Crypto 101

Bitcoin 101: How Bitcoin works




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Bitcoin 101 - Crypto Heroes

After its incredible growth in December 2017, Bitcoin has become one of the most popular buzzwords discussed at all levels. Many people rushed to join the cryptocurrency frenzy without even understanding what Blockchain is, how cryptocurrencies work and what use you can make of it in your daily life.

In this article, we shed some light on how Bitcoin works, what value it gives to its users, where to buy Bitcoin and how to ensure its security. This dummies’ guide to Bitcoin can be useful for those who only begin to discover the cryptocurrency world and want to get some basic understanding of this new digitized means of payment.

What is Bitcoin?

Bitcoin is the alternative means of online payment, the so-called “digital money” that has suddenly grown in price and drawn the attention of broad publicity all over the world in 2017. With the traditional means of digital payments, there is always a central authority that governs and verifies all the transactions. With Bitcoin, the participants exchange value without any third party. The information about all the transactions is written into the public ledger that anyone can get access to. Here are the main advantages that Bitcoin has over the traditional payment systems:

  • The transactions on the Bitcoin network are irreversible.
  • There is no third party to block your account.
  • The transaction fees are much lower.
  • These advantages have not appeared out of the thin air. There was a painful requirement from the society that Bitcoin aimed to resolve. Here’s how it was created.

How Bitcoin was created

The world financial crisis that took place in 2008 revealed the inability of traditional financial institutions to maintain the stable economy and this is what made people’s trust in them waver. In those dark days, an anonymous group of enthusiasts under the name Satoshi Nakamoto presented the idea of the currency that eliminates the need for the third-parties to govern the deal.

Why is that needed? The need for a decentralized currency has risen because of the problems that may appear with centralized financial institutions. When you store your money in a bank account, your money, in fact, does not belong to you. The bank can freeze your account at any time without any explanation. With Bitcoin, such a situation is impossible as you are the only one to control your funds.

How does Bitcoin work?

So how does cryptocurrency work? How does Bitcoin provide transparency and why can’t transactions be reversed?

Imagine the network of information blocks that are produced by different machines around the globe. They serve as a public ledger to keep the records about the payments that users send to each other. It means that whenever you send funds to someone in Bitcoins, a record about this transaction is placed in all the blocks of the network. This process serves to verify the sender, the recipient, the amount of money sent and the time when the transaction has taken place.

If your recipient tries to cheat and says that the funds were never delivered, you can always verify the transaction by showing the corresponding record on the blockchain. You can find the information about any transaction in the network knowing its ID or any of the wallet addresses that participated in the transaction. The blockchain keeps such info as the wallet addresses of the participants of the given deal, the amount of funds sent, the time when the transaction occurred, the size of the transaction fee, etc. Only when a block (a transaction) is done and confirmed, the next transaction can take place.

The information about every transaction is stored in all the blocks of the network that are located in many different parts of the world. If someone wanted to undo a transaction, double-spend the coins or change the amount sent, he would have to get access to more than half of all the blocks. But the possibility of such a situation is tending towards zero as it comes against the main idea of the blockchain.

This is what makes the Bitcoin network more secure, guarantees the Bitcoin value and blockchain security and allows to eliminates the third party to verify the deal.

Now you may wonder what these blocks are and how they are created. To answer this question, we should look a little bit closer at Bitcoin mining.

What is Bitcoin mining?

We’ll try to explain it in the simplest way imaginable without diving into any crazy technical detail. The blocks of the network that we’ve mentioned in the previous paragraph emanate from the work that hundreds and even thousands of computers perform around the globe.

All these machines consume electricity to resolve computational problems. Whenever a machine finds the decryption key, a new block is added to the chain to keep the records about transactions while the owner of this machine gets a reward in Bitcoins. Every new block contains a cryptographic hash of the previous one and they all make up an integral chain (Blockchain).

Bitcoin Mining


Where can I store Bitcoins?

Alright, so you’ve decided to join the cryptocurrency rush and get yourself some Bitcoins. First, you should decide where you are going to store them. There are many different options and different wallets and you should decide which one works for you best.

What is a Bitcoin wallet?

A Bitcoin wallet is your personal unique address that represents a huge mix of digits and letters. Here it’s important to note that you should always copy-paste your address in order to avoid typos. If you make a mistake in the Bitcoin wallet address, your money will be lost with no chance of recovery, because, as we’ve already said at the beginning of this article, all transactions in Bitcoins are irreversible – even if you make a transaction to a wrong wallet.

So what type of Bitcoin wallet should you use? You can install a software wallet on your laptop –  for example, Jaxx or Exodus, use a corresponding browser extension or a mobile app. In order to enhance security, you can get yourself a hardware wallet, such as Ledger Nano S or Trezor. Also, there is plenty of online Bitcoin wallets, too. Alternatively, you can simply print your the private key of your Bitcoin wallet address on a piece of paper to keep it somewhere safe.

Bitcoin wallet pros and cons

The bitcoin wallet system has both pros and cons, like anything else in this world. On one hand, you are the only master of your funds and no one ever can put the hands on your money. On the other hand, there’s nobody to help you get your money back just because it’s impossible.

That is why watch out and don’t lose your password or use a very generic one such as password123, and don’t forget your PIN or accidentally catch a cryptocurrency stealing virus. After all, the Internet is full of stories about people losing their bitcoins because they forgot their PINs, upgraded the hard drive or became victims of hackers.

This is why you should be very attentive when sending your bitcoins to someone else. Whenever you copy-paste the recipient’s address, make sure that the address is correct. Check if the first and the last few letters and digits correspond. Some evil viruses are designed in a way so as to change the recipient’s wallet address to the one that belongs to hackers.

Bitcoin wallet security

Whichever type of wallet you choose, make sure that you set up a really strong password. Also, software and mobile wallets typically provide you with a passphrase that consists of several nouns. You will need this passphrase in case you want to restore your wallet on another device, so make sure that you also write it down, keep in a safe place and never ever share it with anyone.

Remember, with Bitcoins, you are your own bank and there is no one but yourself to ensure your funds’ security. So take all the needed precautions in order not to lose access to your own funds and not to let any hackers put their hands on them.

Where can I get Bitcoins?

Once you have cleared the question with a Bitcoin wallet, now it’s time to find out where you can get the actual Bitcoin. Here are the most reputable platforms where you can buy Bitcoins online.

This is a marketplace where you can buy BTC directly from other people. You can find someone from your own region, check the Bitcoin price that is offered, compare it to the market average on Coinmarketcap and set up a deal which will be curated by the platform.

Coinbase is a reputable platform where you can buy Bitcoins with your local currency. To do that, you will need to attach your bank account. The service supports the limited number of regions so first check if it works in your country.

On this platform, you can buy Bitcoin with a credit card after you upload all the required documents and pass verification. This service works with almost all the regions with a few exceptions – which you can check in their help center.

This service provides you with the easiest way of purchasing Bitcoins. To verify your account, all you need to do is to fill in the basic information about yourself, such as your name and your email address, and to wait for 30 minutes at the maximum. The service is available in 200 countries around the globe with the US as an exception.

If you want to trade Bitcoin on a reputable exchange platform, you can start with Kraken. It is one of the oldest exchange platforms that has been working since 2012. Note that in order to get access to the full set of features, you will need to pass verification and confirm who you are and where you live. To do this, you will need to upload the required official documents.

How do I use Bitcoins?

How does Bitcoin work

Send Bitcoins

The procedure of sending Bitcoins differs from what you are used to with usual online payments. However, it’s not that difficult to grasp. In order to send Bitcoins to someone, copy-paste the recipient’s wallet address in your Bitcoin wallet and click the “send” button. The transaction fee will be calculated automatically and included in the final amount.

Once the payment is sent, the transaction ID will be generated which you can use to monitor the transaction status at Typically, it takes just a few minutes for the transaction to be confirmed and for the recipient to receive funds. If the network is overloaded in the given moment of time or if the service you use requires more confirmations, it may take a couple of hours.

Accept Bitcoins

To accept Bitcoins as a payment, simply copy your wallet address and send it to the other party. The waiting time will be just the same. You can also request to send you the transaction ID for the payment confirmation so that you could monitor its status.

What can I buy with Bitcoin?

Now that you have a Bitcoin wallet and some funds on it, there are two major things that you can do. If your purpose is to make long-term profits on investing in cryptocurrency, all you need to do is to wait till the next ‘bull-run’ begins and Bitcoin’s price rises again. If you plan to get deeper involved in cryptocurrencies and diversify your portfolio, you can take a look at other projects and find the most promising ones.

However, if you want to make blockchain enthusiasts’ dream a reality, you can make Bitcoin fulfill its purpose. Pay with Bitcoin when purchasing goods and services. There have been lots of rumors about Amazon’s plans to start accepting Bitcoin as an official means of payment, but as this giant hasn’t made any official statement on this point yet, you can take a look at the following retailers.

  • Following the success of Papa John’s Pizza that sold 2 pizzas for 10,000 BTC in 2010, many other restaurants started accepting Bitcoin as an official means of payment. Currently, the most popular of them is PizzaForCoins located in California, US.  Not only pizza, but also actual material goods like furniture can be bought with bitcoins, especially in the USA. An example is Overstock. This is a huge furniture retailer based in the UK. This company was one of the first ones who started officially accepting Bitcoins back in 2014.
  • If you want to convert the digital gold into real precious metals you can do this at Apmex, JM Bullion and Sharps Pixley.
  • is another online aggregator of merchants that accept Bitcoins.
  • Newegg is an electronic retail giant that delivers goods almost all around the world.

Bitcoin 101: Summing up

Bitcoin remains a relatively new means of payment, but it has already proved its high efficiency in comparison with traditional financial institutions. It’s fast, secure and transparent. The success that it’s gained in 2017 proves that despite its volatile nature it can be a good investment target.

In the regions with an unstable economy, Bitcoin can serve as a tool to guarantee your funds’ safety. If you want to use it for daily payments, there are already many merchants that officially accept Bitcoins. The good news is that there will be much more in the future. With Bitcoin, you are your own bank and you are the only one to control your funds’ safety. Always be very attentive when sending funds to someone else. Make sure you take all security measures for protecting your funds, such as a really strong password, multi-factor authentication, etc.

All in all, Bitcoin represents a truly revolutionary technology. And if you want to stay at the cutting edge of the progress, using Bitcoin is definitely something you should try.