Trying to understand Bitcoin basics

Bitcoin basics

Let’s discuss, How bitcoin works?

How bitcoin works in Simple terms

In Bitcoin system, everyone cooperates to keep track of everyone else’s money, no central authority (ex. Bank or Government) is involved. To best understand how the system works, let’s walk through an example using  dollars first.

Imagine only $21 Million exist in the world, and there are exists a detailed list of all the people who possess that money. Everyone, including you (even though you have only $5), have a copy of this list. When you give $2 to your friend, you must subtract $2 from your entry and list and add $2 to your fiend’s entry. After informing his transaction, he updates the list as well. In fact, everyone in the world need to update the list, otherwise list will be inaccurate. Therefore, not only do you need to notify your fiend, but also need to publicly announce that you are updating the list. If you try to cheat the system and send your fiend $1000, your cheating attempt would be easy to catch because everyone knows you have only $5 to give.

Now imagine that all transactions are carried out on computers that communicate via internet, and replace dollars with bitcoins. This is how Bitcoin works.


Bitcoin Units

 Bitcoin refers collectively to the entire currency system, whereas bitcoins are the units of currency. Although the total currency supply is capped at 21 million bitcoins, each one can be subdivided into smaller denominations, for example 0.1 bitcoins and 0.001 bitcoins. The smallest unit, a hundred millionth of a bitcoin (0.00000001 bitcoins), is called a Satoshi in honor of Satoshi Nakamoto. 


Bitcoins Conversion
1 bitcoin
1 BTC or 1 XBT
1000 mBTC (millibitcoins)
1 mBTC
1000 μBTC
1 μBTC
100 satoshis = 1 bit

The Bitcoin Address

 Bitcoin uses a public ledger that indicates the number of bitcoins and their owners at any given time. But Instead of associating names of people with accounts, the ledger only lists Bitcoin addresses. Each address can be thought use of pseudonyms is why people can use bitcoins without revealing personal information. The following is an example of a Bitcoin address

Like a bank account number, a bitcoin address consists of a string of letters and numbers (usually beginning with 1) for your convenience, you can put your bitcoin address or QR (quick response) code. You don’t need to be connected to the internet to receive Bitcoin. Only Sender needs to be connected.

Bitcoin QR Codes | Coding, Bitcoin, Bitcoin cryptocurrency


The Private Key:

A private key, like a Bitcoin address, is a long string of numbers and letters (usually starts with 5). As with Bitcoin address, QR codes are often used to represent private keys because of their length. Each private key is paired with a single Bitcoin address and is able to unlock the Bitcion at that address. The following an  example address of private key:

Where as bitcoin address is similar to a bank account number, a private key is more like a PIN: you need it to authorize to the Bitcoin network, instructing bitcoins to be moved from one address to another.

Computers on the network check whether the transaction is authorized before making any updates to the public ledger. Specifically, they check whether the transaction has been digitally signed using a private key. A digital signature is extra data appended to a transaction that can only be created by someone possessing the corresponding private key.

Note that although a private key can be used to produce a digital signature, a digital signature can’t be used to obtain a private key and also a digital signature can’t be used to make new transaction. So broadcasting digital signature on the network is not risky, unlike any other PIN.

The Bitcoin Wallet

A Bitcoin wallet is a collection of addresses and  private keys owned by one person. Having multiple Bitcoin address for paying rent, for shopping online and for saving bitcoins to pay for a house in the future. So a person could have two bitcoins in his wallet that are distributed among many different bitcoin address. Using multiple address in the form of wallet also helps you maintain privacy.

To manage several addresses and private keys, people use Bitcoin wallet programs,  such as  Electrum (software wallet runs on your computer), and also there are hardware wallets such as ledger.


The Blockchain

All Bitcoin transaction are recorded into the blockchain. The Bitcoin ledger is also known as blockchain. The reason for the name is that new transactions are appended to the ledger in the large chunks, or blocks. Then, about every 10 minutes, the transactions in the pool are bundled into a block and added to the blockchain. 
blockchain GIF by Trulioo

The Bitcoin Lottery

As an incentive for user to update the blockchain as frequently as possible, Bitcoin uses a lottery based reward system. Many people become miners and try to be the fist to add block to the blockchain. This is where we replace bank representative who updated your account. In Bitcoin system anyone can fill this role by adding block to blockchain. To pick a single minder to update blockchain Bitcoin used lottery to pick a single user to update and modify and notify everyone. If every one agrees with the change then the block will be added to blockchain. If disagrees it’ll reject the block.

Blockchain Forking

The lottery system works as expected most of the time. But occasionally two miners find a block at the same time, and the blockchain become forked, resulting in two different branches. This will be resolved by the next block added to which branch that branch becomes main branch other will be orphned.

Bitcoin Mining

black and gold round ornament 

Bitcoin mining is the competitive process of collecting transactions and adding them to blockchain in the form of block. Although the total number of bitcoins are capped at 21 million. The transactions happened on the Bitcoin network and to add them to bolckchain, it rewards the newly mined bitcoin to the miners that’s how new bitcoins are generated and added to the network. Once all the coins are mined. The transaction fees are paid to the miners are reward for adding the new block to blockchain.


there are also other terms a beginner you might be hearing such as double spending problem will also be solved as eveyone on the network holds the record of who owns how much bitcoin. No one can cheat the system on the blockchain.

As it eliminate middleman such as banks and also no one can restrict and anonymous makes bitcoin more secure and reliable.

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