How Does Bitcoin Work?
Many people are intrigued about Bitcoin (BTC) and how it works. Like no protocol before it, more people want to understand the inner workings of Bitcoin.
Nobody really cares how the Internet protocol TCP/IP works, but billions use it every day. Bitcoin is similar to other protocols, but of course it governs money.
Light bulb moment, now we know why people want Bitcoin explained.
Of course, being money, proper hard money at that, makes knowing how Bitcoin works all the more important. In this article we look at what makes the Bitcoin network run so sufficiently.
So how does Bitcoin work?
Bitcoin is a 100% digital currency born on the Internet. There are no physical bitcoins, and none of it can ever leave the blockchain it’s coded into, but you can send it and spend it.
The Bitcoin protocol makes transacting value as easy as sending an email or text. It is Internet money that can only be transacted within the Bitcoin network.
At the core level of transacting, you type in somebody’s public address, type in the amount of BTC, or satoshis, and click send. The transaction will usually take a few minutes, and it will definitely go to the address you sent it to. In fact, it cannot not go to that address.
At a basic level, Bitcoin is a ledger with account numbers and balances. If Bob sends Alice two bitcoins, his balance goes down by two and Alice’s will go up by two.
There’s no government issued money, gold, or anything backing these numbers that are represented on Bitcoin’s ledger. It’s just people’s belief that the numbers on the ledger are worth something and in a network that prevents unfair changes.
The Bitcoin network ensures no one can send any BTC from someone else’s account. Every time you send some, it’s broadcasted to the entire network, who then work together to verify it. And it’s only when the thousands of nodes and miners are in agreement that the transaction will occur.
Once done, it will change the ledger on both sender’s and receiver’s balance automatically. Essentially, that’s how Bitcoin works, but of course there’s more to it.
How Bitcoin Transactions Work
Every BTC balance is associated with a private key, and anyone who has this, technically has rights to the bitcoins within that address.
So keeping your private keys private is essential.
Although cryptography is designed to hide data, in Bitcoin’s case it’s used to prove ownership. Each Bitcoin account number has the associated private key that only the account owner knows.
The private key is used to create a digital signature. And when a transaction is sent, the hash of the private key and the transaction data are what the digital signature is. A public key is used to verify the signature.
The signature serves the same purpose as a handwritten signature on a paper cheque, but rather than handwriting, it’s coded into maths and cryptography.
These signatures are tested by others who also hash them, and if their hash matches that of the hash recovered with the signature, then it is definitely from the real sender’s address.
If successful, they know the signature was created by the sender, and the transaction will be verified and added to the blockchain.
Since the signatures are unique to each transaction, they can’t be copied and reused on other transactions, and they help maintain the integrity of the Bitcoin ledger.
Who Checks The Signatures and The Ledger?
The short answer is anybody who wants to. It’s an open ledger and anybody can check it at anytime. And anybody can work on it to help hash and verify the signatures and transactions.
Bitcoin is a decentralized network, that is owned by nobody but run by anybody who wants to help it. How does Bitcoin work? I hear you ask.
Basically, every time someone sends BTC, a message is passed around all the people who want to help maintain the ledger.
These are what are known as miners and nodes, and they all have their version of the ledger, and it updates every time a transaction is made on the Bitcoin network.
The miners are the ones who pick up the transaction and check everything. They hash it into blocks and send the block to the nodes.
Once most of the nodes are in agreement that everything is legitimate, the block is sent back to the miners, who then race against each other to work out the cryptographic puzzle, and ultimately be the one to discover the block.
Whichever miner discovers the block first, gets the honour of adding it to the blockchain, and is rewarded with the BTC block reward. The block reward is 12.5 BTC, but it’s due to be slashed in half in just three days time, in an event known as The Halvening.
The Halvening event takes place every four years or so, and will continue until the last fraction of BTC is minted in around 2140.
Once added to the blockchain, every node’s version is updated and if any node’s version is different it will be rejected. And if any fraudulent behaviour is spotted they will be banned from participating in the network.
The nodes are not paid for their work, and it is completely voluntary, but they along with the miners are what secures the Bitcoin network. It is already the most secure network ever created, and as more nodes and miners jump on board, it will get ever more secure.
Bitcoin Works Because of Human Ingenuity and Passion
Bitcoin sounds like a complicated tangle of decentralized data, and to create something like it can only come from a genius like Satoshi Nakamoto. Whoever, he/she/they might be.
But stripped down, it’s basically an open ledger securing and showing everybody’s value. Anybody, anywhere can buy Bitcoin, mine it, and even earn Bitcoin, and when they have the BTC they are free to do what they like with it.
Bitcoin is a borderless protocol of money, and you can send any amount anywhere in the world.
You don’t have to trust anyone because the code and network of miners and nodes secure everything and guarantee no bad actors can take control of it.
People involved in Bitcoin are passionate about it, and its not because they see it as a get rich quick scheme. They know how Bitcoin works, but most of all the know how Bitcoin can work for a much better world.
Where can I buy Bitcoin in Germany?
There are several reputable Bitcoin exchanges operating in Germany. 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.
Can you buy less than 1 Bitcoin?
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.
Why should I buy Bitcoin?
People who understand Bitcoin buy Bitcoin because it is a peer-to-peer money that nobody can manipulate. It’s all set in the Bitcoin codebase which is secured by hundreds of thousands of computers all around the world. Bitcoins can be sent by anybody and no third party is need to verify the transactions, and nobody can stop Bitcoins being sent. There are many more reasons why people buy Bitcoin, and a deeper dive before doing so is recommended.
How can I earn free Bitcoin?
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 like Bitcoin Bounty Hunt where you shoot your way to Bitcoin riches. 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 Bitcoin interest. Be careful with interest bearing accounts, 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.