How Bitcoin Uses Cryptography - Bittr Academy

What is Cryptography?

Cryptography can be seen as the mathematical backbone of digital security. It includes techniques like encryption, hashing, and digital signatures. All are essential to ensuring data integrityand authenticity. Bitcoin, the first decentralized digital currency, uses cryptography not only to secure its network but also to eliminate the need for trust in any third party. It’s why we call it a cryptocurrency.

Of course, Bitcoin isn’t the only technology built on cryptography. From secure messaging apps and cloud storage to your phone’s password lock, cryptography is embedded in every aspect of modern digital life. But Bitcoin’s design uses these tools in a novel way - to secure money itself.

Encryption and Decryption

Encryption turns readable data (plaintext) into unreadable data (ciphertext), ensuring that only the right person (who has the decryption key) can access the information. Whether you’re logging into a website or sending a private message, encryption is likely used for protecting your data.

Bitcoin does not encrypt its blockchain. Every node needs to see the data in order to validate it. That’s the point. Bitcoin is an open system by design. But when it comes to the private key storage (your access to your bitcoin) wallets use strong encryption like AES (Advanced Encryption Standard) to protect that data. The encryption algorithm is used by the NSA for classified information. If someone wants to steal your bitcoin, they’d have to break world-class encryption or guess your password. Good luck with that.

Hash Functions

A hash function takes an input of any size and returns a fixed-size output. Typically that’s a long string of numbers and letters. What makes it special is that even the tiniest change to the input drastically changes the output. It’s also one-way: there’s no reverse-engineering the original input from the hash.

Bitcoin uses SHA256, a cryptographic hash function, to link blocks together, create digital fingerprints of transactions, and power its Proof-of-Work mining algorithm. Miners must guess trillions of possible combinations to find a hash below a certain threshold. You can test the SHA256 algorithm at https://emn178.github.io/online-tools/sha256.html (Try to find an output that starts like this: 000000000000000000011588ce82a43ef6994923b18693dfcd3fe8f2082785f9. This was he has of Block 890366, Good Luck)

Hashes are also what make Bitcoin immutable. Every block contains the hash of the block before it. Change one transaction, even a single character, and that block’s hash changes. The whole chain would break instantly. The network and other miners wouldn’t accept the chain due to the invalid transaction.

Digital Signatures

Bitcoin uses digital signatures to prove ownership and authorize transactions without revealing your private key. In a similar way you sign a Bitcoin transaction, you can also sign a message: If you control a private key, you can generate a signature that proves to the network that you’re the owner of a bitcoin address. We use this functionality that is also known as message signing at Bittr to make sure you control the address we send your Bitcoin to. This is also known as the travel rule and a requirement by the Swiss regulator. This system is based on a key pair: you share your public key (or a receiving address) with the world, but you always keep your private key secret.

Bitcoin originally used ECDSA (Elliptic Curve Digital Signature Algorithm), and with the Taproot upgrade, now supports Schnorr signatures too. These signature schemes allow the network to verify that a transaction was legitimately signed, without trusting anyone.

Thanks to digital signatures, Bitcoin is truly peer-to-peer. You don’t need a bank or payment processor to tell you your money is real. The math proves it.

The Impact on Bitcoin

Bitcoin doesn’t rely on trust. It relies on math.

Cryptography is what makes this possible. Hashes secure the chain, signatures authorize ownership, and encryption protects your keys. All of this works together to build a monetary network where the rules are not enforced by a central party like people, banks or governments.

Bitcoin didn’t invent cryptography. But it was the first to apply it in a way that created decentralized, verifiable money.

Final Thoughts

Cryptography is the foundation of Bitcoin’s security model
Hash functions power Proof-of-Work and keep the blockchain immutable
Bitcoin doesn’t encrypt the whole blockchain
Wallets encrypt private keys