What Is Bitcoin and How Does It Work?
Bitcoin is a type of digital token that can be sent electronically through a decentralized digital payment network. Bitcoins can be sent from person to person, anywhere in the world; indeed, Bitcoin was initially intended to be used as a secure electronic cash and payment system.
Bitcoin is built on blockchain technology. A blockchain is a type of digital ledger that records information (such as transactions) in a way that makes it nearly impossible to edit or alter that information. This way of recording information is inherently secure, but Bitcoin takes it a step further by specifically employing a decentralized blockchain, which depends on a peer-to-peer network to verify transactions.
All of this may sound a bit complicated right now, but we’ll break it down for you in this guide. Perhaps the most important thing to know is that Bitcoin proposes an alternate approach to finance than the one offered by traditional banks and governments—and many people see it as part of the world’s financial future.
With that in mind, let’s take a look at how Bitcoin started, how it works, and how it’s used in day-to-day transactions.
A short history of Bitcoin
Bitcoin started as a concept rather than a coin.
In 2008, a writer going by the pseudonym of Satoshi Nakamoto published a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” In this paper, Nakamoto shared a vision of a “purely peer-to-peer version of electronic cash” that would allow people to send money to each other without going through a third-party financial institution, like a bank.
Why is it so important to avoid these financial institutions? Nakamoto saw “inherent weaknesses” in the trust-based model that has traditionally defined the financial sector. If you make a purchase online, you’re relying on the trustworthiness of a third-party financial institution to ensure that your transaction is secure and successful. This dependence on a third party comes with costs—transaction costs, sure, but also the costs of fraud and mediation for disputed transactions. What if there was a better way?
Bitcoin attempts to show exactly what that better way looks like. Rather than relying on trusted third parties, Bitcoin offers “an electronic payment system based on cryptographic proof.” Using a peer-to-peer network to verify time-stamped transactions on a blockchain, Bitcoin creates an altogether new type of currency—along with an immutable record of transactions to allow truly secure online payments in that currency.
Bitcoin itself debuted in early 2009, marking the start of the crypto revolution. Since those early days, the value of an individual Bitcoin has sky-rocketed, hitting its most recent all-time high of $68,521 on November 5, 2021.