How Does Bitcoin Work?

How Does Bitcoin Work?

Bitcoin (BTC) seems to have taken the financial news media world by storm. Founded in early 2009 by an anonymous source, the cryptocurrency – currency that operates independently of government-run central banks and allows users to be more or less anonymous (for Bitcoin, at least; other cryptocurrencies, not necessarily true) through encrypted means of sending, receiving, and verifying transactions, including in creating more of a particular cryptocurrency – Bitcoin has recently thrust upwards of $5,650 per 1 BTC.

With Bitcoin rising from quite literally nothing into a very big something, many investors contemplate placing their money in the highly volatile hands of the cryptocurrency. However, most people who’ve ever heard about Bitcoin have wondered at some point,

How does Bitcoin work?

More or less, here’s how the volatile-yet-promising potential future of currency works.

Comparison to traditional currency

Traditional currency, like the Euro or United States dollar, is created and destroyed by governments that issue them. Bitcoin, however, started off with a set amount. Each and every year, one-half of the previous year’s yield has been and will be mined. This predictable rate of creation will halt once 21,000,000 BTC have been mined.

Further, traditional, paper-based currencies are subject to control through monetary policy changes, such as raising a central bank’s interest rate and printing new or destroying a set amount of already-created currency. The decentralized aspect of Bitcoin inherent to its foundation makes it free of governmental control. While you and I both trust governments for infrastructure, running water, and safety, more power should be placed back into the people’s hands.

See Also: How to buy your first Bitcoin

What is mining?

Mining is the process of confirming current transactions. Rather than being carried out by a debit or credit card payment network, Bitcoin mining requires an application-specific integrated circuit, or ASIC, to help confirm others’ transactions. Although I wish I could, miners need far more than a simple computer, residential-capacity electricity supply, and maintenance than what’s necessary to make any sort of profit through mining.

OK, so what’s the blockchain?

Blockchain refers to the aggregate total of all confirmed transactions that have ever occurred and all currently pending transactions. The blockchain is a public ledger available to everyone that calculates each user’s balance, can be used to verify the legitimacy of transactions, and verify the amount of bitcoin you or I currently hold.

The blockchain can’t be altered in any way, shape, or form thanks to cryptography, or a mathematical means of proving numerical happenings in the name of security. Boy, wouldn’t it be nice to artificially create just one Bitcoin for both of ourselves? Yeah, but thanks to the blockchain, nobody can fraudulently create or destroy their own or others’ bitcoin.

How can one keep bitcoins?

Bitcoin, obviously, isn’t a physical good, meaning you can’t keep it in your purse or back-pocket wallet. You can, however, store bitcoins using a digital wallet. A randomized seed (private key) is formed from a combination of words. Combined with a wallet’s password, one can open their wallet anywhere with an Internet connection if they know their seed and password.