Blockchain Almanac: Bitcoin — The Architecture of a Pioneer

Bitcoin is the first cryptocurrency that changed the perception of money and trust. Its architecture formed the basis of the entire crypto industry. Today, we will examine the key principles of the Bitcoin network and demonstrate how it helps traders on the Veles platform to build algorithmic strategies.

UTXO model and transaction transparency

Instead of a traditional bank account, Bitcoin uses a set of individual “banknotes” — unspent transaction outputs (UTXOs). Each “banknote” has its own size, for example, 0.5 BTC or 0.1 BTC. When sending funds, the system spends one or more “bills” in full and creates new ones for the recipient and change.

This ensures 100% verifiability of transactions and absolute transparency: anyone can track the history of each UTXO.

Proof of Work as a security guarantee

The Bitcoin network is protected by the Proof of Work mechanism. Miners form a block of transactions and search for a number (nonce) that, when hashed, produces a result with a specified number of leading zeros. This takes an average of 10 minutes and is automatically adjusted for network stability.

Important for traders to know:

• Transaction confirmation time is usually 10–20 minutes
• Stability allows you to correctly configure entry filters in Veles strategies (see the section What are bot filters?)

For more information on other consensus algorithms, see the following chapters of the Almanac.

Network limitations and trading filters

Bitcoin processes about seven transactions per second. During periods of high activity, delays and commissions increase, which is especially important to consider in algorithmic trading.

When configuring Veles trading bots, you can use filters — indicators for determining optimal entry points. For example:

• Bollinger Bands help avoid entering at “highs” when the price of Bitcoin is at extreme levels
• CCI (Commodity Channel Index) shows areas of oversold/overbought assets
• A combination of several filters reduces the risk of opening a position at an unfavorable moment

Proper filter settings are especially important for Bitcoin network assets, where high fees and slow confirmations can make frequent trading unprofitable.

The “Bomberman” strategy and blockchain selection

The effectiveness of “Bomberman”, for example, often depends on the speed and cost of execution, which brings the question of blockchain selection to the forefront.

Essentially, networks act as different “exchange platforms” with their own rules: throughput, fees, and delays significantly affect the final result. When comparing backtests with BTC, ETH, and SOL network assets, it is clear how the characteristics of each platform change the profitability of the strategy.

Lightning Network and fast settlements

Lightning Network is the second layer of Bitcoin, where participants open payment channels for instant transfers without recording each transaction on the main network. For traders, this means:

• Almost instant deposits and withdrawals from exchanges that support Lightning
• Minimal fees when transferring funds between platforms for quick rebalancing

Read more about blockchain layers in our article on blockchain layers.

SegWit and Taproot: network upgrades

SegWit and Taproot have increased efficiency and privacy:

• SegWit moved signatures outside the block, reducing fees
• Taproot combined complex transaction conditions into a single key, hiding their details

These updates help traders pay less for transactions and keep their transaction parameters confidential.

Bitcoin in a trader's portfolio

Bitcoin is often referred to as “digital gold”. In Veles strategies, BTC is used for rebalancing:

• Decile strategy: transferring part of the portfolio to BTC when key levels are reached
• Correlation signals: BTC movement helps predict the behavior of other assets

Consider what percentage of your portfolio is on the Bitcoin blockchain — this will help you assess diversification and manage risk.

Conclusion

Bitcoin's architecture combines UTXO transparency, Proof of Work security, and Lightning Network second-layer solutions. SegWit and Taproot upgrades have improved network performance and privacy. Understanding these principles helps traders on the Veles platform build more accurate and reliable algorithmic strategies.

Bitcoin laid the foundation for the crypto industry. In the next articles of the Almanac, we will look at how other blockchains are developing these ideas.

📖 Continue your dive:

Full table of contents of the Blockchain Almanac