How Does Bitcoin Work? A Simple Explanation of How Bitcoin Works

Bitcoin is back in the news again, and everyone is saying that it is going to the moon, but you might be in a similar boat to millions of other people out there and wondering 'How does Bitcoin work?' That's not a silly question by any stretch of the imagination, so many people don't know what goes on with Bitcoin, how it works, and a whole heap of other stuff around Bitcoin.

This article, we hope, will help to shed some light on how Bitcoin works, and provide a simple enough explanation of the mechanics behind Bitcoin from a high-level perspective. We're not going to get into the technical nuts and bolts of all things crypto here, just a simple surface-level look at the new dynamic which is unfolding in the global economy.

There are some basic terms that this article will cover for you, so you don't feel so much like this is complete gibberish. When I first got started in crypto, this was all so strange to me. I had no idea about the crossover from tangible, real-world, physical money to the virtual alternative.

In this article, I talked about how I thought when I bought a Bitcoin that there should be an actual coin. When I learned that there wasn't and that this virtual coin went into my 'wallet' I was completely confused. I was left scratching my head wondering 'how does Bitcoin work?' Then the kicker was that the 'wallet' was virtual too! My brain was so close to melting, but I'm all good now, and with a little persistence and some simple explanations, it all makes sense.

Maybe this infographic (now, that's just a fancy way of saying 'image') will help you understand something about the relationship between things in the crypto space. The left of the infographic represents the various aspects of the blockchain and cryptocurrency, which work in a similar way to the email example on the right of the infographic. We'll go into each one a little more as you read on.

A quick note for the OG Crypto Hodlers out there; I know this is not a completely accurate explanation as far as the code and all other things technical in the world of crypto, however, there is a need to ensure that the message is intelligible for those who are uninitiated in all things blockchain.

If you're doing backflips out of frustration over this description right now, instead of spewing bile, please put those energies into something constructive and share it with others to help them understand this brave new world so we can improve adoption. Feel free to elaborate in the comments below in a way that will make sense to any newbie, after all, these are the people who are the 'new adopters' that we are all waiting to see come on board. Let's all just help them understand crypto instead of being judgmental and elitist in our attitudes towards their current comprehension.

So, as I mentioned before, the left of the infographic below is the crypto world, and the right is the email world. They have similar interpretational surface characteristics as you'll see.

Your Public Address

Think of this as the same sort of thing as your email address, except that it is a random-looking string of characters. This is where your crypto in box and out box functions show up. When you have a look at your public address on the blockchain, or the cryptocurrency network, to put it another way, it looks like this (image source: blockchain.info):

This will show you Bitcoins coming into a specific Bitcoin public address, and Bitcoins going out of that public address. You can take a look at anyone's a public address and see what is currently in there, and what has moved in and out since that public address was created.

You can dig even deeper into the transactions and see more information, right down to the origin of the actual Bitcoin in that public address! This is one of the biggest innovations of our time, and once you begin to understand the immutability of the blockchain and the openness of the ledger, the rabbit hole gets so much brighter.

Now, that might sound a bit scary to some who are wondering 'How does Bitcoin work?' And without understanding what a private address does it can sound a lot like anyone can just open up your wallet and take your Bitcoins. Rest assured, they can not do that, not unless they know what your private address is.

Your Private Address

Some would explain your Bitcoin private address as being the wallet that you send your Bitcoins from. This is not really a helpful description in my opinion for a newbie, I believe that it paints the picture that you have two different addresses, or wallets, that the same Bitcoins move between in order for you to use them.

Think of the private address as the password to your wallet, or the keys. Without this, there's no way you can access your wallet. Now, that's some good news and some bad news right there. If you forget your private address or lose it, you'll never be able to get access to the Bitcoins in that wallet. They will be locked up forever. There is no support email you can send. There's no telephone number you can ring to call for help; so be careful! Unless you're prepared to pay a hefty sum to a hypnotherapist, and believe that they can help you.

Make sure you have a safe place to store these as a record if you do write them down. I personally wouldn't rely on simply writing them down for a few reasons, as outlined in 'Hot or Cold; What is the Best Bitcoin Wallet?'

Your Cryptocurrency Wallet

This can be a tricky one with understanding 'How does Bitcoin work?' when looking at the big picture, but hang in there, it's worth it! Your cryptocurrency wallet could take a number of forms, and the options for crypto wallets seems to be growing by the day.

There are pros and cons to the various wallet types, but, essentially, they all do the same thing. A cryptocurrency wallet isn't actually where your cryptocurrencies are stored, they are stored on the blockchain (see below). A cryptocurrency wallet is more like a safe that holds your private addresses, or keys, in different ways until such time that you are ready to use them.

There are certain considerations to make as to the degree of security and the level of convenience you are looking for that will influence your decision in the type of wallet that you will opt for. My preference is to use a hardware wallet as a means of cold storage, and I lean very heavily towards the Nano Ledger S.

Having a cryptocurrency wallet that you can trust is critical. A point to consider with regard to the type of wallet you do choose is 'Who holds the private keys to your public address in this wallet?' If it's not you, my advice is to not rely on it for any longer than you really need to. You wouldn't leave the keys to your car or house with a total stranger, would you? I thought not.

The Blockchain or Cryptocurrency Network

There are quite a few different types of blockchains out there, and each one of them does their own thing in a slightly different way from the next in most cases. However, ultimately, they do the same thing in that they allow transactions to move from one entity to another. The ways in which these move can be very different once you look behind the curtain of the technology and the code, but really, they allow different types of crypto (more easily understood as little packets of information, or data) to move from one person to another.

The blockchain is a digital ledger which could consist of transactions on the Bitcoin network, the Ethereum network, or the NEO network, just to name a few. These too, are increasing in number as time goes by. There are more and more blockchain options with different value propositions every day it seems.

In a very crude way, a blockchain is similar in nature to the protocols that different email services use to operate. For the purposes of this illustration, the different types of blockchains have specific languages that they understand. Something from one blockchain (such as Bitcoin) currently has a really hard time working on another blockchain (such as Ethereum). There are companies looking at ways in how to overcome these issues with atomic cross-chain trading.

These four elements are key to understanding 'How does Bitcoin work?' There are a range of other articles here that are written for newbies to crypto which we hope that you find value in.

This was originally posted on my blog at How Does Bitcoin Work? A Simple Explanation of How Bitcoin Works and shared here to add value to the Steemit Community.

Fore more articles in the cryptocurrency space, check out the following:
What is a Custodial Cryptocurrency Wallet?
Is storing your private key on a physical Bitcoin the best Bitcoin wallet protection?
Hot or Cold; What is the Best Bitcoin Wallet?
Is It Possible To Hack Bitcoin?
Which are the best Cryptocurrency Exchanges?
Should I Buy Bitcoin - How to Guide for Fiat to Crypto On Ramps?
What is a Cryptocoin Exchange?
Investing In Bitcoin – Why You Should Have Multiple On Ramps
Starting with Bitcoin - Encrypted Email and 2FA
Will Bitcoin Replace FIAT Currency?