Home Science & Technology What Are Bitcoins And How Do They Work?

What Are Bitcoins And How Do They Work?


Many of you who spend sometime on the internet regularly must have heard of the word bitcoin. And it is very likely that some of you looked it up on the internet out of curiosity. The truth is that bitcoins have been around for almost 8 years and as per my understanding it is not a sole province of web or computer geeks. Though it is not a household name either. Through this article I would like to explain the elephant on the internet these days: Bitcoins. My target audience would be people who know nothing about it as of now.

The simplest definition we can give it is that it is a currency just like any other conventional currency but the main difference is that bitcoins are decentralized, digital money created, held and spent electronically around the world. The main purpose of such a form of digital currency is to cut out middlemen such as banks and payment companies.

Need for cryptocurrency

What does money represent? It basically represents value of goods and services. In today’s world, a country’s central bank prints physical money. The other thing which bank does is that it credits society at interest. All of this means that the government of a country creates a system for exchange of goods and services. And we pay central banks for the maintenance of this monetary system.

But with the advent of cryptocurrency the need for a monetary system maintained by a bank will not be there. Computers will replace the government functions associated with the management of this financial system, which means that the record of the transactions taking place will be sitting on the computers of people who decide to mine it. What this will do is that it will create a decentralized system maintained by thousands of people all across the globe.

Explanation for conventional currency transaction:

Suppose you have a 1000 rupee note with you. Having it signifies the ownership of that bill. Now if you give that money to one of your friends, transfer of ownership will take place which means now your friend will be the owner of that Rs 1000 and you will lose its ownership. And this kind of transaction can go on.

Explanation for crypto currency transaction:

Suppose you have 10 digital currencies. Due to its digital nature I can make copies of the currency and give one copy to one of my friends and keep the original copy for myself. And if that can happen then who is to stop me from making copies and distributing it all over the internet.

Citing the above example I just wanted to show the problem which is there related to the exchange of digital currencies. Software scientists or geeks have a name for this problem: the double-spending problem.

Can you stretch your brain muscles and think of a solution for this? There is no way for me to know whether you found the solution or not. I would like to believe that you did not find a solution (in order to write further.) Just kidding, of course you did not.

The simple solution is to track every transaction being done in a ledger. Due to the digital nature of the ledger we need to make someone in charge of the ledger. Is the solution complete? It would be great if you could find a flaw in the system. I think this time you did find the flaw. If I am reading your mind correctly you are thinking what if the owner of the ledger adds or subtracts digital currencies? Is there any one who can stop him? Was I correct? You have a very valid doubt. The solution to this can be making a public ledger meaning everyone in the system maintains the ledger. So now the ledger will not just be sitting on one owner’s system but on everyone’s computer. And the record of every transaction happening will be maintained by everyone. Now suppose someone tries to cheat and transfers some bitcoins which he/she doesn’t own, he will be easily caught because such a transaction will not sync up with all the other ledgers. As the system grows and number of transactions increases it would be almost impossible to cheat.

Advantages of cryptocurrency over FIAT money:

Bitcoin is one of the major cryptocurrencies available in the market following the above system. One of the beautiful things which bitcoin has deliberately set is that it has put a limit of 21 million coins on the creation of bitcoins over a period of time. What this does is that now bitcoin cannot be subject to inflation. The other thing you must have understood by now is that it requires an immense amount of processing resource to maintain a ledger. Due to which it is enviable to hack this system. If your loved ones live in a foreign land you must know how difficult it is to send money to a person living in a different country and the procedure costs a lot too. But doing such kind of a transaction using bitcoins is a lot more secure, easy and low cost.


Another wonderful thing about this system is that it is open source. And the maintenance and security of transactions can be done by anyone who has the resources and the brains to do so. And if you are successful in doing so you are rewarded in the form of bitcoins. Right now this is the only way to create new bitcoins.

The main purpose of this article was to generate curiosity about what I think could be the replacement of conventional currencies in future. I would like to believe that I was successful in doing so. This is just an abstract introduction of what is going on in this domain. Hopefully I will try to cover as much as possible in my future articles. In my opinion the time has come to accept a new form of currency because one way or the other this concept will influence every domain of our life very soon and I hope it does.


  1. Dear sir
    bitcon ko aap kaise shariat ke mutabik kaise sahi keh sakte hai ,iska source of income kya hai ,ye kaise inta profit de sakte hai ,kya humey in sab cheezo se parhez nahi karna chahiye kya ye ek tarah ki mlm nahi hai .