How do bitcoins work?


Quick Answer

Bitcoins are a type of virtual currency. They are used as a means of payment for various products and services through a bitcoin-transaction network. This network is maintained through the computational power provided by computers belonging to people who engage in a process called bitcoin mining. Bitcoins are not backed by any government or linked to a central-banking system, making them completely decentralized

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Full Answer

A person can acquire bitcoins in three ways: buying them on a bitcoin exchange, receiving them for products and services provided, and bitcoin mining. Once the bitcoins are acquired, they are transferred to a person’s bitcoin account from which they can be used as any other form of currency. The software that stores bitcoins is called a wallet. It uses public-key cryptography to encrypt the data, in addition to maintaining the bitcoin balance.

The entire bitcoin system runs on a peer-to-peer network, meaning that there’s no central hub that handles the transactions. Every computer that is used to buy, sell or mine bitcoins automatically becomes a part of that network. This allows the bitcoin system to be free of government monitoring and regulation. The system ensures that there is enough computational power to maintain it by requiring users to mine bitcoins before anyone can use them. The power is provided in the form of number crunching that unlocks the transactions locked in a block chain. This way, new bitcoins enter the circulation, while users whose computers are responsible for system maintenance are rewarded.

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