Everything You Need To Know About Bitcoin: How Bitcoin Works!!

When Bitcoin was introduced in 2009, it took the world by storm. Everybody was curious as to what is it, how do you get one, how bitcoin works, etc. Then fast forward to 2013 and greed, drama, conspiracy, crime, theft, and speculation filled the world of Bitcoin. People became millionaires overnight with possession of Bitcoins. Authorities were seizing millions of dollars worth of Bitcoins from Silk Road, the Internet’s black market. The financial society went head over heels to the debate around Bitcoin. And the anti-crime forces were yet to uncover the identity behind Satoshi Nakamoto, the creator of Bitcoin.

Anyways, no matter how many news we read, the concept of bitcoin was still blurry to many of us. This article aims to eliminate that.

What is Bitcoin?

Bitcoin is surrounded with fancy terms and for a layman, it is very confusing. So we will try to break down Bitcoin into layman terms.

Bitcoin is the Internet version of money. It is a form of virtual currency. It’s electronic money! If you have bitcoins, you will not physical purchase products by handing notes or tokens to the seller. You will electronically transfer your bitcoins. Got it?

There’s a fundamental difference between the words “Bitcoin” (with capital B) and bitcoin (with small b). Bitcoin (with capital B) refers to the entire system itself whereas bitcoin (with small b) refers to the actual currency. To understand how Bitcoin Works it should be noted that every purchase that you make with bitcoins is immediately logged digitally in a transaction log. The log keeps track of the time of purchase and a number of bitcoins owned by each individual. The transaction logs stores every bit of information regarding the bitcoin transactions. This log is known as the ‘blockchain’.

Now, blockchain is a collection of enormous data points. This demands that there should be few people who are constantly verifying the blockchain. They are the ones who ensure that all the information that is present or updated on the blockchain is correct and it is updated every time a transaction happens. These people, who confirm the bitcoin transactions, are called ‘miners’. A miner’s job is to monitor that the bitcoin transaction happening is secure and processed properly and is protected by encryption. In return for their services, miners receive payment from vendors/merchants for rectifying each transaction and are also provided with physical, minted bitcoins.

How are bitcoins priced?

Bitcoins are no different than any other currency. Like any other currency, they fluctuate in value relative to other currencies. For example, you all know how drastically the Indian Rupee fluctuates against Dollar. Similarly, bitcoins have their good and bad days.

There is no centralized exchange for bitcoin currency then How Bitcoin Works? How it is priced is each time a bitcoin changes ownership, it’s price changes. This means that whenever there is an exchange of bitcoins between buyers and sellers, they need to agree on a fair price before committing to the transaction. In most cases, the seller is responsible for giving a fair price to the buyer based on the rates followed during other transactions. There is no centralized party, like a bank, that decides the value and price of the currency. The price fluctuates depending on the supply and demand.

Why use bitcoins when there are tons of other payment options?

This is a very valid question. Why bring so much complication when you can just open your wallet and pay cash or just swipe your card. Well, the key takeaway is convenience. Look at the degree of convenience that you would experience with bitcoins. No need to carry cash around in your pocket. But credit card? Well, that’s convenience from the merchant’s point of view. Every time you pay by your card, a commission (or transaction fee) is paid by the seller. In the case of bitcoins, this charge is zero or very less. This acts as an incentive for merchants to use bitcoins.

How to start using bitcoins and how bitcoin works?

Ow, the next thing that would pop into your head is to how to start using bitcoins. That’s simple. The first thing you will need to get is a wallet – like any digital wallet. You can create the wallet via numerous online applications. Your wallet will basically be like an app that you will install into your phone. Once you’ve got yourself a Bitcoin wallet, you can start your bitcoin journey and start accumulating coins. But where do you get coins from?

The next step would be to obtain bitcoins. There are 3 widely utilized ways of accumulating bitcoins:

    • If you are selling certain products, you can start accepting bitcoins as a form of payment.


    • You can purchase and sell bitcoins through the Bitcoin exchanges. This is the most common way people accumulate bitcoins.


  • You can even trade bitcoins for traditional currencies.

Is bitcoin safe?

This depends on what you mean by safe. People worry that their wallet can be hacked but as per experts the cryptocurrency underlying the bitcoin system is quite secure and chances of hacks are very less. Bitcoin is not an interconnected series of individual accounts – accounts with some amount of assets – but rather a record of each and every transaction that has ever taken place involving bitcoins.

When a person wishes to transfer bitcoins to someone else, the computers involved in running the software for the bitcoin process checks and tracks the sender’s public signature through an algorithm. The software also checks the past transactions of the sender encoded in the blockchain in order to ensure that the sender actually owns the bitcoins.Then the same verification process is followed for the receiver. Once all the verification is completed, the transaction is aggregated with other transactions. The bitcoin software verifies the legitimacy of the block of transactions.

Now, to surpass all of these checks and verifications and hack into bitcoin, the hacker would require immense computer power on his plate.

What lies in future for bitcoin?

We are moving towards a cashless future. After understanding How Bitcoin Works it is clear, Bitcoin might embark upon as a winner at the end. But no one knows it for sure.

People often forget that bitcoin is just a protocol. An example of protocol would be HTTP. Bitcoin as a protocol is going to stick as per the opinions of some experts. They say that the bitcoin app (the money exchange part) is just an app written over the protocol. It is like the Netscape browser written for (predominantly) HTTP. Maybe the bitcoin payment system would get wiped out and some new system would get developed the protocol.

With Bitcoin gaining popularity, governments are starting to take stances against or for it. Recently, RBI issued a very vague warning that Bitcoin usage is not safe as there is a possibility of potential risks of money laundering and cyber security. In China, the government went one step ahead and barred financial institutions and payment institutions from using or accepting bitcoins as a form of payment. Governments are raining down and crashing “black markets” on the suspicion of bitcoin usage for illegal activities.

In India, we are still to catch up with the world in bitcoin usage. The Indian currency is not freely convertible. This makes it very difficult to convert rupees to other currencies. Because of this hindrance, obtaining bitcoins is full of hassles as compared to other countries. Another problem with obtaining bitcoins in India is that the most prevalent method of transferring currency is electronic method or NEFT as more commonly known.This makes the liquidity of bitcoins relatively scarce in India. This trend is picking up too but it might take a time longer than anticipated.

What are its characteristics?

Bitcoin offers a plethora of features that set it apart from all the government-backed currencies. Though we have mentioned some of the characteristics before, let’s revisit some of them one by one.

  1. It’s decentralized

Bitcoin or the bitcoin network is not controlled by any central authority. The network consists of a group of machines that monitor and process each transaction. And all the machines need to work in sync otherwise the process would fail. This provides an advantage that one central authority cannot control or tinker with the process. No single authority has the power to take charge of the system.

  1. It’s easy to set up

Opening a conventional bank account is full of hassles. You will be required to follow through numerous protocols. However, in the case of a bitcoin account, you can set it up in seconds, no questions asked, and with no fees payable.

  1. It’s anonymous

To some extent, yes. Each user can have multiple bitcoin addresses and each address is never linked to any personal information of the user. Simply put, you cannot reveal the identity of a user by just their bitcoin addresses.

  1. It’s completely transparent

The Bitcoin system stores and monitors details of every single transaction that ever happened in the network. They store the information in a ledger, called the blockchain (as described earlier). Nobody can hide anything on the blockchain.

In case you deal with bitcoins, a number of bitcoins you have will be fully transparent to other users in the network. They will know the exact amount of bitcoins in your bitcoin addresses but they will not know that the address is yours this is actually how bitcoin works.

  1. Zero or minimal transaction fees

Bitcoin usage does not require or requires minimal transaction fee. This is the reason that merchants are slowly adopting and increasing its usage.

  1. It’s fast

The money transfer process is quite fast. It’s like IMPS. You send money and the amount is transferred as soon as the bitcoin software processes the transaction.

  1. It’s non-repudiable

Once you make a payment via bitcoin, it’s non-refundable unless the receiver sends it back to you. Also, you cannot process two transactions with the same bitcoins.

Hope this article helped shed some light on the world of bitcoin and how Bitcoin Works. Please share your thoughts if you liked the article. 


Tags : BitcoinCryptocurrency
Aditya Singh

The author Aditya Singh

I am an Engineer turned Writer, Blogger, and Web Developer. A writer by day and reader by night, and is passionate about technology and Gadgets.

Leave a Response