Bitcoin: Behind the Scenes

Image by Kanchanara on Unsplash

“Digital gold,” as Nasdaq once described it, has become a common nickname for Bitcoin. Over the past few years, Bitcoin and various cryptocurrencies have gained significant traction. For most people, however, the money or green and red bars are viewed as a get-rich-quick method. How Bitcoin works, however, is not commonly known knowledge. Albert Einstein put it best when he said, “Any fool can know. The point is to understand.” This article won’t reduce this beautiful, systematic way of currency to “gold mining,” nor will it oversimplify the process. We will go over the math and algorithms, which are the backbone of Bitcoin, and why Bitcoin has value. This is a behind-the-scenes look at the mechanisms behind which Bitcoin, and similar cryptocurrencies, are powered. 

To begin, Bitcoin is a decentralized currency, meaning it’s maintained and secured through many entities rather than one; it exists without a central authority. Instead, it relies on transaction notes called ledgers, which record every transaction made using Bitcoin in a way anyone can easily verify. This system allows for Bitcoin to be sent and received around the globe without relying on a middleman. This also allows for transactions to be completed in seconds since you’re not waiting for bank verification. That is simply putting it. Now, let’s get into the nitty-gritty math and algorithms that make all of this possible.

The “crypto” in cryptocurrency comes from the word “cryptography.” The main backbone of Bitcoin relies on this branch of mathematics, which secures transactions. Every Bitcoin transaction is digitally signed and secured with your public key and private key. The public key is like a username everyone can see, whereas the private key is your own secret key. The verification of all the transactions relies on the SHA-256 algorithm, a single mathematical function that turns any input into a 256-bit string of numbers and letters. Just how big is 256 bits? An unsigned 256-bit integer can represent up to 115,792,089,237,316,195,423,570,985,008,687,907,853,269,984,665,640,564,039,457,584,007,913,129,639,936 values. Try saying that number out loud! This is also the main reason that makes each transaction secure and hard to forge. This is also why cryptocurrencies are so secure and don’t need to rely on a bank for verification. 

Cryptography and hash functions may be the backbone of Bitcoin, but there are several more steps involved, which make the digital gold, gold. This is where the mining everyone talks about and proof-of-work comes in. Every time a transaction is broadcast, thousands of computers around the world race to bundle it into a block. A block is a batch of verified transactions that includes a reference to the previous block (called a “previous-hash”), the timestamp of the transaction, and a special number called a nonce. To complete the transaction verification and add the block to the Bitcoin blockchain, the computers around the world compete to solve a type of digital lottery: using the SHA-256 algorithm until the block’s data results in a hash starting with a certain number of zeroes and ones. 

When a block is ready to be placed in the vast Bitcoin blockchain, miners run the SHA256 algorithm on all of its contents:

Hash = SHA256(Previous Hash + Transactions + Timestamp + Nonce)

This single hash is unique to the block’s contents. Even the tiniest change in one or two numbers will output a completely different hash, which is why tampering with Bitcoin’s ledger is nearly impossible. Miners must increment the nonce repeatedly until it meets the algorithm’s difficulty value, which is simply a specific way to start a hash. Once a hash is found, the block is added to the Bitcoin blockchain, linking it with the blockchain’s previous block. The whole process then repeats for every block. This continuous, perfect chain is what gives Bitcoin its integrity and why it’s often referred to as digital gold. 

You’re probably still wondering: how does math, a string of ones and zeros, and functions let you purchase a pizza, buy a house, or pay your friends? The answer lies in the basic economic concepts of supply and demand, trust, and utility. With Bitcoin’s limited supply of twenty million coins, this scarcity creates a finite supply, which in turn creates a built-in resistance to inflation. People find Bitcoin to be a quicker and simpler alternative to traditional banks because transactions are verified through logic, and there is no government control over this, ensuring privacy, trust, and simplicity. Furthermore, Bitcoin can be sent around the globe in minutes, making it a use case for both everyday spending, sending, and remittances, but also as a way to own an investment (for example, gold, silver, diamond, etc). Therefore, its worth is determined by scarcity, decentralization, and the trust and belief of millions of users worldwide.

Another enchanting feature of Bitcoin is the idea of halving. Every four years, the amount of Bitcoin that you get awarded for adding new blocks to the blockchain gets halved. With the initial launch of Bitcoin in 2009, miners earned 50 bitcoins per block hashed. Today, after several halvings have taken place, that number has shrunk to about 3.125 bitcoins earned per block mined. This feature is to ensure Bitcoin remains and continues becoming scarcer until the 21 million supply has run out. Just like precious metals, Bitcoin becomes harder to mine, and this decreasing supply keeps inflation under control and plays a major role in why people compare it to gold and other precious metals.

Bitcoin isn’t simply red and green bars on a trading app. It’s a complex system of math, functions, and trust. Bitcoin is a new way for people to imagine finance and money. Whether you love or hate Bitcoin, the math and technology that powers it have changed the way we all finance. Behind the noisy trading charts and Hollywood depiction of Bitcoin and hacker scenes, Bitcoin and the technology behind it will continue to impact the world.