What is a Bitcoin and How Does it Work?

What is a Bitcoin and How Does it Work?

New inventions are being made rapidly in the digital age, and one of those new inventions is a digital currency with no central governing body called the Bitcoin.

The Bitcoin is the first digital currency in the world, and it was launched in 2009 by Satoshi Nakamoto.

While not a lot is known about Satoshi Nakamoto, and even the name is a pseudonym, his Bitcoin invention has been in the news lately causing many people to start asking, what is a Bitcoin and how does it work?

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Bitcoins are a type of digital currency that have no central monetary authority. This means that they are not issued by a central bank but rather Bitcoins are supported by a computer network where each computer can act as a server for other computers negating the need for a central server.

Even though Bitcoins are a digital currency, they can be exchanged in many places for traditional currency, and users can also transfer Bitcoins directly over the internet with the proper software to another user with the software.

Due to the ability to transfer between users, Bitcoins have the potential to attract people completing international transactions particularly because there are no bank charges to make an international transfer and the fluctuating exchange rates do not affect them.

However, there are still drawbacks to using the Bitcoins today because the value of the Bitcoin fluctuates greatly.

drawbacks to using the Bitcoins

This fluctuating rate has been apparent in the recent news, and Bitcoins have attracted a lot of attention recently due to the quick rise and fall in their value.

In early February, the Bitcoin was worth only $20.00. It then rose rapidly to $250.00 before quickly falling back down to only a $150.00 value.

The unstable value is one of the drawbacks to using Bitcoins for most potential users. Until the value stabilizes, it is unlikely the Bitcoin will be used for purposes like international transactions.

On the other hand, another possible use of the Bitcoin is criminal activity. The Bitcoin has a complex system that could hide exchanges such as money laundering and illegal drug sales.

Drawbacks such as these decrease the likelihood of using Bitcoins as a viable type of currency.

The System

Understanding the system and software is based on how the Bitcoin really works. Because the Bitcoin has no central monetary authority, there would be no way for a central bank to issue new Bitcoins to decrease the value of those that already exist in circulation.

Additionally, Bitcoins are “mined” by the peer-to-peer network executing number-crunching tasks.

The system was designed mathematically to become progressively more difficult to “mine” the Bitcoins, and no more than 21m Bitcoins total can ever be mined.

The network itself is how the Bitcoins are monitored and verified as new ones are mined.

There is a log that is accessible to the entire network which uses participating machines to create and agree on all official log updates of newly mined Bitcoins summarizing the mining process.

Once a user updates the log and has been approved by the network of machines, he or she is given a fixed number of new Bitcoins.

Currently, the number of Bitcoins that a user is given is fixed at 25 Bitcoins for successful log updates.

Bitcoins are "mined" by the peer-to-peer network executing number-crunching tasks

This system has greatly encouraged users to build extremely powerful computers, and it also has encouraged nefarious users to hijack other people’s computers in order to receive a greater number of Bitcoins via mining.

While the Bitcoin system is complex and difficult for users currently, they are likely just the first digital currency in the field of virtual currencies.

Some internet services such as web hosting and online gambling can already be paid in Bitcoins, but currently, most have not adopted it as a means of currency due to the complexity.

Similar to the way that BitTorrent and Skype are run on peer-to-peer computer networks from their users and were not the first file sharing or internet voice over systems, Bitcoin will most likely be obsolete due to new and easier to use rivals that will be added to the virtual currency scene.

Even though it is a complex system, it is possible to answer the most basic questions of what is a Bitcoin and how does it work effectively.

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10 comments on “What is a Bitcoin and How Does it Work?

  1. There seems to be a lot floating around on the internet regarding bitcoins lately. The video did help me to understand them better.

    However, I still don’t understand how you buy bitcoins and how you would use them. I don’t often see shopping carts online offering a bitcoin option along with the Paypal and Visa options?

    1. I think you have to look into this a lot further Michel – maybe watch the video again and re-read the article! Many online vendors offer bitcoin options now and have done for a couple of years (maybe longer actually!). As far as buying them goes – did you miss the part about ‘mining’?

      It’s hard to explain to someone who hasn’t really got the basics grasped from the article above.

  2. Hi Chris,
    Wow this world is changing fast and digital currency has been used for a couple years already like you said on your page. But like you also stated that because of the fluctuation of the Bitcoin that something will come along better in the future. I think your readers are going to have a good understanding of what a Bitcoin is and what it does and how their mined from your article.

  3. Hi Chris, first off just wanted to say that this website is amazing! I love all the different colors that you’ve incorporated into it. Secondly, I didn’t know bitcoin was used so much! The video really helped clarify things. I just might get into Bitcoin! Great work you’re doing ๐Ÿ™‚ I hope everyone has a chance to look at this website.

  4. I had never heard of a Bitcoin before, so this was great information about them. The video was extremely helpful. I thought initially that it was actually a physical “coin.” I still don’t quite understand why anyone would have use for a Bitcoin. This means that I still don’t totally understand it. Seems like a secure way to send funds though.

    1. Well it’s still not the most secure…in my book anyway…but it’s getting there! Take another read of the article – you’ll get there in the end! ๐Ÿ™‚

  5. Thank you for helping me understand a little more about Bitcoin – I have trying to get my head around how it works for the last week.

    Your honest presentation leads me to agree that the system is highly speculative and really only those who can risk some cash would be best suited to using this system. For the lucky ones who can speculate in Bitcoin, I’m sure some big returns are possible.

    The main thing that worries me is that it is still a new currency – even though it is on the ‘forex’ market I still wouldn’t be too comfortable with it. Have you dealt with it yet?

    1. Hi Alan – glad you enjoyed the article!

      I have actually dealt in Bitcoin on the stock exchange but it’s the only currency I’ve had no luck with so far…make of that what you will?

      In my experience it’s not that steady – price and value fluctuate making it hard to trade. I’m also not 100% on board with it yet but I will be keeping a close eye on it in the future…

      Thanks for taking the time to share your opinion with us!

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