The main question you need to ask yourself is: ‘What am I actually buying?’ Understanding what Bitcoin is requires a basic understanding of how it works. We will break down Bitcoin for you – in a straightforward and easy-to-understand way.
Many resources on the web offer very comprehensive guides on how Bitcoin works. But most of them are really difficult to understand. They dive very deep into complex math and computer science. It’s simply hard to digest.
Every ever made transaction using Bitcoin exists on a so called pubic distributed ledger. A ledger is a digital account system in form of a decentralised database which is stored on all computers that run a Bitcoin wallet and therefore the Bitcoin network.
The Bitcoin network is ran by computers across the globe, verifying transactions on the network 24/7. That’s also the the reason why it is called a distributed ledger. Here’s an example: If user A wants to send user B Bitcoin, the computers in the Bitcoin network will validate if user A actually has the right amount of Bitcoin in his wallet. The computer in the network do this by checking the previous transactions, validating that user A has received Bitcoin the past.
If the network can verify that user A has a sufficient amount of Bitcoin in his wallet, then the transaction will be processed.
So, we now know that Bitcoins are records of transactions. But how do we know those records are safe?
Your Bitcoin wallet is a key component and an important part of this process. A Bitcoin wallet is a software that stores your Bitcoin. It has a private and a public key. Your wallet uses the private key to sign transactions. It uses the public key to receive funds from others, who send these funds using their private keys.
The keys are secured using cryptography, which is the study of secure communication. It’s extremely difficult for a hacker to learn anyone’s keys through mathematical means. This allows millions of people to send and receive Bitcoin with confidence.
While a thief can steal your pocket wallet, it is rather difficult to steal Bitcoin in the same way. Hackers would need to hack into your wallet to steal money. That’s not easy, but it does happen.
No government control
But what about the government’s role in all this? How can Bitcoin exist without any central entity controlling it?
Bitcoin is created by a process called “mining.” Mining is what it’s called when computers in the Bitcoin network solve hard math problems. During this process, new Bitcoins are created.
Bitcoin is created, or in Bitcoin-terms “minted”, by a process called “mining”. Bitcoin mining means adding more bitcoins to the currency ecosystem. There will be a total of 21 million bitcoin in circulation by 2140.
People across the globe use their computers to mine Bitcoin. What’s the point of mining? Doesn’t this just cost you electricity? Excellent question. They do it because they get some of the newly created Bitcoin as a reward for verifying transactions on the network. This gives miners a financial incentive to contribute.
It’s such a powerful incentive that mining has become a big business. Entire companies exist to mine Bitcoin using hundreds of machines.