How does Bitcoin work?

How does Bitcoin work? – Part 2

Bitcoin works flawlessly when sending and receiving payments. Bitcoin components related to Wallets, Public key & Private key are explained in detail.

How does Bitcoin work securely when sending and receiving payments?

  1. Like Money is deposited into a bank account, Bitcoin is stored in an immutable transparent block chain public ledger.
    A bank account has only one unique account number per user. All transactions are done on that one account.
  2. Bitcoin can have one unique account number per user or multiple unique (unlimited) account numbers per user.
    For Example, one unique account number per transaction. Another unique account number for another transaction and so on. (This is recommended)
  3. Sending and receiving Bitcoin is as easy as sending an email.
  4. Bitcoins are stored by a user in wallets:

There are basically 5 places where Bitcoins can be stored.

  1. Local hard drive in your Computer or Laptop
  2. Mobile wallets (An Android or iOS app)
  3. Hosted online
  4. Hardware Wallets
  5. Paper wallets

There are two parts to a Bitcoin transaction

1. Public key: That’s your account number/Bitcoin address
2. Private key: That is your confidential password to access Bitcoins in your account.

Every bitcoin transaction has a public key and a corresponding private key. (It is a pair)

The Public key can be given out to anybody to send you Bitcoins.

The protection comes from your private key which is your password for the corresponding public key. It is like the password whenever you do online banking to log in to your online bank account.

To access your Bitcoin in the transparent block chain public ledger, you need the private key. You need it to make payments from your account or convert the Bitcoins in your account to Fiat currency like Dollars, Euro etc.; Without the private key, nobody can access the account to initiate a payment. However, anybody can view the account by visiting blockchain.info  and inputting the public address in the search bar.

Bitcoin payments are irreversible

Any transaction issued with Bitcoin cannot be reversed, they can only be refunded by the person receiving the funds. You should take care to do business with people and organizations you know and trust, or who have an established reputation. Bitcoin can detect typos and usually won’t let you send money to an invalid address by mistake. Be extremely careful.

Note:

The Bitcoin public address is also called the account number. It is called an account number because that is what you give to others to send you bitcoins.
For privacy sake, it is recommended not to reuse a public key once a transaction is done. You can generate as many public key private key pairs as you wish.


You can use one pair for receiving Bitcoins from John on Monday. Another pair for receiving Bitcoins from John on Tuesday. And another pair to receive Bitcoins from Mary. So, on and on.

Secure your wallet

Bitcoin lets you exchange money in a different way than you usually do with banks. So, you should take time to educate yourself before using Bitcoin for any serious transaction.
It is possible to transfer value anywhere in a very easy way and it allows you to be in control of your money.

Bitcoin should be treated with the same care or more as your regular wallet. The great features of Bitcoin also come with great security concerns. Bitcoin can provide very high levels of security if used correctly. Please do remember that it is your responsibility to adopt good practices to protect your money.

Government taxes and regulations

Bitcoin is not an official currency in most of the countries. Most jurisdictions will require you to pay income, sales, payroll, and capital gains taxes on anything that has value, including bitcoins. It is your responsibility to ensure that you adhere to tax and other legal or regulatory mandates issued by your government and/or local municipalities.

Why is it called a transparent block chain public ledger?

It is so called because anybody can view the number of bitcoins in your account by visiting blockchain.info and inputting the public address in the search bar. (That’s the reason it is recommended not to reuse a public key once a transaction is done.

If not, all subsequent transactions and balances in that address will be visible to others who come in later to transact, However, the identity of the user behind an address remains unknown until information is revealed during a purchase or in other circumstances.)

I will show an example to demonstrate this:

The below public Address key is from a donation form on a community funded website. (It may be OK to reuse public addresses on donation forms)

Bitcoin public address (Account number): 1GwV7fPX97hmavc6iNrUZUogmjpLPrPFoE
Input this public address in the search bar at https://blockchain.info/

Voila! You can view all the transactions happening in this public address in real time.

Next => Part 3 “How to setup a Bitcoin account?”

Previous <= Part 1 “Get to know Bitcoin”

Read the introductory part “Getting started with Bitcoin”: Bitcoin explained in simple terms If you have missed it.

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