What is Bitcoin and How Does It Work?


To eradicate the confusion surrounding Bitcoin (BTC), let us separate it into two sections. On one side, we have bitcoin-the-token- a snippet code which symbolizes ownership of a virtual idea. On the other side, we have bitcoin-the-protocol, a distributed ledger system which keeps a network of balances of the bitcoin token. Both components are labeled as “bitcoin.”

The system support transactions without regulation from a central power, like banks. It is developed and kept virtually. Unlike traditional currencies like dollars, BTCs are not printed, they are created by computers using a software.

BTC was the first illustration of what is currently known as cryptocurrencies- an evolving asset class which has some common features with traditional currencies.

Who Invented BTC?

Satoshi Nakamoto, a pseudonymous software engineer, suggested BTC in 2008 as a digital payment method based on cryptocurrency/mathematical proof. Satoshi’s main concept was to create a method of currency exchange, sovereign of any central regulation, which could be transferred electronically in a secure, provable and immutable manner.

How BTC Differs from Traditional Currencies

BTC can be applied in carrying out business electronically, after the buyer and the seller of a good or service have come into agreement. It acts as conventional dollars or euros that are also transacted virtually. However, BTC is distinct from traditional currencies in several ways:

  1. Decentralization

This means that BTC has no central authority, it is regulated by a series of volunteer codes, and operated by an open network of connected machines globally.

  1. Limited Supply

Traditional currencies enjoy unlimited supply- financial institutions can supply as much as they desire and can even alter a currency’s price relative to others. Unlike these fiat currencies, the BTC supply is tightly structured by the basic algorithm.  A certain amount of BTC trickle out each hour and the trend persist till a peak of twenty-one million is attained.

  1. Pseudonymity

While sources of fiat digital transactions are normally made known, BTC investors and traders operate in semi-anonymity. Due to lack of a central authority, traders are not subjected to identify themselves while transacting.

  1. Immutability

Unlike traditional electronic payments, BTC payments are not reversible since there is no central regulator to order payment reversals.

  1. Divisibility

The least unit of BTC is known as Satoshi that is worth 100 millionth of a BTC (0.00000001). this can possibly facilitate microtransactions, which fiat currencies cannot.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.