Video - How Bitcoin Works

Bitcoin is a network of computers that anyone can join and trade funds faster than the traditional way of doing it. It has a set of rules that record transactions at any given time in a very secure manner. The encryption method of this Blockchain technology remains unbreakable and trusted by millions of people worldwide.


By now you've probably heard of Bitcoin. The mysterious digital currency that's not backed by gold or silver or the guarantee of any government or bank. In fact, it seems like it's based on nothing and yet you can buy all kinds of real world things with it. What's weird though is that Bitcoin isn't run or controlled by any single authority. Instead there's just a network of computers that anyone can join and a set of rules that those computers used to process and record transactions. This is called mining. But you don't have to be a miner to use Bitcoin.

Let's say you run a cafe and you're tired of paying credit card fees on every transaction. Bitcoin fees are voluntary and are typically lower and to get started you just need a software wallet which keeps track of your balance and gives you a Bitcoin address. Which is kind of like an email address except you usually make a new one for each transaction. The wallet has no value until either someone pays you in Bitcoin or you buy some at an exchange using pounds or dollars or euros or whatever. Either way whoever gives you the Bitcoins broadcast a message to the entire network of miners saying that the Bitcoins that were attached to her address should now be attached to your address. Her wallet software digitally signs the message which allows all those mining computers to check that the transaction is for real. Because every owner digitally signs Bitcoin transactions, every Bitcoin has a mathematical verifiable chain of ownership. And that might seem secure but it's not quite enough. It's still possible that the Bitcoin that person gave you is just a copy of one she already spent. What prevents that is a universal record of every Bitcoin transaction ever.

All those mining computers collect recent Bitcoin transactions into what are called blocks. Miners compete with each other to verify the transactions in a block and then add it to the great chain of all the blocks that came before. This chain is what allows computers to check that a person isn't trying to spend the same Bitcoin twice. It's secure because before mining computer can add a block it first has to find a special number that satisfies a few mathematical constraints. And the only way to find that number is by guessing, lots and lots of guessing. All that guessing is expensive and that's on purpose because it makes it hard to go back and change the record. But because mining is expensive there's a reward. The first miner to solve each block gets to create shiny new Bitcoins for their trouble. And this happens roughly every ten minutes.

Like any currency Bitcoin has its ups and downs. Its value in terms of other currencies, changes based on the market. But unlike other currencies there's a cap to how many Bitcoins will ever be in circulation. As of January 2015, we're a little over halfway there. But the rules say that the number of Bitcoins created with each block gets cut in half every four years. So, the cap likely won't be reached until sometime around 2140 which should give plenty of time to see if this whole Bitcoin thing hands out.

Written by Melvin Draupnir on January 29, 2015.