What Is Bitcoin and How Does It Work?


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  • Bitcoin is a cryptocurrency that operates on a decentralized database called blockchain.

  • The transactions on the Bitcoin network are recorded on a public ledger and verified by a network of nodes located worldwide.

  • Bitcoin is transparent and permissionless, making it a popular alternative to the traditional financial system.

What Is a Bitcoin?

Bitcoin is a digital form of cash. But unlike the government-issued fiat currencies you’re used to, no central bank controls it. Instead, the financial system in Bitcoin is run by thousands of computers distributed around the world. Anyone can participate in the ecosystem by downloading Bitcoin’s open-source software.

Bitcoin was the first cryptocurrency, announced in 2008 (and launched in 2009). It allows users to send and receive digital money called bitcoins (with a lowercase b, or BTC). What makes it highly appealing is its inherent resistance to censorship, the impossibility of double-spending funds, and the ability to conduct transactions anytime and anywhere.

What Makes Bitcoin Unique?

Here are a few of the key features that make Bitcoin unique:

1. Decentralization

Bitcoin operates on a decentralized public blockchain, meaning a central authority doesn’t control it. Instead, transactions are verified by the network of computers, known as nodes. In addition, anyone can join the network and help secure it.

2. Permissionless

Bitcoin’s permissionless nature means that anyone with an internet connection can participate in the Bitcoin network without authorization or permission from a central authority.

Bitcoin allows users to send and receive payments with anyone on the network, regardless of location or identity. This has made bitcoins particularly popular in regions where access to traditional financial systems is limited or non-existent.

3. Limited supply

Bitcoin has a limited supply of 21 million coins hard-coded into the protocol. This means there will never be more than 21 million bitcoins in circulation, which helps prevent inflation.

4. Transparency

All bitcoin transactions are recorded on a public ledger that is visible to all users. This means that anyone can see the transactions that have taken place, including the amount of bitcoin involved and the addresses of the sender and receiver.

In traditional financial systems, transactions are recorded by banks and other financial institutions, and this information is not generally available to the public. Instead, people rely on these institutions to keep accurate records.

5. Divisibility

Bitcoin can be divided into smaller units called satoshis, which are one hundred millionth of a bitcoin. This means that even if the price of a bitcoin becomes very high, people can still use and transact with very small amounts of the currency. This makes bitcoins more accessible to people with limited financial resources and allows for more granular transactions.

How Does Bitcoin Work?

When Alice makes a transaction with Bob, she’s not sending money in the way you’d expect. It’s not like the digital equivalent of handing him a dollar bill. It’s more like she’s writing on a piece of paper (that everyone can see) that she’s giving Bob a dollar. When Bob goes to send the same funds to Carol, she can see that Bob has them by looking at the sheet of paper.

btc transaction examples

The sheet is a database called a blockchain. All network participants have an identical copy of it stored on their devices. The participants connect with each other to synchronize new information.

To maintain the security and integrity of the blockchain, Bitcoin uses a consensus mechanism known as Proof of Work (PoW). When a user makes a payment, they broadcast it to the network, where it is verified by other nodes known as “miners”. These miners compete to solve a complex mathematical puzzle and must devote computing power to do so. The first miner to solve the puzzle gets to add a new block of transactions to the blockchain.

As an incentive, there is a reward available for whoever proposes a valid block. The reward, often referred to as the block reward, is made up of two components: transaction fees from the transactions within the block and the block subsidy. The block fee is the only source of “fresh” bitcoins. With each block mined, it adds a certain amount of coins to the total supply.

Bitcoin’s PoW consensus mechanism is designed to make it expensive to create a block, but cheap to verify that it’s valid. Suppose someone tries to cheat with an invalid block. In that case, the network immediately rejects it and the miner is unable to recoup the cost of mining.

What Is Bitcoin Used For?

Bitcoin is primarily used as a digital currency and store of value. It can be used to make purchases online or in person, just like traditional currencies. Anyone with an internet connection can send and receive it, and its digital presence means that it can be transferred globally.

Bitcoin is sometimes used for more private transactions. The transactions are public, and the addresses (public keys) are pseudonymous, though not completely anonymous. In other words, while the transactions are visible on the blockchain, the users behind them are not easily identifiable.

Some people also buy bitcoins as a long-term investment, expecting their value to increase over time. Like gold or other commodities, bitcoins’ limited supply and decentralized nature have made it a viable option for investors looking to diversify their portfolios.


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