A very simple explanation of how Bitcoin works


Bitcoin, a popular cryptocurrency created in the late 2000s by developer Satoshi Nakamoto, can be complex in terms of operations. It can be said that Bitcoin is a digital currency that uses cryptography to record transactions. It can also be said that the underlying blockchain technology adds uniqueness to Bitcoin. It can also be said that Bitcoin has to do with the absence of intermediaries such as banks, with the total control of operations in the hands of people. The situation right now is such that even stakeholders within the crypto world lack a consensus on Bitcoin.

Before making any assumptions about Bitcoin, including that it is an emerging speculative investment asset, it is important to understand how Bitcoin works. Is Bitcoin a company where the staff work in an arrangement that resembles the operations of a bank? Are Bitcoin operations controlled from any headquarters? How are records of the movement of BTC tokens from one party to another kept? Here is a simple explanation.

how bitcoin works

First, Bitcoin is also a blockchain network in addition to being a cryptocurrency. The Bitcoin mainnet is a distributed ledger, which means that record keeping is not centralized but distributed among a large number of participants. Nakamoto envisioned Bitcoin as “electronic cash” or virtual money. Money makes sense only when records are kept properly and there is no double spending. The holder must have the ability to use the money once, and the subsequent right to spend must be transferred to the recipient.

Bitcoin works in a way that all transactions are recorded on the ledger by globally distributed peers. This process verifies the authenticity of transactions and prevents double spending. Items like hashing and proof-of-work can be tricky, even for someone with technical experience. These simply contribute to the record-keeping process, with rewards accruing to record managers, also known as nodes. It’s simple: when two parties transact, a record updating exercise is triggered, which is performed by independent nodes that are rewarded for the work done.

Data provided by CoinMarketCap.com

Both cryptocurrency and blockchain

Many cryptocurrency enthusiasts are primarily focused on Bitcoin as a cryptocurrency. However, there is a definite and distinctive blockchain mainnet. It is similar to the Ethereum or Solana or Cardano blockchains. In particular, the Bitcoin blockchain can support the so-called secondary framework, also called Layer 2 in the blockchain world. The Lightning Network is one of those layer 2 protocols that sits on top of the main Bitcoin network. When a token is mined on the mainnet, it is converted into the cryptocurrency Bitcoin (BTC).

Bottom line

Bitcoin can be simple to understand, considering that it is a decentralized virtual currency, and also complex when considering how record keeping is managed on the mainnet. Intermediaries such as central banks and commercial banks have no role to play in it, and authority is distributed among participants known as nodes. Is Bitcoin a speculative investment asset? This is another debatable topic.

Risk Disclosure: Cryptocurrency trading involves high risks, including the risk of losing some or all of your investment amount, and may not be suitable for all investors. Cryptocurrency prices are extremely volatile and can be affected by external factors such as financial, regulatory or political events. The laws that apply to crypto products (and how a particular crypto product is regulated) may change. Before deciding to trade financial instruments or cryptocurrencies, you should be fully informed of the risks and costs associated with trading in the financial markets, carefully consider your investment objectives, level of experience and risk appetite, and seek professional advice when necessary. necessary. Kalkine Media cannot and does not represent or warrant that the information or data available here is accurate, reliable, current, complete, or appropriate for your needs. Kalkine Media will not accept liability for any loss or damage resulting from your dealing with or your reliance on information shared on this website.


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