Bitcoin for Dummies: How Does BTC Work? | Gemini (2024)

Summary

Often referred to as “digital gold,” bitcoin (BTC) is a pioneering digital currency that was launched in 2009 by pseudonymous figure Satoshi Nakamoto. The cryptocurrency BTC is transacted atop the Bitcoin network. The Bitcoin blockchain is decentralized by design, meaning that it is not owned or controlled by any single entity — it is open, public, and practically impossible to censor. Additionally, Bitcoin transactions are auditable and immutable. Every transaction can be viewed publicly, and once a transaction has been executed, it is functionally impossible for it to be undone.

“Bitcoin for Dummies”: How Does BTC Work?

Bitcoin (BTC) is a form of digital money. It exists on its own network that facilitates secure, online transactions directly between accounts without requiring an intermediary — such as a bank or credit card company — to mediate and validate transactions. This means that two people can send each other BTC from anywhere in the world, at any time in the day, without ever having to consult a bank or money transfer service. This revolutionary digital asset was launched in 2009 by a pseudonymous person or group of people called Satoshi Nakamoto. The launch of Bitcoin set in motion the global crypto and blockchain phenomenon, and it remains the largest cryptocurrency by market capitalization today.

What Is Bitcoin and Why Should I Care?

Bitcoin is an internet-native currency that has a variety of characteristics that differentiate it from non-digital money. Crucially, Bitcoin is decentralized by design, meaning that it is not owned or controlled by anyone — it is open, public, and functionally uncensorable. Relatedly, anyone can use Bitcoin and contribute to the collaborative development of its software. Over 10,000 machines around the world (called nodes) run the Bitcoin software that provides the network with its essential functions. Operating across such a vast base makes Bitcoin geographically decentralized — a quality that in turn makes Bitcoin extremely difficult to shut down should any government or organization ever wish to try.

Unlike the U.S. dollar and other fiat currencies, bitcoin is not backed by a government. There is no entity or organization guaranteeing its value beyond the public’s consensus on its value — which is indicated at any given time by the market price of BTC. Some people believe Bitcoin is valuable specifically because it is not controlled by the government. Others are drawn to bitcoin’s fixed supply and highly transparent, automated monetary policy mechanisms. Government-issued currency can be created indefinitely, often driven by political concerns. This often causes problems like inflation and declining purchasing power. In contrast, there will never be more than 21 million bitcoin, and its inflation schedule has been coded into the network since launch.

Additionally, the Bitcoin network is auditable and immutable. Every transaction is available to see, and once a transaction has been executed, it is functionally impossible to undo it. That’s because every confirmed BTC transaction is added to a shared public ledger called the blockchain that is maintained by miners. In cryptocurrency parlance, miners are people who use powerful computers to help ensure that transactions are valid and order them chronologically. Valid transactions are bundled into blocks that conform to strict rules based on cryptography. These blocks are linked in a chain — hence the term “blockchain” — and cannot be modified once added. The benefit of the blockchain is that we have a shared, ownerless, public record of every Bitcoin transaction ever executed. That means you can always check that Bitcoin is working as it should be, and don’t have to trust any other party in a transaction to ensure that it has gone through.

Finally, unlike other forms of electronic payment, Bitcoin offers its users pseudo-anonymity. Instead of a username or an email address or a managed account, Bitcoin users have wallets that generate addresses. These are long strings of numbers and letters that function as your identity in the Bitcoin network. For privacy purposes, Bitcoin wallets allow you to generate new addresses every time you wish to make a transaction, so you don’t necessarily need to maintain the same identity in the network over time. However, the public ledger of blockchain transactions limits the degree of privacy Bitcoin provides, even if ownership of the address is anonymous.

What Is BTC Used For?

People use Bitcoin for a variety of reasons. For some, Bitcoin is a store of value akin to digital gold, because its fixed supply makes it scarce. For others, Bitcoin is an easy and cheap way to transfer value due to its digital nature and often inexpensive transaction fees. Still, some people use Bitcoin because they are intrigued by its potential and enjoy experimenting with new technologies. Learning about and investing in Bitcoin provides an excellent gateway into the exciting world of crypto, blockchain, decentralized technology, and Web3.