How Does Bitcoin Work?

Bitcoin is a decentralized and completely digital currency. Unlike fiat currencies, such as the U.S. dollar, euro or British pound, governments don't create or back Bitcoins.

Bitcoin and other cryptocurrencies—there are many—are powered by "blockchain" technology. The Bitcoin blockchain is a decentralized public ledger, which might sound like technobabble, but isn't difficult to understand as a concept.

The Bitcoin blockchain is a public ledger (or database) that's created and managed by a large network of computers rather than a single entity or central bank—that's what makes it decentralized.

New information, such as recent transactions, are grouped together to form a block. The block is then added (or chained) to the existing database. Once new information is added, it can't be edited or deleted, and anyone can review the Bitcoin blockchain database. The result is a permanent record of Bitcoin transactions that's available for public review.

For example, if you send Bitcoins to someone else, an uneditable record of the transaction is added to the ledger, which is synced on tens of thousands of computers around the world.

Bitcoin also allows for transactions that remain anonymous to a certain extent. While there's a public record of the transaction from person A to person B, there isn't any identifying information about who person A and B are. However, anonymity goes out the window if you publish your Bitcoin address (the address you use to receive the currency) publicly. With your Bitcoin address, someone can see your transactions and even view the balance associated with it.

All of this complex math requires a lot of computational power, which is where Bitcoin miners come in. Miners allow use of their computers to process transactions and, in return, they receive Bitcoins as payment. Anyone can set their computer up to mine Bitcoin, although the cost of electricity to power your computer may be more than you earn in the currency.

What is Bitcoin?

Bitcoin was created by Satoshi Nakamoto, a pseudonymous person or team who outlined the technology in a 2008 white paper. It’s an appealingly simple concept: bitcoin is digital money that allows for secure peer-to-peer transactions on the internet.

Unlike services like Venmo and PayPal, which rely on the traditional financial system for permission to transfer money and on existing debit/credit accounts, bitcoin is decentralized: any two people, anywhere in the world, can send bitcoin to each other without the involvement of a bank, government, or other institution.

Every transaction involving Bitcoin is tracked on the blockchain, which is similar to a bank’s ledger, or log of customers’ funds going in and out of the bank. In simple terms, it’s a record of every transaction ever made using bitcoin.

Unlike a bank’s ledger, the Bitcoin blockchain is distributed across the entire network. No company, country, or third party is in control of it; and anyone can become part of that network.

There will only ever be 21 million bitcoin. This is digital money that cannot be inflated or manipulated in any way.

It isn’t necessary to buy an entire bitcoin: you can buy just a fraction of one if that’s all you want or need.

Who created Bitcoin?

To really grasp how bitcoin works, it helps to start at the beginning. The question of who created bitcoin is a fascinating one, because a decade after inventing the technology—and despite a lot of digging by journalists and members of the crypto community—its creator remains anonymous.

The principles behind Bitcoin first appeared in a white paper published online in late 2008 by a person or group going by the name Satoshi Nakamoto.

This paper wasn’t the first idea for digital money drawing on the fields of cryptography and computer science—in fact, the paper referred to earlier concepts—but it was a uniquely elegant solution to the problem of establishing trust between different online entities, where people may be hidden (like bitcoin’s own creator) by pseudonyms, or physically located on the other side of the planet.

Nakamoto devised a pair of intertwined concepts: the bitcoin private key and the blockchain ledger. When you hold bitcoin, you control it through a private key—a string of randomized numbers and letters that unlocks a virtual vault containing your purchase. Each private key is tracked on the virtual ledger called the blockchain.

When Bitcoin first appeared, it marked a major advance in computer science, because it solved a fundamental problem of commerce on the internet: how do you transfer value between two people without a trusted intermediary (like a bank) in the middle? By solving that problem, the invention of bitcoin has wide-ranging ramifications: As a currency designed for the internet, it allows for financial transactions that range across borders and around the globe without the involvement of banks, credit-card companies, lenders, or even governments. When any two people—wherever they might live—can send payments to each other without encountering those gatekeepers, it creates the potential for an open financial system that is more efficient, more free, and more innovative. That, in a nutshell, is bitcoin explained.

How Bitcoin works

Unlike credit card networks like Visa and payment processors like Paypal, bitcoin is not owned by an individual or company. Bitcoin is the world’s first completely open payment network which anyone with an internet connection can participate in. Bitcoin was designed to be used on the internet, and doesn’t depend on banks or private companies to process transactions.

One of the most important elements of Bitcoin is the blockchain, which tracks who owns what, similar to how a bank tracks assets. What sets the Bitcoin blockchain apart from a bank's ledger is that it is decentralized, meaning anyone can view it and no single entity controls it.

Here are some details about how it all works:

Specialized computers known as ‘mining rigs’ perform the equations required to verify and record a new transaction. In the early days, a typical desktop PC was powerful enough to participate, which allowed pretty much anyone who was curious to try their hand at mining. These days the computers required are massive, specialized, and often owned by businesses or large numbers of individuals pooling their resources. (In October 2019, it required 12 trillion times more computing power to mine one bitcoin than it did when Nakamoto mined the first blocks in January 2009.)

The miners’ collective computing power is used to ensure the accuracy of the ever-growing ledger. Bitcoin is inextricably tied to the blockchain; each new bitcoin is recorded on it, as is each subsequent transaction with all existing coins.

How does the network motivate miners to participate in the constant, essential work of maintaining the blockchain—verifying transactions? The Bitcoin network holds a continuous lottery in which all the mining rigs around the world race to be the first to solve a math problem. Every 10 min or so, a winner is found, and the winner updates the Bitcoin ledger with new valid transactions. The prize changes over time, but in May 2020, the reward for each winner of this raffle went from 12.5 bitcoin per block to 6.25, and in 2024, with the halving, this reward further dropped from 6.25 to 3.125 as a mechanism to increase scarcity.

At the beginning, a bitcoin was technically worthless. At the end of 2019, it was trading at around $7,500, and in November 2021, it topped $64,000. As bitcoin’s value has risen, its easy divisibility (the ability to buy a small fraction of one bitcoin) has become a key attribute. One bitcoin is currently divisible to eight decimal places (100 millionths of one bitcoin); the bitcoin community refers to the smallest unit as a ‘Satoshi.’

Nakamoto set the network up so that the number of bitcoin will never exceed 21 million, ensuring scarcity. As of December 2023, there were around 1,4 million bitcoins still available to be mined. The last blocks will theoretically be mined in 2140.

Intro to Bitcoin 🔍

Bitcoin is a form of digital currency introduced in 2008 by a mysterious person, or group of people, known only as Satoshi Nakamoto.

Unlike traditional currencies, Bitcoin operates as a decentralized system, free from the control of central banks or governments. Instead, it relies on a network of users who collectively maintain its operations via a digital ledger called a blockchain.

The Bitcoin protocol is built on three essential components:

Public-private key cryptography: Wallet software assigns Bitcoin owners both a public key and a private key. A public key is used to create a public wallet address for receiving inbound transactions and verifying digital signatures. A private key functions like a password, and is used to create digital signatures that prove you own funds when sending transactions.
Peer-to-peer networking: Nodes (computers running the software) review transactions to ensure the software’s rules are being followed. Bitcoin miners (nodes that use a specialized computer program that allows them to verify newly submitted transactions) then compete for the right to propose a new batch of pending transactions to join the blockchain.
A finite supply: According to the software rules, no more than 21 million Bitcoin can ever be in circulation—a limit that gives Bitcoin value.

Bitcoin was created to function as a digital medium of exchange, enabling users to buy, sell and trade without centralized intermediaries. Its decentralized nature and strict supply rules contribute to its unique value proposition.

By understanding Bitcoin, you can gain insights into a revolutionary financial technology, explore its potential benefits and risks, and discover how it's reshaping the global financial landscape. In this guide, we'll delve into the fundamentals of Bitcoin, explore its various use cases and discuss the factors that influence its price.

How is new Bitcoin created? ⛏️

There are approximately 20 million Bitcoin in circulation.

To incentivize miners to continue competing against each other to propose new blocks and secure the network, winners of the Bitcoin mining competition are rewarded with a block reward. This reward consists of newly minted Bitcoin, plus any fees attached to the transactions included in the proposed block.

Satoshi Nakamoto designed the Bitcoin network to be self-regulating. Bitcoin’s mining difficulty adjusts automatically every 2,016 blocks (about every two weeks) to maintain a 10-minute average block discovery time. If blocks are mined too quickly, the algorithm raises the difficulty; if too slowly, it lowers it. This ensures a steady and predictable flow of new Bitcoin entering circulation.

As of April 2024, the block reward is 3.125 BTC per block. This reward is halved every 210,000 blocks in a process known as the Bitcoin halving. Once the number of Bitcoin in circulation reaches 21 million, the maximum limit, the protocol will release no more coins.

While Bitcoin mining is energy-intensive, recent advances in technology have reduced the greenhouse gas emissions associated with it. Many major miners now focus on using renewable energy sources. However, those mining at home may still need specialized hardware and software that contribute to higher energy consumption.

How do you store Bitcoin? 🔒

Bitcoin, like all other cryptocurrencies, exists purely in digital form. To store these assets, holders need specialized Bitcoin wallets. Many Bitcoin startups focus on providing secure storage solutions for users.

Hardware wallet

A hardware cryptocurrency wallet (also known as a cold wallet) is a physical device that securely stores a user's private keys, which are necessary for signing transactions and spending Bitcoin.

Because they stay offline most of the time, hardware wallets are generally considered to be less susceptible to hacking.

To use a hardware wallet, you connect it to a computer or mobile device and sign transactions with your private key, which is protected by a PIN known only to you. To make a transaction, the user connects the hardware cryptocurrency wallet to a computer or mobile device and signs the transaction with their private key.

Since private keys are stored on the device, they are not vulnerable to online attacks. Additionally, hardware wallets are portable, meaning users can carry their Bitcoin with them wherever they go.

Software wallet

A software wallet, or hot wallet is a digital wallet stored on a software platform, accessible through a computer, smartphone or tablet.

These wallets are typically free and allow easy access to your Bitcoin from anywhere with internet access. Software wallets are generally considered easier to use than hardware wallets.

However, they are also vulnerable to hacking and malware attacks, making them less secure than hardware wallets.

How to determine the "right" crypto wallet

The main differences between software and hardware wallets are security and convenience.

Software wallets, or hot wallets, are more vulnerable to hacking and malware attacks because they remain connected to the internet at all times. However, hot wallets are more convenient for frequent transactions, as they allow quick access to your Bitcoin from anywhere.

On the other hand, cold wallets, like hardware wallets, are more expensive but offer a higher level of security. They remain offline most of the time, significantly reducing the risk of cyberattacks. While they provide superior security, they can be less convenient for users who need regular access to their funds.

Ultimately, determining the “right” crypto wallet for you is about understanding where on the “absolute security” vs “ultimate convenience” spectrum your crypto strategy most closely aligns.

What is the difference between Bitcoin and altcoins?

Bitcoin and altcoins are both cryptocurrencies, but they differ in their origin, purpose, and underlying technology. The term “altcoin” short for “alternative to Bitcoin refers to all cryptocurrencies that were developed after Bitcoin. As of January 2026, there are approximately 8946 altcoins, although this number fluctuates. Well-known examples include Ethereum, XRP, Litecoin, Dogecoin, and Solana. The highest number of altcoins was recorded in the summer of 2022 and again in early 2025, with just under 10,900 in each case. Altcoins can be grouped into various categories, including Layer-1 and Layer-2 blockchains, DeFi projects, Web3 infrastructure, stablecoins, exchange tokens, meme coins, as well as gaming and metaverse tokens.

Is Bitcoin decentralized?

Bitcoin is decentralized, meaning that traditional centralized financial players such as banks or other financial institutions are not required. Instead, the blockchain network is maintained by many independent users who contribute computing power. They verify Bitcoin transactions and ensure that new Bitcoin enters circulation.

What makes Bitcoin valuable?

Bitcoin is often referred to as “digital gold” because, like the precious metal, it exists in limited supply and is therefore considered particularly valuable. The amount of Bitcoin that will ever exist is capped at 21 million units once this limit is reached, no new Bitcoin will be created.
Although a large share of Bitcoin is already in circulation, forecasts suggest that the last Bitcoin will not be created until the year 2140. The reason for this is the “Bitcoin halving” mechanism, under which the creation of new Bitcoin is reduced by half at regular intervals.

Bitcoin Halving

About every four years, a Bitcoin halving takes place, reducing the rewards paid to Bitcoin miners by half. This reduction in supply can potentially increase Bitcoin’s value, as the asset may become more attractive to investors. At the same time, however, a halving can also affect the profitability of mining and the overall security of the network.

Quick summary

Bitcoin (BTC) is the first cryptocurrency. Developed in 2009 by Satoshi Nakamoto, it enables decentralized and secure transactions without banks or other financial institutions. Bitcoin is mainly used for payments and as a store of value (“digital gold”).
Bitcoin transactions are processed via the blockchain. Miners validate these transactions using the Proof-of-Work mechanism and receive new BTC as a reward.
The network is secured by many independent users, making manipulation difficult and the blockchain particularly tamper-resistant.
The maximum amount of BTC is 21 million. Through Bitcoin halving, which occurs approximately every four years, the creation of new coins is reduced, tightening supply.
Altcoins are all cryptocurrencies other than Bitcoin. They have different use cases, such as smart contracts (Ethereum) or fast transactions (Litecoin), and often use different technologies.

Why Was Bitcoin Created?

While Bitcoin’s creator remains anonymous, the reasons behind its creation remain speculation. However, it may have been driven by several factors, as gleaned from the white paper:

First, Bitcoin aimed to address the flaws of traditional financial (TradFi) systems based on trust, such as centralised control, high transaction fees, and limited accessibility.

Second, Bitcoin's underlying principles include decentralisation, trustlessness, security, and privacy — all achieved through blockchain technology. By eliminating intermediaries, Bitcoin enables fast and low-cost transactions, financial inclusivity, and greater transparency.

These factors also mirror public criticism of the global financial system at the time of Bitcoin’s launch — soon after the 2007–08 global financial crisis.

Bitcoin Blockchain Technology

Bitcoin is based on a technology called blockchain, which is governed by a consensus mechanism. In simple terms, a blockchain notes down all transactions in a digital ledger, which can be publicly viewed by anyone online.

Bitcoin is not governed by one centralised institution; rather, a group of stakeholders maintain the ledger (the blockchain) together to reach agreement on which transactions are right or wrong. This is called a consensus mechanism. Bitcoin relies on the Proof of Work (PoW) consensus mechanism, the first blockchain consensus ever created.

Learn more about Proof of Work and get more details about how Bitcoin works.

How Is Bitcoin Used?

Bitcoin can be used in various ways:

First, Bitcoin can be mined, where miners solve complex mathematical problems to validate transactions and secure the network. In return, they are rewarded with new bitcoins.

Additionally, users can sell and buy Bitcoin on cryptocurrency exchanges, with the goal of taking advantage of price fluctuations to make profits.

Third, Bitcoin can also be used for online purchases and transactions, providing convenience and expanding its utility.

Moreover, some individuals hold Bitcoin, hoping its value will increase over time, allowing them to sell at a higher price. This is not guaranteed, however, as Bitcoin is a highly volatile asset; these individuals are at risk of losing part, or the entirety, of the value of their initial purchase monies.

Is Bitcoin Valuable?

Bitcoin is valued by members of the cryptocurrency community for several reasons. First, it is a decentralised currency, meaning its issuance is not controlled by any government or central authority.

Second, Bitcoin has a limited supply, with only 21 million coins ever to be mined. This scarcity is often compared to gold by the cryptocurrency community and makes Bitcoin an attractive asset for some. Unsurprisingly, Bitcoin has been dubbed ‘digital gold’.

Third, Bitcoin operates on a secure and transparent technology called blockchain. This ensures that transactions are recorded and verified by a network of computers, making it virtually impossible to alter or counterfeit transactions.

Some consider that these factors have combined to make Bitcoin a valuable and increasingly sought-after digital asset.

Who Owns the Bitcoin Network?

Unlike fiat currencies, which are issued and backed by governments, no one owns the Bitcoin payment network itself; it is entirely independent of any one person or organisation (miners work together to maintain the Bitcoin network). However, people and organisations can own BTC, the native currency of the Bitcoin network, and make software to buy, store, or transfer bitcoins.

How Many People Own Bitcoin?

The number of Bitcoin owners has continued to steadily grow. According to a Morning Consult survey, 26% of millennials and 14% of all US adults own Bitcoin. Globally, it is estimated that by the end of 2023 there were 580 million crypto owners, with over 296 million Bitcoin owners. These estimates translate to an average global crypto ownership rate of 6.8% as of June 2024.

Who Owns the Most Bitcoin?

The largest holder of Bitcoin is believed to be Satoshi Nakamoto, the pseudonymous founder of Bitcoin. Nakamoto is estimated to own over one million BTC. Additionally, there are other large holders of Bitcoin, known as ‘whales’.

Learn more about who owns the most Bitcoin.

Sending and Receiving Bitcoin

While miners mine to be rewarded and receive bitcoins, their mining fulfils another important task (other than creating new bitcoins): It records Bitcoin transactions safely and immutably (i.e., they can’t be tampered with) on the Bitcoin blockchain.

Both the sender and receiver need a Bitcoin wallet to complete a Bitcoin transaction with each other. The sender transmits the amount of Bitcoin and wallet address to the network, and within a few minutes, the transaction is verified by miners, included in the next block, and considered complete. The receiver can then log in to their wallet with their private key (i.e., the password to their wallet) and confirm the receipt of the transaction.

In addition, everyone in the Bitcoin network can verify and accept the transaction as valid, as the wallet addresses are immutably recorded on the blockchain and can be viewed publicly with a block explorer.

How Has the Price of Bitcoin Changed Over Time?

Since its launch in 2009, Bitcoin has experienced significant price fluctuations, making it a highly volatile asset. In its early years, Bitcoin was traded for less than a cent per coin. In 2011, it reached its first milestone by surpassing the US$1 mark. BTC continued to gain traction, and in 2013, it reached a peak of $260.

Bitcoin's first notable price surge came in 2017 when it reached an all-time high (ATH) of nearly $20,000. However, the price sharply corrected in the following months, dropping to around $3,000 by the end of 2018.

The cryptocurrency market as a whole experienced another major surge in 2021, with Bitcoin reaching over $60,000 in April of that year. However, it experienced a subsequent correction, and the price dropped to under $20,000 by November 2022.

At the end of October 2023, Bitcoin's price was over $33,000. As of June 2024, it is over $71,000.

How Many Bitcoins Are There in Total?

According to the latest data, there are 19,727,800 bitcoins in circulation as of June 5, 2024 (the maximum supply of bitcoins is capped at 21 million).

In other words, 1,272,200 bitcoins are left to be mined. It takes around 10 minutes to mine a block of Bitcoin (with 3.125 BTC as a miner reward). Currently, approximately 900 new bitcoins are entered into circulation every day, but will decrease since the recent Bitcoin halving.

These halving events are hardcoded into Bitcoin’s blockchain (after every 210,000 blocks are added to the blockchain, or approximately every four years). They reduce the amount of bitcoins awarded to miners by 50% — a measure to prevent inflation. With future mining following, experts predict that the last bitcoin will be mined in the year 2140.

Note that it is estimated that ~20% of bitcoins in circulation are lost, due to a number of reasons: users forgetting the keys to their Bitcoin hardware wallet or owners passing away without sharing their keys, for example.

What Are the Risks of Trading Bitcoin?

Trading Bitcoin comes with risks that beginners should be aware of.

First, Bitcoin is a highly volatile asset, meaning its price can experience significant fluctuations in short periods. This volatility makes it challenging to accurately predict price movements, leading to potential losses. Additionally, the cryptocurrency market operates 24/7, making it susceptible to sudden price swings even during off-hours. As with many assets, users are able to short Bitcoin like they would with other stocks.

Another risk is the potential for security breaches. As cryptocurrencies are stored in digital wallets, hackers can target these wallets to steal funds. Beginners should take proper security measures to protect their Bitcoin holdings, including using secure wallets like hardware wallets and enabling multi-factor authentication (MFA).

Lastly, scams and fraudulent activities are prevalent in the cryptocurrency space. Beginners should exercise caution when dealing with unfamiliar platforms or individuals offering guaranteed returns and/or investment opportunities that seem too good to be true.

It is essential to thoroughly research and understand these risks before venturing into Bitcoin trading.

Conclusion

Bitcoin has come a long way since its early days, revolutionising the financial landscape and soaring in price to unprecedented heights. Despite its volatility, Bitcoin has shown resilience and a degree of potential as a decentralised digital currency. Its ability to operate without traditional financial intermediaries and provide secure, transparent transactions has captured the attention of individuals and institutions worldwide.

With increasing adoption and acceptance, Bitcoin's future looks promising. As the cryptocurrency market continues to evolve, it's clear that Bitcoin has the potential to reshape the way we think about money and finance. Whether crypto serious or curious — it's hard not to be excited about the possibilities Bitcoin holds.

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Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.

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