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

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

Despite being more than ever in the light, the field of cryptocurrencies and bitcoins still remains very complicated. Between mathematical notions that may seem complex, English jargon and many notions to remember, it is not easy to get a precise idea of ​​what is really happening. How it works, its usefulness, its impact: we answer all your questions.

Bitcoin, what is it?

We need to start with the basics first: what is bitcoin? It is a cryptocurrency, i.e. 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 actually two separate concepts: bitcoin is a cryptocurrency, but not all cryptocurrencies are bitcoin.

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

The above terms are complicated at first glance, but we’ll explain them all throughout this article — and to better understand the workings and idea behind the creation of bitcoin, it’s best to go back to what motivated its genesis.

Who created bitcoins?

The creator of bitcoin is Satoshi Nakamoto. A great mystery hangs over this person, whose true identity has never been confirmed, and that he has given no 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 related to his identity, but of returning to his ambition. Satoshi Nakamoto wanted to create a currency that was answerable only to any government authority or banking institution. He wanted to achieve the implementation of a completely independent currency.

But how to achieve this without a third person setting the value of the coin? How to make sure 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 document that should 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 in fact a central element in its development – and in the development of all cryptocurrencies. It is, in a sense, the machine upon which digital currencies exist and from which they are inseparable. For example, the blockchain is to bitcoin what a console is to video games.

More concretely, a blockchain is a database that contains a history of all the transactions that have taken place on it. Since 2009, the bitcoin blockchain has therefore kept track of all the exchanges that have taken place there. The chain has no owner – it’s shared with all its users at the same time, who are all owners, which also means that it doesn’t have a single storage location. Users who host the blockchain on their computer (so-called knots bitcoin) are those that allow the decentralization of the blockchain.

The chain is transparent, i.e. accessible to all, it is secure, tamper-proof and decentralized, which means that it is somewhat 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 the name).

For a new block to be added, it must first be validated by users using a specific protocol, called a consensus protocol, which uses encryption 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 to everyone knots bitcoin, which guarantees 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 process of validating transactions made on a blockchain, in our case that of bitcoin. We do not validate each transaction individually, but per block, as we have just seen. To validate a new block, Internet users are put in competition with each other: the first one who will be able to answer 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 ensures that all knots of bitcoins have the same version.

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

Thanks to the blockchain operating protocol, we therefore have a database that allows us to keep accounts, guarantee transactions, and reward those who keep it by giving them money. It is an autonomous and decentralized system, and this is 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 bitcoins. Once a bitcoin is produced, it works in the same way as other currencies: it can be used to pay for a good or service.

How is the value of bitcoin determined?

Like everything, the value of bitcoin is determined by 2 main factors: its rarity and its usefulness (although we can add a certain amount of speculation from 2020 as well).

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

To this we must also add its usefulness: initially bitcoin was not used much as a currency. Few merchants accepted to be paid in cryptocurrency and there wasn’t a big market on the internet. As time went on and with the growing popularity of bitcoin, more and more people started accepting the cryptocurrency as a form of payment, thereby mechanically increasing its utility and value.

Finally, in recent years, bitcoin has increasingly become part of a stock exchange logic: an entire trading market has been created around the cryptocurrency, which helps to vary prices. The more demand there is for bitcoin, the more it is worth: this is the phenomenon we saw at work when the value record was broken in October 2021. The opposite is also true: when the price falls, everyone wants to sell the bitcoin first. product loses its value completely, causing the value to fall, which is known as bear market.

How to pay with bitcoins?

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

There are some similarities though: First, you’ll need a cryptocurrency wallet (often called a wallet in the middle). Finally, you’ll need the address you want to transfer your bitcoins to.

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