Bitcoin Basics – Part 2

The Bitcoin Network

In this part 2 of this series of Bitcoin basics, we talk of the network behind Bitcoin and in detail about mining. Please also read the previous article
Bitcoin Basics – Part 1.

Update Feb 2021Bitcoin Price Historic Crash – Will It Fall Further?

The Bitcoin network at its core is basically a P2P (peer-to-peer network). The idea is that you have multiple peers, computers and other devices, all connected and all performing somewhat equally. In Bitcoin, every peer holds and maintains a copy of the Blockchain ledger. The Bitcoin network uses cryptographic protocols to secure and protect information being transmitted. And the name for Bitcoin software clients is wallet. Bitcoins are sent as secured digitally signed transactions which are stored on a Blockchain. When consensus (the act of reaching mutual agreement) for a majority of peers, is arrived at, new transactions are stored in a Blockchain as a new block. And this activity is known as mining.


Image source: Worldspectrum on

Bitcoin Transactions

All Bitcoin transactions are signed transactions, providing secure blocks that have cryptographically signed information that can’t be modified. An owner of Bitcoins is listed on the Blockchain as the owner of the transaction, which is effectively ownership of the Bitcoins. And when an owner transfers Bitcoins to other parties, the change in ownership of those Bitcoins is recorded as a transaction on the Blockchain. The new owner becomes listed on the Blockchain as the owner of the transferred Bitcoins. And the Blockchain contains a complete record of all Bitcoins, all owners and all transactions. There is a point to be noted that there can be transaction fees when buying and selling Bitcoins. And that’s how many exchanges or sites make money, by taking a small part of that transaction as an intermediary service provider.

Learn bitcoin mining

Mining is the process of resolving Bitcoin transactions i.e. they are the computations done to validate Bitcoin transactions. This ensures Blockchain security and stability by preventing tampering and creating a secure record. The process of mining requires a complete record of all transactions which in essence is a ledger. The Bitcoin ledger is a Blockchain, which is nothin but a a public distributed ledger. The activity of mining adds transactions to the Bitcoin ledger as Bitcoins are sold. And the ledger or Blockchain is the chain of blocks, which are groups of transactions. They’re validated before they become a part of the Blockchain network.

How Bitcoin Mining Works

When new transactions are created by any nodes on the Blockchain, they are added to the Blockchain and this is achieved through a process called consensus, which is basically getting a majority of nodes on the Bitcoin network to reach an agreement. The Bitcoin Blockchain isn’t updated in real-time, in fact, it’s updated about roughly every ten minutes. And this update process is where the mining process occurs. After this, the group of transactions is converted into a hash and are stored on the Blockchain.

A hash is nothing but a function which takes an input of any length and returns an output of a finite length. It is because of this hash that the transactions are non-updatable, meaning any minute change in the group of transactions and the new block, would drastically change the hash value.


Image source – Wikipedia

More details can be found at

As seen from the above illustration, even a minute change in the input changes the hash output value drastically, hence hashing is a core concept in the cryptocurrency / Blockchain world.

Every hash is created from the hash of the prior transaction block. The mining process doesn’t actually create Bitcoins but rather mining is used to solve problems (computing a unique value) so that the Blockchain can be updated. It involves the work done to solve increasingly complex problems that require a lot of computational processing power. And this is where competition comes in. Generally, the more processing power you throw at mining a transaction block, the higher the chances that you’ll solve it first. So miners invest a lot of money in hardware and power generation to solve these problems. Because there’s a reward for solving the problem so transactions can be added to the Blockchain. And the reward is that miners receive Bitcoins as a transaction fee. So there’s a monetary benefit associated with mining and hence people agree to participate in the Blockchain network as mining nodes. Once a block of transactions has been successfully mined, it’s distributed to the network for consensus (agreement). This happens over and over again, billions of times, and approximately every ten minutes, a hash is accepted. Consensus is achieved and the block is added to the Bitcoin Blockchain network.


In these 2-part series of Bitcoin basics, we understood the basic fundamentals of Bitcoin and also we covered some advanced topics like the Bitcoin network, hashing and mining.

Hitesh Boricha

I have a little over a decade experience in the IT industry. Having worked in various roles in this industry, I am passionate about technology.

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