How Bitcoin Works
What Makes Bitcoin Tick
When its white paper was released back in 2008 and its coin subsequently launched in 2009, Bitcoin ushered in a new era in technology – and a point of no return, both for believers and sceptics alike.
Since then, Bitcoin has occupied the top spot by market capitalization and become the “gold standard” of cryptocurrencies, leveraging its first-mover advantage, ambient popularity, and, perhaps the most important of all, its revolutionary and game-changing technology called blockchain.
So how does Bitcoin work exactly, and what has blockchain got to do with it? What makes the world’s #1 cryptocurrency tick?
This topic is undeniably a rabbit hole that anyone can easily get lost in unless we keep ourselves in check and anchor our readings and research on a few guiding topics as we delve deeper.
Blockchain – The Technology That Powers Bitcoin
Simply put, blockchain technology is a record-keeping system that is decentralized, distributed, and immutable.
Imagine a friend giving you a pencil, which means you now have one pencil and your friend has none. To ensure that both of you don’t forget how many pencils each of you has, you wrote the transaction down on a notebook (or a ledger) and gave every one of your friends a copy.
Since then, every pencil transaction is recorded in the notebook, and everyone’s record is updated every time that happens. You can’t cheat, such as when you give away a pencil that you don’t have, because that transaction wouldn’t add up with everybody else’s record.
Now imagine that record as a digital version that is accessible by anyone who wants to get a copy of it. They can download it on their computer and make sure that every new entry checks out. In return for verifying that a transaction is valid, the first one who did so will get 5 colored pencils as a reward.
This is how blockchain technology works.
In the case of Bitcoin, every transaction has corresponding information regarding its sender, receiver, and wallet addresses involved. These pieces of information are stored in “blocks” that are linked chronologically, one after the other.
Once a block reaches its storage capacity, another block is created, which is “chained” or linked to its previous block, hence the term “blockchain”. You can think of blockchain as a digital ledger that is accessible by all parties involved, updated in real-time, and can’t be tampered with unless everyone who has access to it agrees and accepts the change.
In Bitcoin, its blockchain is maintained by a network of computers that has a copy of its whole “digital ledger”, which basically contains each and every Bitcoin transaction ever made. These computers are called nodes and they are operated by people or pools called miners.
Once a miner successfully validates a transaction and adds it to the blockchain in a process called mining, they get rewarded by a certain amount of Bitcoin, which is 6.25 BTC per block as of writing.
A transaction becomes immutable and cannot be undone once it is recorded on the blockchain, and this is what makes the technology amazing – you can’t cheat it or manipulate the records unless everyone on the network agrees to it.
How Bitcoin Works in Our Daily Lives
Here’s the thing about Bitcoin – while it is important (and we couldn’t stress this enough) and very helpful to have a fundamental understanding of the technology behind it and why Bitcoin was created by Satoshi Nakamoto in the first place, you don’t have to understand all the nitty-gritty of it to be able to use it.
One of the easiest and most common ways to get started with Bitcoin is by signing up in a cryptocurrency exchange such as Coinbase, Binance, Kraken, and Gemini. A cryptocurrency exchange is a platform where buyers and sellers meet to trade cryptocurrencies. It connects you to the cryptocurrency market, which is open 24/7, and lets you buy, sell, and trade different cryptocurrencies of your choice.
If this is your first time signing up in a cryptocurrency exchange, you have to know that most exchanges have a know-your-customer (KYC) process in place. KYC simply means that these platforms may require you to provide personal identification documents such as IDs, proof of residence, or even proof of income in some cases before you can proceed with buying or selling cryptocurrencies.
Once you’ve opened an account in a cryptocurrency exchange, you need to add funds to it first using any of the payment channels that they have so that you can start buying your first Bitcoin. After you have funded your account, simply place a buy order for Bitcoin in the amount that you prefer.
While one Bitcoin is trading at around $48,000 at the moment, you don’t have to buy one whole Bitcoin to start owning yours. Depending on the minimum amount set by the exchange where you signed up, you can buy a fraction of a Bitcoin to suit your budget.
However, please keep in mind that as with any other investment, trading Bitcoin and other cryptocurrencies has its own inherent risks, especially so since the cryptocurrency market is very volatile. Do your own research and only trade what you can afford to lose.
Just like the email that we use almost on a daily basis, we don’t have to know how the Bitcoin backend works in order for us to use it, but understanding its fundamentals will give us better insights as to how we can handle Bitcoin effectively as part of our investment portfolio.