p2pool.

    The following pools are believed to be currently fully validating blocks with Bitcoin Core 0.9.5 or later (0.10.2 or later recommended due to DoS vulnerabilities):

    Bitcoin Mining Pool Payment Methods

    Calculating your share of the bitcoins mined can be complex. In an ongoing effort to come up with the fairest method and prevent gaming of the system, many calculation schemes have been invented. The two most popular types are PPS and DGM. PPS, or 'pay per share' shifts the risk to the mining pool while they guarantee payment for every share you contribute.

    PPS payment schemes require a very large reserve of 10,000 BTC in order to ensure they have the means of enduring a streak of bad luck. For this reason, most Bitcoin mining pools no longer support it.

    One of the few remaining PPS pools is EclipseMC. DGM is a popular payment scheme because it offers a nice balance between short round and long round blocks. However, end users must wait for full round confirmations long after the blocks are processed.

    PPS: The Pay-per-Share (PPS) approach offers an instant, guaranteed payout for each share that is solved by a miner. Miners are paid out from the pools existing balance and can withdraw their payout immediately. This model allows for the least possible variance in payment for miners while also transferring much of the risk to the pool's operator.

    PROP: The Proportional approach offers a proportional distribution of the reward when a block is found amongst all workers, based off of the number of shares they have each found.

    PPLNS: The Pay Per Last N Shares (PPLN) approach is similar to the proportional method, but instead of counting the number of shares in the round, it instead looks at the last N shares, no matter the boundaries of the round.

    DGM: The Double Geometric Method (DGM) is a hybrid approach that enables the operator to absorb some of the risk. The operator receives a portion of payouts during short rounds and returns it during longer rounds to normalize payments.

    SMPPS: The Shared Maximum Pay Per Share (SMPPS) uses a similar approach to PPS but never pays more than the Bitcoin mining pool has earned.

    ESMPPS: The Equalized Shared Maximum Pay Per Share (ESMPPS) is similar to SMPPS, but distributes payments equally among all miners in the Bitcoin mining pool.

    RSMPPS: The Recent Shared Maximum Pay Per Share (RSMPPS) is also similar to SMPPS, but the system prioritizes the most recent Bitcoin miners first.

    CPPSRB: The Capped Pay Per Share with Recent Backpay uses a Maximum Pay Per Share (MPPS) reward system that will pay Bitcoin miners as much as possible using the income from finding blocks, but will never go bankrupt.

    BPM: Bitcoin Pooled mining (BPM), also known as "Slush's pool", uses a system where older shares from the beginning of a block round are given less weight than more recent shares. This reduces the ability to cheat the mining pool system by switching pools during a round.

    POT: The Pay on Target (POT) approach is a high variance PPS that pays out in accordance with the difficulty of work returned to the pool by a miner, rather than the difficulty of work done by the pool itself.

    SCORE: The SCORE based approach uses a system whereby a proportional reward is distributed and weighed by the time the work was submitted. This process makes later shares worth more than earlier shares and scored by time, thus rewards are calculated in proportion to the scores and not shares submitted.

    ELIGIUS: Eligius was designed by Luke Jr., creator of BFGMiner, to incorporate the strengths of PPS and BPM pools, as miners submit proofs-of-work to earn shares and the pool pays out immediately. When the block rewards are distributed, they are divided equally among all shares since the last valid block and the shares contributed to stale blocks are cycled into the next block's shares. Rewards are only paid out if a miner earns at least. 67108864 and if the amount owed is less than that it will be rolled over to the next block until the limit is achieved. However, if a Bitcoin miner does not submit a share for over a period of a week, then the pool will send any remaining balance, regardless of its size.

    Triplemining: Triplemining brings together medium-sized pools with no fees and redistributes 1% of every block found, which allows your share to grow faster than any other Bitcoin mining pool approach. The administrators of these Bitcoin mining pools use some of the Bitcoins generated when a block is found to add to a jackpot that is triggered and paid out to the member of the pool who found the block. In this way, everyone in the pool has a better chance to make additional Bitcoins, regardless of their processing power.

    What is Proof of Work?

    What is Proof of Work

    A proof of work is a piece of data which was difficult (costly, time-consuming) to produce so as to satisfy certain requirements. It must be trivial to check whether data satisfies said requirements.

    Producing a proof of work can be a random process with low probability, so that a lot of trial and error is required on average before a valid proof of work is generated. Bitcoin uses the Hashcash proof of work.