How Does Bitcoin Work?: What does it mean to have a Bitcoin? Many people have not heard of Bitcoin, that is it’s a fully digital currency, with no government to issue it and no banks needed to manage accounts and verify transactions. That no one knows who invented it. Yet many people don’t know the answer to these questions, at least not in full. To get there, and to make sure the technical details underlying this answer feel motivated, we are going to walk through step by step.
How you might have invented your version of Bitcoin. We will start with you keeping track of payments with your friends using a communal ledger. Then, as you trust your friends and the world less and less, and if you are clever enough to bring in a few tools of cryptography to help circumvent the need for trust, what you end up with what’s called a “cryptocurrency.” Bitcoin is just the first implemented example of a cryptocurrency, and there are now thousands more on exchanges with traditional currencies.
Walking the path of inventing your own can help set the foundation for understanding some of the more recent players in the game, and recognizing where there’s room for different design choices. One of the reasons I chose this topic is in response to the unprecedented leap inattention, investment. Hype directed at these currencies in just the last year. I won’t comment or speculate on the current or future exchange rates, but I think we would all agree that anyone looking to buy a cryptocurrency should know what it is.
How To Earn From Bitcoin?
Mainly in this part, you will learn all of the hacks that the rich people are using to increase their incomes and their passive incomes. Cryptocurrency and investing one of the great ways that they are doing that. So, we are going to have a look at kind of two ways that people are making money off Bitcoin. First one is the easy way that anyone could do with zero thought and that buys Bitcoins.
If you look at the graph, over about a year, and a half, two years, as you can see, Bitcoin was twenty-five hundred dollars. So, about two years ago, Bitcoin, one single Bitcoin cost twenty-five hundred dollars. If you bought when it cost twenty-five hundred dollars and you sold six months later, the value of a Bitcoin was seven thousand dollars.
So, what people were doing is buying Bitcoin at two thousand, once it got upto seven thousand they were selling it. So, the link down below if you are interested in buying Bitcoin, you can go to Coinbase kind of one of the big exchanges where you can buy and sell easily. But, this is to show you exactly how they are making money with it. So, by 2007, it’s that easy now. It’s that easy but obviously, you can see that it goes up and down and up and down. It doesn’t just go up forever but that’s the concept of how people are making money with Bitcoin.
That’s just straight investing the second way is what is called day trading using kind of charts and trying to figure out where Bitcoin is going to go in the short term. So, they will buy and sell, maybe in an hour or two or a week. Much more short term and they are trying to make just a little bit of money over and over again.
So, we are going to look at this particular section right here to kind of go over What is being taught here. So, this is about four months. And, as you can see, Bitcoin in the last four months pretty steady downtrend. But, if you in the second row, you can see there is a kind of line that could be drawn to trace the trend of Bitcoin.
The graph line is called the trend. And you can see that when the price of Bitcoin which this chart represents the price of Bitcoin when it hits that line. So, when it hits right on that line, it starts to go up. Let’s look at this chart, you can see right here. It bounced, it was December 10th 2017, the price of Bitcoin hit that line and it started to climb when up to some 19,000 about a month later right at the beginning of January. It got back down to that line again, it hit 12,000 and then it bounced back up.
Then it went all the way down as you can see and once it hit that line again, you can see that line going down. It bounced, so it’s 7,000. It had another big bounce. So, it continues to go down. So, Bitcoin is going down the price of Bitcoin over the long run. But in individual days, you can see that it hits and it bounces and it hits and it bounces and so people buy. They are looking at this chart and you know they might be looking at a two-day view or a three-day view or a two-month view. There’s a lot of different like views you can narrow in one and see different. You can see charts that look just like this. What they are doing is they are just seeing patterns.
There’s a pattern that whenever it hits that line, it bounces. So, a good example would be if I followed that line down here. So, Bitcoin ever hit heaven forbid that would be hitting that line again. I would but it, output everything I had in Bitcoin at that point because, it’s very likely, it’s going to bounce and there is a lot of reasons behind that. But just know that it’s very likely, it’s going to bounce, so what the people are doing, they are buying and selling. They are buying well and they are selling high.
They are buying when the price is low and they are selling high. And all they are going is looking for patterns. Patterns that show when the price turns around. When it stops dropping and start going up for a little bit and they buy and then sell at the top. So, someone will buy here for 7,000 and sell here for 10,000. That’s the dumbed down the list of what they are doing. There is a lot that goes into that and a lot of understanding a lot of just time spent learning. And, seeing these charts, but that is the gist of it now.
Before you go and just dive in and put a ton of money to Bitcoin and throw it all out, this doesn’t always work. This method wins, let’s say 60% of the time and loses 40% of the time. And you are still making money in the long run. But there are plenty of losses and if you are just diving in with a ton of your money, just don’t do that. To reach the highest level of Bitcoin mining, you can also go for a total investment course on various platforms like Udemy, Skillshare etc.
Algorithms Of Bitcoin (In-depth Explanation)
Not just in terms of analogies with vague connections to gold mining, I mean an actual direct description of what computers are doing when sending, receiving and creating cryptocurrencies. One thing worth stressing, by the way, is that even though you and I will dig into the underlying details here, which take some meaningful time, you don’t actually need to know those details to use a cryptocurrency, just like you don’t need to know the details of what happens under the hood when you swipe a credit card.
Like any other digital payments, there are plenty of user-friendly applications that let you send and receive these currencies very easily. The difference is that the backbone underlying this is not a bank verifying transactions, but a clever system of decentralized trustless verification based on some of the math born in cryptography.
To start, set aside the thought of cryptocurrencies for a few minutes. We are going to start the story with something more down to earth: Ledgers, and digital signatures. If you and your friends exchange money, pretty frequently, paying your share of the dinner bill and such, it can be inconvenient to exchange cash all the time. So, you might keep a communal ledger that records payment you intend to make in the future.
Alice pays Bob $20, Bob pays Charlie $40, things like that. This ledger will be something public and accessible to everyone, like a website where anyone can go and just add new lines. At the end of every month, you all look through the list of transactions and tally everything up. If you have spent more than you received, you put that money into the pot, and if you have received more than you spent, you take that much money out.
So, the protocol for being part of this system looks something like this: Anyone can add lines to the Ledger, and at the end of every month, everyone gets together to settles up with real money each month. One problem with a public ledger like this is that when anyone can add a line, what’s to prevent Bob from going in and writing “Alice pays Bob $100” without Alice approving? How are we supposed to trust that all these transactions are what the sender meant for them to be?
This is where the first bit of cryptography comes in: Digital Signatures. Like a handwritten signature, the idea here is that Alice should be able to add something next to a transaction that proves that she has seen it, and approved of it. And it should be infeasible for anyone else to forge her signature. At first, it might seem like digital signatures should not even be possible, since whatever data makes up the signature can just be read and copied by any computer, so how do you prevent forgeries?
The way this works is that everyone generates what is called a public key / private key pair, each of which looks like some string of bits. The private key is sometimes also called the “secret” key so that we can abbreviate it to SK. While abbreviating the public key as PK. As the name suggests, the secret key is something you should keep to yourself. In the real world, your handwritten signature looks the same no matter what document you are signing. A digital signature is much stronger because it changes for different messages.
It looks like a string of 1s and 0s, commonly something like 256 bits, and altering the message even slightly completely changes, what your signature on that message should look like. Formally, producing a signature involves some function that depends both on the message itself, and on your private key. The private key ensures that only you can produce the signature, and the fact that it depends on the message means no one can just copy one of your signatures to forge it on another message.
Hand in hand with this is a function to verify that a signature is valid, and this is where the public key comes into play. All it does is output true or false to indicate if this was a signature created by the private key associated with the public key you use for the verification. No need to go into the details on how exactly these functions work, but the idea is that it should be completely infeasible to find a valid signature if you don’t know the secret key.
Specifically, there is no strategy better than just guessing and checking if random signatures are valid using the public key until you hit one that works. There are 2*256 possible signatures with 256 bits, and you would need to find out the one that works. This is a stupidly large number. To call it astronomically large would be giving way to much credit to astronomy. Let’s just say that when you verify a signature against a given message and public key, you can feel extremely confident that the only way someone could have produced it is. If they knew the secret key associated with the public key.
There’s one slight problem here: If Alice signs transactions like “Alice pays Bob $100,” even though Bob cannot forge Alice’s signature on new messages, he could just copy that same line as many times as he wants since the message/ signature combination is valid. To get around that, we make it so that when you sign a transaction, the message has to include some unique ID associated with that transaction. That way, if Alice pays Bob $100 multiple times, each transaction requires a completely new signature.
Alright, great, digital signatures remove a huge aspect of trust in our initial protocol. But even still, this relies on an honours system of sorts. Namely, you are trusting that everyone will follow through and settle up in cash at the end of each month. But what if, for example, Charlie racked up thousands of dollars in debt, and just refuses to show up? The only real reason to revert to cash to settle up is if some people, I am looking at your Charlie, owe a lot of money.
So, maybe you have the clever idea that you never actually have to settle up in cash as long as you have some way to prevent people from spending too much more than they take in. What you might do is start by having everyone pay $100 into the pot, and have the first few lines of the ledger will read “Alice gets $100, Bob gets $100 etc.” Now, just don’t accept transactions when someone is spending more than they have on the ledger. For example, after starting everyone off with $100, if the first two transactions are “Charlie pays Lice $50 and Charlie pays Bob $50.”
If he were to try to add “Charlie pays you $20,” that would be invalid, as invalid as if he never signed it. Notice, this means you need to know the full history of transactions to verify that a new one is valid. And, this is, more or less, going to be true for cryptocurrencies as well, though there is a little room for optimization. What’s interesting here is that this step somewhat removes the connection between the ledger and physical cash. In theory, if everyone in the world used this ledger, you could live your whole life just sending and receiving money on this ledger without ever converting to the real US.
To emphasize this point, let’s start referring to quantities on the Ledger as “LedgerDollars”, or LD for short. You are of course free to exchange LedgerDollars for real US dollars, for example, maybe Alice gives Bob a $10 bill in the real world in exchange for him adding and assigning the transaction Bob pays Lice 10 LedgeDollars to the communal ledger. But exchange like this is not guaranteed in the protocol. It’s now more analogous to how you might exchange dollars for Euros or any other currency on the open market, it’s just its own independent thing.
This is the first important thing to understand about Bitcoin or any other cryptocurrency: What it is a ledger, the history of transactions in the currency. Of course, with Bitcoin money doesn’t enter the Ledger with people buying into using cash. I will get to how new money enters the ledger in just a few minutes.
Before that, there’s an even more significant difference between our current system of LedgerDollars, how cryptocurrencies work. So far, the ledger is some public place, like a website where anyone can add new lines. But, this requires trusting central location. Namely, who hosts that website? Who controls the rules of adding new lines? To remove that bit of trust, we will have everyone keep their copy of the ledger.
Then to make a transaction, like Alice pays Bob 100 Ledger Dollars, you broadcast into the world for people to hear and record on their private ledgers. But unless we do something more, this system would absurdly bad. How can you get everyone to agree on what the right ledger is? When Bob receives the transaction Alice pays Bob 100 ledger dollars, how can he be sure that everyone else received and believes that same transaction? That he will be able to later use those 10 ledger dollars to make a trade with Charlie.
Imagine yourself just listening to transactions being broadcast. How can you be sure that everyone else is recording the same transactions in the same order? Now we have hit on an interesting puzzle: Can you come up with a protocol for how to accept or reject transactions and in what order so that you can feel confident that anyone else in the world following the same protocol has a personal ledger that looks the same as yours? This is the problem addressed in the original Bitcoin paper. At a high level, the solution Bitcoin offers to trust whichever ledger has the most computational work put into it.
It will take a moment to explain what exactly that means, which involves this thing called a “Cryptographic hash function.” The general idea we will build to is that if you use computational work as a basis for what to trust, you can make it so that fraudulent transactions and conflicting ledgers will require an infeasible amount of computation. Again, this is getting well into the weeds beyond what anyone would need to know just to use a currency like this. But, it’s a cool idea, and if you understand, you understand the heart of bitcoin and other cryptocurrencies.
A hash function takes in any kind of message or file and outputs a string of bits with a fixed length, like 256 bits. This output is called the hash or digest of the message, and it’s meant to look random. It’s not random, it always gives the same output for a given input. But, the idea is that when you slightly change the input, maybe editing just one character, the resulting hash changes completely. In fact, for the hash function, I am showing here, called SHA256, the way that output changes as you slightly change the input are entirely unpredictable.
You see, this is not just any hash function, it’s cryptographic has to function. That means it’s infeasible to compute in reverse direction. If I show you some specific string of 1s and 0s and ask you to find an input message so that the SHA256 hash of that message gives this exact string of bits, you will have no better method than to guess and check. Again, if you want a feel for just how much computation would be needed to go through 2256 guesses, take a look at the supplemented video.
You might think you could reverse engineer no one has ever found a way to do that. Interestingly, there is no proof that it’s hard to compete in the reverse direction, yet a huge amount of modern security depends on cryptographic hash functions. If you were to take a look at what algorithms underlying the secure connection that your browser is making with this article right now, or that it makes with a bank, you will likely see a name like SHA256 in there.
For right now, our focus will just be on how such a function can prove that a particular list of transactions is associated with a large amount of computational effort. Imagine someone shows you a list of transactions, and they say “I found a special number so that when you put this number at the end of the list of the transaction, an apply SHA256. The entire thing, the first 30 bits of the output are zeroes.” How hard do you think it was for them to find that number? For a random message, the probability that the hash happens to start with 30 successive zeroes is 1 in 230, which is about 1 in a billion.
Because, SHA256 is a cryptographic hash function, the only way to find a special number like this just guessing and checking. So, this person almost certainly had to go through about a billion different numbers before finding this special one. And, once you know the number, you can quickly verify that this hash does start with 30 zeroes. In other words, you can verify they went through a large amount of work without saving to go through that same effort yourself.
This is called “proof of work”. And importantly, all this work is intrinsically tied to that list of transactions. If you change one of the transactions, even slightly, it would completely change the hash so you would have to go through another billion guesses to find a new proof of work, a new number that makes it so that he has of the altered list together with this new number starts with 30 zeroes.
Bitcoin vs. Other Cryptocurrencies
So now think back to our distributed ledger situation. Everyone is broadcasting transactions, and we want a way for everyone to agree on what the correct ledger is. As I said, the core idea behind the original bitcoin paper is to have everybody trust whichever ledger has the most work put into it. These works are to first organize a given ledger into blocks, where each block consists of a list of transactions, together with a proof of work. That is, a special number so that the hash of the whole block starts with a bunch of zeros.
For the moment let’s say it has to start with 60 zeroes, but later I will return to how you might choose that number. In the same way that a transaction is only considered valid if it is signed by the sender, a block is only considered valid if it has a proof of work. Also, to make sure there is a standard way to order of these blocks, we will make it so that a block has to contain the hash of the previous block.
That way, if you change any block, or try to swap the order of two blocks, it would change the block after it, which changes that block’s hash, which changes the next block, and so on. That would require redoing all the work, finding a new special number for each of these blocks that makes their hashes start with 60 zeroes. Because blocks are chained together like this, instead of calling it a ledger, this is commonly called a “Blockchain.” As part of our updated protocol, we will now allow anyone in the world to be a “block creator.”
What this means is that they will listen for the transactions being broadcast, collect them into a block, then do the whole bunch of work to find the special number that makes the hash of this block start with 60 zeroes and broadcast ou the block they found. To reward a block creator for all this work, when she puts together a block, we will allow her to include a special transaction at the top in which she gets, say, 10 ledgerdollars out of thin air.
This is called the block reward. Its a special exception to our usual rules about whether or not to accept transactions; it doesn’t come from anyone, so it doesn’t have to be signed. It also means that the total number of legderdollars in our economy increase with each new block. Creating blocks is often called “mining” since it requires a lot of work, and it introduces new bits of currency into the economy.
But when you hear or read about minders, keep in mind that what they are doing is creating blocks, broadcasting those blocks, and getting rewarded with new money for doing so. From the miners perspective, each block is like a miniature lottery, where everyone is guessing numbers as fast as they can. Until one lucky individual finds one that makes the hash of the block start with many zeroes, and gets rewarded for doing so. The way our protocol will now work for someone using this system is that instead of listening for transactions, you listen for new blocks being broadcast by miners, updating your copy of the blockchain.
The key addition is that if you hear of two distinct blockchains with conflicting transaction histories, you refer to the longest one, the one with the most work put into it. If there’s a tie, wait until you hear of an additional block that makes one longer. So even though there is no central authority, and everyone is maintaining their copy of the blockchain, if everyone agrees to give preference to whichever blockchain has the most work put into it, we have a way to arrive at a decentralized consensus.
To see why this makes for a trustworthy system, and to understand at what point you should trust that payment is legitimate, it’s helpful to walk through what it would take to fool someone in this system. If Alice wants to befool Bob with fraudulent block, she might try to send him one that includes her paying him 100 ledger dollars, but without broadcasting that block to the rest of the network.
That way everyone else thinks she still has those 100 ledger dollars. To do this, she would have to find a valid proof of work before all other miners, each working on their block. And, that could happen! Maybe Alice wins this miniature lottery before anyone else. But Bob will still be hearing broadcasts made by other minders, so to keep him believing the fraudulent block Alice would have to do all the work herself to keep adding blocks to this special fork in Bob’s blockchain that’s different from what he is hearing from the rest of the miners.
Remember, as per the protocol Bob always trusts the longest chain he knows about. Alice might be able to keep this up for a few blocks if just by chance she happens to find blocks more quickly than all of the rest of the miners on the network combined. But unless Alice has close to 50% of the computing resources among all miners, the probability becomes overwhelming that the blockchain that all the other minders are working on grows faster than the single fraudulent blockchain that Alice is feeding Bob.
So, in time Bob will reject what he is hearing from the Alice in favour of the longer chain that everyone else is working on. Notice that means you should not necessarily trust a new block that you hear immediately. Instead, you should wait for several new blocks to be added on the top of it. If you still haven’t heard of any longer blockchains, you can trust that this block is part of the same chain everyone else is using.
And with that, we have hit all the main ideas. This distributed ledger system based on a proof of work is more or less how the Bitcoin protocol works, and how many other cryptocurrencies work. There are just a few details to clear up. Earlier I said that the proof of work might be to find a special number so that the hash of the block starts with 60 zeroes. The way the actual bitcoin protocol works is to periodically change that number of zeros to that it should take, on average, 10 minutes to find a block.
So as there are more and more miners on the network, the challenge gets harder and harder in such a way that this miniature lottery only has about one winner every 10 minutes. Many newer cryptocurrencies have much shorter block times. All of the money in Bitcoin ultimately comes from some block reward. These rewards 50 Bitcoins per block. There’s a great site called “block explorer” where you can look through the Bitcoin blockchain, and if you look at the very first few blocks on the chain, they contain no transactions other than the 50 Bitcoin reward to the miner.
Every 2,10,000 blocks, which is about every 4 years, that reward gets cut in half. So right now, the reward is at 12.5 Bitcoin per block, and because this reward decreases geometrically over time, there will never be more than 21 million bitcoin in existence. However, this doesn’t mean miners will stop earning money. In addition to the block reward, miners can pick up transaction fees. The way this works is that whenever you make a payment, you can optionally include a small transaction fee with it that will go to the miner whatever block includes that payment.
The reason you might do this is to incentivize miners to include the transaction you broadcast into the next block. you see, in Bitcoin, each block is limited to about 2400 transactions, which many critics argue is unnecessarily restrictive. For comparison, Visa processes an average of around 1700 transactions per second, and they are capable of handling more than 24,000 per second. Slower processing on Bitcoin means higher transactions fees since that’s what determines which transactions miners choose to include in new blocks.
This is far from the comprehensive coverage of cryptocurrencies. There are many nuances and alternate design choices I have not touched here, but hopefully, this can provide a stable weight but why style tree trunk of understanding for anyone looking to add a few more branches with further reading. A lot of money has started flowing towards cryptocurrencies, and even though someone not interested in making money from Bitcoin claims about whether that’s a good or bad investment. Our team believes it would be healthy for people getting into this game to at least know the fundamentals of the technology.
Since there is no central location that is governed by any specific country. It’s very difficult and expensive to hack and there’s some number that says to even hack the Bitcoin network for ten minutes would cost around half a billion dollars. And, so there is a lot of trusts and a lot of vetting of the protocol and the network that has happened over the past few years. It’s controlled by the consensus of market participants.
So again no one government, no one person or no one group controls the Bitcoin Network which is why it’s gaining so much popularity. So why is Bitcoin so important and there are some aspects of CryptoCurrencies that I think show huge prospects for really changing the world. Let’s look at this first fact that out of the seven-plus billion people that live on the planet about six and a half billion people don’t have access to basic financial and banking services like checking accounts or credit cards and in the US alone, it’s estimated that about eighteen per cent of people don’t have access to these basic financial services and it makes it very easy.
Bitcoin makes it very easy for anybody without government permission or control to have access to virtual banking and I think that’s going to change the world the second fact that we will look at here is since the 2008 financial crisis. Fiat currencies like the US dollar and if you are not familiar with what Fiat Currencies are, it’s a currency to like the US dollar that’s backed by nothing but the trust that people have in the Government you know back in the 70s we were on the gold standard and Nixon took us off of the gold standard.
So, now the US dollar is not tied to anything. about the main character online. In the span of fewer than two years, Zimbabwe for example government essentially devalued their currency to nothing and there’s a lot of people that are speculating that some of the major world’s Fiat currencies are going in that same direction and it’s kind of scary because right now the US dollar is the world’s reserve currency.
We are just printing it like a business. And, so the way that Bitcoin handles this problem is that there is predetermined set amount of Bitcoins that are going to be released over the years and what that does is – it’s inherently designed to be deflationary and really control inflation and the third kind of major problem that Bitcoin really handles is the fact that cross-currency purchases and transfers across borders.
You know cross country borders are expensive and have a lot of friction of government red tape and if you want to move millions of dollars that costs a lot of money wherewith Bitcoin, it’s very inexpensive and there are stories of people moving millions and millions of dollars for just a few pennies. So, before we look at how Bitcoin has value, let’s talk about what is money. Money is very simple any means for exchanging goods and services and in recent history, we have used Fiat currencies as the US Dollar and gold has widely accepted forms of money. There are primarily four properties that define what money is –
1. It needs to be divisible, it needs to be able to break down into different parts or different sizes kind of like the dollar can be broken down into two decimal places. You know a penny or ten cents or a dollar or up from there, gold can also be broken down. You know you can have a bar or an ounce there is a different way to break it down.
2. The second, it needs to be durable, you know it needs to be able to stand the test of time, So if you have a bar gold. If you will put a bar gold here on my desk, odds are it’s not going to just evaporate into thin air and even this 100 trillion dollars in Bob way. The dollar is not likely to just evaporate into thin air.
3. It needs to be fungible. Basically like Modenese. So, 1 US dollar is equal to the value of another US dollar. They are interchangeable kind of like on the future markets where people trade. You know – oranges, or coffee or pig bellies or oil and gold, each unit is equal to another unit. They are all created equal in their value and then the fourth is it needs to be verified you need a way to verify that it’s real and not counterfeit. So, Bitcoin does a very good job of answering those four properties of money.
There is also some other way, that there is a value derived from Bitcoin. First one is that it is limited in amount like the scarce light gold on planet earth. There’s only a set amount of gold. Just like there is a limited amount of Bitcoins, there will only be twenty-one Bitcoins, that are ever mined, just like you can only mine a certain amount of gold.
The second is – it’s decentralized. So, its mentioned this there is no central government which means its a peer to peer network like torrents and it can be anonymous. Now there are some areas for improvement when it comes to the anonymous nature of cryptocurrencies but for the most of the part its anonymous. It is also transparent. Meaning the code in the structure, how the Bitcoin cryptocurrency Network and Protocol is built, is transparent anybody can go and evaluate and look at the code.
How this is built and because it’s been vetted by people way smarter than you for over five years. It’s trusted people place their trust in the Bitcoin protocol even more so than they are putting their trust in their government which is very interesting. The whole cryptocurrency movement could change the way that world leaders and governments are people look at money. It’s also very easy to buy and sell.
It’s so easy to move bitcoins between two people, there are extremely low transaction fees and it’s irreversible So merchants love it, there are no chargeback and none of the problems that you have when it comes to taking credit cards. So, it’s important to keep in mind that Bitcoin is not backed by anything tangible. Just like the Fiat currencies, it’s not the gold standard, it’s just nothing except for the trust that people have in the Bitcoin system and the real value is determined by what people are willing to pay for it.
Which is why we have seen the price of Bitcoin go up. So much over the past couple of years because the demand has increased and people place value in these four aspects of Bitcoin. As you know about the lack of government control and manipulation you know. No person who is elected into the office can step in and contribute to hyperinflation. So protected from inflation, they have trust in Bitcoin protocol where it would cost over a half a billion dollars just to fool the system for about 10 minutes and the anonymous nature of how Bitcoin works.
So, how does Bitcoin work? It’s very simple. Let’s say you take some money, somebody gives you cash or somebody writes you a cheque and you take that money to a bank and you deposit it into your Bank Account. Bitcoin kind of works like this is where if somebody gives you Bitcoins, they are stored in a public ledger and everybody has access to this ledger from the very beginning in 2009. Every transaction is recorded in this ledger. And, sending and receiving bitcoins is as easy as sending an email. It is and I will show you how this works in a second. So, your coins are stored in wallets and you have a few different kinds of wallets.
You can store your local hard drive wallet. So, where your coins live on your computer. You can have paper wallets where you physically write down the codes that are associated with your Bitcoin and keep it off of the network. Hosted online – so there are companies that are providing hosted wallets where you can access your coins from anywhere in the world. And, that’s where the security risk comes in.
Specifically how to buy and sell Bitcoins? With Bitcoins, there are two parts to your Bitcoin Account Number. One is your public key, so this is kind of like your account number or your email address that is kind of it works. And, your Bitcoin Key is made up of 27 to 34 alphanumeric characters. So, it would look something like this, or somewhere around 30 characters. So, this is an account number that you can give out to anybody who wants to send you Bitcoins.
For example, If I wanted to send you five bitcoins, you would give me your public key. I would type that in and then shoot you over the Bitcoins now. Where the protection comes in in the Private Key, which is kind of like your password for whenever you do online banking. You need to know your password to log into your online bank. It’s kind of similar to a private key which is the password you need to access your Bitcoins in the account. Or, in that public ledger. So, it sounds complicated but it is pretty simple.
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