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How Does Bitcoin Work – Explained!

How Does Bitcoin Work

As these new developments are introduced in the market, it provides users with many services, and it all started with the original cryptocurrency – Bitcoin. Unlike traditional payment and banking systems, bitcoin is based on a decentralized blockchain network, rather than a centralized authority where it cannot be controlled by any monetary agency or financial institution. 

What is Bitcoin?

Bitcoin is one of the leading digital currencies, a decentralized, peer-to-peer network that records transactions in a distributed ledger known as the blockchain. Bitcoin was launched in 2009, and it is considered the largest cryptocurrency by market capitalization. Bitcoin is referred to as a cryptocurrency, digital currency, or virtual currency; it is a form of money that is virtual or an online version of cash. Bitcoin design is open-source and public; it uses a peer-to-peer network to conduct transactions. Conducting transactions and issuance of bitcoins are collectively carried out by the bitcoin network. 

How Does Bitcoin Work?

  • Bitcoin can also be called a peer-to-peer electronic cash system or peer-to-peer bitcoin network where the users can transact without any intermediaries. Also, Bitcoin is a digital currency and not a paper currency; the transactions that involve bitcoins are very easy, a person’s physical presence is not needed, and it is carried out smoothly.
  • Bitcoin is a decentralized network which means no intermediary regulates the transactions involving bitcoins. Rather, a Bitcoin transaction cannot be considered valid unless 50% of the machines have verified it on the network.
  • Bitcoins are mined by miners; they use specialized hardware like mining rigs to solve complex mathematical problems for confirming the transactions known as Blocks. When a new block is confirmed, it is added to the blockchain, and the miners are given a small percentage in Bitcoin as a reward.

How Can You Create Bitcoins?

  • Initially, bitcoins were given as a reward to the first miner who had created a hash for the transaction blocks; this implies that there is a competition among the miners like who will be the first one to generate the block to receive bitcoins as a reward.
  • As Bitcoin halves, every four years (the time is taken for creating 210,000 blocks), the reward for miners halves every 4 years too. After the recent halving event that occurred in May 2020, the reward has gone down to 6.25 bitcoins per block for mining it.
  • The miners receive new coins as rewards that are added to their bitcoin wallet. They can exchange them with other peers on the bitcoin network. This, in turn, creates many transactions that are added to the blocks and are assigned hashes, and as a result, more bitcoins are released into the network. This process goes on till the entire bitcoins are in circulation. 

How Do Bitcoin Transactions Work?

  • Bitcoins are stored in an encrypted text file in a digital wallet on a computer or a mobile. You can send and receive bitcoins without the interference of third parties, and all the transactions of sending and receiving bitcoins are recorded in a public ledger called the blockchain, where the transactions are carried out anonymously.
  • Transaction of bitcoin consists of a list of various inputs and outputs; every output has a public key linked to a transaction. For spending these coins, the input is needed with a digital signature that needs to be matched. For digital signatures, bitcoin uses elliptic curve cryptography.
  • If you need to send bitcoin, you need to have access to the private and public keys that are associated with the bitcoin. When we say that a person has bitcoins, we mean that he has access to a key-pair that consists of public keys and private keys.
  • Public keys are also known as bitcoin addresses that are random sequences of numbers and letters that similarly function as an email address or just like a username in social media sites. It is safe to share your public keys with others; you can also give your bitcoin address to your peers if you want them to send Bitcoins. 
  • The private key is also a sequence of numbers and letters, just like passwords for your email accounts; these private keys should be kept secret. You should not share your private key with anyone. Otherwise, there is a possibility that your bitcoins might disappear from your wallet; also, you should back up your private keys and write them down on paper and safely store them; if anybody unlocks the keys, they can get access to the bitcoins that are stored in it.

Final Thoughts

To summarise, bitcoin is a well-known name in the cryptocurrency market where it has revolutionized digital currencies. Needless to say, there are several digital currencies after the advent of bitcoin that are available for investors. Even though several digital currencies are based on bitcoin’s network, none could match the speed of bitcoin, its network strength, and its community support. Bitcoin continues to be the leading cryptocurrency dominating the global market since the value of bitcoin is going towards an upward trend day by day; investors should be very careful when they are investing in this cryptocurrency as the bubble might burst anytime soon. But if you trade with the automated trading platforms like Bitcoin Pro then you can make good money. Bitcoin Pro is an automated trading platform that helps you to make good money from Bitcoin trading. You can check Bitcoin Pro Review to know further more about this innovative platform.

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