Bitcoin is a form of electronic cash. Where most digital forms of money rely on a central party to make it work, like a bank or a payment processor, Bitcoin is maintained by a network of users. As an open network, anyone can become a user by simply downloading a piece of open-source software on their computer and connecting to the Bitcoin network through the internet.
Users on the network can send each other transactions. Once such a transaction is made, all computers on the network check the transaction to make sure the transaction is valid — for example, verifying that the coins in the transaction really exist and really belonged to the person sending the transaction. Because everyone checks everything, no one can be cheated.
New coins come into circulation through a process called “mining,” which is done by a subset of users called “miners.” Anyone can become a miner; however, mining does require computation resources and, therefore, electricity. About once every 10 minutes, in what is best understood as a lottery, one lucky miner is rewarded with new bitcoin. At first, these were 50 coins every 10 minutes, but this number drops every four years, until around the year 2140, when the reward drops to zero. At that point, there will be 21 million coins in circulation, and there will never be more.
In what is one of Bitcoin’s more elegant design features, miners actually provide a service to the network while investing computational resources into mining: they confirm the transactions that users send each other. Miners combine all transactions on the network into “blocks,” and the miner who wins the “lottery” has their block and all of the transactions in it accepted by the network. This way, even if two miners saw two conflicting transactions (for example, because a user tried to cheat and send the same bitcoin to two different people), only one of the transactions will go through.
For more information on mining, visit our “What Is Bitcoin Mining?” guide.
Every time a new block is found, it refers to the previous block. Over time, the blocks form a “blockchain.” If it were to happen that two miners find a new block (“win the lottery”) at the same time, there can be a short period when there are two different, competing transaction histories. This is resolved through a race: the first blockchain to be extended with another block will be considered valid by the entire network. Over time, therefore, the Bitcoin network always settles on a single version of transaction history.
To read more about the foundational distributed ledger technology introduced by Bitcoin, read our guide to the fundamentals of a blockchain.
Finally, it’s worth noting that users on the network don’t identify themselves with their real names. Instead, they use Bitcoin addresses, which are seemingly random strings of numbers and letters. Because Bitcoin addresses cannot always be tied to a real-world identity, the electronic cash can be used fairly anonymously. (Though it should be pointed out that Bitcoin’s privacy guarantees are in actuality fairly weak for a number of reasons; unless you’re fairly savvy, it’s best to assume you are not fully anonymous.)
WHO CONTROLS BITCOIN?
Bitcoin is not controlled by any single manager or entity, but instead it is maintained by a network of users. One of Bitcoin’s most powerful and unique qualities is the fact that the transactions on its blockchain ledger are verified by the consensus of the network’s members and not by a third party or “trusted” authority.
In this sense, no single party or consortium “controls” Bitcoin in the way that a government controls a fiat currency or that a board controls a corporation. When users run a full Bitcoin node in order to validate transactions and blocks on the blockchain, they choose which specific protocol that node will use.
IS BITCOIN ANONYMOUS?
Though there is a common misconception that bitcoin transactions can be conducted in the dark and free from third-party monitoring, bitcoin is not anonymous. It does, however, grant a level of pseudonymity that the traditional financial system typically does not (although purely cash-based transactions remain far more anonymous than bitcoin transactions).
Because every bitcoin transaction is publicly broadcasted and immutably recorded on the Bitcoin blockchain, it is possible for blockchain analysts to trace these transactions and potentially link them to real-world identities.
However, developers throughout the bitcoin space are consistently working on tools that are meant to help obscure bitcoin transactions and add additional anonymity layers.
For more information, check out our guide on Bitcoin anonymity.