What is Bitcoin & How Does It Works?

What is Bitcoin

Some of the links in this post are from our sponsors. We provide you with accurate, reliable information. Read our Advertising Disclosure.

If you’re looped into current news and have been over the past few years, you’ve definitely heard about bitcoin and cryptocurrency. And while you may have a rough understanding that it’s some digital currency, you may not really understand more yourself or be able to explain it to someone else.

How can we understand what exactly Bitcoin is and how it works?

Bitcoin is software used as a digital currency that can be used to buy real things and that you can buy using real money, like exchanging dollars for pounds. Each bitcoin transaction is recorded on the blockchain, which is a public list.

So how is it generated and exchanged, and what value does it hold? Where you can get it and what you can buy with it are also probably questions, you’re asking yourself, as well as how it actually works or how ordinary people can use it.

We’ll cover all the basics you need to know about this phenomenon that has caused ripples throughout the world.


Rated #1 Safest Crypto IRA Company

When it comes to customer service, fees, safety, and overall customer satisfaction, BitIRA checks all of the boxes.

What is Bitcoin?

Bitcoin is a digital currency that is not run or overseen by any specific country, government, or bank and is not centrally controlled at all. It relies on software and cryptography that is run through a peer-to-peer network.

All bitcoin transactions are recorded on a public ledger, which is held on multiple servers throughout the world, making this one of the safest currencies to hold, near impossible for hackers or fraudsters to sabotage.

Anyone can set up a server called a node. Who owns which coins is decided cryptographically across all nodes. Every transaction that happens with bitcoin is then broadcast publicly to the network and shared from node to node. 

Every ten minutes or so, miners collect all these transactions and group them into a block, which then becomes part of the blockchain.

How Does Bitcoin Work?

Virtual currencies such as bitcoin are stored in digital wallets and accessed by owners online. A private key is used to prove ownership of the funds when making a transaction.

In essence, this key is all you need to access your virtual funds, a term that has become known as a brain wallet.  Bitcoin can be bought with money and exchanged for money through a cryptocurrency exchange online, in person, or through any communication platform.

There is nothing intrinsic built into bitcoin that allows it to be converted into another currency, and there is nothing inherently valuable that the bitcoin currency is pinned to.

The purpose of bitcoin was to provide a safe digital currency that could be used just like other currencies as a payment system that would operate without any central control. And safety?

Based on an algorithm designed by the U.S. National Security Agency, this is impossible to crack – there are more private keys that would need to be tested than there are atoms in the universe!

It is possible for the websites of bitcoin exchanges to be hacked, similar to a bank being hacked, and for funds to be stolen like that, but not the actual bitcoin network.

A more realistic issue is that as a result of no central control if errors are made in transactions, there is no recourse. 

Is Bitcoin The Only Cryptocurrency?

Bitcoin is one of many cryptocurrencies that have been developed in recent years. Though bitcoin is still ahead of other cryptocurrencies in terms of the user base, market capitalization, and popularity, other virtual currencies are being used to create decentralized virtual financial systems.

Some other popular cryptocurrencies at the moment include:

  • Ethereum
  • Litecoin
  • Cardano
  • Polkadot
  • Stellar
  • Bitcoin Cash
  • Chainlink
  • Binance Coin
  • Tether
  • Monero

Bitcoin is often used as a generic name for cryptocurrencies but is, in fact, its own specific currency. It was the original currency that launched the blockchain and has remained the most popular, but that is not to say that these alternative cryptocurrencies, and others, are not worth using or investing in.

What is Bitcoin Mining?

Bitcoin mining is the process through which the bitcoin network is maintained, and new bitcoins are brought into existence. It is profitable for the miner to do, as they get rewarded with newly created bitcoin.

In order for the publicly broadcast transaction to be bundled into blocks by miners, a cryptographic calculation that is very difficult to generate but easy to verify needs to be completed.

The first miner to do this, broadcast it to the network and have it verified as correct, then gets a payout. In addition, this bock is then added to the blockchain, simply a digital chain of all the transactions packaged into blocks.

The maximum number of bitcoins that can be in circulation is 21 million – this is inherent in the software. With mining becoming twice as hard every four years, through the size of the payouts being reduced, this is expected to be reached only by 2140.

Mining can only happen with rooms full of powerful equipment and graphics cards that are able to crunch the numbers.

Which transactions are chosen to bundle into a block is up to the miners, so senders usually add fees as an incentive. The fees continue as an incentive for miners to continue once all bitcoins have been mined.

Who Invented Bitcoin?

In 2008, a white paper titled “Bitcoin: A peer-to-peer electronic cash system” was uploaded to a recently purchased domain name .org, authored by Satoshi Nakamoto

The software described in the paper was publicly released at the beginning of 2009, and Nakamoto continued to work on it with developers until 2010. The software is now open-source, and Nakamoto has never revealed itself.

Quick Recap

Bitcoin is the leader of the cryptocurrency offering, and aside from its share price having risen exponentially over the past two years, it remains a viable currency with which to make digital transactions in a secure way through the blockchain.

Whether you want to invest in it, mine it, or just use it as a practical currency, there is lots more to learn about this alternative to fiat money.

Best Security

Rated #1 Safest Crypto IRA Company

When it comes to customer service, fees, safety, and overall customer satisfaction, BitIRA checks all of the boxes.