Cryptocurrency is such a foreign concept to most people that they just accept the fact that they don’t actually understand how it works. This is why many people are disinterested in currencies like Bitcoin or Ethereum, and why others are scared of them. Cryptocurrencies don’t need to be confusing though, and everyone can at least have a basic understanding of how they work. Below we’ll break down the basics of Bitcoin and how this currency works, so next time someone brings up the price of Bitcoin you’ll have a better idea of what’s really going on.

How it Works on the Surface

Cryptocurrencies, such as Bitcoin, are digital tools for transferring value between people anywhere in the world. Imagine handing a dollar bill to a friend next to you. This is similar to the process of transferring Bitcoin from one person’s digital wallet to another, there are just a few key differences that make Bitcoin so useful.

Bitcoin Can Be Transferred Anywhere

Bitcoin is highly convenient to use and can be sent anywhere in the world where an internet connection is available without restrictions. If you hold Bitcoin or another cryptocurrency, you can send some of your balance from your wallet to any other wallet rapidly. When you initiate the transfer everyone using Bitcoin will get an update so they know what happened and where that money is now.

Bitcoin is Managed by Everyone

One of the best features of Bitcoin is that everyone using the tool has access to the ledger that tracks transfers from one wallet to another. That means there is no way to cheat the system. If you send money to another person, everyone can see that you sent money. By giving everyone access to the ledger Bitcoin is safe and reliable. You don’t have to rely on a bank, a government, or any other third party to verify and manage your money for you.

Understanding Digital Wallets

Before you can send or receive any crypto, you should have a wallet. A crypto wallet or digital wallet is a tool that gives you ownership of cryptocurrency in a specific location on the universal ledger known as the Blockchain. Wallets keep track of a public key and a private key for you. The public key is what you give to others so they can send coins to your wallet. The private key is what gives you access to your wallet balance. Protect your private key with your life, because anyone that has your key can send your coins wherever they like!

Digital wallets can be physical devices that connect to a computer to allow you to complete coin transactions when you want, or they can be software programs that you use on a computer or mobile device to manage your coins. It’s up to you to choose the wallet type you use, but once you have a wallet you must keep track of your private key carefully and protect it from others to secure your money.

Completing a Bitcoin Transfer

If you want to send Bitcoin to a friend, you must go through a few steps.

• Begin by obtaining a Bitcoin Wallet
• Now, fund your wallet using a Bitcoin exchange
• Get the public key for your friend’s wallet
• Use your wallet program to initiate a coin transfer to the proper public key
• Pay a small fee to the Bitcoin userbase to update the Bitcoin ledger to finalize your transaction
• Your coin transfer is now finalized and the money will be delivered to your friend’s wallet momentarily

Bitcoin is Valuable Because It’s Useful and Scarce

On the surface, it seems like Bitcoin, or another cryptocurrency, shouldn’t have any actual value. Most forms of cryptocurrency are just digital goods that aren’t linked to anything physical at all. This is similar to many government currencies today, but Bitcoin isn’t even backed by a government agency to help give it value. Bitcoin is highly valuable though (a single coin is currently worth $30,891) and people continue to invest in the digital currency.

Even though it doesn’t immediately make sense that a cryptocurrency can be so valuable, Bitcoin holds value because it’s a useful tool and the coin is scarce. Only a maximum of 21 million coins can ever exist, and that number can’t go up at all. This is different than fiat currencies where a government can make more currency at will. Bitcoin is also a safe and reliable way to transfer money without requiring help from a third party. This makes it highly valuable and useful to anyone that needs to get money around the world fast. The utility of Bitcoin makes it valuable to people, and that combined with the scarcity of the currency is what is driving its price up over time.

Now You Know

Hopefully, you now have a better idea of how cryptocurrencies work. As long as you understand what a crypto wallet is and how Bitcoin transfers work and why they’re secure, you know more than most!