What Exactly is Bitcoin and How Does it Work? Complete Guide

Bitcoin has been the subject of many discussions since its inception, but what exactly is Bitcoin and how does it work?

This is a complete beginner’s guide to Bitcoin.

Join me let’s explore this topic if you want to understand Bitcoin and how it works. 

In truth, cryptocurrency has been a buzzword in recent years, and Bitcoin is often considered the poster child of this digital currency revolution. 

However, despite its popularity, many people are still unsure of what exactly Bitcoin is and how it works. 

There have also been many debates and controversies about Bitcoin since its inception.

But in this post, I am going to discuss what exactly Bitcoin is, its creation, how it works, and how to invest in it.

I will also cover other important topics around Bitcoin – to help you better understand this revolutionary technology that has gained increasing popularity over the years.

What Exactly is Bitcoin?

Bitcoin is a digital currency or cryptocurrency. 

It is a decentralized currency, which means it is not controlled by any government or financial institution. 

Instead, it operates on a peer-to-peer network where users can directly send and receive payments without intermediaries such as banks or payment processors.

The backbone of Bitcoin is the blockchain, which is a decentralized, public ledger that records all transactions made on the network. 

The blockchain ensures that all transactions are secure and transparent, as each transaction is verified by multiple nodes on the network before it is added to the ledger. 

This makes it difficult to alter or manipulate transaction data, ensuring the integrity of the system.

Bitcoin transactions are fast, secure, and low-cost. 

What Year was Bitcoin Started

The domain name Bitcoin.org was registered in August 2008.

In October of the same year, the now-famous white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” was published on Bitcoin.org.

On January 3, 2009, the first Bitcoin block was mined. This is now known as the “genesis block”.

A week later, the first test transaction took place. 

Bitcoin had no real monetary value at this point. 

In fact, the first economic Bitcoin transaction happened more than a year later, on May 22, 2010. When a Florida man spent 10,000 Bitcoin for 2 Papa John’s pizzas. This day has been celebrated as Bitcoin Pizza Day ever since. 

What is the Main Purpose of Bitcoin

Bitcoin was created in the aftermath of the 2008 financial crisis, which highlighted many of the weaknesses and inefficiencies of traditional financial systems. 

Bitcoin was seen as a potential alternative to these systems, providing greater transparency, security, and control over one’s finances.

A currency to provide a way for people to make peer-to-peer transactions without the need for intermediaries such as banks or governments. 

Bitcoin was designed to be a trustless system not controlled by any person, group, government, or financial institution, and therefore free from manipulation or inflation.

Bitcoin is often compared to gold because of its scarcity. 

There is a finite amount of Bitcoin in circulation, with only 21 million ever to be mined. 

This scarcity is intended to make Bitcoin more valuable over time.

Who is the Real Creator of Bitcoin

Bitcoin was created by an unknown person or group using the pseudonym “Satoshi Nakamoto”. 

The true identity of the creator(s) remains a mystery, and they have not been publicly identified.

How is a New Bitcoin Created

New bitcoins are created through a process called “mining.” 

Bitcoin mining involves solving complex mathematical problems using specialized computer hardware to validate and verify transactions on the Bitcoin network.

When a miner successfully solves a problem, they are rewarded with a certain amount of bitcoins, which is currently 6.25 Bitcoin per block but is halved after every 210,000 blocks mined, or roughly every 4 years.

A block is a group of transactions that have been validated and added to the blockchain, which is a public ledger that records all Bitcoin transactions.

The mining process is designed to be resource-intensive and time-consuming to ensure that the creation of new Bitcoin is slow and steady. 

In fact, the total number of Bitcoin that can ever be created is limited to 21 million, which is expected to be reached in the year 2140.

It’s important to note that the mining process also plays a critical role in securing the Bitcoin network and ensuring that transactions are processed quickly and efficiently.

Mining Bitcoin is one of the many ways to earn Bitcoin for free

To get a better understanding, you can read:

Number of Satoshis in a Bitcoin

There are 100 million satoshis in 1 Bitcoin.

The term “satoshi” refers to the smallest unit of Bitcoin, named after Bitcoin’s unknown creator(s) Satoshi Nakamoto. 

It is similar to how there are 100 cents in 1 US dollar.

1 sat = 0.00000001 BTC

100,000,000 sat = 1 BTC

Number of Satoshis in a Bitcoin

This is why you don’t need to buy 1 Bitcoin to start investing in Bitcoin. 

In fact, you can start investing in Bitcoin with as little as $20.

Where to See Live Bitcoin Price

There are several websites and applications where you can see the price of Bitcoin. 

Two of the most popular options are:

These platforms provide the real-time price of Bitcoin and other cryptocurrencies, historical data, price charts, market capitalization, trading volume, and other relevant information about the cryptocurrency market.

How is Bitcoin different from Traditional Currency?

Bitcoin differs from the traditional currency in several ways. 

Firstly, it is decentralized, meaning is not controlled by any government or financial institution. 

Instead, it operates on a peer-to-peer network. 

Secondly, it is digital, meaning that it exists solely in digital form and does not have any physical equivalent like banknotes or coins. 

So ignore anyone who wants to sell physical Bitcoin to you. 

Thirdly, its transactions are recorded on a public ledger called the blockchain, which makes them transparent and difficult to alter. 

Finally, unlike fiat currencies, Bitcoin has a limited supply, with only 21 million units that can ever be created.

How Does Bitcoin work

Here are how Bitcoin works, including the technology behind it and the process of mining.

Blockchain technology

Bitcoin transactions are recorded on a public ledger called the blockchain. 

The blockchain is essentially a database that records all transactions that have ever occurred on the Bitcoin network. 

It is a decentralized system, meaning there is no central authority controlling it.

The blockchain is made up of a series of blocks, each containing a group of transactions. 

These blocks are linked together in chronological order, forming a chain.

Each block contains a unique code called a hash, which is generated by a mathematical algorithm that takes into account the data in the block. 

This hash links the block to the previous block in the chain, making the entire chain tamper-proof.

Mining

Mining is the process of adding new transactions to the blockchain. 

Miners use powerful computers to solve complex mathematical equations, which allows them to add new blocks to the chain. 

In exchange for their work, miners are rewarded with newly created Bitcoins.

Mining also serves as a way to verify transactions on the network. 

Miners check that transactions are valid before adding them to a new block, and the network as a whole verifies each block before adding it to the blockchain. 

This verification process ensures that all transactions on the network are legitimate.

Transactions and Wallets

Bitcoin transactions are sent from one digital wallet to another. 

Each wallet has a unique address, which serves as a destination for the transaction. 

Transactions are verified by the network, and once verified, they are added to the blockchain.

Digital wallets are software programs that store Bitcoin and allow users to send and receive it. 

They come in several forms, including desktop, mobile, and web-based wallets. 

Each wallet has a unique address that serves as the destination for Bitcoin transactions.

Why do people want Bitcoin?

Here are some reasons people like Bitcoin:

  • Potential for high returns: While the price of Bitcoin can be volatile, the truth remains it has seen incredible growth since its creation in 2009, which has led many investors to take notice. In 2010, one Bitcoin was worth less than $0.01, but as of March 2023, one Bitcoin is worth over $27,000. Bitcoin is the best-performing asset of the last decade – surpassing other investment options like stocks, bonds, gold, and silver.
  • Hedge against Inflation: People use Bitcoin as a hedge against inflation. As you may know, inflation can erode the value of traditional currencies, making them less valuable over time. Bitcoin on the other hand can help protect against inflation, as its value continues to increase over time due to limited supply and an increase in demand.
  • Fast Transfers and Low fees: The ability to transfer funds quickly and at lower transaction fees is another reason people like Bitcoin, particularly for international transactions. Unlike traditional transfers, Bitcoin transactions can be processed in a matter of minutes, making it an ideal option for investors who require quick transaction settlements.
  • Independence from a Central Authority: Bitcoin also offers investors independence from the central authority, which is one of the key advantages of this technology. The government cannot control or censor it, which can be important in countries with authoritarian governments.
  • Anonymity: Bitcoin transactions are relatively anonymous, which means users can make purchases without revealing their identity.

How do people get Bitcoin?

There are several ways people can get Bitcoin.

The four major ways are:

  • Buying Bitcoin using ‘real’ money.
  • Accepting Bitcoin as payment. 
  • Earning Bitcoin through Mining.
  • Earning Bitcoin by Referring your friends. 

Buying Bitcoin

Here are several ways to buy Bitcoin:

Crypto Exchanges

Cryptocurrency exchanges allow you to buy and sell Bitcoin for other cryptocurrencies or fiat currencies. 

Examples of popular exchanges include Binance, Coinbase, KucoinGate.io, and Bybit.

You should check my recommended crypto exchanges.

Bitcoin ATMs

Bitcoin ATMs allow you to buy Bitcoin using cash. 

These machines are found in major cities and can be a convenient way to buy Bitcoin.

To see Bitcoin ATMs near you visit Coin ATM Radar

Peer-to-Peer Transactions

Peer-to-peer transactions involve buying Bitcoin directly from another individual. 

A website like Paxful facilitates these types of transactions.

You should check our detailed guide on how to buy Bitcoin and other cryptocurrencies for more details. 

Receiving Bitcoin from Someone 

To receive Bitcoin from someone, you will need to follow these steps:

  • Obtain a Bitcoin wallet address: You will need a Bitcoin wallet address to receive Bitcoin. The easiest way a beginner can get a Bitcoin wallet address is by registering with a crypto exchange
  • Share your Bitcoin address: Once you have a Bitcoin wallet address, you will need to share your Bitcoin address with the person who wants to send you Bitcoin. Your Bitcoin address is a string of letters and numbers that identifies your wallet.
  • Wait for the transaction to be confirmed: After the person sends you Bitcoin, you will need to wait for the transaction to be confirmed by the Bitcoin network.
  • Check your Bitcoin account/wallet: Once the transaction is confirmed, you should see the Bitcoin in your Bitcoin account/wallet. 

It’s important to note that Bitcoin transactions are irreversible, so be sure to double-check the Bitcoin address you provide to the sender to avoid sending it to the wrong address.

read also:

Sending Bitcoin to Someone else

To send Bitcoin to someone, you will need to follow these steps:

  • Add funds to your Bitcoin wallet: Before you can send Bitcoin, you need to have Bitcoin in your crypto exchange account/wallet. You can obtain Bitcoin by purchasing it from an exchange, receiving it from someone else, or mining it.
  • Obtain the recipient’s Bitcoin address: To send Bitcoin, you will need the recipient’s Bitcoin address. This is a unique identifier that represents their Bitcoin wallet. The recipient should provide you with their Bitcoin address.
  • Enter the recipient’s Bitcoin address: In your Bitcoin exchange account/wallet, look for the option to send Bitcoin. You will need to enter the recipient’s Bitcoin address, and the amount you want to send.
  • Confirm the transaction: Before the transaction is sent, you will need to confirm it. Double-check the recipient’s Bitcoin address and the amount you are sending. Once you confirm the transaction, it cannot be reversed.
  • Wait for the transaction to be confirmed: After you send the Bitcoin, you will need to wait for the transaction to be confirmed by the Bitcoin network.

Once the transaction is confirmed, the recipient should see the Bitcoin in their account/wallet. 

read:

How to buy Bitcoin and send it to someone

What is Wallet Address in Bitcoin

A Bitcoin wallet address is a unique identifier that represents a destination where Bitcoin can be sent. 

It is a string of alphanumeric characters that begins with the number 1 or 3 (or bc1 in the case of SegWit addresses) and can be up to 34 characters long.

When you want to receive Bitcoin from someone, you provide them with your Bitcoin wallet address, which they use to send Bitcoin to you. 

Check the image below to see what a Bitcoin wallet address looks like. 

What is Wallet Address in Bitcoin

How can Bitcoin be Used?

Bitcoin can be used in a variety of ways, including:

1. Buying goods and services: Bitcoin can be used to buy goods and services from merchants that accept it as payment. 

A growing number of businesses, both online and offline, now accept Bitcoin as a payment method.

2. Investment: Bitcoin can be bought and held as an investment, with the expectation that its value will continue to increase. 

Some investors view Bitcoin as a long-term store of value, similar to gold or other precious metals.

3. Trading: Bitcoin can be traded on cryptocurrency exchanges, where investors buy and sell Bitcoin based on its current market value. 

Traders can profit from the price movements of Bitcoin by buying low and selling high.

4. Remittances: Bitcoin can be used to send money across borders, allowing for fast and low-cost local/international transfers without the need for a traditional bank.

5. Fundraising: Bitcoin can be used for crowdfunding and fundraising campaigns. 

Charitable organizations, political campaigns, and individual fundraising efforts have all used Bitcoin as a payment method.

6. Microtransactions: Bitcoin can be used for small payments and micropayments, such as paying for online content or tipping content creators.

Overall, Bitcoin is a versatile and increasingly popular payment method that can be used for a wide range of purposes.

How long does a Bitcoin Transaction take

The time it takes for a recipient to receive a Bitcoin transaction can vary depending on several factors, such as network congestion, transaction fees, and the size of the transaction.

In general, Bitcoin transactions are added to a block approximately every 10 minutes. 

However, if the network is congested, it can take longer for a transaction to be included in a block.

To increase the likelihood of a transaction being confirmed quickly, users can attach a higher transaction fee to the transaction. 

Miners are incentivized to include transactions with higher fees because they earn fees for adding transactions to a block.

In general, a transaction with a reasonable fee can be confirmed within 10 minutes to an hour. 

Anything outside of that can be a result of a congested network and low transaction fees.

Some wallets and crypto exchanges may allow users to choose between different levels of fees when sending Bitcoin to ensure faster confirmation times. 

Bitcoin Investment Tips for Beginners

Investing in Bitcoin can be a lucrative opportunity, but beginners need to take necessary precautions to minimize risk. 

Here are some tips for beginners looking to invest in Bitcoin:

1. Start small: Bitcoin is a volatile asset, and its value can fluctuate rapidly. 

To minimize risk, it’s a good idea to start with a small investment and gradually increase your investment as you become more familiar with the market.

2. Choose a reputable exchange: When buying Bitcoin, you’ll need to choose a reputable exchange to facilitate the transaction. 

Look for a well-established exchange with a good reputation and robust security measures in place.

Check out my trusted crypto exchanges.

3. Secure your Bitcoin: Once you’ve purchased Bitcoin, it’s important to keep it secure. 

read:

4. Diversify your investments: While Bitcoin can be a lucrative investment, it’s important to diversify your investments to minimize risk. 

So, consider investing in other cryptocurrencies. 

[READ10 Best Cryptocurrencies to Buy which I Recommend for Beginners]

5. Be prepared for volatility: Bitcoin is known for its volatility, and its value can fluctuate rapidly. 

Be prepared for the possibility of price swings, and avoid investing more than you can afford to lose.

How to get Started in Bitcoin Investing

Investing in Bitcoin involves a few steps. 

Here are some steps you can take to start investing in Bitcoin:

1. Choose a crypto exchange: To buy Bitcoin, you will need to use a crypto exchange. 

Look for a reputable exchange that is secure, easy to use, and has low fees. 

Some popular exchanges include BinanceBybitKucoin, Coinbase, and Gate.io.

2. Set up an account: Once you’ve chosen an exchange, create an account using your email address or mobile phone number.

After registration, you will need to complete KYC (Know Your Customer) verification. 

This is a mandatory process that requires you to provide your personal information, such as a government-issued ID. 

Thankfully it is not difficult to complete.

3. Fund your account: Once your account is set up, you can fund it with cash or other cryptocurrencies. 

You can fund your account using credit/debit cards, bank transfers, and third-party payment processors like Paypal, Apple pay, etc.

4. Buy Bitcoin: With funds in your account, you can now buy Bitcoin. 

Choose the amount you want to invest, and place a buy order. 

As I mentioned earlier, you can start with as little as $20. 

5. Store your Bitcoin: After buying your Bitcoin, you can store it in your crypto exchange or move it to a wallet. 

There are various types of wallets, including hardware wallets (which store your Bitcoin offline), software wallets (which store your Bitcoin on your computer or phone), and online wallets (which store your Bitcoin on a website). 

As a beginner, you can start by leaving it on the exchange. 

Only be sure it is a reputable crypto exchange. 

You should see my favorite crypto exchanges

Conclusion

There you have it, what Bitcoin is, and how it works – a complete beginner’s guide. 

A digital currency that operates independently of central banks and financial institutions.

Bitcoin is a lucrative investment opportunity. 

I hope you found the post helpful.

Kindly share it with your friends and follow us on Twitter and on Instagram

You should also check out other content from us below to learn and understand Bitcoin and the cryptocurrency market better.

read also:

What Exactly is Bitcoin and How Does it Work

IMPORTANT; you must never send money to anyone you meet online asking to help you invest in cryptocurrency. They are scammers. Crypto is easy, and you can do it all by yourself.

DISCLAIMER:

The information presented here should not be used as the sole basis of any investment decisions, nor should it be construed as financial, tax, legal, or accounting advice. I will also advise that you invest in cryptocurrency only what you are comfortable living without, at least temporarily.

[READ: How to Send Money through Bitcoin ATM]

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