How does Bitcoin actually work? A breakdown of the entire process from transactions to Mining.

In December 2024, the price of BTC has surpassed 100,000 USD for the first time, drawing global attention back to Bitcoin. But do you really understand how Bitcoin works? Don't worry, this article breaks down the complex on-chain logic into several easy-to-understand modules.

What is Bitcoin? Simply put, it is digital cash.

In 2009, a person named Satoshi Nakamoto (who is still a mystery) invented Bitcoin. It is essentially a string of code, not controlled by any bank or government. You can directly transfer Bitcoin to anyone in the world without going through intermediaries—just like how email can send messages directly.

Key point: Once confirmed, Bitcoin transactions cannot be reversed. This is the biggest difference between it and credit cards.

Bitcoin vs Fiat Currency: The Essential Differences Are Here

Traditional currency is printed by central banks, can be issued at will, and the government can freeze accounts.

Bitcoin is different:

• No central management authority
• Only 21 million coins will be mined (a definite cap)
• 100% digital
• Anyone in the world can use it if they have internet access.
• Transactions are non-reversible

The value of Bitcoin comes from market consensus and scarcity, somewhat like digital gold.

How is a Bitcoin transaction conducted? 6 steps revealed

Step 1: Create Transaction You specify the recipient's address and the transfer amount.

Step 2: Private Key Signing Sign the transaction with your private key to prove that this Bitcoin is indeed yours.

Step 3: Broadcast to the Network The transaction is sent to thousands of nodes across the network.

Step 4: Node Verification The network checks whether you actually own these coins to prevent “double spending” (spending one coin twice).

Step 5: Miners Packaging Miners form valid transactions into a block, competing to solve mathematical problems.

Step 6: Confirm on-chain Your transaction is packed into a block and added to the blockchain. The more new blocks that follow, the safer this transaction becomes.

Wallet, Public Key, Private Key - Understanding these three concepts is crucial

A wallet is not a place to store money, but to store your keys.

• Public Key (Bitcoin Address): Can be shared publicly like an email, others can use it to transfer coins to you.
• Private Key: A password that is absolutely confidential; whoever has it can spend your Bitcoin. Leak = bankruptcy.
• Wallet Software: Manage your keys and help you send and receive Bitcoin

Common wallet types: mobile app, hardware wallet (the most secure), paper wallet, web wallet

Blockchain: A ledger that everyone can read and no one can alter.

Blockchain is a distributed ledger. Each block contains recent transactions, timestamps, and the hash value of the previous block.

The Magic of Chain Structure: If someone wants to tamper with an old transaction, they must change all subsequent blocks - which is nearly impossible.

This ledger exists on thousands of computers worldwide, with no single point of failure and an incredibly strong resistance to censorship.

What is Bitcoin mining? Why is it so important?

Mining has two functions:

1. Create new Bitcoin miners solve mathematical problems to earn new coin rewards
2. Protecting the Network Super secure network through Proof of Work (PoW)

Current Reward: 3.125 BTC/block (after the 2024 halving)

Miners can still collect transaction fees. In competition, the difficulty adjusts automatically, producing a new block approximately every 10 minutes.

Halving Mechanism: Bitcoin's Inflation Control Valve

Bitcoin automatically halves the mining rewards every 4 years:

• 2009: 50 BTC
• 2012: 25 BTC
• 2016: 12.5 BTC
• 2020: 6.25 BTC
• 2024: 3.125 BTC
• Year 2028: 1.5625 BTC

The result of this is that by around the year 2140, all 21 million Bitcoin will have been mined. This is the smartest part of Bitcoin's design - writing scarcity into the code.

Bitcoin Security: Is It Really That Safe?

The Bitcoin network has never been successfully attacked, and its security comes from:

• Top-tier cryptographic protection
• Thousands of nodes are stored in a decentralized manner.
• The PoW system makes the cost of attacks infinitely high.

Want to 51% attack Bitcoin? It costs billions of dollars. Not worth it.

But individual users must be responsible for their own security:

• The private key must never be leaked.
• Use a hardware wallet to store large amounts of Bitcoin
• Double-check the address before transferring (if sent to the wrong one, it can't be retrieved)
• Backup your recovery phrase

What is the use of Bitcoin? How is it used now?

Digital Gold: Hedge against inflation, asset safety

Cross-border remittance: Faster and cheaper than traditional banks, suitable for remittance needs.

Investment Assets: Large companies such as MicroStrategy and Tesla are hoarding Bitcoin as financial reserves.

Financial Inclusion: People without bank accounts can access Bitcoin through the internet.

US Strategic Reserve: In 2025, Trump signed an executive order to establish a national Bitcoin reserve, with multiple states following suit.

But the number of people using Bitcoin for everyday shopping is still very few - too volatile and too slow.

You Need to Know the Pain Points of Bitcoin

Price volatility: It may rise by 20% or fall by 20% on the same day.

Network Congestion: Limited processing capacity, high fees and slow speeds during peak periods

Energy Consumption Issue: Mining is very power-intensive, although more and more mining farms are using green energy.

Regulatory Uncertainty: Countries have vastly different attitudes, with El Salvador being the only country to designate Bitcoin as legal tender.

Future Direction: Lightning Network and Technical Upgrades

Lightning Network: A second-layer solution that makes Bitcoin transactions incredibly fast and costs so low that they can be ignored.

Taproot Upgrade: Enhances smart contract capabilities and privacy

Ecosystem Expansion: Bitcoin ETF allows retail investors to hold easily, while institutional acceptance continues to rise.

Summary

Bitcoin creates a money system that does not require banks through cryptography + distributed consensus + economic incentives. From a transaction to network confirmation, from miner competition to on-chain permanent record, each link is a perfect application of mathematics and game theory.

Although Bitcoin faces challenges in scalability and volatility, after breaking 100,000 USD in 2024, it has transformed from an experimental asset into a part of global asset allocation.

Want to use Bitcoin? Start small, learn to manage private keys, and understand the irreversible risks. This is not gambling; it is participating in a financial system transformation.