The technology behind bitcoin was first described in Satoshi Nakamoto’s White Paper in 2008. It is based on two other proposals for alternative electronic currencies: Wei Dai’s b-money proposal and Nick Szabo’s Bitgold proposal.

Bitcoin is a P2P (peer-to-peer) currency, ie a P2P network that keeps track of all transactions in a distributed database. There is no central server that keeps track of them or determines which ones are valid. Each participant (node) in the P2P network stores the transactions, and can enter or leave the P2P network without creating problems.

Previous proposals for P2P currencies suffered from the “double-spending problem”; that the same money could be transferred to two different places, and that the network then had to have a method to determine which transaction was valid. Satoshi Nakamoto solved the problem with the help of a so-called “blockchain”. Each transaction is stored in a block of data, and all blocks are connected in a sequence (chain). If two “competing” blocks were created (two blocks with the same predecessor in the chain), the nodes accept the block that the majority of their neighbors have accepted, and build the next block in the chain on this. If there is a branching of the chain, the network thus makes a decision about which branch is valid (and thus which transaction is valid). The decision is spread quickly through the P2P network, which makes it practically impossible to change. To make it more difficult for an attacker to create blocks that support their own branch of the blockchain, a distributed time server and time-consuming calculations are used to create a block, so-called proof-of-work.

The transactions use asymmetric encryption (more specifically ECDSA) and are public. The history of all transactions must be stored in the database and a Merkle tree is used to reduce the storage space requirement.

Unlike credit card networks like MasterCard and VISA and payment processors like Paypal, bitcoin is not owned by a company or individual. Bitcoin is the world’s first completely open payment network which anyone with an internet connection can participate in. Bitcoin was designed to be used on the internet and doesn’t depend on banks or companies to process transactions.

One of the most important elements of Bitcoin is the blockchain, which tracks who owns what, very similar to how a bank tracks assets on your account. What sets the Bitcoin blockchain apart from a bank’s ledger is that it is decentralized, meaning anyone can view it and no single entity manages or controls it.

Key details about Bitcoin

• Specialized computers are known as ‘mining rigs’ and perform the calculations required to record and verify a new transaction. In the beginning, a normal desktop PC was powerful enough to participate, which allowed pretty much anyone who was curious to try mining bitcoin. Currently, the computers required are massive, specialized, and often owned by businesses or large numbers of individuals combining their resources. (In October 2019, it required 12 trillion times more computing power to mine one bitcoin than it did when Nakamoto mined the first blocks in January 2009.)
• The miners’ collective computing power is used to ensure the accuracy of the ever-growing ledger. Bitcoin is inseparably tied to the blockchain; each new bitcoin is recorded on it, as is each following transaction with all existing coins.
• How does the network motivate miners to participate in the constant and vital work of maintaining the blockchain? The Bitcoin network holds a continuous lottery in which all the miners and mining rigs around the world compete to be the first to solve a math problem. Every 10 min or so, a new winner is found, and the winner updates the ledger with new valid transactions. The prize changes over time, but as of early 2020, each winner of this raffle was awarded 12.5 bitcoin.
• As bitcoin’s value has risen, its easy divisibility (the option to buy a small fraction of one bitcoin) has become a key attribute for its continued success. One bitcoin is currently divisible to eight decimal places (100 millionths of one bitcoin); the bitcoin community refers to the smallest unit as a ‘Satoshi’ to honor its mysterious founder.
• Nakamoto set the bitcoin network up so that the number of bitcoin will never exceed 21 million, ensuring scarcity of the cryptocurrency. There is currently around 3 million bitcoin still available to be mined, which will happen more and more slowly. According to the latest estimate, the last blocks will be mined in 2140.

Using bitcoin has not always been as easy as it is today, back in 2013, a bitcoin enthusiast named Laszlo Hanyecz created a message-board post offering 10,000 BTC – which then was worth around $25 – to anyone who would deliver two pizzas to his house in Jacksonville, Florida. As the legend goes, those two pizzas, which another bitcoin early-adopter bought from a local Papa John’s, marked the first successful purchase of non-virtual goods using bitcoin. Thankfully it has become a lot easier to use bitcoin nowadays.

What makes bitcoin different from other payment methods? 

• Bitcoin is simple: Transactions using BTC aren’t that different from those using a credit or debit card, you’ll simply enter the payment amount and the vendor’s public key (similar to an email address) via a wallet app. When transacting in person you can use a smartphone or tablet, often a QR code will pop up to simplify the process even further.
• Bitcoin is private: One of the big benefits of paying with bitcoin is that doing so limits the amount of personal information connected to the transaction. The only time you would need to share your name and address is if you’re purchasing physical goods that need to be delivered.
• Bitcoin is flexible: So what you do with your bitcoins depends completely on your personal interests. Here are some ideas:
  • You can exchange or sell it for cash using a Bitcoin ATM.
  • You can spend it online or in a normal store as you would any other currency by using a Bitcoin debit card.
  • You can hold on to all or some of it as part of your savings and investment strategy.

The simplest way to buy bitcoin is to purchase it through an online exchange like Coinbase. Coinbase makes it easy to buy, sell, send, receive, and store bitcoin without needing to hold it yourself using public and private keys.

However, if you choose to buy and store bitcoin outside of an online exchange, here’s how that works.

1. Each person who joins the bitcoin network is issued two keys:
   1. The public key, which is a long string of letters and numbers that you can think of like an email address.
   2. The private key, which is equivalent to a password.
2. When you buy, send, or receive bitcoin you get a public key, which you can think of like a key that unlocks a virtual vault and gives you access to your bitcoins.
3. Anyone can send bitcoin to you via your public key, but only the holder of the private key can access the bitcoin in the “virtual vault”.
4. There are many ways to store bitcoin both online and offline. The simplest solution is a virtual wallet.