What Is a Bitcoin and How Does Bitcoin Work?

 Are you Wondering How Does Bitcoin Work? 

You've Come to the Right Place - Read On and Find Out! Wondering How Does Bitcoin Work? You've Come to the Right Place Read On and Find Out!

      

Bitcoin is made up of two words, ‘Bit’ & ‘Coin’. If you cut the information inside computers into smaller pieces, you will find 1s and 0s. These are called bits. You already know about coins.

what are Bitcoins?

Bitcoins are just the plural of Bitcoin. They are coins stored in computers. They are not physical and only exist in the digital world! That’s why Bitcoin and other cryptocurrencies are often called digital currencies.

It can seem quite confusing at first, but in this guide,

 I'll make it as simple as possible — welcome to Bitcoin for newbies! By the end of the guide, even total beginners will understand what Bitcoin is, how to get Bitcoin, and how to use Bitcoin.

Let's start!

Looking for the most secure place to buy BTC? I have collected the best-rated crypto exchanges that were approved as the safest platforms for buying BTC below, so take a look.

How Does Bitcoin Work? Why Was Bitcoin Invented?

Let’s start with the basics...

There are three types of people in this world: the producer, the consumer, and the middleman. If you want to sell a book on Amazon, you must pay a big 40-50% fee. This is the same in almost every industry! The middleman always takes a big part of the producer’s money.

To understand what is Bitcoin, it's important to know why it was created. Bitcoin was invented to remove one type of middleman — the banks. If you need to transfer $5000 from your country to your friend in the United Kingdom, the money must go through a bank in your country. They take a fee for processing. Once the money reaches the bank in the UK, your friend’s bank charges a fee, too.

It isn’t just the fees that are the problem, it’s the data they store. Banks store lots of private data about their customers. Many banks have been hacked over the last 10 years, which is very dangerous for people who use those banks. This is why it is important to understand how does Bitcoin work.

Unlike Bitcoin, banks can freeze/block peoples’ accounts whenever they want. They have too much control over the people that use the banks, and they have abused their power. Banks played a big role in the financial crisis of 2008, too. Bitcoin started in 2009, just after that crisis. Many people believe that the crisis was one of the reasons for creating Bitcoin.

Bitcoin is the solution: it has no single authority. That means no banks, no PayPal, no government to be able to tell the bank to freeze your account. It’s great, right? The question on everybody’s mind now must be ‘how does bitcoin work?’.

How Bitcoin Works?

The creator of Bitcoin made three main concepts for Bitcoin that are essential in understanding the principles of Bitcoin:

• Cryptography
• Supply and Demand
• Decentralized Networks

Cryptography

In World War II, cryptography was used a lot. It converted radio messages into code that nobody could read. To read it, you would need to convert back to the original message. To do that, you needed a key. It was possible through mathematical formulas!

Bitcoin uses cryptography in the same way. Instead of converting radio messages, Bitcoin uses cryptography to convert transaction data. That is why Bitcoin is called a cryptocurrency. Knowing that takes you one step closer to understanding how does Bitcoin work.

Supply and Demand

This is the main concept of supply and demand: when something is limited, it has more value. The more people that want it, the more the price of it will go up. It’s the same as rare vintage cars.

Bitcoin uses this same concept. The supply of Bitcoin is limited. Bitcoin is produced at a fixed rate, which will decrease over time — it halves every four years. Bitcoin has a limit of 21 million coins; once there are 21 million Bitcoins, no more coins can be created. How many Bitcoins are there at the moment? Well, currently (27.07.20), there are 18.5 million Bitcoins created.

 We've still got a long, long way to go before it reaches 21 million!

Can Someone Spend Bitcoin Twice?

Bitcoin transactions are grouped together and stored in blocks. These blocks are linked back to one another in a series. This is why it is called a blockchain.

Each transaction in the block has a public key written on it. If it is your Bitcoin, it will be your private key that is written on it. Because each block is connected to the block before it, no Bitcoin can be spent twice.

What If Someone Tries to Tamper the Blocks?

If someone tries to change the transaction data in one of the blocks, it will only change it on their own version, just like a Microsoft Word document that’s stored on your computer.

This is one of the key elements of how does Bitcoin work. To make the change go onto the shared database so that it’s on everybody’s version, they will need to control 51% of the computers in the network.

What are the Advantages and Disadvantages of Bitcoin?

You should already know what most of the advantages of Bitcoin are after reading this far into the guide. However, I haven’t talked much about the disadvantages, have I?

There are still some benefits I haven’t talked about too, though, so let’s start with the advantages and then I’ll look at the disadvantages. Then, you will fully know and be an expert on the question - how does Bitcoin work?

The Advantages of Bitcoin

✓ International payments are a lot faster than banks;
✓ Fees are low;
✓ Blockchain — near impossible to hack;
✓ Decentralized — cannot be shut down at a single point;
✓ Transparent — you don’t have to trust anyone;
✓ Anonymous — you don’t need to use your name;
✓ Powered by the community — the fees are shared instead of going to a single point (i.e. a bank or PayPal);
✓ No verification for new users — anyone can use it.

International Payments: A Big Advantage

If you want to send an international payment, it will normally take 3+ days with your bank and cost you a fee of around $10-15 or more. It’s different in each country, but it’s still expensive and takes a long time.

If you send it using Bitcoin, it will only take around 10 minutes. Sometimes it takes longer (up to an hour or more), but it is still much quicker than the 3+ days that the banks take. The fee for Bitcoin changes often and the developers are trying to keep it as low as possible. At present (27.07.20), it is around an average of $3.

It is cheap because there is no middleman (banks, PayPal, etc.) to pay! This what Bitcoin is all about.

Now, let's take a look at the shortcoming of how does Bitcoin work.

The Disadvantages of Bitcoin

✗ Mining uses lots of electricity;
✗ Not as fast as other cryptocurrencies;
✗ Fees change a lot;
✗ Anonymous — used for crime;
✗ Difficult to use — private keys, public keys, etc.

Conclusion

The invention of Bitcoin is only the beginning. Some people are using Bitcoin and other cryptocurrencies instead of banks, but it still hasn’t completely replaced banks. What are your thoughts? Do you think that Bitcoin will replace banks? Or does it need to improve first?

By answering the above questions, you can test what you have learned in this guide. You can also try to answer the question “how does Bitcoin work?” in just three sentences. Try it — it’ll help you remember what you’ve learned. Post your answer in the comments!

Finally, remember - use only the most trustworthy exchanges when purchasing or selling Bitcoin!

Let's go through the process of how to buy Bitcoins once again: 

1. Get a reliable cryptocurrency wallet that will keep your assets secure (Ledger Nano S and Trezor are among the most recommended hardware wallets). 

2. Sign up to Coinbase. 

3. Purchase Bitcoin in USD or any other available currency. 

4. Copy your Bitcoin wallet address. 

5. Send your Bitcoins your wallet.