When it comes to How Does Bitcoin Work, let’s start with the big question:
What is Bitcoin?
Bitcoin is a cryptocurrency, in the digital assets category. It’s a system to send and receive web payments.
It’s a peer-to-peer system with no central authority, and for that reason, to duplicate it or manipulate it is not easy.
Each payment made is known as a Bitcoin Transaction, and once these transactions are verified, they are recorded on its ledger system, known as the blockchain.
The reason we call the ledger a system blockchain is that bitcoin transactions are gathered in a form of blocks about every 10 minutes, and because they create a chain of blocks, we began to call it blockchain.
The Bitcoin blockchain is also known as the ledger system.
This Bitcoin blockchain is open to the public, and every computer that’s part of the network has a copy of the ledger.
Each of those network computers also verifies transactions, and for doing that, the Bitcoin network rewards them with new bitcoins. This is what’s known as bitcoin mining or just mining.
To put it in simple terms, mining is just validating bitcoin transactions and receiving a reward for doing so from the network.
What’s interesting is that only 21 million bitcoins will be ever mined, and every four years the reward for mining bitcoins decreases.
So, it works with a predicted supply, and it’s governed by scarcity, making it digital gold.
Bitcoin is the father of all crypto, and it’s often described as the new cash of the internet.
The supply of bitcoin is handled by computers instead of banks, and that’s why once you have some bitcoins, you’re basically your own bank.
Any person with access to the web can transfer any amount of cash, anywhere in the globe, at any moment of the day, without anybody else involved.
Bitcoin is also a great accounting system, as runs automatically.
Because the ledger system is available to the public, every single bitcoin is accounted for, so it’s basically impossible to fool the system with duplicated bitcoins on the network.
And also, as the network is not managed by anyone, there’s no central point of failure, so it can’t be shut down.
Since its early stages as the preferred payment method of the dark web, Bitcoin has grown into a massive monster that has caught the attention, and the cash, or even the largest bank conglomerates in the world.
How Does Bitcoin Work: Bitcoin and bitcoin
Now in this How Does Bitcoin Work quick guide, let’s see the difference between Bitcoin and bitcoin.
Before we get started with all this, it’s important to point out that what some people might be referring to bitcoin as a currency, other people can be talking about the underlying Network.
Both of these are called bitcoin, but they are not written in the same way. When Bitcoin with a capital B is written, this is referred to as a Bitcoin Network, but when it’s written as bitcoin or bitcoins with no capital letter used, then this is when people are referring to the currency unit of the network.
How Does Bitcoin Work: What Is Cryptocurrency
Next in our How Does Bitcoin Work, let’s check out what is cryptocurrency.
Most people out there know Bitcoin as a cryptocurrency.
The first part of this word is related to cryptography, while the second part is related to currency.
Cryptocurrency is not a digital currency because it uses cryptographic proofs to validate transactions, while a digital currency will be using third parties to do the same task.
When we mention trusted third parties, we are referring to actual Banks or similar businesses such as PayPal or Western Union.
So, what’s really great and revolutionary about Bitcoin is that this is a currency that is getting its power directly from the people and not from a big financial institution or a government.
How Does Bitcoin Work: Bitcoin Brief History
Now in our How Does Bitcoin Work guide, let’s see who’s responsible for creating the first of all cryptocurrencies.
Back in 2008, a guy by the name of Satoshi Nakamoto released a white paper which he called “Bitcoin: peer-to-peer electronic cash system.”
The following year this system actually went live, and it’s being online since that day, 3rd of January 2009.
Abd the main reason why Bitcoin is still working it’s because it became the top decentralized peer-to-peer Network in the globe, and it continues to do grow.
What’s great is that once it started working, there can never be a central point of failure.
Now, here’s something you probably didn’t know, and one of the most interesting facts about Bitcoin: it is open source.
Yes, Bitcoin is open source and that means that basically anyone can copy MIT license and start creating the own cryptocurrencies, as it already has occurred with some crypto coins you probably are already familiar with such as Ethereum, Zcash, Monero, Litecoin, Dash, plus hundreds of others.
And this is something you probably didn’t know either:
Bitcoin is completely decentralized but a lot of these new cryptocurrencies does have a central authority, which means that they are completely centralized.
And in that case, some of these new cryptocurrencies cannot be said to be really crypto, but actually a hybrid of crypto and digital currency.
How Does Bitcoin Work: The Distributed Ledger System
Next in our How Does Bitcoin Work guide, let’s see out the distributed ledger system.
Now, the crypto Ledger system not like a bank ledger, but instead, it’s publicly available to anyone with internet access, so you can watch every wallet address and its proper value as they are visible to anyone out there.
But only the people that have access to the actual wallet’s private keys can have access to the funds inside those wallets.
So what we’re saying here is that you basically don’t need a third party to send and receive Bitcoin funds online, which basically makes you your own bank.
How Does Bitcoin Work: The Blockchain
It’s time in our How Does Bitcoin Work quick guide to check out what the blockchain is.
Every single transaction ever made related to bitcoin is recorded, and once it’s been validated, it will be added to a block.
These blocks, containing hundreds of transactions are also validated, and become part of the already validated blocks, forming what it’s known as the blockchain.
How Does Bitcoin Work: Bitcoin Mining Fundamentals
It’s now time in our How Does Bitcoin Work do dive into some Bitcoing mining fundamentals.
Now, to start mining bitcoins, the first thing you need to do is to install the Bitcoin core software on a computer.
But you can’t use a simple computer to do this. In fact, you can only do this with specialized software, including Hi-Tech microchips, because it’s very costly.
Now those that actually spend money to do this are known as Bitcoin miners.
What’s interesting is that when Satoshi first implemented the blockchain, he did it in a certain way, so that there could be only 21 million bitcoins mined, total.
When the system was first implemented, Bitcoin had not much value, so miners were basically voluntaries.
But now this is one of the most profitable occupations in the world.
if you want to become a Bitcoin miner, you can do this by yourself, or you can also work with other people, and this is known as mining pools.
When you join a mining pool, you will get a percentage of all the successfully mined blocks.
You will also be responsible for sealing each Bitcoin transaction into the ledger. And so a miner can also be described as as an authenticator.
You get rewarded for this work with bitcoins, and this is how a new value is then added to the system.
And once a new block has been accepted by every Bitcoin member connected to the network, then this transaction is going to be permanent, which means that it will never be modified.
How Does Bitcoin Work: Bitcoin Supply & Demand
Now in our How Does Bitcoin Work, let’s see check out supple and demand.
There are a few factors that can be involved when it comes to moving the price of Bitcoin up and down, but at the core, we can find supply and demand.
As mention a little above, there are only 21 total million bitcoins, and this is known as controlled supply.
It’s really interesting that it’s estimated that more than 3 million pre-mined bitcoins are probably lost in space because people just lost their private keys to their wallets!
And this reduces this 21 million figure to around 18 million that will ever circulate.
Plus, let’s not forget that when Satoshi created bitcoin, he kept 1 million for himself, which he probably will never use.
So this reduces the total number of bitcoins that can be mine to 17 million, total.
If you want to invest in Bitcoin, this is great because the price continues to increase in value.
This is because there is an increased interest from the public and also from private banking institutions and Wallstreet to invest in Bitcoin.
And so, as this is like gold, and because there is a limited supply, and because more and more people are keeping it to themselves, the supply is continuously decreasing, so this makes the value of Bitcoin even higher.
Also, we can add to this the fact that regular Fiat currencies are decreasing in value, so this makes the value of Bitcoin even higher, and this is a trend that will continue in the future.
How Does Bitcoin Work: Buying Bitcoin
Last but not least in our How Does Bitcoin Work guide, the big question: should you invest in Bitcoin?
Now, it’s important to avoid the “fear of missing out” mentality and buy Bitcoin because of a certain announcement on TV or YouTube, etc.
This is because Bitcoin is not an investment, and that means that there’s a lot of people out there trying to manipulate the rising bitcoin trading market.
So, when you see a certain announcement, this can be the result of a paid campaign to try and get people to pay attention to a certain sector of the market.
In reality bitcoin, it’s not a simple investment to make. And the very best advice we can give you here is to really find professionals such as money managers or Bitcoin brokers that can advise you on how to move your cash into crypto, and get the best ROI when doing so.
Plus, there are many cryptocurrencies out there that are actually scams, so it’s better to be well informed before investing a single cent in a different cryptocurrency than that one created by Satoshi.
So, in sum, yes, Bitcoin it’s an outstanding investment, but you need to know all about it to be successful, and reading this How Does Bitcoin Work guide it’s definitely the first step to get there.