What Is Bitcoin and How Does It Work?

In this article, we’ll define Bitcoin, describe how the BTC blockchain works, and show you some of the benefits of this digital currency. You’ll also learn about some of the risks of Bitcoin use and how to protect yourself against them.

So, what are you waiting for? Without further ado, let’s start!

How does Bitcoin work?

Since it’s a creation by an anonymous person or a group of people known as Satoshi Nakamoto, Bitcoin has been designed as the “Peer-to-Peer Electronic Cash System.” 

“A version of digital currency that allows online payments to be sent directly from one party to another without going through any central financial or banking system.”

This sophisticated payments system uses the following key concepts:

• It operates as a decentralized network of digital files known as a blockchain.
• The peer-to-peer network concept helps solve double-spending problems. 
• All transactions are recorded on the blockchain using digital signatures.  
• Each payment is verified by signing a hash of the previous transfer and the public key of the new owner. 

This enables tracing Bitcoin history to prevent people from spending and sending coins they do not own, undoing transactions, or making copies.

_{Image source: Bitcoin.org}

Bitcoin or any other cryptocurrency can be stored and transferred using different digital wallets. 

Advantages and disadvantages of Bitcoin

Advantages

There are some significant advantages of Bitcoin:

• It is decentralized. This means it is not subject to the whims of governments or central banks. 
• It offers private and secure transactions. Transactions are verified by the network, making it difficult for unscrupulous individuals to defraud users. 
• Bitcoin has the potential for considerable growth. Because it is still a new technology, there is room for expansion. As more people adopt Bitcoin, its value is likely to increase. Bitcoin is an attractive investment for those looking to capitalize on the growth of the digital economy.

Disadvantages

While Bitcoin has its advantages, several disadvantages should be considered:

• The risk of hacking. Because no central authority regulates Bitcoin, there is no way to recover lost or stolen coins. 
• The price of Bitcoin is highly volatile and subject to sudden swings. This can make it difficult to use Bitcoin as a reliable store of value. 
• Bitcoin is still relatively new and has only begun to be accepted by a few merchants. While this is slowly changing, finding places to spend your Bitcoin may still take time and effort. 

Overall, Bitcoin has both advantages and disadvantages people should consider before investing.

Bitcoin (BTC) cryptocurrency project review

We will study the Bitcoin project by looking at the following criteria, and you can use the same strategy for any other cryptocurrency:

• Vision: Read the white paper 
• Team: Who are the founders 
• Advisors and investors: Who else supports BTC 
• Roadmap: State and execution
• Tokenomics: BTC price and critical metrics
• Activity: Look at the blockchain (on-chain) data
• Product: Test it out if available (advanced users)

Vision: Read the white paper

In October 2008, a special paper called the Bitcoin White Paper was released to the world. A person or group of people named Satoshi Nakamoto wrote it.

This paper proposed a way for people worldwide to make payments and complete transactions without needing to trust anyone else! Instead of relying on someone like a bank or government, this document spoke about building something called the Bitcoin network. 

It’s only nine pages long but describes complex ideas in simple language so anyone can understand it! 

Team: Who are the founders

Satoshi Nakamoto, who created Bitcoin, is a mysterious figure, and nobody knows who he is. Some people think it could be Dorian Nakamoto, but he said he isn’t the real Satoshi. Others believe Craig Wright or Nick Szabo might be the true founder of Bitcoin. 

In 2009, Satoshi wrote the Bitcoin white paper and made the first post ever about cryptocurrency on an online message board. Nobody can be sure how much money Satoshi has made from Bitcoin, but some estimates say he owns at least 1 million BTCs.  

Bitcoin.org is an essential website for the Bitcoin project, and Satoshi Nakamoto and Martti Malmi first owned it. 

After leaving the project, Nakamoto decided to give ownership of the website to other people so that no single person or group could have too much control over it. That way, everyone can have a say in how Bitcoin works.

Advisors and investors: Who else supports BTC

Bitcoin has a growing number of financial investors who are firmly behind it:

• Barry Silbert founded Digital Currency Group, which invests in well-known cryptocurrency companies. 
• Then there’s CEO Michael Saylor of MicroStrategy, who has invested heavily in the currency. 
• You can never forget Cameron, and Tyler Winklevoss, who people say have become the first Bitcoin billionaires because they own around 70,000 coins. 
• Elon Musk‘s company Tesla bought $1.5 billion worth at one time, but that amount has dropped to only $191 million by their 2022 annual report. 
• Michael Novogratz started Galaxy Digital Holdings, which helps its clients manage cryptocurrency and digital asset investments.

Roadmap: State and execution 

Bitcoin’s roadmap is essential because it tells us how the cryptocurrency will evolve. The roadmap explains what updates are being made to the network, what kind of new technologies are and will be developed, and the timeline of when these changes could happen.

We can gain insights into Bitcoin’s progress and direction by understanding the roadmap. 

The roadmap also allows developers to plan their strategies toward the same goals as everyone else involved with Bitcoin. In other words, it helps everyone stay on track and move forward together!

Tokenomics: BTC price and critical metrics

Any cryptocurrency is governed by a set of rules described as tokenomics. Bitcoin is not an exception. To better understand Bitcoin tokenomics let’s look at essential metrics such as supply, issuance, distribution, and halving mechanisms.   

• Max Supply: 21,000,000 BTC
• Total Supply: 19,401,725 BTC
• Market Cap: $502B (Market cap = Current price x Circulating supply)
• Fully Diluted Market Cap: $542B
• Current price: $25,881 (Jun 14, 2023)
• All-time High: $68,790 (Nov 10, 2021)
• All-time Low: $0.04865 (Jul 14, 2010)

_{*Data source Coinmarketcap, ss of June 2023 (some data is subject to change over time).}

To better understand and evaluate Bitcoin’s economics, let’s look at the token distribution, how many people hold it, halving events, and more. 

Bitcoin token allocation and distribution:

100% of all BTCs distributed within the community.

ETH holdings metrics: 

_{Images source: Coinmarketcap.com}

Wallet addresses by the amount held in USD:

• $0 – $1k: 88.11%
• $1k – $100: 11.32% 
• $100K+: 0.57%

Whale holdings:

• Whales – 1.33%
• Others – 98.67%

According to Glassnode, as of May 2023, more than 1 million active wallets (addresses) hold 1 or more BTCs. 

BTC supply schedule and halving

When discussing BTC economics, it’s vital to understand the supply schedule for Bitcoin and the halving process. 

Bitcoin’s total supply is programmed to be limited to 21 million coins. January 3rd, 2009, marked the inception of the Bitcoin Network with the Genesis Block. For BTC transactions to go through, miners must verify each block and add it to the blockchain to receive a reward for validation. Every 210,000 blocks mark the halving event.   

The halving process cut miners’ rewards to half for validating each block. Halving events will continue until all 21 million bitcoins have been all mined. So far, there have been 3 halving events; the next one will occur sometime in 2024.  

Year	Number of blocks	Miners reward
2009	1	50 BTC
2012	210,001	25 BTC
2016	420,001	12.5 BTC
2020	630,001	6.25 BTC
2024	740,001	3.125 BTC
—	—	—
2140 – 2141		0 BTC

The last set of blocks is expected to be mined and rewarded somewhere between 2140 and 2142. 

_{Image source: Coingecko.com}

This information should give you a better idea of what can affect BTC price and when it could happen. 

Activity: Look at the blockchain (on-chain) data

By looking at Bitcoin’s on-chain metrics, you can learn a lot about it. Imagine taking a snapshot of all the transactions since it was created.

You can use several free and paid services to look at blockchain data on Bitcoin. Here is the list of resources showing on-chain data for Bitcoin:

• Blockchain.com – Bitcoin Mempool (free)
• Theblock. co – On-chain metrics (free)
• Glassnode.com (paid) 

That information is recorded onto a public ledger for everyone to see, and that ledger is called the blockchain. By examining this data, we can tell how much Bitcoin has been sent from one person to another and where it’s gone over time. 

Product: Test it out if available (advanced users)

This step is optional and is often used by developers to test their applications. 

But sometimes, testing out cryptocurrency before you do any transactions is a good idea, even if you are a regular user and not a developer. 

Let’s look at the example of how you can try out Bitcoin but avoid risking your actual Bitcoins.

How to use Bitcoin testnet with Trezor wallet:

• Connect and unlock your Trezor device. 
• Open Trezor Suite. Go to settings and select the ‘Crypto’ tab. 
• Under Testnet coins, click on Bitcoin Testnet and close the window. 
• Voila! Your Trezor is all set up for you to use the Testnet version of Bitcoin.

For more information, use this guide on the Trezor website.  

How to use Bitcoin

While most people in the US use Bitcoin as an alternative investment, there are other ways to utilize the original cryptocurrency. You can also use Bitcoin to make purchases, though only a few vendors accept Bitcoin as payment. 

However, some services allow you to connect a debit card to your Bitcoin account. This means you can use Bitcoin the same way you would use a credit card. These services generally involve a financial provider converting your Bitcoin into dollars instantly. 

Utilizing Bitcoin in this way provides more flexibility in spending than simply investing in it. As Bitcoin becomes more mainstream, more vendors will likely accept it as payment. 

Is Bitcoin secure?

As the world becomes increasingly digitized, more and more people are looking for ways to store their money securely online. With traditional banks, there is always the risk of fraud or theft, and even governments have been known to seize assets. 

A decentralized digital currency, Bitcoin, offers a potential solution to these problems. Because Bitcoin is not subject to government regulation, it is theoretically more secure than traditional currencies. However, Bitcoin is not without its risks. 

The value of Bitcoin is highly volatile and tends to fluctuate wildly in a short period. Moreover, because it is still a relatively new technology, there are concerns about its long-term stability. 

Nevertheless, for those looking for a secure way to store their money online, Bitcoin may be worth considering.

Risks of investing in Bitcoin

Investing in Bitcoin comes with a few risks:

• The value of Bitcoin is highly volatile and can fluctuate dramatically from day to day. This means that there is a risk that you could lose a significant amount of money if you invest in Bitcoin and the value goes down. 
• There is the insurance risk. Unlike traditional investments, Bitcoin and other cryptocurrencies are not insured through the Securities Investor Protection Corporation (SIPC) or the Federal Deposit Insurance Corporation (FDIC). 
• No government or financial institution regulates Bitcoin. This means there is no guarantee that your money will be safe if you invest in Bitcoin. 
• There is also the risk that the Bitcoin network could be hacked, and all Bitcoins can simply disappear. 

Despite these risks, many still invest in Bitcoin because of its potential for high returns. If you decide to invest in Bitcoin, you must do your research and only invest what you can afford to lose.

Summary

So what do you think? Is Bitcoin worth investing in? While some criticisms have been leveled against it, Bitcoin offers some advantages, such as being decentralized and having low transaction fees compared to traditional methods. 

Moreover, this digital currency could continue to rise in value over time. Do your research before deciding whether or not to buy into the Bitcoin craze!