What is Bitcoin and how does Bitcoin work? 2020


What is Bitcoin?

Bitcoin is a talk of the town these days. On one side, Japan considers bitcoin as a legal tender, while on the other, JP Morgan Chase CEO James Dimon calls it little more than a “fraud”. Some countries consider dealing with Bitcoin is equivalent to fraudulent activity. Nevertheless, we need to understand what is Bitcoin, how does bitcoin work, how does bitcoin mining work and how does a bitcoin ATM work so that we can attempt to answer the question why some countries accepting Bitcoin as a currency while many countries are against it.

The term ‘Bitcoin’ is a combination of two words Bit & Coin. If we cut the information stored in the computer in smaller chunks, we will end up finding 0’s and 1s. These are known as bits and you are already aware of what is coin hence requires no explanation.

Bitcoins are the digital currencies stored in an electronic device, especially computers. That is the reason, this currency is popular as Cryptocurrency or digital currency. Let us understand how bitcoin works only.

In the business world, you can find three categories of people: Producer, consumer, and middlemen. If you want to sell your product on amazon, you have to pay a fee for your middlemen for facilitating the transactions. Middlemen take most of the benefits in the whole economic cycle resulting in no margins or fewer margins for the manufacturer. Even when the manufacturer can offer the products at a deep discount and lowest prices, the presence of middlemen makes it difficult for manufacturers to sell a product for lower prices.

I hope by now you must have got a hint about what are we trying to say. If NO? continue reading.

What is Bitcoin? How Does Bitcoin Work, How Does Bitcoin Mining Work, How Does A Bitcoin ATM Work
What is Bitcoin?

Bitcoins are introduced to remove the presence of middlemen in the business activities passing the benefits directly to the producer and the end-user. Bitcoins were developed to remove middlemen from the economic system especially the banking systems.

For example, if you need to transfer $10000 to your friend the United States, the money must pass through your bank who takes processing fees and other transaction charges. Once your money reaches your friend in the United States, his bank too will take the transaction fees. Both the sender and the receiver will have to sacrifice your money in the process.

It is not just the fees that create a problem, the data security, and storage that is required. Banks and other middlemen in the financial system track the critical private information that belongs to millions of customers. When hackers get access to such data, the customers will be vulnerable to the danger of loss of precious private information.

This is very dangerous at times. There are several reported cases in which the customers have lost their precious credentials and lost money too from their bank accounts. The banks had a greater role in the financial crisis of 2008. Bitcoins were introduced in 2009 and it was just after the financial crisis. Many people argue that the introduction of bitcoin was due to the financial crisis. Let us now understand the mathematics and logic related to how does bitcoin works?


How Does Bitcoin Work?

In this section, let us try to understand how does Bitcoin Work and the mechanics behind Bitcoin.

The creator of Bitcoin has established three main concepts that work like pillars for bitcoin creation.

What is Bitcoin? How Does Bitcoin Work, How Does Bitcoin Mining Work, How Does A Bitcoin ATM Work
How Does Bitcoin Work

A. Decentralized Networks

When we browse and search ‘www.yahoo.com’ our computer begins an interaction with Yahoo computers and then both computers begin communicating with each other and our browser show text, images, videos, etc.

Let us assume that your Yahoo browser is down for some reason, you would be able to see these videos, images, and text since both the computers could not connect. Because the data is stored in a centralized network.

What is Bitcoin? How Does Bitcoin Work, How Does Bitcoin Mining Work, How Does A Bitcoin ATM Work
How Does Bitcoin Mining Work

To understand how bitcoin work does, it is important to understand the decentralised network.

In a decentralised network, unlike in a centralised network, the data is saved in multiple locations called ledgers. You need not wait for a centralised network to respond to your signals. In simple terms, your yahoo never goes offline

B. Cryptography

You must have heard cryptography very frequently from a security point of view. Considering the usage of cryptography during world II to encrypting your password to protect the privacy of your bank account details, cryptography has its relevance across various industries.

When the data is encrypted, you would require system support to convert the message into the original format and read it which requires a key. However, it gives a lot of power for those who create the data in securing the privacy of the data. Bitcoins similarly use the cryptography to convert transactional data. This is the reason to call bitcoin as cryptocurrency.

C.Supply and Demand

The fundamental principle of economics is that an element earns value when it is in limited quantity. The more people want to acquire it, the higher the prices would become. It is exactly like your Old Bullet Motor Bike. You must have heard people buying it for more than its showroom price.

Bitcoin uses a similar concept. Since the supply of Bitcoin is limited, it has continued to appreciate its value. Bitcoins have mined a standard and fixed rate which will decrease over a period. It splits every four years. It has a limit of 21 million coins and no more Bitcoins can be created. Yet it is a long way to reach the limit of 21 million coins. Therefore, that answers your basic question of how bitcoin works.


How Does Bitcoin Mining Work?

Generally, cryptocurrency mining is an extremely challenging and painstaking job. Cryptocurrency mining is also a costly yet rewarding activity. Due to the attractive rewards, many across the world involved in cryptocurrency mining activity since it pays in two ways

  • Miners remuneration
  • Rewards with crypto tokens

The main draw for many Bitcoin miners is the possibility of being compensated with useful bitcoin tokens. You need not be a miner to own cryptocurrency tokens. You can also buy cryptocurrencies utilizing fiat currency; you can exchange it on an exchange like Bit stamp using another crypto. You even can receive it by performing video games or by printing blog posts on programs that pay users in cryptocurrency. An instance of the latter is Steemit, which is kind of like Channel except that users can pay bloggers by paying them in a patented cryptocurrency called STEEM. The STEEM can then be traded elsewhere for bitcoin.

The bitcoin incentive that miners get is an incentive that encourages individuals to help in the main objective of mining: to help, legitimize, and observe the Bitcoin system and its blockchain. Since these duties are circulated amongst many users all over the world, bitcoin is said to be a “decentralized” cryptocurrency. That means it does not belong to any government or central bank.


How Does A Bitcoin ATM Work?

So far, we have discussed what is Bitcoin and how does bitcoin work. Let us now understand how does a Bitcoin ATM works?

Bitcoin ATMs are popularly known as Bitcoin Teller Machines (BTMs). They are not the ATMs per se rather Bitcoin ATMs are physical cryptocurrency centers where you can purchase Bitcoins with fiat money using some machines. You can Sell Bitcoins too on the same machines. Bitcoin ATMs are meant for those who are not linked with any banking system and dealing only with Bitcoins.

What is Bitcoin? How Does Bitcoin Work, How Does Bitcoin Mining Work, How Does A Bitcoin ATM Work
How Does A Bitcoin ATM Work

There are more than 1600 Bitcoin ATMs functional across the world and are expected to rise in number end of 2020. Let me explain buying Bitcoins using and ATM and Selling Bitcoins using an ATM separately.

Buying Bitcoin with an ATM

  • Create an Account with a Bitcoin ATM operator. Establish your confidential identity
  • Have a private Bitcoin wallet to record and store your transactions. The wallet can be downloaded as an app using your smartphones.
  • Insert your physical currency into the ATM and key-in which Bitcoin Wallet Address you want to send money. Let us assume you insert $1000. The Bitcoin ATM operator then sells you $100 worth of Bitcoins at the marketplace. Operating fees will be deducted. Often the miners deduct their fees as well.
  • You receive a confirmation that your Bitcoin wallet now maintains the secure record of this transaction, showing that you own that $1000 worth of Bitcoin, minus the fees.


Selling Bitcoin with an ATM

  • If you do not already have an account with a Bitcoin ATM operator, you will need to create an account.
  • Then, using one of their Bitcoin ATMs, log in to your account, specify how much Bitcoin you want to sell, and which wallet address you want to sell from.
  • This particular transaction will be authenticated on Bitcoin Network and you will see a notification as soon as the verification is completed. As soon as the verification is over you withdraw cash, and this takes longer than the time required to buy bitcoins.
  • As with buying Bitcoin, the ATM operator will pay a fee for the transaction, so the cash you collect will be minus the operator’s fee and probably also the miner’s fee. Dependent on the current market value of Bitcoin at the time of your sell transaction, it may be worth more or less than you paid for it initially.


On a serious note, blockchain also has potential security threats. Serious concerns can rise against the blockchain concept, especially with regards to trust and who is responsible should a problem arise. It is also under the radar of the regulatory authorities in many countries. It will take some time, a strong performance record, for it to make a meaningful contribution to the digital world. But as a new technology, it has a long way to go and yet to earn that trust from the users.

Hope, you got to know more about what is bitcoin, how does bitcoin work, how to invest in bitcoin, where to buy bitcoin, how to purchase bitcoin, how to make money with bitcoin and how to pay with bitcoin

Feel free to share your thoughts and queries in the comment section


Other related articles:

What is Bitcoin?

What is Blockchain Technology?

What is Cryptocurrency?

An Overview of Money Management


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About Pavan kumar C

Pavankumar Chandrappa is an excellent academic writer, learning designer, research scholar, and blogger in the management domain. He has more than a decade of blended experience in academia and industry with great exposure to writing on various paradigms of business management. He has published a series of research papers on various paradigms of learning. You can access his detailed biography by typing"Pavankumar Chandrappa" on google search.

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