How Does Bitcoin Work

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Bitcoin is the first worldwide digital currency which allows any individual to transact with it without the involvement of a third party broker such as a bank. IT was introduced in 2009 and its creation is attributed to Satoshi Nakamoto (pseudonym). There is no centralized authority that controls the currency and any one can use it and benefit from it.

Why are Bitcoins Unique

The Bitcoin digital currency has no physical form. It is created and maintained using mathematical computations done by computer networked users called miners. The process of facilitating Bitcoin transactions is called mining.

Bitcoins have become popular in the recent past for more than one reason. The very fact that Bitcoins are not controlled by a central authority has made them vulnerable to the criminal community that has tried using them to make transactions outside the eye of the law. The power of making Bitcoins rests with the general public and not centralized banks. Bitcoin accounts cannot be subject to examinations by the tax personnel nor can they be ‘frozen’.

How Bitcoins Work

How does bitcoin workBitcoins are designed to be self-contained, that is, there is no need for institutions such as banks to move or store the currency. When a person owns Bitcoins, they behave much like normal currency. They can be used to purchase material goods and services online. They can also be stashed away for years, over which their value may grow to higher numbers. Bitcoins can be transferred from one personal wallet to another.

As it involves complex computations to generate a Bitcoin, it is one hundred percent resistant to any kind of forgery. It is not easy for fraudsters to manipulate the system.

The value of a Bitcoin varies on a daily basis. The latest value can be checked through Bitcoin exchanges. The total value of all Bitcoins that are present is estimated to be two billion dollars. It is also purported that Bitcoins will stop being created by the year 2040 when the total number of Bitcoins reaches 21 billion in number. Currently, close to 11 million Bitcoins have already been mined and are in circulation.

The fees required to use Bitcoins are very small. This is because there are no banks involved and hence no charges that come along. However, small charges are required to be paid to three entities (service providers): to the servers that support the miners’ codes, the online exchanges that help to convert the Bitcoins into corresponding dollars and other currencies, and thirdly, the mining pools that an individual may join into.

The servers typically charge a one-time transaction fee whenever money is sent across the concerned nodes. The exchanges charge when Bitcoins are exchanged into euros or dollars. The mining groups charge a support fee or donation when enthusiasts join the group.

There are no regulations whatsoever that govern Bitcoins at present. There is no insurance coverage of any kind for the depositor, and there is no precious metal that goes into its making. The value of the Bitcoin is thus within itself.

Bitcoins are created and mined through a network of computer users. The miners maintain a ledger of all the Bitcoin transactions that have taken place. The miners are paid for the auditing and accounting work through Bitcoins that they earn for the network on a weekly basis.

How Bitcoins are Created

The ledger file that contains all of the Bitcoin transactions is called ‘blockchain’. Every Bitcoin code in the blockchain is a file that is very small. The code has three parts to it: the first part is the address that identifies it of about 34 characters in length; the second part is the history of who has bought or sold the Bitcoin; the third part is the most complicated and is a key that is captured to confirm the specific Bitcoin key transaction. This is a digital signature. The digital signature is unique for every Bitcoin user.

Any Bitcoin transaction is tracked using this digital signature and serves as the final confirmation of the transaction. This signature prevents fraudulent duplicate transactions and forgery of the Bitcoin transactions. It is of interest to note that whereas the Bitcoin system records every single wallet address that it encounters, it does not record the names of the wallet owners. Therefore it provides complete anonymity while providing confirmed transactions.

Whereas the Bitcoins are stored in a person’s individual wallet that is resident on a specific computer of private choice, the transaction history of every Bitcoin used or transacted is stored in a public file stored on the Bitcoin network. This is helpful in preventing users from transacting Bitcoins for dubious purposes. All of the Bitcoin transactions can be viewed at This is the public ledger that contains all of the Bitcoin transactions that took place since the currency’s inception.

To mine Bitcoins, it means that one has to solve a computationally intensive mathematics problem on your home computer. A computer’s resource may typically calculate the answer in three to four days’ time. In some cases it may take longer. Each problem has a set of solutions each of which is about 64 digits long.

The money obtained by trying to mine Bitcoins using a single computer is very paltry and may run to a few cents. However, a miner can make a substantial amount of money if they run the computations on a network of computers or combine a group of miners to run the computers. The computer intensive hardware to mine Bitcoins is a major deterrent for those that want to mine Bitcoins or others that want to manipulate the system.

A Bitcoin wallet can be stored online in a cloud or on a hard drive. The latter method is preferred by those that own a couple of Bitcoins. The most important file to be stored is the data file associated with an individual’s Bitcoin wallet.

Misuse of Bitcoins

Bitcoins may be spent all over again when there is a time delay in processing the transaction. Mining pool members can dishonestly divide the Bitcoins that are mined. Online exchanges that are unregulated can also cheat people of their money.

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