Anyone discovering Bitcoin is quickly intrigued by it and want to know how Bitcoin works. And a deep dive isn’t just required but desired.
Bitcoin is a deep rabbit hole, and the more you learn about it the more it entices you, and the more you realize you didn’t know enough before.
But how does Bitcoin work? What is it? Who controls it? In this article we explain how Bitcoin works in a not-too-technical way.
How Does Bitcoin Work?
Bitcoin is a software program that allows users to send value to one another, a bit like the way we send emails.
But unlike emails the data tied to your Bitcoin transactions are valuable, so keeping it safe takes a bit more than a password to your inbox.
A Bitcoin wallet is necessary to start with Bitcoin. This can either be a software wallet or hardware wallet. Both of them are very secure, but I would recommend the hardware wallet.
Your wallet will generate a private and public address for you. Your public address is to share with anyone wanting to send you some Bitcoin.
It’s advisable to only use your public address once, as this will help you remain as private as possible.
How Bitcoin Works
The Bitcoin Ledger
Every transaction you send and receive is stored on the Bitcoin blockchain, which is a public ledger.
The Bitcoin network relies on this and every transaction in Bitcoin’s history is on there. Anybody can check any transaction on the ledger at any time.
All confirmed transactions are included on the ledger, which automatically recalculates every address balance.
If somebody sends you a transaction the ledger will calculate the sender’s address to determine they have enough Bitcoin to send. Once it’s determined, the transaction will take place and both yours and the sender’s Bitcoin wallets will automatically re-balance once the transaction is complete.
Everything verified on the blockchain is stored in chronological order and every block is connected to the previous one and cryptographically secured.
Bitcoin Transactions
A Bitcoin transaction is a transfer of value between two parties. Your Bitcoin wallet generates and stores your private key. And as the name ‘private address’ suggests, it should remain private.
Your private address is used to sign transactions. It is all coded into the Bitcoin protocol, and it provides mathematical proof that the value sent has come from the owner of the wallet.
Your private key signature also prevents the transaction from being edited by anybody else once it has been issued.
A transaction will usually take up to 20 minutes to complete, although in times of heavy congestion it can take longer. And all transactions are carried out through a process called mining.
Bitcoin Mining
Bitcoin is made up of many complex features and there is no single part that makes it work. However, Bitcoin mining is arguably the key to how Bitcoin works, or at least the best way of understand how it works..
Bitcoin Mining is a distributed consensus system that works to verify transactions and add new blocks onto the Bitcoin network.
Bitcoin mining relies on hundreds of thousands of specialized hardware devices. They all work together to add transactions to the network, and then work against each other to win the Bitcoin block reward that comes with every new block.
Bitcoin mining ensures the Bitcoin ledger is stored chronologically. It also protects the neutrality of the network by ensuring no central authority can control the system.
Transactions that are broadcast to the network, are picked up by miners. They then hash them into a block that are cryptographically secured to the previous blocks (the blockchain) every 10 minutes or so.
Bitcoin miners are rewarded for their work. They earn BTC from the transaction fee, and also compete with each other to win the Bitcoin block reward.
The Bitcoin block reward is the only way new bitcoins are added to the circulating supply, and at present there are 6.25 BTC minted with every new block.
Miners will send full blocks to Bitcoin nodes, every 10 minutes or so. The nodes work together until they agree that the block is full of legitimate transactions.
Once the nodes reach consensus, they send the block back to the miners who then race to win the new BTC up for grabs.
The miners compete against each other to win the block reward, and to do so the winning mining device will have beaten every other device in working out the extremely complex puzzle the Bitcoin protocol has asked.
Each mining device has roughly a 13-trillion-to-one chance of winning the race to discover the cryptography. Therefore, working together in a mining pool is necessary for a solo miner.
Bitcoin is a software program, downloaded and distributed on hundreds of thousands of devices, which are both miners and nodes.
They make up the security of the Bitcoin network, and ensure everything runs smoothly. Everything is coded, and all you have to do as a Bitcoin user is keep your private keys secure and private, and send and receive bitcoins.
Sending and receiving transactions is really quite simple, because the system means you don’t need to trust a third party.
This is a quick summary of how Bitcoin works. Check out our Bitcoin for Beginners library for many other guides to Bitcoin
Welcome to Bitcoin, it’s a deep, deep rabbit hole.
Bitcoin FAQs
There are several reputable Bitcoin exchanges operating in Mexico. However, the most recommended exchanges are Kraken or BlockFi. Or you can buy Bitcoin from Bitcoin marketplaces, such as LocalBitcoins or Paxful. All of these exchanges and marketplaces are global with high liquidity and excellent customer service. Check out our reviews on each platform.
You can get rich from Bitcoin, but most people haven’t. Anybody who expects to get rich, especially from a little investment, will likely be disappointed. Bitcoin isn’t a get rich quick scheme, and should be seen as a risky and volatile asset that could bring gains for anybody who can stomach volatility. If you’re interested in and want to buy Bitcoin, you should really have a long term plan.
Yes. Every Bitcoin can broken down into 100 million bits. They are known as satoshis, after the pseudonymous creator Satoshi Nakamoto. And some companies will let you buy as little as $1 worth of Bitcoin, which at time of writing is worth about 11,000 satoshis. There are many companies that have a system for dollar cost averaging (DCA). This is a great way to buy Bitcoin, and is known in the space as ‘Stacking Sats’. Basically, what you do is set up small automatic, recurring payments to buy Bitcoin (or sats), and you DCA over time.
Nothing is really free, because even when you earn free Bitcoins you’re giving up your time, which is precious. But you can earn free Bitcoins. If you are a gamer, there are games that allow you to win satoshis. Or there’s Carrot – a platform where you can earn free Bitcoin for doing tasks. Or you can save your Bitcoin in an interest bearing account and earn some BTC interest. Be careful with these, and only go with legitimate companies, though. I recommend Blockfi, you can read the review here.
A Bitcoiner since 2017 and a Bitcoin Maximalist since 2018, Tommy is our main writer and editor at Bitcoin Maximalist. Other than researching and writing about Bitcoin, Tommy loves spending time with his family and supporting his beloved Leeds United.
