How Does Bitcoin Work?

So you want to start investing in the Bitcoin; but, do you know how it works? For a newcomer, understanding the technical aspects of Bitcoin is imperative to ensure success. Newcomers can use bitcoin era as a guide to learn about bitcoins and trading them. When you have downloaded a Bitcoin wallet for storing your coins, you will be provided with a Bitcoin address that you will need for future transactions. This address can only be disclosed to people who will pay you Bitcoins or receive Bitcoins from you.

How does Bitcoin work?

Bitcoin is a decentralized digital currency recording transactions in a shared ledger called the blockchain. Bitcoin miners will maintain complex mining rigs for solving cryptographic puzzles using specialized computers. When blocks are mined successfully, miners get rewarded with Bitcoins and transactions thus verified are added to the blockchain. Any blockchain will comprise of many blocks of data chained together; the information is represented as a series of random numbers and letters. There is no involvement of a third party in transactions.

Anyone can access or use the blockchain network and your race, gender, ethnicity, etc has nothing to do with it. Bitcoin’s blockchain is public in the sense that you anyone can view the amount of transactions made; but the identity of the parties remains hidden. Transactions refer to the transfer of money between Bitcoin wallets. Each wallet will have secret information or a private key for signing transactions and providing a proof that it has come from the wallet owner. This signature ensures that this transaction cannot be intercepted or tampered with by anyone. Transactions take about 10-20 minutes to get confirmed.

Mining has to be done for verifying transactions. This enforces a chronological sequence in the blockchain. To get confirmed, the transactions have to be part of a block that conforms to stringent cryptographic rules which have been verified by this network. The rules ensure that the blocks cannot be changed once added and if this is done, other blocks are automatically invalidated. So, no individual or group can possibly control or tamper with data in the blockchain or replace parts of it. This means that even if the blockchain is public, one cannot tamper with Bitcoins. It also prevents double spending because for this to happen, a hacker will need to have control over more than 51% of the total computing power.

To prevent any of this from happening, you need to have trust. In traditional monetary exchanges there is a centralized arbiter like a bank. But, given the way Bitcoin works, there is no place for a bank-like institution. Bitcoin network is completely decentralized where everyone watches the other person. Cryptographic rules ensure that each block is chained together in a transparent and immutable blockchain.

Miners are rewarded with Bitcoins for verifying transactions but this reward value gets cut into half every 4 years. This called “halvening” and this is designed to ensure that mining continues till 2140. Hash refers to the string of numbers or letters which verifies data validity but will not expose the information itself. The hash technology is what lets the Bitcoin network check for a block’s validity instantly. If any block is tampered with, the subsequent block will automatically change and alert the network. Mining Bitcoins is power-intensive and demands costly mining rigs and a huge amount of electricity. Earlier miners would mine independently but now they prefer to sign up for pools where the hash power of all miners is combined to improve changes of a higher payout.