What is Bitcoin & How does it work?

You've heard of Bitcoin, but you just don't understand how it works, right? Well, here is a simple breakdown to explain what Bitcoin is and how it works.

Bitcoin is a decentralized digital currency that allows for peer-to-peer transactions without the need for a central intermediary, such as a bank. It was first introduced in 2008 by an individual or group of individuals using the pseudonym Satoshi Nakamoto in a white paper entitled "Bitcoin: A Peer-to-Peer Electronic Cash System."

The key innovation behind Bitcoin is its use of a distributed ledger technology called the blockchain. The blockchain is a public, decentralized ledger that records all Bitcoin transactions. Each block in the blockchain contains a group of transactions and a reference to the previous block. This creates a chain of blocks, hence the name "blockchain."

One of the main advantages of the blockchain is its immutability. Once a block is added to the blockchain, the transactions it contains cannot be altered. This ensures the integrity and security of the Bitcoin network and helps to prevent fraud and double spending.

The process of adding new blocks to the blockchain is known as mining. Miners, who are incentivized by the reward of newly minted bitcoins and transaction fees, use powerful computers to solve complex mathematical problems, known as proof-of-work (PoW) algorithm. The first miner to solve the problem is able to add the next block to the blockchain and is rewarded with newly minted bitcoins. The reward for adding a block is currently 6.25 BTC but it goes down by 50% every 210k blocks.

The total number of bitcoins that can be mined is limited to 21 million. This fixed supply is built into the protocol and ensures that the value of Bitcoin is not diluted over time. Currently, 18 million of the 21 million bitcoins have already been mined.

Bitcoin transactions are pseudonymous, meaning that while transactions are recorded on the blockchain, the identity of the individuals behind the addresses is not publicly available. However, the transparency of the blockchain makes it possible to trace the flow of bitcoins from one address to another, and a growing number of firms offer blockchain analysis services to help identify individuals and organizations involved in illicit activities.

Bitcoin can be bought and sold on digital currency exchanges and can be used to buy goods and services at an increasing number of merchants, both online and in the physical world. However, the value of Bitcoin is highly volatile and can fluctuate significantly over short periods of time. It's considered a high-risk investment and its not a legal tender in most countries.

Overall, Bitcoin represents a significant development in the world of finance and technology. Its decentralized nature, combined with the security and integrity of the blockchain, have the potential to disrupt traditional financial systems and change the way we think about money. While it is still considered a relatively new technology, Bitcoin has already gained significant attention and adoption, and its impact is likely to continue to grow in the coming years.