So you’ve heard about Bitcoin but are not quite sure what it is how it works. No worries! We’ve got you covered.
In this guide, you will learn what bitcoin is and how it works.
Bitcoin is a decentralized, open-source, peer-to-peer digital payment system that enables anyone with an Internet connection to send, receive, and store money in digital form without the need for a financial intermediary.
In simple terms, bitcoin is money for the Internet.
Through the brilliant combination of advanced cryptography, economic incentives, peer-to-peer technology, and a novel distributed consensus mechanism, bitcoin is a new type of money for the digital age, free from government or central bank interference.
The Bitcoin whitepaper, detailing the technology behind the world’s first decentralized digital currency, appeared on a cryptography mailing list on October 31, 2008.
The digital currency launched on January 3, 2009, when Bitcoin’s pseudonymous creator, Satoshi Nakamoto, mined the first block of the Bitcoin blockchain. On January 12, 2009, he sent the first-ever bitcoin transaction to prolific cypherpunk Hal Finney.
You can use Bitcoin without having to understand its technological underpinnings. Once you know how to open an exchange account, buy bitcoin using local currency, and store it securely in a digital wallet, you can invest in and/or use the cryptocurrency.
However, every experienced investor will tell you that you should never invest in something you don’t fully understand.
At this point, you know that bitcoin is a digital currency that operates on distributed peer-to-peer technology, and you have heard of the term blockchain.
So now, let’s dive into what blockchain is and how it enables bitcoin transactions.
The blockchain is a decentralized system that leverages advanced cryptography, peer-to-peer technology, and distributed consensus to securely transfer and record data. In the case of Bitcoin, the data processed and stored are units of money.
Bitcoin transactions are recorded in sequences of blocks. Hence, the name blockchain for the cryptocurrency’s distributed database.
To ensure the security and integrity of the Bitcoin network, so-called “miners” participate in the network by solving mathematical puzzles using specialized hardware to process transactions.
As an incentive to participate as a miner in the Bitcoin network, miners are rewarded with the block reward when finding a new block and with transaction fees that are paid to miners during each on-chain bitcoin transaction.
Each bitcoin transaction can be publicly viewed on a Blockchain Explorer while the sender and recipients remain private. Only alphanumeric wallet addresses are visible on the public ledger.
From a bitcoin user’s perspective, the complex technology underlying the cryptocurrency plays a relatively small role. As long as you know how to set up a secure wallet, send and receive bitcoin, and how to buy and sell it on an exchange, you can enter the world of Bitcoin as a user or as an investor.