How does Bitcoin work?
Now you know what a Bitcoin is. That’s the foundation for understanding how this digital currency works. To make a transaction, you need something called a wallet.
You can think of a wallet as a digital purse. It works through two key elements: the private key and the public key. You’ll automatically receive both keys as well as a so-called seed phrase when you create a wallet. You’ll need the seed phrase, for example, to recover your wallet. The private and public key are needed to make payments or transactions using Bitcoin.
Short explanation of the two keys:
The entire Bitcoin network verifies transactions
Let’s look at an example. You now know what Bitcoin is and how it works, so you make a payment in the digital currency at an online retailer. The transaction is encrypted with your private key and sent to the entire Bitcoin network.
All computers connected to the network – known as nodes – verify this transaction. They check whether the coin really exists and whether it hasn’t already been spent. If everything checks out, the transaction enters a pool from which miners form new blocks. Miners are computer owners who provide their computing power and energy to the network.
These miners use their computing power to solve mathematical problems. Only once they solve a problem can a new block be added to the existing chain – the blockchain. This block also contains all previous transactions. As a reward for solving this complex task, miners receive new Bitcoin as well as the transaction fees from users.
You can best imagine the blockchain as a public, decentralised ledger, which is stored simultaneously on multiple computers. That’s what makes it so secure. If a hacker were to try and alter a transaction after the fact, they’d need to trick the majority of the entire network, which would require an enormous amount of computing power. This mechanism is also known as the Proof of Work mechanism.
But when is a payment actually considered complete? Generally, when several new blocks have been added after your block. You can think of the process like this: the deeper a transaction is anchored in the blockchain, the lower the chance of it being reversed.
Bitcoin is therefore increasingly being used as a digital payment method. Its trustworthiness is based on two core elements: complex mathematical problems and a closed community within the network. Crucial information if you want to truly understand what Bitcoin actually is.
Can Bitcoin be misused for criminal purposes?
Bitcoin, like traditional fiat money (US dollars, euros), is also misused for criminal purposes. However, unlike transactions with conventional paper money, Bitcoin transactions can be viewed and traced by anyone.
Although Bitcoin is frequently associated in the media with the “darknet” and various criminal activities, the cryptocurrency is still rather unsuitable for illicit use. There are even specialised companies that support government authorities in tracking suspicious transactions involving cryptocurrencies.
What is the purpose of Bitcoin?
In the Bitcoin whitepaper, you’ll read that Bitcoin is the world’s first “peer-to-peer electronic cash system”, allowing online payments to be sent directly from one party to another without going through a financial institution.
In a sense, Bitcoin has deviated from this original idea due to scalability issues, as the number of transactions the Bitcoin network can process is limited. Currently, Bitcoin is primarily used as a speculative store of value, much like digital gold or Gold 2.0.
On 1 August 2017, after a heated debate about Bitcoin’s scalability, a new blockchain called Bitcoin Cash was launched. It’s a split (hard fork) from the original Bitcoin blockchain.
How can I buy Bitcoin?
You can buy Bitcoin via a crypto platform by creating an account, depositing fiat currency and then purchasing Bitcoin. It’s important to choose a reputable platform and pay attention to security and fees.
If you want to buy Bitcoin easily, you can do so right here on Bitpanda:
Step 1: Open the Bitpanda platform
On the Bitpanda platform, you can buy more than 600 cryptocurrencies, including Bitcoin. Open the platform and click the “Get started” button in the top right corner.
Step 2: Create an account
Register on the Bitpanda platform. At first, you’ll enter your first and last name, email address and a secure password. Then you’ll go through a verification process – usually a video identification process. There, you confirm your identity with a valid ID document and then gain access to your account.
Step 3: Deposit fiat currency into your account
To deposit fiat currency, you have various payment options available. You can choose between Giropay, SOFORT, SEPA, Skrill, Visa, Mastercard, NETELLER, Apple Pay and PayPal.
Step 4: Buy Bitcoin now
Log into your account and navigate to the dashboard. Within the dashboard, you can use the search function to find specific assets. Enter “Bitcoin” there. Next, indicate how much money you want to invest and confirm the transaction.
At first, your Bitcoins will be stored in the Bitpanda platform’s online wallet. You can choose to leave them there or store them securely in a hardware or software wallet.
Good to know: Hardware wallets are considered the gold standard in the crypto space. These are physical devices – often a USB stick – on which you can store your cryptocurrencies offline.
However, if you’re just starting out, it makes sense to initially trust platform wallets. This way, you can focus entirely on cryptocurrencies at the beginning – without complex keys or seed phrases. You can always switch later on.
