What is Bitcoin and how does it work?


Bitcoin is a technology of money, the first drastic change since the creation of banking more than 900 years ago. As such, Bitcoin’s advances are seen in the areas of money transfer, control, and safekeeping, as well as in terms of money supply and money issuance.

Key Fact:

  • Bitcoin improves money in its entirety: both for its use and its creation.
  • Bitcoin is as easy to use as a bank account or digital banking app.
  • Bitcoin allows the user to mobilize their money at will 24/7/365, in minutes, and at a very low cost.
  • Bitcoin gives the user back control over their money, adding improvements to digital privacy.
  • By not depending on a central entity, anyone can use bitcoin and “work” operating the system.

What is Bitcoin?

As its creator, Satoshi Nakamoto described it in the technology’s defining document: Bitcoin is a peer-to-peer (p2p) electronic cash system. Every word in this definition is key. First, there is talk of a cash system and not only cash, this implies that Bitcoin is not only money (bills, coins, or any instrument to keep accounts between people), but also the rules and mechanisms for that cash to exist. and can be used. Using an analogy, Bitcoin is the dollar, the Federal Reserve, and the banking network all at once.

What is Bitcoin and how does it work?

Second, there is talk of electronic cash, which indicates that this money, these “bills” or “coins” that are used are not physical but digital. Bitcoin is created with computers that transform energy into money. This also means that while a physical representation (see OpenDime for an example) of that electronic cash can be created, its original form is digital.

Finally, there is talk of p2p or between equals to refer to the fact that Bitcoin does not have a central authority, there is no entity within this system that is more powerful or has more privileges than another. In Bitcoin, anyone who wishes can take part in the system at the level they want: they can be a simple user of money through accounts (also known as wallets ), be an auditor of the system through node software on their computer and /o can also be a currency issuer through mining equipment.

How Bitcoin improves money?

In the face of who uses the money

Until recently, there were only three main ways to manage money: cash, bank account and with a company like PayPal. The first form, cash, is highly convenient for payments of small to medium amounts in person, for example, up to a few hundred bills; It’s instant, it’s private, and it’s free. For large amounts, however, using cash becomes cumbersome, both because of the counting and verification of bills and because of the space they occupy. The same effects when it comes to saving or storing cash, adding the care that must be taken to avoid damaging the bills. Finally, cash is seriously inconvenient to use for international transfers.

Ways two and three (banks and companies like PayPal) solve some of the drawbacks of cash but add problems. To save or move money, an account on these sites helps dramatically since the user does not have to count or verify bills or find a place to store or take them, these companies take care of it. This advantage allows simple shipments of large sums of money, as well as international transfers; although they are slow (they take days) and can be very expensive.

Apart from the problem of high costs, there are two others of profound importance, which are the lack of control over money and privacy in transactions. By using banks or companies like PayPal, the money in a certain way ceases to be the property of the owner and becomes the property of these companies. How is this checked? Easy. Try to move your money on a day that these companies are not working (like weekends) or when you need it and these companies say you can’t for X reason, like lack of data or whatever policy they can make up.

Likewise, each movement that the user makes with his money is recorded and scrutinized by these companies, who judge and decide what the user can or cannot do with “his money” depending on their policies. To make matters worse, the data they record from each transaction of their users is shared with third parties all the time (data companies to earn money, or government agencies are common examples).

Bitcoin appears the fourth and best way to manage money today. This technology blends the best of past worlds. It allows transactions to be treated with the privacy and convenience of cash, and since it works digitally, it also adds the possibility of saving small to large sums of money and moving them to and from anywhere in the world. The best, at a low cost.

With Bitcoin, a person can open, free of charge, a digital account and keep as much money as they want; if you do it correctly, your money will always be accessible to yourself and protected from access by others. Once you have your money in your Bitcoin account or wallet, you can move it 24/7/365 to other Bitcoin accounts around the world in moments and with costs that approach zero, regardless of where in the world the money is being sent. transaction. These accounts include business accounts from which the user can purchase goods and services directly with BTC.

In short, Bitcoin makes money easier and cheaper to store and move, with greater security, control, and privacy for the owner and with lower costs than any other system.

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In the face of who issues the money

Bitcoin as a system not only defines how money is handled but also defines money itself: the characteristics of electronic cash. So, like a central bank, the Bitcoin system defines how many coins it issues and at what rate (expansion of supply), with the difference that it does so regardless of demand. Whether it is used by many or few people, the Bitcoin system will continue to issue money at the rate agreed upon by users without modifications to its programming.

In contrast, a central bank claims to be able to assess demand and modify the money supply accordingly, unsuccessfully seeking to keep the value of its currencies “stable” (for example, that a dollar is always worth a dollar in the market). . This is the main cause of the loss of purchasing power of money in the world, since the random and excessive increase in the supply of money, by simple mathematics, only leads to money as a whole is worth less. In other words, that one peso buys a loaf today and tomorrow, after printing, only enough for half a loaf.

Bitcoin eliminates this problem by pre-scheduling the offer. Since it is defined from the beginning of the system how new currencies will be added to it, the danger of loss of purchasing power due to random and excessive printing disappears. Given this condition, the demand for bitcoins logically and predictably affects (at least in the long term) the price of money and therefore the purchasing power of those who have it: if more people use BTC than before, the price will rise; on the contrary, if they use it less, its price will fall.

Furthermore, unlike a central bank, which is run privately by a few people (although it is an institution that affects the public), Bitcoin is run by anyone: anyone who wants to can “work” in this system, securing it. , keeping accounts and issuing coins.

Bitcoin Money Supply

The total supply of coins in the Bitcoin system has been defined since its launch in 2009 and will reach a maximum of 21 million bitcoins in the year 2140. In the same way, the rate of issuance of these new coins (expansion of supply) began with 50 bitcoins created every ten minutes approximately. Issued units are halved every four years; for example, since the year 2020, 6.25 BTC are regularly issued, and by 2024, 3,125 new BTC will be issued.

How does Bitcoin work?

Facing a use

Bitcoin works just like a digital bank account: the user has an account or wallet where they can deposit money and withdraw (send) it to another account. To do this, the user uses a kind of bank account number called a ” Bitcoin address “, which is nothing more than a finite series of alphanumeric characters.

Types of Bitcoin addresses

Bitcoin addresses can come in different formats and, depending on it, they allow the user to use more or less technological advances to manage their money. The difference becomes apparent at the start of each address. The most common formats are listed below, from oldest to newest:

Original format: 1 5e15hWo6CShMgbAfo8c2Ykj4C6BLq6Not
Format with simple spending conditions: 3 5PBeaofpUeH8VnnNSorM1QZsadrZoQp4N
Native Segwit format: bc1q 42lja79elem0anu8q8s3h2n687re9jax556pcc
Taproot format: bc1p mzfrwwndsqmk5yh69yjr5lfgfg4ev8c0tsc06e

In the case of Bitcoin accounts or addresses, the money that is deposited is not just any currency, but bitcoins (acronym BTC), the native currency of this system. BTC, just like any other currency, takes its value in reference to other assets that exist in the market. For example, one bitcoin was worth $35,000 (USD) on Monday, January 24, 2022, and so was 18.25 ounces of gold (XAU). Today it has another price.

It is important to note that unlike the types of money that we used to use in our daily lives, such as the dollar, the peso, or the euro, whose values ​​are believed to be stable (that is, a dollar, peso, or euro today buys the same than tomorrow or the day after, but not in a year or more), bitcoin has a variable value at all times. This does not necessarily imply a problem since, by being connected to the internet, a user can know exactly how much bitcoin to receive or spend when paying whatever.

Bitcoin is divisible

1 BTC is the whole unit of one of the “coins” or “bills” of the network. Now, each unit of bitcoin can be divided up to its hundred millionth part, that is, up to 0.00000001 BTC; which is also known as 1 sat or satoshi.

Facing a system operator

Bitcoin works as a network of computers connected through the Internet that is responsible for carrying out two main functions: one, keeping the system’s common accounting book up to date, synchronized, and in order, and two, consolidating the transactions carried out by users. of the system and issue new coins.

The word “blockchain”

It is important to clear up a widely held misconception before proceeding. The word “blockchain” is often used as a substitute for Bitcoin technology. However, it only refers to the ledger, an encrypted data file that contains the history of transactions made on the network. In short, it is an essential part of technology, but it does not replace it.

The first task is performed by the « nodes ». These are ordinary computers that run the Bitcoin software permanently in order to store the ledger, synchronize it with other nodes and keep it in order; Just as if you open WhatsApp and keep it on, synchronizing the messages, making sure to only save those that are in a specific language.

Types of Bitcoin nodes

Broadly speaking, there are two types of nodes:

Full nodes, which run the Bitcoin software, store the ledger and keep it in sync, and in good standing. They are also used to send and receive bitcoin (BTC).
Light nodes, also known as wallets or Bitcoin accounts, are applications that are used to use bitcoin (BTC) without the need to maintain the network. These work by requesting the information they require for their transactions from the full nodes.

The second task is carried out by the « miners ». These are also computers but specialized in carrying out a single task with very high performance. In this case, the task is to guess a number, among infinite possibilities, that allows you to compose a group or block of transactions sent by users under the rules established by the system and confirmed by the nodes.

There are thousands of these computers in the world competing to be the first to guess that number (technically called « nonce »), as if it were a lottery, and thus win the reward for the correct composition of the block of transactions in each round of approximately 10 minutes. . This reward includes the new coins issued by the system and the fees paid by users for sending their payments.

bitcoin mining at home

Although the Bitcoin mining industry is becoming more advanced, with more specialized equipment and larger farms, it is always possible to do the activity individually on a small scale in a profitable way, thanks to the nature of the Bitcoin system.

How to start using bitcoin?

Getting started with bitcoin is really easy. You just need to create a digital account using some dedicated program, equipment, or website and then acquire bitcoins (BTC) using one of the many ways that exist: through another person, at an exchange or bank, at an ATM or at A house of change. Each option for both accounts and purchases has advantages and disadvantages, be they cost, convenience, control, or security.

In the case of accounts or wallets, the easiest way to start is through a mobile application. The interested party must go to the application store of their phone (Google Play, AppStore, F-Droid, or another) and search for “Bitcoin”. There you will find a sea of ​​applications and you can choose the one that suits you best.

Be careful when downloading Bitcoin wallets

When reviewing the phone store, it should be noted that applications that are dedicated to private accounts, others that are exchange or bank, as well as others that may be scams, will be shown.

If the user wants to have complete control of his money, he must download a wallet application or personal Bitcoin account.

Once you have your account, familiarize yourself with it: see where the transactions are displayed, the balance, the receive and send window, as well as the configuration section.

To acquire your first bitcoins and be able to use this electronic cash system, you must give the person or institution with whom you are transacting the Bitcoin address of your account: either by copying and pasting it in text or by showing the QR code. Once your bitcoins have been sent to you, they will appear as an incoming transaction in your application that will be confirmed once the system has validated it.

With the bitcoins in your account, all that remains is to say Congratulations! You can now use the most advanced money system in the world. It is recommended to test send and receive funds (preferably with little money) to become fully familiar with the system and use it correctly.