What is Bitcoin? How Does it Work?

4 min, 31 sec READ

Bitcoin is a cryptocurrency, an encrypted form of digital currency that allows users to make and receive payments globally. It is the world’s first completely decentralized, peer-to-peer digital currency. Bitcoin is not issued or controlled by any central bank or institution. This means the account and payment information is not stored in any one location, there is no central management or overseer, and no central point of failure for security.

What is a Decentralized Currency?

To understand the concept of decentralized currency, one must first understand how centralized (state or fiat) currency works.

The world’s current monetary system is an example of coercive centralization. Typical national currencies (fiat currencies) are issued and managed by government-run central banks. This system is coercive and centralized because citizens are given no choice but to use the currency of the state. The government bodies in control of the money creation, regulation, and transfer can coerce you to trade, pay taxes, and settle debts using only your government’s official currency. In this system, money only moves under the control of the state and the state’s control is not earned or settled by mutual contract, but by privilege of national law.

So, when we say Bitcoin is a decentralized currency, we mean it functions without this centralized control. This basically means that no one entity controls it, nobody can manipulate its circulation, and nobody can insist that you use it. You can opt out of using Bitcoin as a currency at any point. A Bitcoin exchange or wallet service may be centralized, but you don’t need them to use or generate Bitcoins and they can’t control the currency. Any service within the Bitcoin ecosystem only exists at the pleasure of its users. See the difference?

How is Bitcoin Different from Regular Fiat Money?

Bitcoin is different from fiat currencies in several key ways:

  • Bitcoin is digital: it does not exist in the physical world, so it is impossible to counterfeit or tamper with in the way cash can be.
  • Bitcoin is decentralized: Bitcoin transfers are processed by a worldwide network of computers working together (on a Blockchain). The account and transfer information is not stored in any one location. So, no one can interfere with the ledger, intercept or refuse transfers, regulate it by policy, or take coins away from their owner. If one part of the network were to go offline, say, because of power failure or localized natural disaster, the rest of the network would keep on working. It is also near impossible to hack into the network because the information is spread all over the globe.
  • Bitcoin is easy to use: Setting up accounts, fulfilling prerequisites, and paperwork are not a necessity in the Bitcoin world. You can set up a Bitcoin account (wallet) in seconds, no questions asked, no fees required. Transfers don’t require a middleman. Bitcoin eliminates the fees and hassle of exchanging between national currencies via a third-party.
  • Bitcoin is anonymous: You can have multiple Bitcoin wallets with no link to your personal information like name, address, nationality, etc.
  • Bitcoin is transparent and very secure: It is the world’s first application of Blockchain technology. The Blockchain is a decentralized, un-hackable, completely public, and globally-distributed ledger. Every single Bitcoin transaction is stored on the distributed ledger that makes up the Blockchain network. Once a transaction is recorded on the ledger it is impossible to remove it, meaning you cannot spend the same coins twice or reverse a transaction without the approval of the other party.
  • Bitcoins are a limited resource: The Bitcoin protocol establishes that only 21 million Bitcoins can ever be brought into existence by miners. This is intended to rule out long-term inflation. Bitcoin is in this way more like gold—a finite resource—than the US dollar, which is theoretically infinite and therefore has precarious value.
  • Bitcoin transaction fees are very small: Your bank may charge you up to 30$ for an international transaction. On a Bitcoin exchange fees are much, much less.
  • Bitcoin is fast: You can send money anywhere in minutes, directly to another wallet holder. The time it takes to processes a Bitcoin transaction is far faster than any other payment form.

What can you pay for with Bitcoin?

You can pay for a variety of goods and services with Bitcoin, including online shopping, travel bookings, restaurant meals, tuition fees at certain universities, or even crypto advertising network fees. Several large companies like Microsoft, AT&T, and Overstock accept Bitcoin. Some non-profit organizations and political campaigns also accept Bitcoin donations. Additionally, certain real estate companies accept Bitcoin for property purchases.

What is Bitcoin’s Future? What Problem Does it Solve?

Blockchain, upon which Bitcoin is based, is a revolutionary technology that will reinvent how money is stored, spent, transferred, and distributed around the world. It has the potential to alter global exchange and trade forever. It could help limit the control of central regulatory agencies, decrease inflation, combat financial fraud and hacking scams, reduce banking and remittance fees, and reduce global debt.

Even if Bitcoin itself doesn’t survive, the underlying concept of Blockchain technology has already proven that it will survive and change the world. Blockchain technology makes financial transactions far more secure, faster, and more equitable—and that’s a change that’s here to stay.

Helpful? Yes No
80% of people found this helpful.