How Bitcoin works – The Most Effortless Explanation

This is how Bitcoin works

Bitcoin works like any digital currency system except there are no middle men such as banks or wire transfer services .Bitcoin is a network as well as a cryptocurrency and this network is called the Blockchain. Blockchain Technology is a type distributed ledger system and bitcoin is the first successful use case of the this technology. This technology was chosen because once information is entered, it can not be modified nor double spending.

Sending and Receiving Bitcoins

You can store your Bitcoin in a cryptocurrency wallet.

(I recommend Exodus for beginners).

All you need to do is enter the amount of Bitcoin and the recipient’s wallet address to send out Bitcoin.

This is also called the Private Key.

How a transaction with bitcoin works?

Each time a user sends Bitcoin to another user, the transaction gets sent to the Bitcoin Blockchain.

Other users all around the world who are on the network then validate the transaction.

The network then approves the transaction and the recipient receives the Bitcoin.

The transactions get registered on the Blockchain.

Once added to the blochain, it is very difficult to modify.

Decentralization Explained

Bitcoin is decentralized meaning you can send and receive Bitcoin to anyone around the world within minutes.

You can also send large amounts of Bitcoin anonymously without any fiscal limitations.

And the transactions may costs only a few cents in some cases.

Consequently, transfers are cheaper as well as faster as because there is no middleman.

How does bitcoin work

Why is it called CRYPTO currency anyway?

Crypto stands for cryptography which is the technology to encrypt the transactions.

The BlOCK in blockchain

Each time time a user sends bitcoin to another person, the transactions are bundled and encrypted into blocks.

This encryption is known as the hash.

how does bitcoin works on the blockchain
2668 Transactions are bundled together in this block (source: www.blockchain.com)

The CHAIN

The transactions are split to be verified by users throughout the network.

how does bitcoin work
Transactions are verified by computers from all around the world (source: www.blockchain.com)

The transactions are then rebundled together.

Each ‘block’ of transaction is added to the existing chain of blocks.

How does bitcoin work- how does blockchain work
Validated blocks are added to the existing blocks

How is bitcoin priced?

Market supply and demand are the main factors which determine the price of bitcoin.

The government can not influence the price Bitcoin..

Who are the people selling Bitcoin?

The people selling Bitcoin are miners and cryptocurrency traders.

how does bitcoin work

Miners are the ones who create new bitcoins.

How are bitcoins created?

Remember how I was explaining how bitcoin transactions are processed?

Well, each time a block of transactions is verified, the miners receive bitcoin as an incentive

This is also what powers the blockchain.

Here is a more indepth explanation of how cryptocurrency mining works

Why is everyone saying Bitcoin mining is a waste of Energy?

Bitcoin uses an encryption algorithm called SHA-256 hash.

In very simple words, Sha-256 is a proof-of-work algorithm.

This simply means that the miners have to ‘work’ to confirm a transaction.

The Bitcoin Mining Process

The job of the miner is to decrypt and validate a transaction.

What they do exactly is they  guesses until someone finds the correct answer.

The first user to find the answer gets the bitcoin as reward.

However, the competition to earn the Bitcoins first increases as more users enter the network.

As a results, the miners invest in more powerful and energy hungry computers to process transactions.

The Energy Waste

There powerful computers are know as ASICS and require a lot of energy.

As a result many governments have banned cryptocurrency mining due to their impact on local energy costs.

Can’t they just use another Algorithm?

Yes!!!!

These are called Altcoins.

Popular altcoins include Litecoin, Dogecoin and Potcoin.

Altcoins

As mentioned above, bitcoin uses an algorithm called SHA-256 which also uses a lot of energy.

Many programmers see the proof-of-work not only as a waste of energy.

But they also believe that they can increase the speed of transactions.

Thus began the quest for the fastest and cheapest Altcoin.

This resulted in software updates also known as forks.

New software updates sometimes require new infrastructure which is why sometimes there are free coins and other times not.

Are there other ways to get Bitcoin?

Yes, you can buy Bitcoin on cryptocurrency exchanges.

Some exchanges such as Coinmama, allow you to buy Bitcoin instantly with a Debit or credit card.

Coinmama is very user friendly unlike many other exchanges, so feel free to create a free Coinmama account to check it out or you can check out my Coinmama Review

How do I store my bitcoin?

A cryptocurrency wallet is where you store your Bitcoin

The difference between cryptocurrency wallets versus traditional digital wallets is the fact that there is no middle men.

So this means that you are responsible for the security of your bitcoin.

I recommend using Exodus which a desktop based multi cryptocurrency wallet.

It takes only a few minutes to install and it is completely free.

How do I secure my bitcoin?

To secure your bitcoin wallet you need to create a hard copy or “paper wallet” so you can recover your password in case your computer crashes.

As cryptocurrency exchanges are hackers favorite targets, it is therefor not advisable not to keep your cryptocurrency on an online exchange.

To find the best cryptocurrency wallet suited for you, check out my article on the 5 Cryptocurrency Wallets Everyone ought to know about.

Protip: Never ever give your private key to anyone – Your private key is like an login integrated with a password.

What does a Bitcoin look like?

In fact, a bitcoin looks like a transaction attached to a person.

how does bitcoin work- how does blockchain work
What a Bitcoin REALLY looks like (source: blockchain.com)

In other words, Bitcoin is the transfer of value from one person to another

Why don’t banks like Bitcoin?

The main reason banks don’t like Bitcoin is because they usually have very strict regulations to follow.

Also,they can not do business with certain countries.

The problem for government and banks is anybody can send or receive bitcoin to countries which were inaccessible to receive money such as Iran, North Korea due to sanctions.

Bitcoin allows people to bypass these trade sanctions among countries.

That being said, many banks are investing in blockchain technology because of the security it brings as well as the cost saving potential.

Final Thoughts

The only way to truly understand Bitcoin and decentralization, you will need to buy your first BTC.

Let me know if this info was helpful for you đŸ˜‰
Cheers,
Marie

Founder of Satoshi Library

Owner of SatoshiLibrary

PS

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Disclaimer: I am not a financial advisor and the information provided does not replace professional advice. Cryptocurrency prices are highly volatile as well as evolving very quickly. This post may contain inaccuracies, so please do your own research before placing money in any website. Thanks!

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