Bitcoin is a decentralized, online currency which can be sent from one user to another on the peer-to-peer bitcoin network without intermediary involvement.
- Bitcoin is the best-known cryptocurrency, and just because of Bitcoin, blockchain technology was invented.
Let us find out how Bitcoin works:
1. Blockchain Technology
Blockchain is a distributor ledger which can be accessed by anyone.
After the data is stored in the Blockchain, it is complicated to change it. The popularity of Blockchain is increasing nowadays.
- All the Bitcoin transactions are recorded in one public account in a digital form called a ledger. A copy of this ledger exists on every system which is a part of the Bitcoin network.
- In simple words, when you make a transaction in Bitcoin, there are computers globally recording that transaction in real-time, which means there is no central authority who has the transaction record.
- Anyone can access any transaction at any time, but neither it can be changed nor it can be deleted. Hence, the data is completely anonymous and safe.
Let’s understand the technicals of a block:
- A block contains a few data, hashes and hash of the previous block.
- The data stored in a block depends on what kind of Blockchain it is.
- The Bitcoin blockchain contains the data about a transaction, the sender, receiver, and Bitcoins exchange.
- A block also contains a hash.
- A hash is similar to a fingerprint; it recognizes the block and all the contents inside the block. It is always different, just like a fingerprint.
- Now once a block is created, then its hash is calculated.
- Any change in the block will cause the hash to change.
- A hash function is an algorithm that receives an input of any size and turns it into an output with a fixed size.
- With the hash function, it’s effortless to find the production by giving the input.
- Bitcoin uses the secured hash algorithm (sha256) hash function.
- Hashes are crucial when we have to detect changes in the blocks.
- The final element inside a block is the hash of the previous block.
- This previous hash has effectively created a chain of blocks, and this technique makes up Blockchain secure.
- Since every block has a previous hash, even if somebody hacks and changes the block’s data, then the whole Blockchain becomes invalid. They no longer star a valid hash of the previous block.
- But this is enough to prevent the hackers, so to counter this, Blockchain has a concept of proof-of-work.
- It is a mechanism that slows the production of new blocks. Bitcoin takes about 10 minutes to calculate the proof of work and add a new block to the chain.
- In simple words, it takes 10 minutes to add a block.
- Together, hashes and proof of work make the Blockchain the most secure way to perform transactions.
- Blockchains run on a peer-to-peer network, and anyone is allowed to join.
- When a new block is created, that new block is sent to everyone on the network, and each node then verifies the block so as to ensure that it has not tampered with.
- And if everything is alright, then each node at this block to their own Blockchain.
- A consensus is created by all the nodes present on the network.
- They agree about the valid blocks and tampered blocks are rejected by other nodes present in a network.
- It is impossible to change the data of a blockchain.
- Along with the time the blockchain technology is also involving
- A recent example of it is the creation of smart contracts
- Smart contracts are stored on the Blockchain, and they can be used to exchange coins based on specific criteria automatically.
- Blockchain technology is in huge demand because of its security. It can be used in various other fields like medical records collecting taxes creating a digital notary.
2. Bitcoin Mining
- The process that maintains the decentralized public ledger is known as mining
- The people who run the system are known as miners.
- Mining earlier started with the prospect of being rewarded by Bitcoin.
- The primary purpose of mining is to monitor and legalize Bitcoin transactions along with ensuring their validity.
- Miners are paid for the work they do as an auditor.
- They verify the legitimacy of Bitcoin transactions.
- The reward for mining Bitcoins gets reduced by half every four years.
- The miners verify the transactions. For example, you want to send Bitcoins, the miner will confirm whether your account has Bitcoins or not. To complete these transactions, the miner will solve a complicated mathematical equation with the help of high processing power computers.
- Once the equation is solved, the other computers on the same network, confirm it and then the transaction adds to the chain.
- Now a block of these transactions gets created, and this technology is known as the Blockchain.
- Miners — get Bitcoins for doing all these complex tasks. Miners have computers with high-end processors and mining software along with high-powered resources.
- Anyone can mine Bitcoins if they have a high-end computer with a good GPU and suitable hardware to earn Bitcoins.
3. Bitcoin Transactions
- Apart from mining activities, the Bitcoin owners purchase their cryptocurrency from exchange platforms that provide Bitcoin and other digital currencies exchanges such as LendenX, Coinbase.
- The regulations governing the selling and buying of Bitcoins are constantly shifting and are complex.
- The Bitcoin network is secured, but the individual exchangers have been a target of many thefts, often losing millions.
- In recent times various big companies like Tesla, Microsoft, Starbucks etc., are accepting bitcoin as a payment method.
- Countries like El Salvador have accepted and made Bitcoin a legal tender. The U.S $ is still the primary currency of El Salvador.
4. Keys And Wallet
- For security reasons, Bitcoin uses two keys, a public key and a private key.
- These keys are also called a username (public key) and password (Private key).
- A hash of the public key called the address is displayed on the Blockchain.
- To receive Bitcoins, the sender shall know your address.
- It is easier to receive money, but verification of Identity is required to send it.
- To access your Bitcoin, you use a wallet which is a set of keys. Just like you use while logging in any social media app where only you know the password and everyone can see your username.
- A digital wallet is needed to store Bitcoins. The wallets are of two types one is a hot or wallet, and another one is a cold wallet.
- A cold wallet is an offline device used to store Bitcoins without connecting to the internet, and cold wallets are considered more secured and protected from intrusion by hackers.
- A hot wallet is also known as an online wallet which means that you store your Bitcoin on a cloud of a trusted exchange accessible through the internet.
5. How BTC makes money
Unlike any other commodity, Bitcoin follows the law of demand and supply, which means that the volatility gets affected because of the rising and fall in the demand that happens from time to time. People buy Bitcoin as a form of currency waiting to sell when the prices go up.
Usage
Bitcoin is used by many people as an alternative investment apart from bonds and stocks as a way to diversify their portfolio.
It is used as a store of value because since the government does not back this currency, it gives an advantage to the people for a worst-case scenario.
6. HOW TO BUY BITCOIN:
Bitcoin can be bought in significant four ways
- Bitcoin mining
By becoming an auditor of the transactions as discussed earlier.
- Cryptocurrency exchange
These are the platforms that facilitate the buying and selling of cryptocurrencies.
- Peer-to-Peer purchase
It involves buying directly from other Bitcoin owners through peer-to-peer tools like local bitcoins.
- Bitcoin ATMs
There are several places where Bitcoins and other cryptocurrencies can be bought by using a cash or debit card . The United States has 7000 Bitcoin ATMs.
This article is for knowledge; we advise you to ask your financial experts before taking any investment decisions.*