What is Bitcoin and How Does it Work?

Bitcoin is a digital currency that is based on a Peer-2-Peer (P2P) decentralized technology. It was created in 2009 by a developer or group of developers referred to as Satoshi Nakamoto.

Satoshi Nakamoto is credited for publishing the Bitcoin Whitepaper in 2008. The identity of Satoshi remains unknown till today, however, his work birthed a new form of money that is currently changing the world of traditional finance.

Bitcoin is the world’s first true expression of blockchain technology and all transactions that take place when using bitcoin are registered on the public ledger. As a blockchain-enabled innovation, transactions are visible to everyone tasked with maintaining the Bitcoin network (node operators), however, BTC comes with unique cryptography that makes certain aspects of the transactions pseudo-anonymous.

Bitcoin is recognized with the ticker symbol ‘BTC’ and its total supply is capped at 21,000,000, and the coin can be acquired through a number of ways as would be explained below.

How Does Bitcoin Work: The Process of Mining

Bitcoin is not issued by any Central bank or regulated by any financial authority. The process of creating a new Bitcoin is called mining, an essential system that is crucial to the entire operations of the Bitcoin network.

When a Bitcoin transaction is sent to a wallet, thousands of miners (node operators) compete to solve a complex mathematical equation that will help confirm and register the transaction in a block on the blockchain. These transactions are collated on an average of 10 minutes (average Block Time) and mapped onto the blockchain with preference to the miner that first solved the computation needed to confirm the transactions.

In return, as much as 6.25 BTC is given as a reward for solving the equation and this exactly forms the way new coins are generated. In retrospect, without miners, transactions cannot be confirmed, and new coins cannot be generated. 

Part of the technical details put in place by Satoshi Nakamoto was that anyone can become a miner. The more the miners, the more difficulty will be experienced in solving the equation. Based on Bitcoin’s decentralized model, more miners imply higher security and network health.

However, the rewards for miners are programmed to reduce by half every four years through a process called Halving. The last halving took place in May 2020 which slashed the reward given to miners from 12.5 to 6.35.

The next halving event is slated for May 2024 and the reward will be reduced to 3.125 BTC per block. At the moment, as many as 18,955,775 Bitcoin units have been mined thus far. Based on the halving mechanism, the total 21 million BTC is not expected to be mined until at least the year 2140.

Bitcoin Uses

The original design of Bitcoin was for it to serve as a new currency of the internet. However, Bitcoin’s uses have evolved over the years. Based on its massive price growth over the years, it is not uncommon to find investors acquiring the coin as a hedge against inflation, seeing it is not governed by human-flawed monetary policies and its pegged supply.

A number of institutional investors have also taken a liking for BTC as a reserve asset on their balance sheet. This is a trend that became prominent in 2020 and is expected to dominate throughout this decade. The importance of Bitcoin is evolving, but one thing is certain, more people now use BTC than they were in 2009 when Satoshi Nakomoto first minted the first set of BTC.

Where to Buy and Store Bitcoin

While the primary way to generate Bitcoin is via mining, anyone can acquire Bitcoin by buying it on an exchange or trading platform. There are numerous trading platforms that sell Bitcoin including Binance and Coinbase. 

While local laws may impact how easy it is to get one’s hands-on Bitcoin, there are Over-The-Counter (OTC) desks that also offer BTC sales services. Anyone can also buy Bitcoin from friends and family, provided the buyer has the recommended wallets.

Buying Bitcoin is one thing, potential buyers should note that storing the coins is another. That there are no bank or customer services that one can complain to in the case of losses is why extra care should be taken in storing the coins. Oftentimes when a purchase is made with an established trading platform, the coins are deposited in a wallet that is automatically created at the point of registration.

The wallets from exchanges are referred to as hot wallets as they are connected to the internet. Hot wallets are prone to hacks, and as such, Cold Wallets, which safeguard BTC through a USB-like device, are often recommended. Depending on the amount and plans for the BTC in question, proper research should be done on the right choice of storage methods when buying Bitcoin.