What is Bitcoin and how does it work?

Bitcoin is a digital asset that allows two parties to transact without going through an intermediary. Blockchain technology and a peer-to-peer network allow Bitcoin to easily confirm transactions while preventing double-spending. In this blog, we will review what bitcoins are and touch on their functionality.

When was Bitcoin created?

In 2008, the world was reeling from the financial crisis. As a result, the general public confidence in banks and financial institutions was at an all-time low. This is when an anonymous developer (or group of developers) published a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” Bitcoin was the first ever cryptocurrency, which utilized public-key cryptography and hash algorithms to ensure efficient P2P transactions. The first ever BTC was mined on 3 January 2009.

How does Bitcoin work?

To understand the mechanics of Bitcoin, we need to look at three things:

  • Blockchain
  • Mining
  • Public and private keys

 

Let’s go through them one by one.

How does Bitcoin use blockchain?

When you make a transaction using your bank, a transaction record is stored in the bank’s ledger, right? You can download your transaction history as a spreadsheet for tax purposes. This ledger is essential since it’s indisputable proof that the transaction happened. However, this ledger is controlled by a centralized agency (the bank).

For Bitcoin to work, it needed a way to decentralize the ledger itself. Now, how do you do that without incurring double spending?

Double spending is the idea that the same unit of money can’t be used in more than one transaction. For example, let’s say you are interested in buying two items and these items are worth $100 each. Let’s also assume that you only have a $100 note in your wallet. In this case, if you purchased both items with the same $100 note, you are doing a double spend, which isn’t possible in real-world transactions.

However, this equation changes in a digital ecosystem. Banks that own their ledgers can prevent this from happening via their software. However, what do you do when there is no centralized overseer?

Satoshi Nakamoto solved this problem by integrating the blockchain – a series of blocks including timestamped data secured via cryptography. Along with being decentralized, the blockchain is transparent and non-tamperable. The Bitcoin network can download and maintain a copy of the blockchain to keep track of all the transactions. Every transaction is verified by specialized network nodes called “miners.’

What is Bitcoin mining?

Mining is the process by which new bitcoins are released into the network. The mining process is done by users called “miners” who own specialized equipment called “ASICs.” The miners then use their resources to solve cryptographically challenging puzzles continually. If they win, they get to add a block to the blockchain and earn rewards. Along with mining the blocks, miners are also responsible for verifying the legitimacy of transactions. This plays a significant role in removing double-spending.

How long does it take to mine 1 bitcoin?

In the Bitcoin blockchain, it takes approximately 10 mins to mine a block and release new BTC into the ecosystem. This time is also called “block time.”

what is bitcoin block time

Image Credit

 

Bitcoin private and public keys 

Users can interact with the Bitcoin ecosystem through a compatible wallet. Before going any further, it’s important to clarify a certain misconception about these wallets. 

The wallets don’t store your coins. 

The coins will always be on the blockchain. The wallet simply generates your public address and private key.

The public address is like your bank account – it points to the location in the blockchain where your coins are stored. The private key is like your ATM pin – it gives you the right to interact with your coins directly.

Can bitcoin be converted to cash? 

You can easily convert bitcoins to cash via the following:

  • Using a crypto exchange that supports your local currency.
  • Using peer-to-peer transactions to interact with people willing to pay you cash for your BTC.

 

NOTE: Bitcoin prices can be highly volatile. Bitcoin price depends on the current market value, which can fluctuate significantly.

Conclusion

Not only has Bitcoin matured to become one of the most exciting asset classes, but it has also given birth to the trillion-dollar crypto market, including NFTs and DeFi (decentralized finance). However, before you invest in Bitcoin, it is imperative to know the basics. The following FAQ should help clear up some doubts.

Bitcoin FAQ

What is bitcoin in layman’s terms?

Bitcoin is a cryptocurrency that allows you to directly transact with anyone, anywhere in the world. The receiver can receive your coins if they have a Bitcoin address.

What is bitcoin based on?

Bitcoin uses the SHA-256 cryptographic algorithm.

When did bitcoins start?

The Bitcoin whitepaper was published in 2008, and the first BTC was mined on 3 January 2009.

How are bitcoins used?

Many companies like Tesla and MicroStrategy used BTC as a hedge against inflation. Countries like El Salvador and the Central African Republic use bitcoin as legal tender. They can also be used for eCommerce. BTC has also become a popular asset for portfolio diversification.

What happens when you buy bitcoin?

When you buy Bitcoin on an exchange or a P2P marketplace, it gets to your public address. Do note that this may take some time. The network throughput and transaction speeds may vary.