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Bitcoin Fundamentals

Understanding Bitcoin means understanding the problems it solves, the principles behind its design, and the cryptographic building blocks that make it work.

History and Philosophy​

The Problem​

Before Bitcoin, digital money had a fundamental issue: the double-spend problem. Digital information can be copied freely, so how do you prevent someone from spending the same digital money twice? Previous attempts (DigiCash, e-gold, b-money, Bit Gold) all required a trusted third party to keep track of balances.

The Breakthrough​

In October 2008, Satoshi Nakamoto published the Bitcoin whitepaper: "Bitcoin: A Peer-to-Peer Electronic Cash System". The key innovation was combining several existing technologies into a system that solves double-spending without a trusted intermediary:

  • Proof of Work — From Adam Back's Hashcash (1997)
  • Distributed timestamps — From prior work on timestamping services
  • Merkle trees — From Ralph Merkle's work (1979)
  • Public-key cryptography — From Diffie-Hellman and subsequent work

The Bitcoin network launched on January 3, 2009, when Satoshi mined the genesis block.

Core Principles​

  • Decentralization — No single entity controls the network
  • Permissionless — Anyone can participate without approval
  • Censorship resistance — No one can prevent valid transactions from being confirmed
  • Fixed supply — 21 million BTC maximum, enforced by consensus rules
  • Pseudonymity — Addresses are not tied to real-world identities by default
  • Verifiability — Anyone can run a node and verify every transaction

Basic Cryptography​

Hash Functions​

Bitcoin uses cryptographic hash functions extensively. A hash function takes arbitrary input and produces a fixed-size output (the "hash" or "digest").

SHA-256 (Secure Hash Algorithm, 256-bit) is Bitcoin's primary hash function:

Input: "Hello"
SHA-256: 185f8db32271fe25f561a6fc938b2e264306ec304eda518007d1764826381969

Properties that make hash functions useful in Bitcoin:

  • Deterministic — Same input always produces the same output
  • One-way — You can't reverse a hash to find the input
  • Avalanche effect — A tiny change in input completely changes the output
  • Collision resistant — It's computationally infeasible to find two inputs with the same hash

Bitcoin also uses RIPEMD-160 (combined with SHA-256 as HASH160) for generating shorter addresses.

Elliptic Curve Cryptography​

Bitcoin uses the secp256k1 elliptic curve for key pairs and signatures:

  1. Private key — A random 256-bit number (your secret)
  2. Public key — Derived from the private key via elliptic curve multiplication (shareable)
  3. Address — Derived from the public key via hashing (what you share with others)

The math ensures you can go from private key → public key → address, but never in reverse.

Digital Signatures​

When you send Bitcoin, you create a digital signature using your private key. This proves you own the funds without revealing your private key. Bitcoin originally used ECDSA (Elliptic Curve Digital Signature Algorithm) and now also supports Schnorr signatures (added in Taproot, 2021).

Blockchain Concepts​

Blocks​

A block is a data structure containing:

  • Block header — Version, previous block hash, Merkle root, timestamp, difficulty target, nonce
  • Transactions — The list of transactions included in this block

Blocks are chained together by including the hash of the previous block in each new block header — forming the blockchain.

Proof of Work​

Miners compete to find a nonce that, when combined with the block header, produces a hash below the current difficulty target. This process:

  • Requires significant computational work to find a valid nonce
  • Is trivial to verify (just hash the header and check)
  • Adjusts difficulty every 2,016 blocks (~2 weeks) to maintain ~10 minute block intervals

Consensus​

Bitcoin's consensus rules define what makes a block and transaction valid. Every full node independently verifies every block and transaction against these rules. No block is accepted on trust — the motto is "Don't trust, verify."