What is bitcoin (BTC) and how does it work?

Bitcoin, the first and best known of cryptocurrencies, has become essential. The digital currency is making waves all over the world, from China to the United States to El Salvador, and is gaining more and more followers. Creation, operation, use, safety: we go through your questions.

Since the end of 2020, one word has been on everyone’s lips: bitcoin. Between the surge of its extraordinary price in 2021, its ban in some countries, its legalization in otheror its recognition as official currency in El Salvador and in the Central African Republicbitcoin has been in the news regularly for 3 years.

Although it is more than ever in the light, the field of cryptocurrencies and bitcoin nevertheless remains very complicated. Between mathematical notions that may seem complex, English jargon and many notions to remember, it is not easy to get a good idea of ​​what is really going on. Operation, usefulness, impact: we answer all your questions.

Bitcoin, the best known crypto-currency // Source: Canva

Bitcoin, what is it?

We must first start with the basics: what is bitcoin? It is a cryptocurrency, that is, a currency that is not created by a centralized entity. Concretely, no government or central bank oversees the creation of bitcoin, unlike what happens with classic fiat currencies. The euro is controlled by the European Central Bank, the dollar is issued by the US Federal Reserve, etc.

It is important to note from the beginning of this article that it is very easy to confuse the definitions of bitcoin and cryptocurrency. These are indeed two separate concepts: bitcoin is a crypto-currency, but not all crypto-currencies are bitcoin.

To give a basic definition, bitcoin is an autonomous digital currency, which is created at regular intervals by an algorithm, and based on a system known as blockchain, or chain of blocks in French. There are no banknotes or bitcoin coins: everything is done online.

The previous terms are complicated at first sight, but we will explain them all during this article — and in order to better understand the functioning and the idea behind the creation of bitcoin, it is better to go back, to what motivated its genesis.

Who created bitcoin?

The creator of bitcoin is Satoshi Nakamoto. A great mystery hangs over this personwhose true identity has never been confirmed, and who has not given a sign of life since the bitcoin blockchain went online in January 2009.

However, it is not a question here of returning to the various theories linked to his identity, but of returning to his ambition. Satoshi Nakamoto wanted to create a currency that would answer only to any government authority or any banking institution. He wanted to arrive at the implementation of a fully independent currency.

But how to achieve this objective without a third person to fix the value of the currency? How to ensure that it is not misused? A safety net had to be put in place. The solution found by Satoshi Nakamoto is the implementation of a blockchain.

What is a blockchain?

You may be wondering what the definition of blockchain has to do with a paper supposed to define bitcoin: you are absolutely right. However, it is necessary to understand how a blockchain works before moving on to the explanatory part on bitcoin: the blockchain is indeed a central element in its development – ​​and in the development of all crypto-currencies. It is, in a way, the machine on which digital currencies exist, and from which they are inseparable. To take an example, the blockchain is to bitcoin what a console is to video games.

Bitcoin is based on a blockchain // Source: Canva
Bitcoin is based on a blockchain // Source: Canva

More concretely, a blockchain is a database that contains a history of all the transactions that have taken place on it. The bitcoin blockchain therefore keeps, since 2009, a trace of all the exchanges that took place there. The chain has no owner: it is shared simultaneously with all its users, who are all the owners, which also means that it does not have only one storage location. Users hosting the blockchain on their computer (so called of the nodes bitcoin) are those that allow the decentralization of the blockchain.

The chain is transparent, that is to say that it can be consulted by everyone, it is secure, tamper-proof and decentralized, which means that it is in a way self-managed thanks to the users of this chain. This is made possible by its architecture: transaction information is stored in blocks of data, which are added to the chain as you go (hence its name).

For a new block to be added, it must first be validated by users using a specific protocol, called the consensus protocol, which uses cryptography technology to ensure its inviolability. This is a very important step, which is called mining. Once a new block is added to the chain, it is visible on all nodes bitcoins — which ensures its integrity.

How is bitcoin produced, or mined?

Mining, let’s talk about it. The term refers to the act of creating a new block, and therefore, new units of cryptocurrency — in our case, bitcoin.

This is the validation process for transactions made on a blockchain, in our case, that of bitcoin. We do not validate each transaction individually, but by block, as we have just seen. To validate a new block, Internet users are put in competition with each other: the first to succeed in answering a cryptographic equation (therefore, extremely complex) will win the right to approve the new block of transactions. This process is referred to as the “consensus protocol”.and it ensures that all nodes of bitcoin have the same version.

Bitcoin mining requires a lot of computing power // Source: Canva
Bitcoin mining requires a lot of computing power // Source: Canva

Once the new block is added, the miner who validated it is rewarded for their work: they get new bitcoin units. This is what ensures that anyone cannot create bitcoin as it should, which would distort its usefulness as a currency.

Thanks to the operating protocol of the blockchain, we therefore have a database which makes it possible to keep the accounts, to ensure the transactions, and which rewards the people who maintain it by giving them money. It’s an autonomous and decentralized system, and that’s what has made bitcoin so successful over the years.

How does bitcoin work?

To recap: bitcoin runs on a blockchain, like all other cryptocurrencies, and is produced through an operation called mining. These are the basics you need to know about bitcoin. Once a bitcoin is produced, it functions in the same way as other currencies: it can be used to pay for a good or a service.

How is the value of bitcoin determined?

Like everything, the value of bitcoin is set by 2 main factors: its rarity, and its usefulness (even if we can also add a certain amount of speculation since 2020).

As we have seen, not everyone produces their own bitcoins, as we cannot print new banknotes ourselves in order to get rich. This provides some stability to bitcoin. Moreover, from the start, Satoshi Nakamoto planned that only 21 million bitcoins would ever be created. This adds a rarity to bitcoin which makes it a precious commodity, like gold or oil: the rarer something is, the more expensive it is.

Since the beginning of 2022, the price of bitcoin has fallen sharply // Source: Canva
Since the beginning of 2022, the price of bitcoin has fallen sharply // Source: Canva

We must add in addition to this its usefulness: initially, bitcoin was not used for much as a currency. Few merchants accepted to be paid in cryptocurrency, and there was not a big market for it on the Internet. Over time and with the growing popularity of bitcoin, more and more people began to accept cryptocurrency as a form of payment, thus mechanically increasing its usefulness and value.

Finally, in recent years, bitcoin has become more and more part of a stock market logic: an entire trading market has been created around the crypto-currency, which helps to vary prices. The more demand there is for bitcoins, the more they are worth — this is the phenomenon we saw at work when the value record was broken, in October 2021. The reverse is also true: when the price drops, everyone wants to sell before the product loses its value entirely, causing the value to fall — which is known as bear market.

How to pay with bitcoins?

Since it is a completely digital currency, it is not possible to pay exactly as you are used to: there are no coins, nor a credit card (yet) for pay in bitcoin. Payment in bitcoin therefore requires internet access.

There are some similarities though: first, you will need a crypto wallet (often called wallet in the middle). Finally, you will need the address to which you want to transfer your bitcoins.

For further

Genesis has filed for bankruptcy // Source: Nino Barbey for Numerama


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What is bitcoin (BTC) and how does it work?


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