What Is Bitcoin And How Does It Work?

Bitcoin

 Bitcoin is not only the first cryptocurrency, but it is also the most well-known of the over 5,000 cryptocurrencies currently in use. Bitcoin has become an inextricable part of the landscape, with financial media enthusiastically covering each new dramatic peak and stomach-churning fall.

While the high volatility can make for fascinating headlines, it hardly qualifies Bitcoin as the best option for new investors or those seeking a secure store of value. Understanding the ins and outs of Bitcoin can be challenging, so let's have a closer look at how it functions.

What Is Bitcoin and How Does It Work?

Bitcoin is a decentralised digital currency that can be bought, sold, and exchanged without the use of a middleman such as a bank. Satoshi Nakamoto, Bitcoin's founder, first identified the need for "an electronic payment system based on cryptographic proof rather than confidence."

Any Bitcoin transaction that has ever been made is registered on a public ledger that is open to all, making transactions impossible to reverse and fake. That's on purpose: Because of their decentralised existence, Bitcoins are not sponsored by the government or any issuing entity, and their worth is only guaranteed by the proof baked into the framework.

“It's worth money because we, as people, agreed it has value—just like gold,” says Anton Mozgovoy, co-founder and CEO of Holyheld, a digital financial services firm.

Bitcoin's value has skyrocketed since its initial public offering in 2009. Although it once sold for less than $150 a coin, one Bitcoin now costs nearly $50,000 as of March 1, 2021. Since its supply is capped at 21 million coins, many expect its price to rise steadily over time, particularly as more big, institutional investors begin to treat it as a kind of digital gold to protect against market volatility and inflation.

 How Does Bitcoin Work?

Bitcoin is based on a blockchain, which is a distributed digital ledger. Blockchain is a connected body of data made up of units called blocks that contain information about each and every transaction, such as the date and time, total amount, buyer and seller, and a unique identifying code for each exchange, as the name implies. Entries are linked in chronological order, forming a digital block chain.

According to Stacey Harris, a consultant for Pelicoin, a network of cryptocurrency ATMs, “once a block is added to the blockchain, it becomes open to anyone who wants to display it, functioning as a public ledger of cryptocurrency transactions.”

Blockchain is decentralised, meaning it is not regulated by a single entity. Buchi Okoro, CEO and co-founder of African cryptocurrency exchange Quidax, compares it to a Google Doc that everyone can edit. “It is not owned by anyone, but anyone with a connection may contribute to it. And as various people make improvements to it, your copy is changed as well.”

Although the idea of anyone being able to edit the blockchain can seem dangerous, it is precisely what makes Bitcoin trustworthy and safe. A majority of all Bitcoin holders must validate a transaction block before it can be added to the Bitcoin blockchain.It must be checked by the vast majority of Bitcoin users, and the unique codes used to identify users' wallets and transactions must follow the proper encryption pattern.

Since these codes are long, random numbers, counterfeiting them is extremely difficult. According to Bryan Lotti of Crypto Aquarium, a fraudster guessing the key code to your Bitcoin wallet has about the same odds as winning the Powerball lottery nine times in a row. This degree of statistical randomness in the blockchain authentication codes, which are required for any transaction, significantly reduces the probability of a fraudulent Bitcoin transaction being made by anyone.