How does Bitcoin work ?

This part of our Bitcoin guide explains that Bitcoin is a new type of currency, also known as a cryptocurrency or digital money. It was created to be a global currency system.


Blockchain and Bitcoin

Bitcoin is based on fundamentally new technology. It relies on cryptography and the use of powerful computers. The internet allows it to work.

Bitcoin transactions are not controlled by a single administrator. They are recorded in a distributed ledger called a Blockchain.

While a bank might have a copy of the ledger representing financial transactions through an account, the Blockchain is a different type of ledger. It is shared by Bitcoin’miners’ and ‘nodes’ around world.

What is Blockchain Technology?

Blockchain gets its name from its data structure, which is composed of 1-megabyte files called “Blocks”, which are in essence ledgers. Through a complicated mathematical proof, blocks are ‘Chained together. for this reason it is called blockchain.

The Blockchain is a public shared ledger that all Bitcoin network users rely on. All network nodes, which are computers running Bitcoin software, have the ability to access the Blockchain and view authenticated transaction data. Transacting parties can remain anonymous to a certain extent because the Blockchain doesn’t display the names of the parties, but rather provides an alphanumeric identification.

The Blockchain relies on cryptography, which is the art of writing and solving codes to verify the integrity of the ledger.

Bitcoin wallets

To exchange Bitcoin (BTC) denominations, parties use what is known as a “Bitcoin Wallet”. Bitcoin Wallets give their users both a Public Key (from which one sends or receives Bitcoins) and a Private Key.

Although the term “Wallet” can be considered a bad term, it is actually a good one to use. A better name would be “Keychain”, where users can copy both their keys and not just have access to one.

A Bitcoin Private Key

A Private Key, an extremely important’signature” for Bitcoin users is used to verify pending transactions by providing a mathematical proof that they originate from the wallet owner.

By submitting a transaction signed by the user’s key and indicating their intent to transact in Bitcoin on the Blockchain, a user can signal that they want to do so. After verifying that the transaction is valid, the bitcoin network validates it by verifying that the to/from addresses and the private key are valid. It also confirms that sufficient funds are available to complete the transaction. Usually, the transaction is confirmed by the bitcoin network within ten minutes.

Bitcoin Mining

Mining is the process of authenticating transactions and putting them in a block for inclusion in the Blockchain. “Miners” are computer-savvy users who use powerful hardware to solve complex mathematical problems and cryptographically sign transactions. They then connect the transactions to all transactions that have taken place in the Bitcoin network.

By securing Bitcoin’s network, miners help the Bitcoin community. It takes a lot of resources to solve the cryptographic proofs for each block. The ‘bounty or reward’ for winning the race to mine 1 megabyte transactions is Bitcoin.

A malicious transaction is so complex in computation and electricity that it almost always makes more sense to use the same compute power to protect the network and receive the block reward. This prevents malicious actors from attacking the network, and keeps the Blockchain safe from fraudulent or malicious entries.

Mining derives its name from the fact that miners get Bitcoin as a reward in a manner similar to how rare commodities like gold are mined from ground.

What should I know about Bitcoin?

Although Bitcoin is an intriguing technology that can be used to store value or exchange money, it is fundamentally different than traditional banking systems and has some significant differences.

Bitcoin is not hackable because it relies on complex mathematical proof to its foundation – and to even steal one transaction would require immense resources – Bitcoin wallets have the same vulnerabilities that conventional wallets in that they are only secure as the user who leaves them.

Bitcoin wallets can be easily transferred around the globe and are a target for hackers looking to steal digital currency. You should choose a reliable Wallet service provider and ensure that your Wallet is protected.

Bitcoin storage

Custodial services and exchanges are other popular storage options. These usually participate in either the transaction or holding of cryptocurrency. These entities are often a target for hackers because they hold large amounts of bitcoin or other digital currencies. Therefore, it is important to be careful when using them.

Bitcoin is also easy to steal because payments made in Bitcoin can’t be reversed without the help of the person who incorrectly received them.

Although the Bitcoin network is able to detect typos and won’t allow users to send Bitcoins to invalid addresses, all confirmed transactions must be considered final due to the fact they are encrypted by cryptography. When exchanging Bitcoin, parties must be able trust each other.

Bitcoin is no anonymous

Bitcoin is not an anonymous currency. While one could rely on a bank for privacy (a private ledger), all computers connected to the Bitcoin network can view the Blockchain and most often see the balance of each wallet. The network also allows all transactions to be seen. Although the identities of the parties involved in transactions are not visible on the network, sophisticated analysis of blockchain data could enable third parties to track how the bitcoin moves through the network.