Bitcoins are an electronic currency. As such they can be used as a payment instrument where there is an agreement between the buyer and the seller. Unlike the vast majority of coins that can be used as a means of payment, bitcoins are not issued by an institution. This feature is somewhat unique and makes bitcoins the first currency that does not have a central bank behind it.
In practice, bitcoins do not exist in the sense, which cannot be physically touched. As many economists with bitcoin have been able to say, we are in the presence of a currency that would not have existed had there not been the technological development of information technology.
From this point of view, therefore, bitcoins can be defined as a computer product that arises from sophisticated algorithms. The value of bitcoin itself, as well as the price increase or its decrease, is governed by calculations that are not accessible to everyone. It is probably precisely because not everyone understands the calculations behind bitcoin, that there is so much mystery about this electronic money and it is not known how bitcoins actually work.
Bitcoin how they work?
The first question asked when it comes to bitcoin functioning concerns the determination of the starting value. In monetary matters, central banks determine what the cost of money is. And in the case of virtual currency, how is the value of bitcoin determined? The starting point when dealing with this topic is the concept of mining or extraction. Mining is basically free and this means whoever can mine gold or create bitcoins. In principle, therefore, the number of bitcoins in the world can be increased indefinitely.
This applies, however, only on paper because bitcoins work in a much more particular way. Today, in fact, only those who have special hardware can create bitcoins. All the others can only use bitcoins since the complexity of calculation prevents them from being an active part in the creation of this virtual currency.
Through mining, the algorithms underlying the bitcoins themselves are decrypted. In this way, new currency is generated which immediately ends up in the availability of the various calculation agents. The distribution phase is very delicate since it takes place according to a strictly proportional criterion. An essential feature of the functioning of bitcoins is that the currency production network and the payment management network coincide.
From all that we have highlighted in this paragraph on how bitcoins work it is deduced that this currency is the first example of cryptocurrency in the world.
Obviously those who choose to invest in bitcoin, these considerations on how virtual currency works are of interest to a certain extent.
Bitcoin how they work: units of measurement
The bitcoin is a free currency and not subject to control by any authority but of course has its units. The basic unit of the currency is the millibitcoins, then the micro bitcoins and finally the satoshi. The former are equal to 0.001 bitcoin, the microbitcoin are equal to 0.000001 bitcoin and, to finish, the satoshi are equal to and 0.000000001 bitcoin.
Bitcoin creation
In addition to the unit of measurement of bitcoin, other numbers define the size of this cryptocurrency. These are the numbers relating to dissemination. Currently (2019) there are about 17 million bitcoins in circulation. The goal is to reach a maximum of 21 million bitcoins in circulation. It is, however, a long-term target. In fact, to reach this remarkable figure, it will take a century.
Bitcoin how it works: creation algorithm
The current rules focus on creating 25 bitcoins for each calculation block. This quantity is not stable but is destined to decrease over time. In practice, the further you move away from the “zero” moment of the birth of bitcoin, the greater the necessary calculation contribution. Obviously behind this mechanism there is a sophisticated algorithm but, regardless of the calculations, it is obvious that over time the mining becomes more expensive.
This mechanism is very important from a monetary point of view. In fact, thanks to these variations, we are witnessing a sort of absorption of inflation.