An Easy Lesson On How Bitcoin Works

Everyone loves money. Money requires taking place any kind of transactions in our daily life. We have this money in different forms of currencies. To control the regulated flow of money, different currencies are actually attached to different countries. We all are actually used to with this. Now let’s be informed about a new type of currency. This new type of currency exists electronically and actually, people are using it in their daily life! We are talking about “Bitcoin”. Bitcoin is one of most revolutionary development in a modern era. It has the potential to change the entire landscape of currency transaction or it could be the start of new era.

What is Bitcoin?

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Bitcoin is a virtual currency. It exists digitally. This is a stateless currency so it is not attached to any government or state. Bitcoin is the first ever decentralized currency as it does not have any central authority to control stuff or it does not have any single administration. This is also known as the first ever cryptocurrency of the world. So basically there is no single management in there to keep track or investigating fraud. So how does this Bitcoin is even running? Simple, it runs by math. Interesting! Let’s go more details of this currency.

Features of Bitcoin:

From the basic definition of Bitcoin, we can understand it is a unique currency. Apart from its digital existence, there are multiple features are in there that makes it unique. Let’s discuss first the special features of Bitcoin.

No Central Authority: Decentralization is the biggest feature of this digital currency. There is no single authority in there to main and track this currency. Though there is some human intervention is required to run the process. There is a group of volunteer coders maintains it. These group of people is not part of any institution but they work individually from different places at the same time. The overall process of this currency runs in an open network and it is being owned by no-one. This attracts to the people who are absolutely not interested to the binding of the traditional banking/currency system.

Pseudonymous: This curreny transactions maintain semi-anonymity of both sender and user. In the traditional banking system, both sender and receiver need to validate themselves in order to complete one transaction. However, in the case of Bitcoin, there is no single authority validator so no party requires to identify themselves. Meanwhile, there is a certain type of protocol within Bitcoin which checks the previous transactions, balance and identify the wallet number instead of the person to take place the transaction.

Now the obvious question whether is this an ideal currency for criminal activity? Not so easy mate. As it works in an open network so the activity of each transaction is visible to everyone. Thus why law enforcement group can track easily where the money is actually going

Supply is limited: Unlike traditional currency, no authority can produce Bitcoin at any time neither the value of this currency can be manipulated. A limited number of Bitcoin produce in every hour based on a mathematical algorithm. This production continues at a diminishing rate until it reaches 21 million. The limited supply methodology helps to keep the balance of supply and demand. The decreasing number of bitcoins actually modeled off the rate at which things like golds are dug out of the earth and the idea is that keeping the supply of bitcoins limited will raise their value over time.

Global: It has global reach. The transaction through Bitcoin network can take place within few minutes. Also, anyone can make the transaction with this digital currency at any corner of the world.

Secure: The cryptography method makes this currency secure than ever. A Bitcoin currency transaction based on two keys. These are public Key and Private Key. The cryptography method and the size of key makes it more secure to the transaction.

Divisibility: A very small amount of the whole Bitcoin can be used. The Smallest amount of Bitcoin is known as Satoshi. A Satoshi is valued by one hundred millionths of a bitcoin. Bitcoin allows this microtransaction. However, in the traditional method, it is not acceptable.

Non-reversible: Transaction through Bitcoin is completely Non-reversible. Once you have done one transaction through it, it has gone.

How Bitcoin system works:

Bitcoin exists based on a network and cryptocurrency. This is completely a digital currency. To connect with the peer to peer Bitcoin Network and keep your Bitcoin, you need to have a digital wallet which supports this currency. Through this network, Bitcoin user can transfer their crypto money to others.

What is this Peer to Peer network?

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This Peer to peer network is similar to the P2P network is using to share files, entertainment items, such as movies, songs etc. The difference is, unlike music or any other file, Bitcoin is not just a string of data which can be duplicated. A bitcoin means an entry in a global ledger. This huge global ledger is known as “The Blockchain”.

Though this Blockchain, every Bitcoin transaction ever happened is been recorded. Of course, the size of that data is big. At the end of 2010 the complete ledger was only 1 GB in size; however, at the end of 2017, the complete ledger is about 149 GB’s of Data (Source:  So when you send a Bitcoin then you actually not sending a file instead.

How is the process working?

A Bitcoin Wallet does not actually hold your bitcoin. It holds the bitcoin addresses and all the transactions you have made. There it shows the balance of your bitcoin. This address is 34 string of letters and numbers. It is also known as Public Key. The whole world can see this, there is no problem with it. On the other hand, it also corresponds with a “Private Key”. This Private Key contains 64 letters and numbers. Please note, this Private Key must be kept safe and secret.

Once user signed issue a transaction signed by the Private Key with all necessary details. The details include whom and what you want to send.  While the information has been sent to network it validates two things, (1) Have you own the bitcoin (2) Have you sent that someone else already. While the validation is complete the transaction included in a block and attached with the previous block, hence created the “blockchain”.

Please be noted, while the signature with Private Key corresponded with Public Key it validates the transaction without knowing the private key. During the validation, the network confirms that this digital currency has not spent checking your address’s history. Yes, of course, your previous transactions are open as all transactions in Bitcoin ledger are public.

Who maintains the ledger?

This digital currency does not have any central authority. So how the decentralized Bitcoin’s ledger is maintaining the ledger? Well, there is a group of volunteers maintaining this ledger. As the Bitcoin network is open so anyone can volunteer to update the ledger.

What happens when some develop the wrong ledger or some error occurs?

When multiple people keep the transaction in track then someone might make mistake. The mistake might be made intentionally or non-intentionally. Now if someone made mistake then it has been caught. Once someone prepare the ledger and declares in the network. In the same time, other people are also keeping the track of the transaction. So when all the people keep the track and declare on the network the wrong one has been identified and caught.

Now let’s go into a more complicated problem. Imagine when someone is maintaining the ledger but due to network error or delay the person do not get the transactions in same order. So now you got a bunch of people with a bunch of slightly different blocks to pick from but none of them are necessarily wrong. It solves this problem as a mathematical problem. This problem solves by a Cryptographic Hash Function. It takes the output and shows the input.  This Hash Function is known as “SHA256”. In average ten minutes it solves a problem. In this period of time, it runs through billions of guesses before come to in a conclusion. Whoever solves the HASH first gets the add the next block of transactions to the blockchain which then generates a new math problem that needs to be solved. If multiple people make blocks at roughly the same time, the network picks one to keep the building upon, which becomes the longest and most trusted chain.


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Machinery Required for Mining

As of, you understand the importance of Volunteers who track the transactions and update the ledger. Now, why they do that? Well, this is not just a volunteer work. Every time a volunteer wins the race to add a block in the blockchain, they get a reward. Just out of the thin air they receive 12.5 Bitcoins. As of today, all the Bitcoins have been created, all are sourced from this volunteers. These volunteers are known as Miner. It might sound easy that someone becomes the miner and solve the problem and then earn Bitcoin. Actually, this is a very costly method. The machinery required for this mining are costly, also it consumes lots of electricity as well.

Is it a Good Idea to invest in Bitcoin?

Well, this is the question everyone thinks about. The thing is, this currency is still new. Yes, it’s secure but people are yet to habituate with it. Also, as this does not have any central authority there is still a big scope of the answer requires in the case of legal issues. Some countries issued a ban on this currency because the system or process of bitcoin is still not clear to many. Again the value of Bitcoin fluctuates quickly which makes it vulnerable quickly.

At the same time, the way this currency is being accepted by many cities day by day. Meanwhile, the acceptability of this currency is also increasing. Time will tell us whether it would be a good move to invest in Bitcoin or not.

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