Bitcoin: An Elementary Explanation of How It Works

Elementary Explanation Of How Bitcoin Works

So, what is Bitcoin? First of all, it’s the first cryptocurrency ever created. It was created in 2009. It’s anonymous, decentralized and it uses no banks. 

To most people, Bitcoin can seem like a financial concept made in a parallel universe. Yes, it’s a very complex and complicated concept, but it doesn’t mean it’s impossible to understand it.

When you think about it, most people started off with no idea about bitcoins and how they worked. But now, they’re probably investing left, right and center in various cryptocurrencies like professionals and possibly profiting very nicely as well! So, in this post, we’ll try to simplify how Bitcoin works using a betting game analogy:

Imagine playing a betting game with your friends, but none of you has any money to hand, so you decide to use a ledger to record the transactions, like your winnings and losses. But you don’t want to put your trust in any one friend to record everything, so a lot of you decide to make a ledger simultaneously.

This way, at the end of each game, those who kept ledgers can compare their records to see if it all evens out—which means that cheating the system would be virtually impossible unless everybody else is in cahoots with you, which ultimately defeats the purpose of cheating in the first place.

These ledgers are not hidden or exclusive to the ledger keepers; you can view them anytime you want. To add your transactions to the ledger, all you have to do is broadcast your transactions to the ledger keepers, and you pay as little or as much as you want to make sure they record your transaction in that ledger as soon as possible.

Your friends who keep the ledgers up to date get compensation for their hard work with a reward in the form of money. This money comes from an external source—say, a vault with a limited amount of money. The money in the vault wasn’t part of the money circulating in the betting pool, but it became so once it was acquired by your ledger-keeper friends.

This simple analogy is exactly how Bitcoin operates, albeit on a much more complicated level. Bitcoin runs on a global computer network, and each transaction is compiled into new blocks which are then connected to the last block on the blockchain. And the bitcoin miners are the ledger-keepers who work hard to record transactions and mine those precious bitcoins.