Subscribe to our Newsletter to get Free Analysis
$ 28,406
$ 1,834.1
$ 330.80

What is Bitcoin & How Does it Work?

What is Bitcoin? Bitcoin is a decentralised digital currency that is powered by blockchain technology. It is free from banks, governments and/or third parties. Bitcoin allows you to transact with anyone around the world with less fees and faster payments. Essentially, it is the future of the monetary system. 

I believe the world is evolving at a rapid pace especially in the world of technology, but there are gaps in other fields. Giving you an example, using the idea of cars; every year a new model comes out; more advanced and with better features. Well, how about the financial system? We have Bitcoin offering us a better and more advanced form of currency and many people are still sitting on their hands, hesitant to buy. In this article I hope to release any resistance you may be experiencing towards using or investing in Bitcoin. I believe the first best step is to understand Bitcoin and how it works. 

Keep reading if you want to learn:

  • What is Bitcoin?
  • Who Invented Bitcoin?
  • How Does Bitcoin Work?
  • What Is The Purpose Of Bitcoin?
  • Disadvantages
  • Advantages

What is Bitcoin?

Bitcoin is a decentralised digital asset. Furthermore, it is commonly referred to as a digital currency. Bitcoin operates without any central control; excluding banks and governments from all transactions. Transactions are carried out directly to the other person on the receiving end. Bitcoins transactional process is far more superior to regular transactions as we know of. Completing transactions with Bitcoin does not require the need of a middleman to approve the transaction such as a bank etc. 

Since Bitcoins launch and till present day; all transactions are recorded on a public distributed ledger. This ledger is accessible to everyone at any time. When using Bitcoin, transaction fees are much lower, it can be used world-wide, you do not have to worry about your account being frozen and there are no prerequisites or arbitrary limits. 

Who Invented Bitcoin?

In 2008 the domain name .org was purchased. An academic white paper was uploaded and titled “Bitcoin: A Peer-to-Peer Electronic Cash System. It laid out the theory and design of a system for a digital currency excluding any control from organisations or governments.

The author that went by the name of Satoshi Nakamoto, wrote: “The root problem with conventional currencies is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.” 

The following year, the software described in the white paper was finalised and publicly launched on the 9th of January 2009. Satoshi Nakamoto persisted on working on the project with various developers until 2010. Nakamoto withdrew from the project and left it to its own devices. 

Satoshi Nakamoto’s identity is still yet to be discovered and remains anonymous. The software is now an open source, which means that anybody may freely see, use, and contribute to the code. Many businesses and organisations, including MIT, are working to enhance the software.

How Does Bitcoin Work?

Bitcoin is powered on an open-source code known as blockchain. Furthermore, the blockchain is a digital distributed ledger. Each transaction is a block of data that is chained to previous  blocks of data. This creates a permanent record of every transaction. In order to transact with Bitcoin, one must own a Bitcoin wallet. Once easily set up, you will attain a private key and a public key. The private key acts as a digital signature for the owner to initiate and digitally sign transactions. It is essential to provide proof of authorisation. 

Furthermore, in order for a transaction to be processed a Bitcoin miner must verify the transaction. The miner does this by investing in computational power and time to solve a complex mathematical problem. Once this is achieved by the miner, the transaction is then verified and a new block is then added onto the blockchain. After this process is completed, the miner is rewarded financially, in Bitcoin. 

Another factor to consider is the supply and demand of Bitcoin. The importance of understanding this is that it is partly related to the value of Bitcoin. There is a limit to the amount of Bitcoins that can be mined. Once 21 million coins have been mined, there are no more Bitcoins to be created. The estimation of time for all coins to be mined is in the year 2140. The more scarce an asset is, the more potential value it has.

What Is The Purpose Of Bitcoin?

Bitcoin was intended to enable a new global settlement mechanism that is completely decentralised from the current financial system. Bitcoin provides tamper-proof algorithmically predictable monetary policy that is verifiable at all times due to its non-centralized structure. Because of its embedded autonomous property structure, Bitcoin’s asset can be self-sovereignly owned by a single individual. Users can send and receive any amount of money to or from anyone, anywhere, at any time.


Price volatility

Due to the fact that Bitcoin has still not grown into a mature asset, there is a lot of price volatility. This scares away many potential users and investors. Tip – it is a good idea to understand how to read charts and apply some technical analysis to your charts to ensure you do not buy at premium prices. 


While supporters claim that bitcoin’s blockchain technology is more secure than traditional electronic money transfers, hackers have found bitcoin hot wallets to be a lucrative target. Numerous high-profile thefts have occurred, including the announcement in May 2019 that more than $40 million in bitcoin was taken from several high-net-worth accounts on cryptocurrency exchange Binance (the company covered the losses).

Not protected by SIPC

SIPC does not provide any protection. If a brokerage collapses or funds are stolen, the Securities Investor Protection Corporation guarantees investors up to $500,000, but bitcoin is not covered.


Transactions are private and secure at all times, with fewer potential fees. Once you have bitcoins, you can send them to anyone, anywhere at any time, cutting down on the time and potential cost of every transaction.

Personal information such as a name or credit card number is not included in transactions, which removes the possibility of customer information being taken for fraudulent purchases or identity theft.

Big profit gains. Some investors who buy and hold Bitcoin are wagering that as the currency matures, it will gain more trust and become more widely used, increasing its value.

The capacity to bypass traditional banks and government agencies. Following the financial crisis and the Great Recession, some investors are eager to embrace a decentralised currency that is fundamentally independent of traditional banks, governments, and other third parties.

What To Do Next?

If you are interested in discovering 99 places that accept Bitcoin to start using your Bitcoin then check out our article here.