What is Bitcoin, and How does it Work?

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Bitcoin
Bitcoins

Today there are many cryptocurrencies, but the most popular is still Bitcoin, perhaps because it was the first to arrive. It drew attention from the first moment for two of its key characteristics: it is managed by its users, and there is no government behind it that acts as an arbitrator.

After having reached a historical record at the beginning of 2021 with a value of more than US$ 30,000, widely exceeding its 2017 mark, bitcoin again opens the debate in the financial world, where for many it is already considered digital gold, while others They assure that using it would be a very risky bet, especially since we are facing the pandemic caused by the coronavirus.

What is Bitcoin?

The word “Bitcoin” (code: BTC or XBT – symbol:₿) contains different meanings starting from the way you write it; in fact, in “capital,” it refers to the technology and the network, while in lowercase it refers to the currency itself. Dwelling for a few seconds on the concept of currency, we can write that:

bitcoin is a digital currency, precisely a cryptocurrency with a bidirectional flow (also connected with the real economy as well as the virtual one) on a decentralized system, i.e., that does not use a central body to create money and manage transactions. In fact, it uses a database distributed on the nodes of the network to keep track of transactions and uses cryptography to manage the various functional aspects such as the generation of new money.

Having written this, it is more natural to list and understand the different meanings contained in the word Bitcoin (upper and lower case), such as:

Digital currency – syllable the word Bitcoin = “bit-coin,” the syllable ” bit ” refers to the computer bit or numbers and mathematical operations. This makes you understand that the digital currency does not have a physical medium such as banknotes or coins but still allows instant and borderless BTC transfer operations.

Digital currency – digital currencies were created with the aim of being independent of banks, guaranteeing greater anonymity but not total as all completed transactions are recorded on a database known as a ” blockchain. ” Through this database, with the necessary investigations, it is possible to ascertain the identity behind a payment thanks to the correlation between transaction and server address that allows the identification of the users involved.

Decentralized system – in addition to what has already been written previously, I underline that it was born and grew without sponsorship from governments and financial institutions, snubbing the various capitalization downs of all world stock exchanges and keeping the bitcoin currency exchange value unchanged, never suffering any backlash to discount.

Bidirectional flow – as the type of currencies and currencies are more directly linked to the real economy both when it comes to the exchange rate and virtual and real purchases.

Cryptocurrency – as it uses cryptography and the proof-of-work scheme to guarantee security, privacy in transactions, and safeguard against digital counterfeits.

Peer-to-peer (P2P) payment system – the peer-to-peer architectural system allows you to send payments online without going through a financial institution. In this way, a trusted third party is excluded for the validation of the payment, reducing the cost of the transaction.

Irreversible – transactions with BTC cannot be canceled even in case of scam, fraud, or typos.

BTC or XBT – are the most common abbreviations of Bitcoin, such as USD for the US dollar or EUR for the Euro.

How does Bitcoin work?

Cryptocurrency users rely on the codes that its system offers to shield any fraud operation. And this support is offered by the blockchain, which is a cryptographic system in which any asset expressed in this currency is stored and transferred between the people involved in the transaction. In this encrypted system, everything is stored online.

In simple words, Bitcoin can be just another payment system, a very simple one in digital money. However, behind it lies a much deeper structure. As mentioned, the blockchain is the platform created to carry out transactions.

One of its functions is to prevent the double-spending of a Bitcoin unit, which is completely prohibited within this system. And since everything is online, it serves as a kind of public accounting where anyone can see that there are funds and that the transactions were executed satisfactorily.

For those who are not very used to this financial market, the means of payment is very simple. In order to use the cryptocurrency, it is necessary to register in a Bitcoin wallet, which can be downloaded on a mobile device or on a computer at no cost.

Through them, transactions are carried out whose commission is negligible, which may vary depending on some scenarios such as network congestion, the amount of the transaction, and the urgency of the user. The transactions can be executed between 6 or 10 minutes, a time in which those involved take time to confirm the operations.

What is the purpose of Bitcoin?

The idea behind the project was to create an independent currency not controlled by any authority (such as central banks), electronically transferable around the world, instantly, with very low transaction fees.

Bitcoin is open-source

Bitcoin provides a new platform for innovation. The software is completely open-source, and anyone can verify the source code.

Limit scarcity of value and hyperinflation of cryptocurrencies

Cryptocurrencies, currently being decentralized systems, are not controlled and managed by any central authority. As in most cryptocurrencies (including bitcoin), the distribution and transactions of cryptocurrencies take place collectively on the network. Furthermore, a maximum ceiling is placed on the number of coins in circulation to avoid hyperinflation.

On the other hand, in real money, those who aim to keep inflation under control are the Central Banks; in Europe, it is the ECB (European Central Bank) which maintains price stability by increasing or decreasing the printed quantity of money and controlling the inflation rate by managing the interest rate applied to loans.

Who issues bitcoins?

There is no central bank that issues BTC as the ECB does for the euro (€) or the Federal Reserve Bank for the dollar ($).

Bitcoins are created automatically by the system or by the Bitcoin network, which distributes them to users randomly.

The chances you have of receiving bitcoins increase in proportion to the computing power provided by your PC and lent to the Bitcoin network for data processing, particularly for money transfer. If you want to force the “hand” to increase the chances of receiving BTC, you have to ” mine bitcoins ” ( Bitcoin Mining ).

Get more information: How to make money with Bitcoin: the complete guide.