Bitcoin: How Cryptocurrencies Work
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Bitcoin: How Cryptocurrencies Work


Say there’s a coin that’s currently worth
hundreds of U.S. dollars, but it’s not made of gold, or platinum, or any precious metal. In fact, it’s not the kind of coin you can
hold in your hand or stick in a piggy bank. It’s a digital currency, which means it
only exists electronically. I’m talking about bitcoin. Bitcoin doesn’t work like most money. It isn’t attached to a state or government,
so it doesn’t have a central issuing authority or regulatory body. Basically, that means there’s no organization
deciding when to make more bitcoins, figuring out how many to produce, keeping track of
where they are, or investigating fraud. So how does bitcoin work as a currency, or
have any value at all? Well, bitcoin wouldn’t exist without a whole
network of people and a little thing called cryptography. In fact, it’s sometimes described as the
world’s first cryptocurrency. And here’s how it works. Bitcoin is a fully digital currency, and you
can exchange bitcoins between computers in a worldwide peer-to-peer network. The whole point of most peer-to-peer networks
is sharing stuff, like letting people make copies of super legal music or movies to download. If bitcoin is a digital currency, what’s
stopping you from making a bunch of counterfeit copies and becoming fabulously wealthy? Well, unlike a mp3 or a video file, a bitcoin
isn’t a string of data that can be duplicated. A bitcoin is actually an entry on a huge,
global ledger called the blockchain, for reasons we’ll get to in a minute. The blockchain records every bitcoin transaction
that has ever happened. And, as of late 2016, the complete ledger
is about 107 gigabytes of data. So when you send someone bitcoins, it’s
not like you’re sending them a bunch of files. Instead, you’re basically writing the exchange
down on that big ledger – something like, “Michael sends Hank 5 bitcoins.” Now, maybe you’re thinking, “But, wait. You said bitcoin doesn’t have a central
authority to keep track of everything!” Even though the blockchain is a central record,
there’s no official group of people who update the ledger and keep track of everybody’s
money like a bank does – it’s decentralized. In fact, anybody can volunteer to keep the
blockchain up to date with all the new transactions. And a ton of people do. It all works because there are lots of people
keeping track of the same thing, to make sure all transactions are accurate. Like, imagine you’re playing a game of poker
with some pals, but none of you have poker chips, and you left your cash at home. There’s no money on the table, so a few
of you get out some notebooks, and start writing down who bets how much, who wins, and who
loses. You don’t completely trust anyone else,
so everyone keeps their ledgers separately. And at the end of every hand, you all compare
what you’ve written down. That way, if someone makes a mistake, or tries
to cheat and snag some extra money for themselves, that discrepancy is caught. After a couple hands, you might fill up a
page of your notebook with notes about the money movement. You can think of each page as a “block of
transactions.” Eventually, your notebook will have pages
and pages of information – a chain of those blocks. Hence: blockchain. Now, if thousands of people are separately
maintaining the bitcoin blockchain, how are all the ledgers kept in sync? To stick with our poker analogy: think of
the entire bitcoin peer-to-peer network as a really huge poker table with millions of
people. Some are just exchanging money, but lots of
volunteers are keeping ledgers. So when you want to send or receive money,
you have to announce it to everyone at the table, so the people keeping track can update
their ledgers. So for every transaction, you’re announcing
a couple of things to the bitcoin network: your account number, the account number of
the person you’re sending bitcoins to, and how many bitcoins you want to send. And all of the users who are keeping copies
of the blockchain will add your transaction to the current block. Having a bunch of people keep track of transactions
seems like a pretty good security measure. But if all it takes to send bitcoins is a
couple of account numbers, that seems like it might be a security problem. It’s a huge problem with regular money – just
think about all the ways criminals try to steal other people’s credit card information. And with bitcoin, there’s no central bank
to notice anything weird going on to shut down fraud, like if it looked like suddenly
you spent your entire life savings on beef jerky. So what’s stopping Hank from pretending
he’s me and just sending himself all of my bitcoins? Bitcoins are kept pretty safe thanks to cryptography,
which is why it’s considered a cryptocurrency. Specifically, bitcoin stays secure because
of keys, which are basically chunks of information that can be used to make mathematical guarantees
about messages, like “hey, this is really from me!” When you create an account on the bitcoin
network, which you might have heard called a “wallet,” that account is linked to
two unique keys: a private key, and a public key. In this case, the private key can take some
data and basically mark it, also known as signing it, so that other people can verify
those signatures later if they want. So let’s say I want to send a message to
the network that says, “Michael sends 3 bitcoins to Olivia.” I sign that message using my private key,
which only I have access to, and nobody else can replicate. Then, I send that signed message out to the
bitcoin network, and everyone can use my public key to make sure my signature checks out. That way, everyone keeping track of all the
bitcoin trading knows to add my transaction to their copy of the blockchain. In other words, if the public key works, that’s
proof that the message was signed by my private key and is something I wanted to send. Unlike a handwritten signature, or a credit
card number, this proof of identity isn’t something that can be faked by a scam artist. The “who” part of each transaction is
obviously important, to make sure the right people are swapping bitcoins. But the “when” matters, as well. If you had a thousand dollars in your bank
account, for example, and tried to buy two things for a thousand dollars each, the bank
would honor the first purchase and deny the second one. If the bank didn’t do that, you’d be able
to spend the same money multiple times. Which … might sound awesome, but it’s
also terrible. A financial system can’t work like that,
because no one would get paid. So if I only have enough money to pay Olivia
or Hank, but I try to pay them both, there’s a check built into the bitcoin system. Both the bitcoin network and your wallet automatically
check your previous transactions to make sure you have enough bitcoins to send in the first
place. But there’s another problem that might happen
with timing: Because lots of people are keeping copies
of the blockchain all over the world, network delays mean that you won’t always receive
the transaction requests in the same order. So now you’ve got a bunch of people with
a bunch of slightly different blocks to pick from, but none of them are necessarily wrong. Okay, bitcoin. How do you solve that problem? Turns out, it’s by actually solving problems. Math problems. To add a block of transactions to the chain,
each person maintaining a ledger has to solve a special kind of math problem created by
a cryptographic hash function. A hash function is an algorithm that takes
an input of any size, and turns it into an output with a fixed size. For example, let’s say you had this string
of numbers as your input And our example hash function says to add
all of the numbers together. So, in this case, the output would be 10. What makes hash functions really good for
cryptography is that when you’re given an input, it’s really easy to find the output. But it’s really hard to take an output and
figure out the original input. Even in this super simple example, there are
lots of strings of numbers that add up to 10. The only way to figure out that the input
was ‘1-2-3-4’ is to just guess until you get it right. Now, the hash function that bitcoin uses is
called SHA256, which stands for Secure Hash Algorithm 256-bit. And it was originally developed by the United
States National Security Agency. Computers that were specifically designed
to solve SHA256 hash problems take, on average, about ten minutes to guess the solution to
each one. That means they’re churning through billions
and billions of guesses before they get it right. Whoever solves the hash first gets to add
the next block of transactions to the blockchain, which then generates a new math problem that
needs to be solved. If multiple people make blocks at roughly
the same time, then the network picks one to keep building upon, which becomes the longest,
and most trusted chain. And any transactions in those alternate branches
of the chain get put back into a pool to be added onto later blocks. These volunteers spend thousands of dollars
on special computers built to solve SHA256 problems, and run their electricity bills
up sky high to keep those machines running. But why? What do they get out of maintaining the blockchain? Is it just community service? Well, bitcoin actually has a built-in system
to reward them. Today, every time you win the race to add
a block to the blockchain, 12 and a half new bitcoins are created out of thin air, and
awarded to your account. In fact, you might know the bitcoin ledger-keepers
by another name: miners. That’s because keeping the blockchain updated
is like swinging a proverbial pickaxe at those hash problems, hoping to strike it rich. When bitcoins were first created in 2009,
they didn’t really have any perceived value. Tens of bitcoins would have been worth the
same as a bunch of pennies. As of November 10th, 2016, though, one bitcoin
is worth 708 US dollars. So 12 and a half bitcoins are worth 8,850
dollars. That’s a nice chunk of change! Every single bitcoin that exists was created
to reward a bitcoin miner. Besides the big payout when they add a new
block of transactions, miners are also essentially tipped a very small amount for each transaction
they add to the ledger. It’s also worth noting that every 210,000
blocks, the number of coins generated when a new block is added goes down by half. So what started as a reward of 50 bitcoins
decreased to 25, then 12 and a half. It’ll only be around 6 bitcoins in a couple
more years, and keep decreasing. Eventually, there will be so many transactions
in a block, that it’ll still be worthwhile for miners to mostly be paid in tips. According to current projections, the last
bitcoin – probably around the 21 millionth coin – will be mined in the year 2140. This decreasing number of bitcoins is actually
modelled off the rate at which things like gold are dug out of the earth. And the idea is that keeping the supply of
bitcoins limited will raise their value over time. So, is investing in bitcoin a good idea? Now that’s… not really a SciShow kind
of question. Bitcoin is still volatile, and experimental. A lot of people love it, and a lot of people
think it’s doomed to fail. We just think it’s an interesting idea,
and it makes us wonder what cryptography might do for us next. Thanks for watching this episode of SciShow,
brought to you by our patrons on Patreon. If you want to help support this show, just
go to patreon.com/scishow. And don’t forget to go to youtube.com/scishow
and subscribe!

About Ralph Robinson

Read All Posts By Ralph Robinson

100 thoughts on “Bitcoin: How Cryptocurrencies Work

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  4. But what makes them worth that who says there worth that much I'm just a dumbass I guess but I don't understand it and where can you turn them in for real cash

  5. Let’s use money that they charge us for using. The fees , who wants to use something and pay all the dam fees. No, and we are stupid to do it. Fee to use a dam wallet and to transfer funds. Nooooooo

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  8. So what happens when we use up all of the bitcoins and my second questions are there always gonna be miners, what if all the miners went on strike or something lol. I’m just tryna better understand crypto. My bad for the not so smart questions

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  21. Thank you! I've tried reading into this a few other times and never quite understood it until now. Great job Scishow at dumbing it down for morons like me! 🙂

  22. i do appreciate the handwork of a professional hacker i used from Instagram @westhack000 he helped me to get 3000$ worth of bitcoin with just 950$ i paid to him you guys should try him out his the best

  23. Very good explanation.
    I disagree, however, that is is decentralized or not being controlled by someone or some group.
    One step closer towards the one world government goal.

  24. Hmmmmmm…
    "12.5 bitcoins are
    CREATED OUT OF THIN AIR and awarded to your account. "
    Sounds like government work to me…

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  29. You going to need more than an amazing video if you want to make profit from crypto. Experience and expertise is key

  30. I was mining bitcoin back in 2012 at under 50 bucks. Litecoin at under $2. XRP at under .0065 cents. Eth at $5 missed the .20 cent mark. Antshares(neo) at under .50 cents. My gut tells me NASH(NEX) and XRP are going to do pretty well in this coming bull market

  31. The concept of trading bitcoins and cryptocurrency as a whole was to me a big sham and i would rather have a few coins and hodl until i got into some serious problem and needed a bailout. What got into my head immediately was to sell the little i had which was just above 2 btc but then, I don’t know if i should call it coincidence or a divine help, i was having a conversation at work and a colleague I don’t even roll with talked about his portfolio and how it has grown enormously because he trades using James Williams signals and then i asked for his contact ([email protected]) and decided to give it a try. After talking with James, we started off by having some basic but very important points on how to be successful in trading. Next thing he gave me free signals to try on demo and the result was encouraging. Finally, i started trading for real with his signals and instructions and u didn’t have to convert my coins to fiat in other to resolve my issues because in just 2 weeks, my return on investment was over 300%. James Williams was my own miracle and i am grateful to him and my colleague the contact. I also want all to know about him because using his signals can have very positive life changing results in your financial stand.

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  33. As computer engineer in his 40's my early crypto investment in bitcoin paid off really good, lately there's so much saturation of altcoins, which prompted my need for a diverse portfolio, a broker, and a manager that will keep my crypto investment at optimal yield.

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  34. Crypto trading is not what you rush into without proper knowledge of how the market works. You might have watched several videos on how to trade and equally tried out the method you watched about, but at the end it always results to you making little profit, not making profit or making a loss at the same time. Irrespective of how many videos you might have watched online if you don't have proper knowledge of the market you will certainly not make the best out of cryptocurrency trading. I was once a noob trading crypto without a proper understanding of how the market work. Sincerely BTC irregular movement made me lose so much money from the market and other alts I entered also face downward trend, but today I am happy because I finally met a pro trader who made me to understand the market movement and also provide me with signals to trade. I started 2 months ago with just 1.5BTC and now using her strategies to trade I already have 6BTC. Despite the irregular BTC movement, I still made profit. If you are still in the dark about how to trade crypto and you need a mentor to tutor you on how to trade effectively I urge you to contact [email protected] or via whatsapp: +447427424057 for all your cryptocurrency questions, strategy and beginners coaching and you will be glad you did.

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  36. Early Last year I decided to go into bitcoin and learn about it and with just limited knowledge I decided to give it a shot by buying and that was in mid-2018 after a friend of mine told me the importance of Bitcoin to the economy. I was afraid initially at but after I have seen several use cases I decided to buy 7BTC and I left it in my wallet expecting the price to rise like the previous year in some months time due to my how I understand the market but it never happened. In fact, it became worse that the value of my coins drop down to the fact of me almost giving up on the cryptocurrency market and selling off but I hold on to my patience and did a little research on how I can earn profit with my coins. After an intensive research I found a beginners trading post talking about a strategy on how to trade and make profit so I decided to give it a try and I contacted the person in charge, Mr markeverest. He took time to explain to me the different ways to make profit in this bearish market. I decided to give it a try and I invested 3 BTC of my coin, and it quickly rose to 9 BTC towards the end of December 2018, and I was convinced that this is the best way to make a good profit from Bitcoin. If you're still confused and don't know the step to take to profit in this new year I urge you to contact [email protected] for all your cryptocurrency questions, strategy and beginners coaching and you will be glad you did.

  37. If you’re new to this it’s confusing. But with the help of @ olekdhacker_ on IG. He’ll handle your investment . Trusted guy.

  38. Bitcoin will go pass 85k like a Lamborghini also Bitcoin 2 will blast off like a rocket once the whales find out. You can purchase BTC 2 on Crex24 exchange for around $1.50ea beat the crowd.

  39. Amazing can't believe this until I tried this hacker on @hack_Lan on Instagram he helped me doubled my bitcoin in every damn transaction… legit 💯

  40. The Crypto Prayer

    Our gracious and heavenly Satoshi, we pause in the midst of this future altering technology, mindful of the many blessings you have bestowed upon us.
    As investors, Lord, we don't ask for any special favors. We ask only that you will let us compete in this arena as in the arena of life, yet in the same breath reward us for our foresight, and belief in the future of the block.

    We don't ask that we never feel a dip, or to never have another alt bloodbath.
    We only ask that you help us to dollar cost average into profitable coins to hold long, and to hold dear.
    Help us, Lord, to wisely avoid shitcoins – for these are the work of the devil, and into the devil’s arms we shalt not fall. Let us invest in such a manner that when we make that last inevitable ride to the country up there, where the grass grows lush, green and stirrup high, and the water runs cool, clear and deep, that you, as our last Judge, will tell us that our entry fees are paid when we can pay our dues in VTHO or SATS.
    Amen.

    May all of us prosper!

    Send your Satoshi wishes
    BTC address – 1BvsiKD2KRuPbeHw8mteX8WbqFuV29A91c

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