What is Bitcoin and how does Bitcoin work?

Bitcoin being launched in 2009, was the first of its type of asset that is known as cryptocurrency. This is a form of digital cash that is decentralized and that eliminates the importance of traditional intermediaries such as banks in making financial transactions. Bitcoins are usually powered by a combination of a network of individuals who create software-driven cryptography. This is basically the science of passing hidden information which is only read by the receiver and the sender.

Passing secret information creates a currency that is backed by code instead of things that are of physical value such as silver and gold or even trust in central authorities such as japanese yen and U.S. dollar.

The only thing that is needed in bitcoin is an electronic payment system that is formed on a cryptographic proof rather than a trust. This allows two parties to willingly transact directly with each other thus avoiding the need of a trusted third party.

How does bitcoin work?

A bitcoin uses a trading symbol that is BTC which simply is a computer file kept in a digital wallet on a personal computer or a smartphone. In order to understand how bitcoins work, it is essential to understand these terms:

  • Bitcoin miners.

Bitcoin miners or individuals of a peer-to-peer technology independently confirm transactions through a high-speed computer usually with less than 20 minutes. Miners are then paid in bitcoins due to their efforts.

  • Blockchain.

Bitcoins are powered by an open source code that is commonly known as a blockchain. The blockchain then creates a shared public ledger whereby each transaction is known as a block that is normally chained to the code hence creating a permanent record when each transaction is made.

  • Private and public keys.

Each bitcoin wallet contains a private and a public key. These keys work together in ensuring the owner signs the transactions after initiating them hence delivering proof of authorization. 

Bitcoins follow the law of demand and supply and since the demand increases and decreases, a lot of volatility increases in the cryptocurrency price. Bitcoins are then stored in two types of digital wallets that include the hot wallet and cold wallets. The hot wallet is a digital currency that is kept in the cloud on a trusted provider and then it is also accessible through a desktop or a smartphone app. A cold wallet is a portable device that is encrypted that is more of a thumb drive that then allows you to download and keep your bitcoins.

The disadvantages of buying bitcoins.

The following are some of the cos of bitcoins

  • Price volatility.

The spike that was there in 2017 was as a result of speculators rushing into the market. Recently, the gains have been good if you bought bitcoins in 2018. 

  • Not protected by SIPC.

The securities protection corporation insures investors up to $ 500,000 if funds are broken but that doesn’t cover cryptocurrency.

  • Limited use.

Last year in may, telecommunications giants AT&T connected with companies such as microsoft and dish network in accepting payments in form of bitcoins

  • Hacking concerns.

Backers might have it that the blockchain behind the traditional money transfer is a little bit secure, however, bitcoin hot wallets have had a better target for hackers. Recently, there have been bigger hack mostly in 2019 where more than $40 million were stolen in bitcoins. They were stolen from high end accounts on cryptocurrency exchange where the company covered its losses.

The advantages of buying bitcoins.

The power of bitcoin cannot be ignored. Here are the advantages of investing in bitcoin

  • The ability to avoid traditional banks or government intermediaries.

After the great financial crisis, some investors become ready to invest in an alternative that is the decentralized currency. Such currency is outside the regular control by the traditional intermediaries or any other third party.

  • The potential for big growth.

There has been a bigger potential of bitcoins growing. Some investors who have bought and held cash are wishing that once the bitcoins mature that greater trust will follow and hence its value will grow.

  • Private, secure transactions anytime.

Once you have bitcoins in your possession, you can be able to transact them anywhere and anytime. Bitcoins transactions do not have any personal information such as a name or even a credit card number. Lack of such information eliminates cases of information being stolen. 


With all the above information of what bitcoin is and how it works, it is time you think about investing in them. A lot of people like the fact that they are not controlled by a third party such as banks and the government. They also love the fact that they can spend bitcoins anonymously. However, by understanding the actual reasons you should be investing in bitcoin and the challenges, then I believe you will have no doubts investing in it.