How do Bitcoins work?

Bitcoin works on blockchain technology. The blockchain is a shared public ledger on which the entire Bitcoin network relies. Any confirmed transactions (including newly added bitcoins) are added into blockchains.

When any user initiates a new transaction (send or receive bitcoins), the transaction is verified using blockchains.  Here is a video that explains how Blackchain technology works. This is a must watch video as think of Blockchain as internet & Bitcoin as email service that operates on Internet.

Think of this like the physical ledger that is maintained by banks. The only difference is, in this case, it’s maintained by the public & anyone can use the ledger to match a transaction.

Bitcoin uses Public-key cryptography. This system uses two pieces of information to authenticate messages.

 

When you set up your Bitcoin wallet for the first time, you are asked to setup a private key (also known as a “seed”). This is the most important part of Bitcoin security. The ideal thing to do is to write down your seed keyword on a piece of paper & keep it somewhere safe.

Important: Never write down your private key (seed) online & don’t share it with anyone!

We will look into the security of Bitcoin in an upcoming section & we have a dedicated section for understanding how Bitcoin wallets work.

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