How Bitcoin works: a simple and detailed explanation of the technology

Bitcoin is the first decentralized digital currency in history, built on principles that seemed impossible just a few years ago. It does not belong to states, banks, or corporations. It is not controlled by any single person. It operates 24/7, in any country, for any user who can connect to the internet.

To understand Bitcoin, it's not enough to know it's a "digital coin." It is essential to grasp the fundamental principles:

• What decentralization is,

• Why the blockchain cannot be forged,

• How transactions work,

• Where new coins come from,

• And why the system has remained stable for over 15 years.

The Essence of Bitcoin: A New Money Paradigm

Bitcoin is not merely "electronic money." It is a new monetary system based not on trust in a person or organization, but on mathematics, cryptography, and a distributed network of users. Understanding this is the first step to understanding how Bitcoin works.

Bitcoin is a Decentralized Network, Not Just a "Digital Coin"

In the traditional financial system:

• A bank stores account data,

• A bank confirms operations,

• A bank decides who to transfer funds to,

• A bank can block access, reverse an erroneous transfer, or cancel a transaction.

Bitcoin is structured in the opposite way:

• There is no bank,

• There is no central server,

• There is no management company,

• There is no owner or administrator.

Bitcoin is a network of thousands of computers (nodes) around the world that voluntarily run the same program, Bitcoin Core, maintaining:

• Common rules,

• A unified database (the blockchain),

• Synchronization of the entire system.

Each node confirms transactions, validates blocks, and stores the complete history of all operations from the first to the last block. This means the "coin" BTC is merely a record in a distributed ledger, while the true Bitcoin is the global network itself.

The Fundamental Difference from Banks: Trust in Math and Code, Not Intermediaries

Traditional finance is built on trust:

• In a bank,

• In the state,

• In regulators,

• In financial intermediaries.

Bitcoin eliminates the need to trust anyone. It replaces:

• Banks → with cryptography,

• Regulators → with a consensus algorithm,

• The law → with mathematics,

• Auditors → with open-source code and a public ledger.

All Bitcoin's rules are:

• Embedded in the protocol,

• Transparent,

• The same for everyone,

• Immutable without the consensus of the majority of the network.

In essence: No one can change Bitcoin's rules, "print more money," or cancel a transaction. Its rules are stricter than those of any existing financial system.

The Public Ledger: An Open Accounting Book for Everyone

Every Bitcoin transaction is recorded in a special ledger—the blockchain. This is an open, publicly accessible, immutable database. Anyone on the planet can: open it, read the transaction history, check the balance of any address, and verify that the system is operating honestly. At the same time, users' real names are hidden—only cryptographically generated addresses are visible.

This approach provides a unique combination:

• Transparency, as in a public accounting book,

• Privacy, as in a pseudonymous system.

This fundamental feature makes Bitcoin "trustless"—it operates without requiring trust.

The Technological Heart: Blockchain

If Bitcoin is a city, the blockchain is its foundation, roads, and architecture, without which no one could move or interact.

The blockchain provides:

• Security,

• Immutability,

• Transparency,

• Synchronization for all network participants.

This is not just a database but a brilliant architectural innovation combining the principles of cryptography and distributed systems.

What is a Block: Structure, Hash, and the "Fingerprint" of Data

A block is a file containing:

• A list of transactions,

• A cryptographic "hash" of the block,

• The hash of the previous block,

• Service data (timestamp, block number, difficulty, etc.),

• A "nonce"—a number found by miners.

A hash is a mathematical "fingerprint" of the block's entire contents.

Properties of a hash:

• It is unique,

• It is impossible to predict,

• The slightest change in data → results in a completely different hash,

• It is impossible to "forge" data without changing the hash.

The hash is the primary element protecting data in the blockchain.

The Chain of Blocks (Blockchain): How Blocks are Cryptographically Linked into an Unbreakable Sequence

Each block contains the hash of the previous block. Therefore, blocks are linked in a line: Block 1 → Block 2 → Block 3 → ...

If a malicious actor tries to change data in block #100:

• The hash of block #100 will change,

• The reference to block #101 will change,

• The hash of block #101 will change,

• And so on, up to the last block.

To forge data, one would need to recalculate the entire chain of blocks faster than the entire network of miners. This is practically impossible. Blockchain = protection against forgery of the entire history.

Distributed Database: Why the Blockchain is Stored Simultaneously by Thousands of Participants (Nodes)

A copy of the blockchain is stored:

• By all nodes in the network,

• On tens of thousands of independent computers,

• In different countries,

• Under the control of different people.

Even if:

• A country goes offline,

• A data center fails,

• Servers are attacked,

• The system will continue to operate.

This is because it has no single point of failure.

Cryptographic Protection: Digital Signatures and Hashing as the Foundation of Immutability

• Hashing (SHA-256) — protects block structure.

• Merkle Trees — compact storage of transactions.

• ECDSA Signatures — proof of key ownership.

• Proof-of-Work — protection against attacks.

These mechanisms ensure:

• Impossibility of forging transactions,

• Impossibility of spending funds without a signature,

• Impossibility of altering history,

• Fair competition among miners.

Cryptography is the foundation of Bitcoin's security.

Transactions: How Transfers Happen

Transferring bitcoin is not about moving coins.

A "coin" is merely a record in the blockchain.

A transaction is a change to that record—strict, verifiable, and cryptographically protected.

Understanding transactions is key to understanding the entire Bitcoin system.

Anatomy of a Transfer: Sender, Recipient, Amount, Signature

Each Bitcoin transaction contains:

• The sender's address,

• The recipient's address,

• The amount, fee,

• A digital signature,

• Sometimes multiple inputs and outputs (UTXO model).

The key element is the digital signature, which proves: The sender genuinely owns the private key corresponding to the sending address. If a transaction is signed with a private key, it is considered authentic.

Unlike bank transfers, here you cannot:

• "Forge a document,"

• "Ask an operator to confirm,"

• Force the network to process an invalid transaction.

The Key Pair: Public Key (Address) and Private Key (Secret Password)

A Bitcoin address is derived from a public key. A private key is a secret string containing 256 bits: something like E9873D79C6D87DC0FB6A5778633389...

It is needed to:

• Sign transactions, proving

• That the coins belong to you.

The public key is needed to:

• Receive funds,

• Verify signatures.

Important: Whoever owns the private key owns the bitcoin. There is no bank, recovery service, or tech support. Losing your private key = losing your BTC forever.

The Path of a Transaction: From Wallet to Mempool (Queue of Unconfirmed Operations)

After being sent, a transaction:

1. Is signed with a private key;

2. Is broadcast to the network of nodes;

3. Enters the mempool—a distributed queue of transactions;

4. Waits for miners to include it in a new block.

The mempool is a sort of "waiting room." If the fee is low, the transaction may wait a long time. If it's high, miners will include it faster.

The Role of Fees: Why They Are Needed and How They Affect Confirmation Speed

The fee does not depend on:

• The transfer amount,

• The country,

• The currency.

It depends only on the transaction's size in bytes and the demand for block space.

Why do fees exist?

• A block can hold a limited amount of data,

• Miners choose transactions with higher fees,

• The fee is part of their reward.

Therefore:

• High network load → fees increase,

• Low network load → fees are minimal.

This is a completely market-based, fair mechanism, independent of intermediaries.

Mining and Network Security

Mining is not "creating coins." It is the fundamental protection of the network against forgery, attacks, and double-spending. Without mining, Bitcoin would be just an ordinary digital database. Mining makes it a living, decentralized system resistant to hacking.

Mining is the Process of Creating New Blocks and Confirming Transactions

Approximately every 10 minutes, miners compete to solve a cryptographic puzzle.

The winner:

• Forms a new block,

• Includes transactions from the mempool,

• Receives a reward:

  • New BTC (block reward),

  • User transaction fees.

Miners are the "builders" of the blockchain, ensuring its continuous operation.

Proof-of-Work: Solving a Cryptographic Puzzle to Protect the Network

Proof-of-Work (PoW) is the mechanism on which Bitcoin operates.

Miners:

• Assemble a block,

• Try different numbers—a nonce,

• Attempt to find a hash that meets a strictly defined condition (a certain number of leading zeros).

This requires enormous computational power.

Why is this cheap for the network but expensive for an attacker?

• Honest miners are distributed worldwide,

• There are millions of them,

• They spend electricity for the reward,

• An attacker would have to surpass the combined power of the entire network.

Today, that power is greater than that of any supercomputer in the world.

How Mining Prevents Double-Spending and Network Attacks

The double-spending problem is fundamental to digital money: How can we be sure a user hasn't sent the same coin twice?

Bitcoin solves this with:

• Competition among miners,

• Cryptographic rules,

• The need to recalculate the entire chain if an attack is attempted.

If someone tries to submit a fake transaction:

• Nodes will reject it,

• Miners won't include it in a block,

• The entire network will refuse to accept it.

To successfully falsify a transaction, an attacker would need to execute a 51% attack, which is practically impossible.

Miner Rewards: New Bitcoin (Emission) + Transaction Fees

Miners receive:

• A block reward—new BTC.

• User fees—for including transactions in the block.

The block reward halves every 4 years (halving), making Bitcoin a deflationary asset. Fees provide a long-term incentive for miners after BTC emission ends.

Thus, miners:

• Not only "mine" new coins,

• But also ensure the entire network's operation.

One of Bitcoin's most unique features is its strict monetary policy, hardcoded into its protocol. Unlike traditional currencies, the amount of BTC cannot be increased by government, bank, or organizational decree. Bitcoin's emission is programmed in advance and controlled by no one. This makes BTC analogous to "digital gold"—a scarce, limited, and predictable asset.

The Hard Cap: Why Only 21 Million Bitcoin Will Ever Be Created

Bitcoin's creator—Satoshi Nakamoto—decided the currency should have a finite emission. Thus, the cap was set: 21,000,000 BTC.

What this means:

• No one can ever "print more Bitcoin,"

• This completely eliminates inflation from increasing the money supply,

• Over time, BTC becomes a scarcer asset.

This cap is hardcoded into the protocol and is practically impossible to change because:

• Any change must be supported by an overwhelming majority of nodes,

• Nodes are not interested in devaluing the asset.

The system is protected socially, technically, and economically.

Divisibility: Satoshi—The Smallest Unit (0.00000001 BTC)

Bitcoin is divisible into 100,000,000 parts. The smallest unit is a satoshi, or "sat": 1 BTC = 100,000,000 satoshi.

This makes Bitcoin suitable for any operation:

• From large payments,

• To microtransactions worth a few cents.

As the price of BTC grows, people increasingly transact in satoshis—similar to how we use pennies or cents, but on a much finer scale.

Halving: Periodic Reduction of Miner Rewards and Its Economic Consequences

The halving is an event that occurs approximately every 4 years, resulting in the miner reward being cut in half.

Example:

• 2009: 50 BTC per block,

• 2012: 25 BTC,

• 2016: 12.5 BTC,

• 2020: 6.25 BTC,

• 2024: 3.125 BTC,

• 2028: 1.5625 BTC (projected).

Why is this needed?

• To slow emission,

• To create scarcity,

• To enhance BTC's value over time,

• To avoid inflation.

The halving is a key factor making Bitcoin a deflationary asset.

Deflationary Model vs. Inflationary Model of Fiat Money

Fiat money (rubles, dollars, euros):

• Are printed by a central bank,

• Increase in volume every year,

• Lose purchasing power,

• Depend on political decisions.

Bitcoin:

• Has fixed emission,

• Cannot have its policy altered,

• Becomes increasingly scarce,

• Protects against devaluation.

Simply put: Dollars lose value over time. Bitcoin, conversely, becomes scarcer and more valuable. This is a fundamental shift in the global financial system.

Wallets and Secure Storage

Many think bitcoin is stored in a wallet, like money in a physical wallet. This is untrue. A wallet is merely a tool that manages cryptographic keys. Your bitcoin actually resides on the blockchain—the global ledger. The wallet only gives you the ability to control it.

A Wallet is a Tool for Managing Keys, Not for Storing "Coins"

BTC is not stored in an app. BTC is not downloaded to your computer. BTC is not stored on a flash drive.

What is stored is:

• The private key,

• The public key,

• Addresses for receiving funds.

A wallet is a program that:

• Generates keys,

• Signs transactions,

• Shows your balance,

• Synchronizes with the network.

Therefore, the keys are paramount, not the application.

Types of Wallets: Hot (Online) and Cold (Offline Storage)

Hot Wallets (online)

These are applications:

• On your phone,

• On your computer,

• In a browser.

Pros: Convenient, fast, free.

Cons: The private key is stored on the device → can be stolen by malware.

Ideal for everyday operations.

Cold Wallets (offline)

Hardware devices like:

• Ledger,

• Trezor,

• ColdCard.

Pros: The private key is stored in a separate chip, never connects to the internet, high level of protection.

Cons: Costs money, less convenient.

This is the best way to store large amounts.

The Importance of the Private Key: "Not Your Keys, Not Your Coins"—Losing the Key = Irreversible Loss of Funds

A community phrase: Not your keys—not your coins. If you don't have the keys, you don't have the bitcoin.

If you store BTC:

• On an exchange,

• In a custodial service,

• In an app without a seed phrase,

Then you do not own the private key. And therefore, those coins are not legally or technically yours. Only owning the private key = full control over your funds.

Why Transactions Cannot Be Reversed: The Principle of Irreversibility as a Security Feature

In the banking system:

• You can cancel a transfer,

• You can freeze a transaction,

• You can recall a payment.

In Bitcoin:

• A transaction is irreversible,

• You cannot "call an operator,"

• You cannot reverse a mistake,

• You cannot block funds.

Why is this so?

• So no one can censor the network,

• So no one can stop your money,

• So there is no single point of control.

Irreversibility is a feature, not a bug. It guarantees financial autonomy.

Bitcoin's Strengths and Weaknesses

Any technology has its advantages and limitations. But the peculiarity of Bitcoin is that its pros and cons are not just "platform" flaws and merits, but the result of the fundamental principles laid down by its creator. What some call a weakness, others consider a key advantage—and vice versa.

Advantages

• Decentralization and Censorship Resistance — Bitcoin cannot be: shut down, blocked, taken offline, confiscated, have its transactions canceled, or be stopped by government order. Why? The network consists of thousands of independent nodes; it has no center, owner, or governing body; its rules are hardcoded and the same for all. This makes Bitcoin a unique tool for financial freedom.

• Transparency and Public Verifiability of All Transactions — Anyone can: see all operations, check the correctness of balances, verify that no "extra printing" is occurring, and validate any block. This is an impossible level of transparency for traditional finance, where data is hidden in private databases.

• Permissionless Control Over Your Funds — To send BTC you do not need to: ask a bank, explain the source of funds, obtain permission, adhere to business hours, and it doesn't matter which country you are in. This makes Bitcoin the first monetary system where a person owns their money like a safe key—and no one can interfere.

• Protection from Inflation Due to Limited Emission — Fiat currencies devalue naturally: the more money printed, the lower the purchasing power. Bitcoin is structured differently: the number of coins is limited, issuance is controlled by an algorithm, inflation is predictable, and the supply decreases over time. These are ideal properties for long-term value storage.

Limitations and Challenges

• Price Volatility — Sharp price fluctuations are a consequence of the market's early stage of development and Bitcoin's limited economic size. Causes of volatility: news cycles, speculative demand, limited coin supply, lack of large institutional stabilizers. Volatility decreases over time but will never fully disappear—it's the price of independence.

• Network Throughput and Rising Fees Under High Load — The Bitcoin blockchain processes on average: 3–7 transactions per second. When the mempool is full, activity spikes, and demand for block space increases, fees can temporarily rise. This is a key driver for second-layer solutions (Lightning Network, Liquid, RGB).

• High Energy Consumption of Mining (PoW) — Bitcoin uses the Proof-of-Work algorithm, which requires: significant computational power and a substantial amount of energy. However: a large portion of mining uses cheap or renewable energy; miners often use energy that would otherwise be wasted (flare gas, hydro surplus); the energy expenditure is fundamental to the network's attack resistance; in the long term, PoW has proven more reliable than PoS.

• Lack of Built-in Buyer Protection (No Chargeback) — A Bitcoin transfer is: irreversible, final, and not controlled by a bank. If you send coins to the wrong address—they are impossible to recover. This makes the network censorship-resistant but requires user responsibility.

Practical Uses of Bitcoin Today

Bitcoin is no longer just an experiment. It has become a tool used by: ordinary people, companies, funds, and even states. Moreover, its use cases vary greatly—from daily payments to strategic capital preservation.

"Digital Gold": Store of Value and Inflation Hedge (Savings)

Today, Bitcoin is called: digital gold.

Why?

• Limited emission (21 million),

• Resistance to inflation,

• Impossibility of forging the blockchain,

• Decentralization,

• Global liquidity.

Bitcoin has become a savings instrument for:

• Capital accumulation,

• Protection against national currency devaluation,

• Long-term investment.

Institutional investors (funds, corporations, banks) view BTC as a valuable asset.

A Means for International Transfers Without Intermediaries

An international bank transfer:

• Takes 1–5 days,

• Requires documents, approvals,

• Goes through intermediaries (SWIFT, correspondent accounts),

• Incurs additional fees.

A Bitcoin transfer:

• Takes minutes to an hour (depending on the fee),

• Has no intermediaries,

• Has no limits,

• Does not require revealing personal data,

• Is independent of country or banking system.

This is especially valuable:

• In countries with strict capital controls,

• In regions with unstable banks,

• For freelancers and remote workers worldwide.

An Investment and Speculative Asset

Many buy Bitcoin:

• As an investment,

• As a long-term asset,

• As a hedge against inflation,

• As a speculative instrument.

Reasons for its appeal:

• Limited supply,

• High liquidity,

• A global, non-stop market,

• Growing demand from institutional players.

BTC has become part of the portfolios of: private investors, public companies (MicroStrategy, Tesla), pension funds, and ETFs.

Payments in Countries with Unstable Financial Systems or High Inflation

In countries with: hyperinflation (Argentina, Turkey), strict capital controls (Nigeria), or unstable banks (Lebanon, Venezuela), people use Bitcoin as: a store of value, a stable alternative to the national currency, a means for international payments. Bitcoin gives people financial autonomy when the banking system is unstable.

Compatibility and Interaction with Other Cryptocurrencies and the DeFi Ecosystem

• Lightning Network — instant, cheap payments,

• Liquid Network — enhanced privacy and fast finality,

• Tokenizing BTC on Ethereum (WBTC) — access to DeFi,

• Second-layer protocols (Stacks, RSK),

• Ordinals and Bitcoin-NFTs.

Bitcoin is becoming not just a store of value, but also a participant in a multi-chain ecosystem where blockchains work together.

Debunking Myths: Common Questions and Misconceptions

Any new technology is surrounded by misunderstanding, rumors, and speculation. Bitcoin is no exception. Precisely because it breaks conventional financial logic, many myths have emerged around it, hindering people from objectively evaluating the technology. Let's address the most common ones.

"Is Bitcoin a Pyramid Scheme or Bubble?" Analysis Through the Lens of Technology and Demand

Many newcomers compare BTC's price growth to a "speculative bubble." But Bitcoin's foundation is entirely different:

• It has a limited emission,

• It has growing demand,

• It has the world's largest decentralized network,

• It has millions of users,

• It promises no returns,

• It does not require recruiting new participants.

A pyramid scheme is a structure with guaranteed returns and obligations. Bitcoin promises nothing, pays no "dividends," and has no managing center.

Price growth is the result of:

• Market demand,

• Limited supply,

• Adoption by institutional players,

• Its role as digital gold.

If comparing BTC to anything, it's more akin to a scarce commodity (like gold) than a financial pyramid.

"Is Bitcoin Fully Anonymous?" Pseudonymity and Transaction Chain Analysis

The misconception: "Bitcoin is an anonymous currency for criminals." The reality: addresses are not directly linked to a person; but all transactions are publicly visible; every coin leaves a digital trail; analytical companies (Chainalysis, Elliptic) successfully track suspicious activity. Bitcoin is not anonymous—it is pseudonymous. This means: identity is hidden, but addresses are transparent. This is one reason why criminals increasingly avoid BTC in favor of fully private coins (Monero, Zcash).

"Can the Bitcoin Network Be Hacked?" The Difference Between Hacking a User's Wallet and Attacking the Blockchain

It's important to distinguish:

1. Hacking a Wallet — This happens if a user: stores keys in the cloud, opens phishing sites, uses weak device security. This is a user error, not a Bitcoin flaw.

2. Hacking the Blockchain — This would require: controlling >51% of the global computing power, incurring colossal energy costs, and suffering economic losses exceeding any potential gain.

As of today, this is considered economically and technically unfeasible. Bitcoin is the most secure computational network in human history.

"Do You Need to Be Tech-Savvy to Use It?" Overview of Simple and Accessible Tools for Beginners

In the beginning, usage was indeed complex. But today, it's different.

Using BTC has become simpler than managing a banking app:

• Mobile wallets with user-friendly interfaces,

• QR codes for instant transfers,

• Exchange wallets for beginners,

• The Lightning Network for instant micropayments,

• Hardware wallets with simple instructions.

To start using Bitcoin, it's enough to: download an app, save the seed phrase, get an address, and make a transfer. The technical depth is hidden "under the hood," as with ordinary banking services.

Conclusion: Bitcoin as a Financial and Technological Revolution

Bitcoin is not just an innovation. It is a new perspective on how money can work in the digital age. It has proven that: money can exist without states, financial systems can operate without intermediaries, security can be based on mathematics, and trust can be distributed rather than centralized.

Bitcoin is Not Just a Currency, But the First Successful Implementation of a Decentralized Trust System

Bitcoin's main achievement is not the "coin" BTC. Its true invention is a provable, resilient, decentralized trust system. This idea became the foundation for: all subsequent cryptocurrencies, blockchains, the DeFi ecosystem, the Web3 movement, and the concept of tokenization and digital assets. For the first time in history, Bitcoin showed that value and accounting can exist without a central authority.

Its Main Legacy is Proof of a Working Model That Does Not Require Centralized Trust

Before Bitcoin, it was believed that: distributed systems were unreliable, digital money was easy to counterfeit, eliminating intermediaries was impossible, and operating without central management was unfeasible. Bitcoin disproved all of this. It created a new class of systems that are: resilient, transparent, self-regulating; have no single point of failure; and are independent of political pressure.

Understanding the Principles of Operation is the Key to Responsible Navigation in the New Digital Financial World

Bitcoin is already part of the global economy. Therefore, it is important for everyone to understand: why it works, what makes it resilient, how security is ensured, what risks the user bears, and how to use it responsibly. This knowledge helps: avoid mistakes, protect your funds, not fall victim to myths, and use the technology consciously.