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How Does Bitcoin Work?

Bitcoin is a decentralized cryptocurrency started in 2009 by a person or persons using the name Satoshi Nakamoto. You can consult APMEX’s other educational articles for a deeper understanding of what exactly Bitcoin is, but here we want to discuss how Bitcoin works. If you have been eager to begin using Bitcoin but have hesitated due to lack of information, we’re here to help.

Decentralized Cryptocurrency

These two words taken together mean that Bitcoin is a digital asset designed to work as a medium of exchange—like money—using cryptography to secure the transactions. Bitcoin also relies on cryptography to control the creation of more Bitcoins, and to verify the transfer of assets between parties. Bitcoin is also run by the people who use it. There is no central authority overseeing Bitcoin; the authority has been dispersed to many people with computing power keeping a public ledger. That public ledger keeps everyone honest and on the proverbial up-and-up. Essentially, Bitcoin allows one to enjoy total anonymity when buying and selling goods, with a complete absence of government oversight.

Getting Started with Bitcoin

As a new user, you can begin using Bitcoin even before you have a perfect grasp of how it works. Your comfort with Bitcoin will grow when you see it in action. Once you installed a Bitcoin wallet on your computer or mobile device, it will generate a Bitcoin address. This address is how you send and accept Bitcoin, and you generally only use a Bitcoin address once. You choose with whom to share a given address, and you can create another whenever you wish. The process is similar to sending an e-mail and accessible to even those who are not tech-savvy.

How it Works

For example, Liz requests that her Bitcoin balance, held at her address on the public ledger, be reduced by three Bitcoin while an address owned by Jack be increased by three Bitcoin. Liz and Jack do not have to be acquainted in real life; she need only know his address. Bitcoin addresses function as public keys in that they are visible to anyone. Liz confirms that she owns that public address through the generation of a digital signature with her private key, which she keeps secret. So, everyone has a front-facing public address and a secret private key. This is how anonymity is ensured.

Once Liz announced to the keepers of the public ledger that she wished to transfer a balance of Bitcoin on the ledger from one owner to another, it is grouped into a block with other transactions and members on the system then compete to be the first person to confirm that the transactions in the block are legitimate. Once a block is confirmed, the ledger, or blockchain, is updated to reflect the most recent transactions.

That is how the Bitcoin system works, in the simplest possible terms. Bitcoin works on a public ledger reckoning the rightful ownership of every extant Bitcoin. Transactions amount to debiting one address and crediting another while public key cryptography ensures the security of each transaction.

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