How Bitcoin Really Works?

To be profitable with Bitcoin you have to know how it really works. So in this chapter we will explain everything that is involved including the underlying technology which is blockchain. We are not going to go into a lot of technical detail about blockchain so don’t worry. But you do need to understand the principles of it.

You connect to the Blockchain community using a computer network. This network has Bitcoin ledgers using blockchain. All Bitcoin transactions are compiled into blocks and then these blocks connect in a chain like formation. This is where the name blockchain comes from.

The Bitcoin Process

If you want to make a Bitcoin transaction then you will use your wallet to send out a request to all of the nodes (computers) on the entire Bitcoin network. The nodes use special algorithms (a set of rules and calculations) which validate the Bitcoin transaction.

Your Bitcoin transaction has to be verified and confirmed and after this it is combined with some other transactions to make a new data block and eventually a blockchain. All new blocks are added to the end of the blockchain. At this stage the transaction is final and immutable.

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It usually takes between 10 minutes and 45 minutes to process a Bitcoin transaction. A Bitcoin transaction never happens immediately. There can be no changes to the transaction once it is finalized. The receiver of your Bitcoin transaction then sees this in their wallet.

Bitcoin Miners are Essential

We have mentioned Bitcoin miners a couple of times in this guide and actually these people are very important. Why? Well they are the keepers of the Bitcoin ledgers. If you think of a gold miner working tirelessly to find gold, Bitcoin miners are doing the same thing trying to find scarce Bitcoins.

The Bitcoin miners verify and confirm all Bitcoin transactions. They really are the lifeblood of the Bitcoin system. Without them the whole thing would not work. There would be no new blocks created for the blockchain. This is why they are rewarded occasionally with valuable Bitcoins.

If blocks are not added to the blockchain then no Bitcoin transactions will be finalized. This means that not only will Bitcoin payments fail to be sent and received but there will be no new Bitcoins created.

Bitcoin miners know that there are only a limited amount of Bitcoins available and as time passes they will all be competing for a dwindling number. They just leave their Bitcoin mining computers running 24 hours a day to keep verifying and confirming transactions and trying to earn those elusive Bitcoins.

No Trust Required

The design of Bitcoin and the underlying blockchain technology is such that no trust is required. It uses heavy encryption techniques to keep everything safe hence the name “cryptocurrency”.

There is no need for human trust in the Bitcoin network because it operates on tried and tested computer algorithms. It is virtually impossible to cheat the Bitcoin network because it is a public environment. It would take a ton of computing power to break down all of the encryption even if that were possible. So it makes more sense to use this kind of power to mine the Bitcoin network instead.

Your identity is protected on the Bitcoin network. All of your Bitcoin transactions are verified using a private and public key. You use your private key as your “digital signature” in your Bitcoin transactions and network users can verify this by using your public key. Both of these keys are encrypted so you can only use the public key if the correct private key is used.

Public and private keys are very important for you to understand as a cryptocurrency investor. A public key is tied to a public address where you can deposit cryptocurrencies. You can use your public address to broadcast so that you can receive payments from other peers.

Your private key is not to for sharing with anyone as it is essentially the password to protect your funds. This private key links to your public key for added security. Your private key is how your balance is determined through the Bitcoin network.

The public and private key system has two major advantages:

1. It is virtually impossible for cyber criminals to steal your identity and make fraudulent transactions.

2. You can be completely anonymous on the Bitcoin network if that is useful for you.

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