How Does Bitcoin Work?

5 min

Bitcoin has become a worldwide phenomenon due partly to its incredible innovation in terms of technology and cross border payments, but also because of its unbelievable market performance over the last decade. Bitcoin was voted the top performing asset of the past decade, and there is no denying why. So, how does Bitcoin work? Today we’re uncovering everything you need to know about the inner workings of the most powerful cryptocurrency.

Bitcoin 101

Before we dive into how does Bitcoin work, let’s cover the basics. Bitcoin is a peer to peer payment system that was launched in 2009 by Satoshi Nakamoto, an anonymous entity that remains a mystery to this day. Bitcoin was designed as a response to the global financial crisis and set to be a decentralized payment system that was exempt from banking institutions’ errors. Over the past decade the cryptocurrency has increased in value, hitting $20,000 for the first time in 2017, and then again in December 2020. Within the first week of 2021 (8 January) the price increased to incredible highs of $40,000, $41,941.56 to be exact, a new all time high.

The cryptocurrency has also paved the way for many other cryptocurrencies, of which there are currently over 8,000 according to CoinMarketCap. The industry has grown into a sizable $1 trillion market, most of which has Bitcoin to thank. Bitcoin currently dominates the market with a 65% share.

How Does Bitcoin Work?

Now that we’ve covered the basics, let’s get into the nitty gritty. As previously mentioned, Bitcoin is a peer to peer payment service that does not rely on any third party financial institutions, banks or governments. Instead, the network is operated by a network of nodes (computers) and miners. In very simple terms, miners are responsible for verifying transactions while nodes keep records of all the transactions. All transactions are added to the blockchain, which is a public ledger of all activity on the network.

Looking more deeply into this, let’s say one person in Belgium is sending Bitcoin to someone in England. The Belgium person will enter the wallet address of the recipient and indicate how much they would like to send. The wallet through which it is being sent will calculate the network fees, the Belgium person will confirm, and the transaction will enter a “transaction pool”.

From here, miners will fight to solve a complex mathematical puzzle and the first one to do so correctly will be allowed mine the next block. The miner will then verify that all senders of the transactions they are verifying have sufficient balances, and the transactions will be executed. The miner will then add the new block to the blockchain, and it will be circulated amongst the network. Once all the nodes approve, they will all update their blockchain records with the new block.

The person in England will then get a notification to say that they have received Bitcoin, and will most likely require 3 confirmations before being able to access the funds (some wallets and merchants require 6 confirmations). Confirmations are represented by new blocks added to the blockchain following the block with that specific transaction. Blocks take 10 – 40 minutes to be created.

Where Do New Bitcoins Come From?

Satoshi Nakamoto designed the cryptocurrency to be deflationary in nature, intending the price to increase over time as opposed to decreasing like fiat currencies. Bitcoin has a fixed supply of 21 million coins, with a certain number being released each year. Initially, the mining reward for mining a block on the Bitcoin blockchain was 50 BTC, but after every 210,000 blocks (roughly 4 years) the reward halves. In May 2020 the third halving took place, driving the block rewards down to 6.25 BTC per block. This equates to roughly $230,000 at the time of writing.

So where do new Bitcoins come from? Each time a miner verifies a transaction, the miner will receive each transaction’s network fee and once they have mined enough transactions to complete a 1MB block and add it to the blockchain, they will receive the mining reward too.

Once the 21 millionth coin has been mined no new coins will ever enter circulation.

Ready To Enter The Wonderful World Of Bitcoin?

Now that you understand more about the original cryptocurrency and how does Bitcoin work, are you ready to enter the market? With Tap, users can buy, sell and trade Bitcoin with the tap of a finger. The cleverly designed app utilises smart trade technology to find the best prices on the market, and executes the trades for you in a swift manner. The platform also makes use of a highly secure wallet in which users can store their digital and fiat currencies. Download the Tap app today and tap into the future.