What Is Bitcoin, and How Does It Work?

Understanding Bitcoin – What is Bitcoin in-depth?

At its simplest, Bitcoin is either virtual currency or reference to the technology. You can make transactions by check, wiring, or cash. You can also use Bitcoin (or BTC), where you refer the purchaser to your signature, which is a long line of security code encrypted with 16 distinct symbols. The purchaser decodes the code with his smartphone to get your cryptocurrency. Put another way; cryptocurrency is an exchange of digital information that allows you to buy or sell goods and services.The transaction gains its security and trust by running on a peer-to-peer computer network that is similar to Skype, or BitTorrent, a file-sharing system.

Bitcoin Transactional properties:

1.) Irreversible: After confirmation, a transaction can‘t be reversed. By nobody. And nobody means nobody. Not you, not your bank, not the president of the United States, not Satoshi, not your miner. Nobody. If you send money, you send it. Period. No one can help you, if you sent your funds to a scammer or if a hacker stole them from your computer. There is no safety net.
2.) Pseudonymous: Neither transactions or accounts are connected to real-world identities. You receive Bitcoins on so-called addresses, which are randomly seeming chains of around 30 characters. While it is usually possible to analyze the transaction flow, it is not necessarily possible to connect the real world identity of users with those addresses.
3.) Fast and global: Transaction is propagated nearly instantly in the network and are confirmed in a couple of minutes. Since they happen in a global network of computers they are completely indifferent of your physical location. It doesn‘t matter if I send Bitcoin to my neighbor or to someone on the other side of the world.
4.) Secure: Bitcoin funds are locked in a public key cryptography system. Only the owner of the private key can send cryptocurrency. Strong cryptography and the magic of big numbers makes it impossible to break this scheme. A Bitcoin address is more secure than Fort Knox.
5.) Permissionless: You don‘t have to ask anybody to use cryptocurrency. It‘s just a software that everybody can download for free. After you installed it, you can receive and send Bitcoins or other cryptocurrencies. No one can prevent you. There is no gatekeeper.

Where can I find Bitcoins?

You can get your first bitcoins from any of these four places.
  • A cryptocurrency exchange where you can exchange ‘regular’ coins for bitcoins, or for satoshis, which are like the BTC-type of cents. Resources:  Coinbase and Coinsquare in the US & Canada, and BitBargain UK and Bittylicious in the UK.
  • A Bitcoin ATM (or cryptocurrency exchange) where you can change bitcoins or cash for another cryptocurrency. Resources: Your best bets are BTER and CoinCorner
  • A classified service where you can find a seller who will help you trade bitcoins for cash. Resources: The definitive site is LocalBitcoins.
  • You could sell a product or service for bitcoins. Resources: Sites like Purse.
Caution! Bitcoin is notorious for scams, so before using any service look for reviews from previous customers or post your questions on the Bitcoin forum.

How does Bitcoin work?


Without getting into the technical details, Bitcoin works on a vast public ledger, also called a blockchain, where all confirmed transactions are included as so-called ‘blocks.’ As each block enters the system, it is broadcast to the peer-to-peer computer network of users for validation. In this way, all users are aware of each transaction, which prevents stealing and double-spending, where someone spends the same currency twice. The process also helps blockchain users trust the system.

“Unlike traditional currencies, which are issued by central banks, Bitcoin has no central monetary authority. Instead it is underpinned by a peer-to-peer computer network made up of its users’ machines, akin to the networks that underpin BitTorrent, a file-sharing system, and Skype, an audio, video and chat service. Bitcoins are mathematically generated as the computers in this network execute difficult number-crunching tasks, a procedure known as Bitcoin “mining”. The mathematics of the Bitcoin system were set up so that it becomes progressively more difficult to “mine” Bitcoins over time, and the total number that can ever be mined is limited to around 21 million. There is therefore no way for a central bank to issue a flood of new Bitcoins and devalue those already in circulation.”

How can I store my bitcoins?

To see how the system works, imagine someone called Alice who’s trying out Bitcoins. She’d sign up for a cryptocurrency wallet to put her bitcoins in.
The Bitcoin Wallets
There are three different applications that Alice could use.
  • Full client – This is like a standalone email server that handles all aspects of the process without relying on third-party servers. Alice would control her whole transaction from beginning to end by herself. Understandably, this is not for beginners.
  • Lightweight client – This is a standalone email client that connects to a mail server for access to a mailbox. It would store Alice’s bitcoins, but it needs a third-party-owned server to access the network and make the transaction.
  • Web client – This is the opposite of “full client” and resembles webmail in that it totally relies on a third-party server. The third party replaces Alice and operates her entire transaction.
You’ll find wallets that come in five main types: Desktop, mobile, web, paper and hardware. Each of these has its advantages and disadvantages.

How do I buy and sell stuff with Bitcoins?

Here’s the funny thing with Bitcoins: there are no physical traces of them as of dollars. All you have are only records of transactions between different addresses, with balances that increase and decrease in their records that are stored on the blockchain.
To see how the process works, let’s return to Alice.
Example of a Bitcoin transaction
The transaction between Alice and Bob.
Alice wants to use her Bitcoin to buy pizza from Bob. She’d send him her private “key,” a private sequence of letters and numbers, which contains her source transaction of the coins, amount, and Bob’s digital wallet address. That “address” would be another, this time, the public sequence of letters and numbers. Bob scans the “key” with his smartphone to decode it. At the same time, Alice’s transaction is broadcast to all the other network participants (called “nodes”) on her ledger, and, approximately, ten minutes later, is confirmed, through a process of certain technical and business rules called “mining.” This “mining” process gives Bob a score to know whether or not to proceed with Alice’s transaction.

What is Bitcoin Mining?

Mining, or processing, keep the Bitcoin process secure by chronologically adding new transactions (or blocks) to the chain and keeping them in the queue. Blocks are chopped off as each transaction is finalized, codes decoded, and bitcoins passed or exchanged.
Miners can also generate new bitcoins by using special software to solve cryptographic problems. This provides a smart way to issue the currency and also provides an incentive for people to mine.
The reward is agreed-upon by everyone in the network but is generally 12.5 bitcoins as well as the fees paid by users sending transactions. To prevent inflation and to keep the system manageable, there can be no more than a fixed total number of 21 million bitcoins (or BTCs) in circulation by the year 2040, so the “puzzle” gets increasingly harder to solve.

What do I need to know to protect my Bitcoins?
Here are four pieces of advice that will help your bitcoins go further.
  • As you’d do with a regular wallet, only store small amounts of bitcoins on your computer, mobile, or server for everyday uses, and keep the remaining part of your funds in a safer environment.
  • Backup your wallet on a regular basis and encrypt your wallet or smartphone with a strong password to protect it from thieves (although, unfortunately, not against keylogging hardware or software).
  • Store some of your bitcoins in an offline wallet disconnected from your network for added security. Think of this as a bank, while you, generally, keep only some of your money in your wallet.
  • Update your software. For added protection, use Bitcoins’ multi-signature feature that allows a transaction to require multiple independent approvals to be spent.
Spending some time on these steps can save your money.