You’ve Bought Bitcoin, Congratulations! But What Does It Mean To Own Some Bitcoin? | by Sylvain Saurel | Feb, 2022

Contrary to popular belief, it is not complicated to understand how Bitcoin works for the use that most people will make of it. It is no more complicated than trying to understand the functioning of the current monetary and financial system. Quite the contrary! In fact, it will take you years to really understand how the current system works. I would say that Bitcoin is much simpler since its operation is described in full in only 3,219 words in the original white paper published by Satoshi Nakamoto.

The key to understanding how Bitcoin works is not to be afraid to spend as much time as necessary looking for answers to your questions, but also to never hesitate to ask a Bitcoiner for help when you can’t figure things out after doing your research.

A real Bitcoiner will always take the time to help you understand things so that you can check for yourself. This makes sense since the Bitcoin motto is: “Don’t Trust, Verify”.

To help you verify things for yourself, you must be able to understand the basics. Recently, someone who had just bought Bitcoin asked me two important questions:

• What does it mean to own Bitcoin?
• Where is my Bitcoin stored?

I thought it would be interesting to write an article to share my answers to these two questions with as many people as possible. So here is everything you need to know about the subject.

Generally, your Bitcoin will have been purchased on an exchange platform, such as Coinbase, Kraken, or Swan Bitcoin. After purchasing your Bitcoin, these trading platforms will show you the total amount of BTC you have. You must understand that you do not own any Bitcoin. What you have here is a promise or an IOU, which should be able to be exchanged for Bitcoin one day.

However, you are facing a major risk: that the exchange platform decides not to give you free access to your Bitcoin for totally arbitrary reasons. Not your Keys, Not your Bitcoin. Without the private keys associated with your Bitcoin in your possession, you are not in control.

So you absolutely must take possession of your Bitcoin’s private keys to truly access the liberating power of its revolution.

This is where some confusion arises for beginners in the Bitcoin world. Some wonder where their Bitcoin is stored when they take possession of the associated private keys. Two central concepts of Bitcoin come into play: the wallet and the Blockchain.

A wallet is a collection of ECDSA (Elliptic Curve Digital Signature Algorithm) key pairs. If you’re not familiar with cryptography, a key pair consists of a public key and a private key. This key pair is used to encrypt or sign bits of data.

The public key is known to everyone and can be used to encrypt messages in such a way that only the owner of the private key can decrypt them. The private key can also be used to sign messages in such a way that anyone with the public key can verify that the message came from you.

So each address stored in a Bitcoin wallet consists of a key pair: the address you send to the person is the public half, while the private half is in your wallet.

So you’re not storing Bitcoin in your wallet, but rather these key pairs that will allow you to access your Bitcoin via the Blockchain. The Blockchain is a database containing information about all the transactions made since the network was launched by Satoshi Nakamoto on January 3, 2009.

However, there is no information in the Blockchain indicating: “Adam owns N BTC”.

Technically speaking, you have the keys that can sign a transaction that spends an unspent transaction output (UTXO). The transaction outputs are created as part of each transaction. They consist of a locking script and an amount. This locking script defines exactly what is needed so that you can later spend this specified amount of BTC.

When you go to make a transaction, the transaction will be distributed to the network and if the transaction is valid, it will be included in the next block. This is where the information about the amount of each transaction is stored.

The moment you initiate a transaction on the Bitcoin blockchain, all your previous transactions to or from that address are scanned and a balance is calculated. If your transaction amount exceeds the available balance, your transaction will be rejected by the network and will not be included in the next block to be mined.

Owning Bitcoin means that you have the keys to unlock the script for at least one UTXO. Your balance is defined by the sum of all the UTXOs you can unlock (and therefore spend). Using your keys, your wallet is, therefore, able to scan the Bitcoin blockchain at any time to determine your balance.

When you send Bitcoin to another address, you use your keys to unlock Bitcoin, proving to the network that you have the right keys to do so, and then you lock that Bitcoin back into a new transaction output that only the receiver will be able to unlock with his keys.

To understand what you have in Bitcoin, you need to master the concept of transactions and the keys that unlock the amount of UTXOs. Most money in the world today exists merely as transaction histories and balances. As I just showed you, Bitcoin is no exception.