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Bitcoin FAQ

What is Bitcoin?

Bitcoin is a peer-to-peer payment system and digital currency introduced as open source software in 2009. It is a cryptocurrency, so-called because it uses cryptography to control the creation and transfer of money. Bitcoins are created by a process called mining.

Participants who provide computing power to help secure the network are rewarded with newly minted bitcoins. This is voluntarily, one can be a miner, user, or both. Users send and receive bitcoins using wallet software on a personal computer, mobile device, or a web application. Bitcoins can be obtained by mining or in exchange for products, services, or other currencies.

What is a Bitcoin address?

A Bitcoin address, or simply address, is a string of 27-34 letters and characters, beginning with the number 1 or 3. It represents a possible destination for a Bitcoin payment. Addresses can be generated at no cost by any user in any number. Like e-mail, you can send bitcoins to a person by sending bitcoins to one of their addresses. Users are encouraged to have many different Bitcoin addresses.

An example of a Bitcoin address is: 1CC3X2gu58d6wXUWMffpuzN9JAfTUWu4Kj

For each Bitcoin address, there is a secret number known as a private key which is required for access to the bitcoins.

What is a private key?

A private key is a secret number that allows the bitcoins to be spent. Every Bitcoin address has a matching private key. The private key is mathematically related to the Bitcoin address, and is designed so that the Bitcoin address can be calculated from the private key. Importantly, the private key can not be calculated from the Bitcoin address.

Because the private key is the "pin number" that allows to spend the bitcoins, it is important to keep it secure and secret!

Private keys can be kept on computer files, but they are also short enough to be written down or printed out.

An example of a private key is: 5Kb8kLf9zgWQnogidDA76MzPL6TsZZY36hWXMssSzNydYXYB9KF

Any Bitcoins sent to the address 1CC3X2gu58d6wXUWMffpuzN9JAfTUWu4Kj can be spent by anybody who knows the private key 5Kb8kLf9zgWQnogidDA76MzPL6TsZZY36hWXMssSzNydYXYB9KF.

What is a strong password?

Often, the security of your money is determined by the strength of your password. A password of less than 10 characters is too weak. Common words and phrases are too weak, even when adding some digits to it.

You can consider your password even less secure if you:

  • use it for multiple services
  • use a common phrase or words (for example quotes or song lyrics)

If you want a strong password:

  • Use a trustable source that creates a set of random words offline. For example a big book where you randomly pick ten or more words. Memorize them, and avoid keeping insecure copies of them.
  • If you are extra paranoid, you have to get creative. Do something with your password that you can remember - maybe add some numbers at the end, do some substitutions, capitalize some letters and so forth. As long as you are not removing words or changing unique words for more common ones, personalizing or extending your password can add more security.

What is a cold storage?

Cold storage in the context of Bitcoin refers to keeping a reserve of Bitcoins offline.

For example, a Bitcoin exchange typically offers an instant withdrawal feature, and might be a steward over hundreds of thousands of Bitcoins. To minimize the possibility that an intruder could steal the entire reserve in a security breach, the operator of the website follows a best practice by keeping the majority of the reserve in cold storage, or in other words, not present on the web server or any other computer. The only amount kept on the server is the amount needed to cover anticipated withdrawals.

Methods of cold storage include keeping bitcoins:

  • On a USB drive or other data storage medium in a safe place (e.g. safety deposit box, safe)
  • On a paper wallet
  • On a bearer item such as a physical bitcoin or Bit-Card
  • Online, but on encrypted media where the encryption key is offline.
  • Use a offline Bitcoin Hardware wallet

Deep cold storage refers to keeping a reserve of Bitcoins offline, using a method that makes retrieving coins from storage significantly more difficult than sending them there. This could be done for safety's sake, such as to prevent theft or robbery.

Because Bitcoins can be sent to a wallet by anyone knowing the wallet address, it is trivial to put a wallet in cold storage but to keep a copy of the addresses needed to send funds to it.

A simple example of deep cold storage is opening a safety deposit box and putting a USB stick containing an encrypted wallet file in it. The public (sending) addresses can be used any time to send additional bitcoins to the wallet, but spending the bitcoins would require physical access to the box (in addition to knowledge of the encryption password).

Deep cold storage would typically be used for holding large amounts of bitcoins, or for a trustee holding bitcoins on behalf of others. In such a case, additional precautions should be taken beyond a simple example of a single safety deposit box.

  • The box could be accessed by bank or maintenance personnel, so the contents of the box alone should not be sufficient to access the wallet.
  • The box could be stolen or destroyed in a disaster, or the media could become unreadable, so the box should not contain the only copy of the wallet.
  • The trustee could die or become incapacitated. If access to the wallet or knowledge of its location is lost, or encryption passwords are lost, the bitcoins are gone forever. Provisions should be made so that the box can be accessed by someone else as appropriate, including any encryption passwords.

What is an encrypted private key?

BIP 0038 is a standard to encrypt individual private keys. Encrypted private keys are intended for use on paper wallets and physical Bitcoins.

We will generate one or more pairs of a Bitcoin address and its encrypted private key with an intermediate code. We only know the address and encrypted private key, but cannot decrypt the private key as we never receive the original passphrase.

An encrypted private key starts with a '6'. The starting number '6' represents "a private key that needs something else to be usable". The second character ought to give a hint as to what is needed to use the private key. For an encrypted key requiring a passphrase, the uppercase letter P is used. The encrypted private key is the first factor, the needed passphrase to decrypt it being the second factor of a two factor authentication system.

An example of an encrypted private key is: 6PgNBNNzDkKdhkT6uJntUXwwzQV8Rr2tZcbkDcuC9DZRsS6AtHts4Ypo1j

What is an intermediate code?

Everybody who knows both the encrypted private key and the passphrase has full access to the bitcoins held at that address. With an intermediate code, it is possible to let someone else create encrypted private keys without telling him the corresponding passphrase.

The owner will generate an intermediate code from his password. Any number of encrypted private keys can be generated from the intermediate code. All those encrypted private keys can be decrypted with the original password, which only the owner knows. An intermediate code is 123 characters long, starting with "passphrase".

An example of an intermediate code is: passphraseoRDGAXTWzbp72eVbtUDdn1rwpgPUGjNZEc6CGBo8i5EC1FPW8wcnLdq4ThKzAS

What is a confirmation code?

We return a confirmation code back to the owner which allows him to independently verify that he has been given a Bitcoin address that actually depends on his passphrase. For this he does not have to remove the hologram to expose the encrypted private key.

A confirmation tool, given a passphrase and a confirmation code, can recalculate the address, verify the address hash, and then assert the following: "It is confirmed that this Bitcoin address depends on this passphrase".

This protects the owner from being given a Bitcoin address that is unrelated to the key derivation. If a Bitcoin address given to the owner can be successfully regenerated through the confirmation process, the owner can be reasonably assured that without the passphrase spending funds is infeasible. A confirmation code is 75 characters long, starting with "cfrm38".

An example of a confirmation code is: cfrm38V8aXBn7JWA1ESmFMUn6erxeBGZGAxJPY4e36S9QWkzZKtaVqLNMgnifETYw7BPwWC9aPD

About Us

The 5C-Basic GmbH & Co. KG was founded in 2010 with headquarters in Leipzig. We have been fascinated by the Bitcoin since 2012 and in the beginning of 2013 we implemented the project Bit-Card.

legal information

Feel free to contact us if you have any problems.

Company 5C-Basic GmbH & Co. KG
Address Stauffacherweg 16
04129 Leipzig, Germany
Email support@bit-card.com
Register Court AG Leipzig, HRB 26544