What is Bitcoin & How it Works

13 mins read
What is Bitcoin

What is Bitcoin is something that has attracted a lot of public attention lately. It is also often considered as a new investment instrument that has the potential to maximize profits.

The name Bitcoin itself has been heard for a long time with the enthusiasm of investment activists in this type of cryptocurrency.

The benefits offered are so tempting because the increase in its valuation from time to time is extraordinary.

What is Bitcoins

What are Bitcoins? Bitcoin is a type of digital currency that was created in January 2009. It was invented by Satoshi Nakamoto, who was a pseudonym. Until now it is still an unsolved mystery.

Bitcoin is a question that is heard quite often these days. Along with the trend of information stating that doing business in this area is very promising.

Bitcoin uses a peer to peer (P2P) system. However, the system works without a single repository or administrator where the United States Department of the Treasury calls Bitcoin a decentralized currency.

Unlike most other currencies, Bitcoin is not dependent on one major issuer. Bitcoin uses a distributed database and spreads to the nodes of a P2P network to a transaction journal.

Bitcoin History

On August 18, 2008, the domain Bitcoin.org was registered. This domain is already WhoisGuard Protected, which means the user’s identity is not public information.

Then on October 31, 2008, Satoshi Nakamoto made the announcement on the Cryptography Mailing List at metzdowd.com. “I have been working on a new electronic financial system that is completely peer-to-peer, with no third parties,” Magna Carta says of how Bitcoin operates as of today.

On January 03, 2009, the first Block of the Bitcoin blockchain launched could be interpreted as a statement, a hint, or simply as a token.

Cryptocurrency users believe that this is a special statement from Satoshi after appearing in the newspaper ‘The Times: Chancellor on brink of second bailout for banks’ on the same date.

The first version of the Bitcoin software was announced on the Cryptography mailing list on January 8, 2009. And the next day, Block 1 was mined, and Bitcoin mining had already started.

How bitcoin works?

As a new user, the first thing is to install a Bitcoin wallet on your computer or mobile. This step will automatically create the first Bitcoin address.

Just like email, we can share Bitcoin addresses with other people, so they can pay or vice versa. However, Bitcoin addresses should only be used once.

The blockchain is a public transaction record on which the Bitcoin network rests. All confirmed transactions are stored in the blockchain.

In this way, Bitcoin wallets can calculate the remaining spendable money and new transactions can be verified to ensure that they are actually owned by the user.

Private Keys, a value transfer transaction between Bitcoin wallets that are entered into the blockchain. Bitcoin wallets store a secret piece of data called a private key or seed, which is used to sign transactions, providing mathematical proof that it really comes from the wallet owner.

Mining is a system used to confirm queues of transactions by inserting them into the block-chain.

This process confirms the chronological order of the block-chain, protects network neutrality, and allows other computers to agree on the state of the system. In order to be confirmed, transactions must be chained in a block that complies with strict cryptographic rules and will be verified by the network.

Mining is also like a competitive lottery in that it prevents each individual from easily adding successive new blocks to the block-chain.

How to Buy Bitcoin

There are many proponents who believe that Bitcoin is the digital currency of the future. Although not backed by any government or central bank, Bitcoins can be exchanged for traditional currencies.

But in reality, the exchange rate of Bitcoin against the dollar attracts potential investors who are interested in investing in the currency.

In March 2014, the IRS stated that all virtual currencies, including Bitcoin, would be taxed as property, not currency. Profits or losses from Bitcoin stored as capital will be realized as capital gains/losses, while

Bitcoins held in stock will be counted as normal profit/loss. Like any other investment, the principle of buy low and sell high applies to Bitcoin. The most ancient way to collect currency is to buy on a Bitcoin exchange, but there are other ways to earn and own Bitcoin as well.

The advantages and disadvantages of Bitcoin

Bitcoin as a medium of exchange has several main advantages. And behind that, there are also some drawbacks. If you want to know more closely what Bitcoin is, you also need to know its advantages and disadvantages.

Most importantly, bitcoin is known as a counterfeit-resistant medium of exchange. In more detail, here are the advantages and disadvantages of using bitcoin as a means of payment:


Unlike conventional currencies that are prone to tampering, the cryptographic rules applied to bitcoin make their owners avoid the same risks.

Also Read: The Future Of Blockchain Technology In The Gambling Industry

Able to act as a global currency

Even though each country has its own currency, bitcoin is still present and entered into it. Bitcoin knows no national borders, does not waver due to political conditions in government, and is not affected by anything.

As a protector from inflation

Like gold, bitcoin is considered to act as a hedge against inflation. Bitcoin can suppress excessive inflation.


Bitcoin is a new form of public saving that is implemented with a hassle-free system. In addition, by saving bitcoins, all the usual financial intermediaries in banks can be eliminated. The holders also do not have to pay service and registration fees.

Bitcoin Disadvantages

Crypto Bitcoin is considered by most investors as one of the hedging assets from a country’s inflation. The advantage is that it is decentralized, aka does not depend on the government in a country.

However, every investment that has advantages of course also has disadvantages. A professor of economics from Cornell University, Eswar Prasad explained Bitcoin is the most famous cryptocurrency in the world, has several drawbacks and triggers other digital currencies to produce more viable options.

“It’s not like most people think and mining Bitcoin is bad for the environment, Bitcoin also doesn’t function well as a currency,” Eswar Prasad told CNBC International on Thursday (17/6/2021).

What is Bitcoin & How it Works
Watch the video : www.cnbc.com

He said that one of the interesting aspects is that other cryptocurrencies have found solutions to overcome some of Bitcoin’s weaknesses.

Bitcoin mining causes environmental problems

Bitcoin mining refers to the energy-intensive process required to generate new digital coins and ensure a secure and verified payment network.

“The electricity used when validating transactions on the Bitcoin blockchain in the mining process, of course, is not good for the environment,” Prasad said, quoted by CNBC International.

Tesla CEO Elon Musk said last month that his electric car company would stop paying using Bitcoin when buying Tesla cars because of environmental concerns and causing bitcoin prices to drop 5% within minutes.

However, a few days ago, he changed his mind instead, where Musk said in a tweet on Sunday (13/6/2021) that Tesla would accept Bitcoin back in transactions, provided that Bitcoin mining uses clean energy.

Crypto mining is carried out by miners using specially built computers to solve complex mathematical equations that effectively enable future digital coin transactions.

For this service the miners are rewarded for their efforts to solve the algorithm by being paid using crypto.

But unfortunately, the entire process used to mine and create Bitcoin requires more energy and can consume more power than the energy use in countries like Finland and Switzerland.

On the other hand, Ethereum, the second largest cryptocurrency which is sometimes seen as an alternative to Bitcoin, comes with a different mining method and is expected to use less energy.

Ethereum runs a system called a ‘validator’ on its network. But in the end, it should eliminate the need for the enormous amount of computing power required to validate transactions and the Ethereum Foundation claims it will use 99.95% less energy than before.

“It would be much more energy efficient and it could provide many of the benefits that Bitcoin is supposed to provide. It could also make transactions cheaper and faster,” Prasad said as quoted by CNBC International.

Bitcoin is not very ‘anonymous’

Earlier in June, US law enforcement officials (Federal Bureau Investigation/FBI) said they had frozen a ransom of at least US$2.3 million in Bitcoin paid to a group of hackers involved in the Colonial Pipeline ransomware attack in May.

The FBI also said its agents were able to identify the Bitcoin wallet hackers used to collect ransom from victims of the Colonial Pipeline ransomware.

What’s interesting is that there are other cryptocurrencies that are trying to fix this and offer more anonymity. He highlighted Monero and Zcash as a few examples.

“So Bitcoin has really started something of a search for better alternatives and people seem to be looking for a medium of exchange that doesn’t require them to go through trusted institutions like governments or commercial banks,” Prasad said.

Bitcoin is not a good currency

According to Prasad, Bitcoin should provide an anonymous and efficient medium of exchange, but Bitcoin is considered to have failed to provide such a medium. Bitcoin is still considered slow and impractical to pay for goods and services, so the Bitcoin market is very volatile.

Bitcoin has become a speculative asset for people who hope it will appreciate in value, not because they want to use it as a mode of payment.

“So if you want to get and use it, like you are like rich people, where at this time to get Bitcoin you have to spend quite a lot of money. And Bitcoin is used by many people to accelerate their wealth, not as a means of payment,” said Prasad.

Simulacrum: An independent information portal. Starting from important news! Like Bitcoin, Technology, Business, Games to entertainment. We have the technology. We have the capability to produce it. Better than before. Stronger. Faster.

Previous Story

What to Expect from Future Blockchain Technology

Next Story

Online Gambling Using Cryptocurrency

Latest from Business