How Does Bitcoin Work?

Understanding How to Use Bitcoin

Bitcoin, the world's first digital currency, created a worldwide phenomenon when it was launched in 2009. But what exactly is Bitcoin and how would someone go about using it in daily commerce? The following describes exactly how Bitcoin works.

The Beginning of Bitcoin

Bitcoin was created by an anonymous individual using the name "Satoshi Nakamoto." Initially, Bitcoins could only be obtained by mining for them online. A computer whiz would solve intricate "puzzles" that were created online through Bitcoin transactions. Now they can be obtained through online exchanges where they can be purchased. They are also accepted as payment for services or products. There are even a few Bitcoin ATMs in the United States. Mainstream businesses such as Paypal, Expedia, and Overstock are even beginning to accept Bitcoins. The interesting thing about Bitcoin is that they don't actually exist anywhere, not even on hard drives. They can, however, be exchanged and used as currency like the cash people carry in their wallet.

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How Transactions Work

Bitcoin transactions occur between electronic wallets. A Bitcoin wallet is where the private keys are stored to access the address and spend funds. To send Bitcoins a person needs a Bitcoin address, which is generated randomly, and a Bitcoin key. The key is simply another sequence of numbers and letters. Bitcoins exist only as the record of transactions. Sometimes there are transaction fees, but not always. Some of the terms associated with Bitcoin transactions include "tx", which is short for Bitcoin transaction, and "script", which is the scripting system that is used to process and validate transactions.

The Future of Bitcoin

Since Bitcoin is not connected to a government or a central bank, many people believe this type of monetary system is the currency of the future. How much a Bitcoin is worth has changed dramatically during the last few years, which may prove problematic for its practical use. Bitcoins have gone from being worth almost nothing to about $1,000 each at their peak. They have recently been worth about $260. The block-chain concept, which is the official ledger used online to monitor transactions, could be used as a template for other online applications. Whatever happens with the actual Bitcoin, the concept behind it has definitely paved the way for further innovation in technology.