What Is Bitcoin and How Does It Work?
A deep-dive into Bitcoin: its history, technology, economics, and what sets it apart from every other cryptocurrency.
Bitcoin (BTC) is the world’s first and largest cryptocurrency. Created in 2009, it introduced the concept of decentralised digital money and remains the benchmark by which all other cryptocurrencies are measured.
The basics
Bitcoin is a digital currency that exists on a decentralised network. No single entity creates or controls it. New Bitcoin is created through a process called mining, and transactions are recorded permanently on the Bitcoin blockchain.
Key facts:
- Maximum supply: 21 million BTC (mathematically enforced)
- Current supply: Approximately 19.7 million BTC in circulation
- Block time: Approximately 10 minutes
- Mining reward: 3.125 BTC per block (post-April 2024 halving)
How Bitcoin transactions work
When you send Bitcoin, you broadcast a signed message to the network saying “I am sending X amount to this address.” Bitcoin nodes verify your signature and that the funds exist. Miners bundle verified transactions into blocks and add them to the blockchain approximately every 10 minutes.
Each block contains a reference (called a hash) to the block before it, forming an unbroken chain back to the first block ever mined, known as the genesis block.
What is Bitcoin mining?
Mining serves two purposes: it creates new Bitcoin (as a reward for miners), and it secures the network by making it computationally expensive to alter the transaction history.
Miners compete by performing trillions of mathematical calculations per second, looking for a number that satisfies specific criteria. This is called proof of work. The winner adds the next block and receives the block reward plus transaction fees.
Bitcoin as digital gold
Many investors think of Bitcoin as “digital gold”: a scarce, durable, portable asset that can serve as a store of value over time. Like gold, it cannot be devalued by printing more. Unlike gold, it can be sent anywhere in the world in minutes.
What are Bitcoin’s limitations?
Bitcoin processes around 7 transactions per second, which is far fewer than traditional payment systems like Visa. It also uses substantial amounts of energy due to the proof-of-work consensus mechanism.
Solutions like the Lightning Network allow faster, cheaper Bitcoin transactions by conducting them off the main chain and settling periodically.
Where can I buy Bitcoin?
Bitcoin is available on virtually every cryptocurrency exchange. For a step-by-step guide, see how to buy Bitcoin as a beginner.