What is Bitcoin and How does it work?

Bitcoin was created back in 2008 in a published paper, titled as “Bitcoin – A peer-to-peer electronic cash system” with the name of the owner as Satoshi Nakamoto. He created this system by collaboration of several cash transfers systems to create a uniquely designed electronic cash system. This system of Bitcoin doesn’t depend on the central system for its operation, and thus is a broadcast system used for transactions.

An assemblage of data hypotheses and technologies that form a  foundation of digital or virtual cash transactions is Bitcoin. The virtual currency is used to transfer, buy, or sell the commodities by the currency unit Bitcoin. These transactions take place with the participants, spread across the Bitcoin connections. Bitcoin uses the basic protocol of data transfer i.e. Internet, whereas the use of other data transfer networks can also be put into practice. The entire data stock of Bitcoin is accessible as an open source software, all over the Internet, and can be easily accessed by a wide range of computing devices such as Laptops, Computers, Smart Phones, etc.

The transfer of bitcoins can be carried over networks conveniently, as the other conventional currencies can be done. These bitcoin transactions include buying, and selling of goods, transfer money to an organization or an individual. The sell, purchase, and interchange of bitcoins in return to other currencies at the specific exchange rate is also possible. The biggest advantage of using bitcoin is that it a perfect form of currency over the Internet with the perks of being fast, secure, and unbounded with respect to boundaries. 

What is exactly Bitcoin?

The Bitcoin currency is entirely virtual, and there does not exist any physical, or virtual coins. The coins are just an implication towards the transfer value of the currency among the sender, and receiver. Each user of Bitcoin had a set of his own key which is a proof of his ownership. All means of transactions in the Bitcoin system are carried with the help of these keys. The user needs to unlock it, for transfer or spending the bitcoin currency. To store the key, and related data, digital wallets are used, which are available in the user’s computer. To possess a key that unlocks the transaction is the only way to spend bitcoin. This provides the advantage of entire control of the Bitcoins in the hands of the user.

Bitcoin is a disseminated, peer-to-peer system, and is not under control of any ‘Central’ server or a control system. The process of creating Bitcoins is termed as ‘mining’, this process involves the formulation of mathematical problems while the process of bitcoin translation is ongoing. The ability  of a computer to process data, verification, and record the transaction, can allow a user to operate as a miner. In an average time of every 10 minutes, someone is liable to rectify the transactions of the previous 10 minutes, and is rewarded with new exclusive Bitcoins. The bitcoin mining distributes the functioning of a central-bank and generates a need to replace any centralized bank with International competition.

How does Bitcoin Work? 

The transfer of the Bitcoin informs the network regarding the number of bitcoins requested for transfer to the other Bitcoin user, and the authorization of the other owner. The new user will be liable to use these bitcoins, by creating a new transaction, and authorizing another owner. In this way, the line-up of transactions on Bitcoin continues with the shifting of ownership.

The transactions related to bitcoin is a two-ended data entry system. The debit transactions are termed as inputs, while credits are termed as outputs. The user can process one or more than one input in a single debit transaction, as well as one or more than one output can be processed in a single credit transaction. All these transactions are registered in the Bitcoin account. These credits and debits, doesn’t generally sum up to the same amount. The sum of outputs is less than that of the inputs, this difference is a small amount charged as transaction fees, which goes to the miner who is involved in the transaction in the ledger. All the transactions in Bitcoin are visible in the Book-Keeper entry.

The Bitcoin transactions include the authorization of each amount of bitcoin transferred by use of digital signature associated with the respective individual. This signature is in the digitized format, and can be verified by anyone. In Bitcoin, the term, ‘spending’ is equivalent to signing a transaction treaty, which transfers the sum of amount from the prior owner to a former owner, that is identified by a unique Bitcoin address.


To generate a transaction at Bitcoin, you only need to specify the receiver, and the amount to be transferred. The wallet application contains all the inputs, outputs, and other specifications. Feeding up the destination, and the amount in the Bitcoin application is the only thing you need to do, the rest of the processing is carried out in the application itself.

The wallet application can operate even in offline mode. The construction and signing can be carried out in offline mode, the Bitcoin network is required only to execute the transfer. The data entry of each debit, and credit is stored in the Bitcoin Wallet, when you receive a Bitcoin amount it is registered in your wallet, and when you transfer any sum if amount to someone else the debit data is stored in your wallet as well. If the wallet application is unable to record the data unspent transactions, the bitcoin network will be questioned to retrieve this information.


The database of transactions outputs are stored in the wallet application of Bitcoin. These databases are encrypted and can only be accessed with the wallet’s own keys. Thus, you will have a transaction copy saved in your wallet application. Every database in the wallet of Bitcoin has a copy of each unspent output in the entire transaction chain. The wallet allows the verification of all the incoming transactions with the precise input of amount, and respective details of the transfer. 


The propagation of the transaction in the Bitcoin network becomes a part of the block chain, only after its verification process. This process is called Mining. The trust of the Bitcoin System is based entirely on the Computation process. To bundle the transactions into various blocks, a tremendous amount of calculation is to be performed to prove it. While, a small amount of calculated data to verify the proven process. The process of mining involves two main functions in Bitcoin, 

  • New bitcoins are generated in each block, by the process of Mining. This is similar to printing of New Money by the Central Bank. The amount of bitcoins created within each module is fixed, and may decrease with time. 
  • All the data related to transactions is confirmed by computational databases, and is limited to the specific block that contains them. This generates the surety, and safety of accessible data. The greater the number of blocks involved the greater is the trust ensured.

Mining can be described as a giant computational data that resets every time you find a solution. The difficulty level is adjusted automatically, so that it takes approximately 10 minutes to get through with the help of the solution.

Bitcoin is gaining popularity among the investors, and organizations as the price of Bitcoin is increasing at a considerable rate. The value of Bitcoin is expected to increase by a greater amount in the near future.

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