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What Is Bitcoin and How Does It Work?
Key Takeaways
Bitcoin is the very first cryptocurrency ever created. It was introduced via a whitepaper in 2008 and officially launched in January 2009. Bitcoin’s creator is only known by the pseudonym Satoshi Nakamoto.
Bitcoin runs on blockchain technology, which works like a public ledger. Instead of a bank checking transactions, a global network of computers does the work.
Bitcoin isn’t owned by any company or government. It’s decentralized, transparent, and open source, making it a popular alternative to traditional financial systems.
What Is Bitcoin?
Think of Bitcoin as cash for the internet. It was the first digital currency ever invented, introduced to the world in 2008 and launched a few months later in 2009. It lets you send money directly to someone else without needing a middleman.
It's worth noting that people usually write "Bitcoin" with a capital B when talking about the network or the technology, and "bitcoin" with a lowercase b when talking about the coins themselves. The ticker symbol you see on exchanges is BTC.
Unlike the dollars or euros in your wallet, which are printed and controlled by governments, Bitcoin is decentralized. This just means no single boss, bank, or government runs the Bitcoin network. It’s a peer-to-peer system.
Why do people like Bitcoin so much? You can own and control your money. You can use Bitcoin to send money anywhere, anytime, without relying on an intermediary. The system is also immune to double-spending attacks, so once you spend a coin, you can’t try to spend that same coin again somewhere else.
How Does Bitcoin Work?
Bitcoin relies on a technology called blockchain. You can think of a blockchain as a digital notebook that everyone can read but no one can erase.
Every time a transaction happens, it gets written onto a "block." That block is linked to the previous one, forming a chain. This record is copied onto thousands of computers around the world (called nodes).
Because so many computers have a copy of the notebook, nobody can cheat. If one person tries to change the numbers to give themselves more money, the other computers reject it. Also, anyone can participate in the ecosystem by downloading Bitcoin's open-source software.
Decentralization: Bitcoin's blockchain is maintained by a distributed network of computers, ensuring no central authority controls the ledger.
Immutability: Once a transaction is added to the blockchain, it cannot be altered or deleted.
Security: Transactions are secured using cryptography, and verifying each block requires a lot of resources and repetitive work (i.e., solving some puzzles in a process known as mining).
BTC transaction example
Technically, Bitcoin doesn't use bank accounts with balances. It uses a system called UTXO (Unspent Transaction Output), which is more like keeping track of individual digital coins in a wallet. But for simplicity, let’s look at it like a transfer.
Let’s say Alice wants to send 1 BTC to Bob.
The blockchain updates to show that Alice has 1 less BTC and Bob has 1 more. It’s like Alice writing on a public billboard, "I gave Bob 1 Bitcoin," so everyone knows the money moved.
When Bob wants to send that money to Carol later, the network checks the history to make sure he actually received it from Alice first. Everyone’s ledger stays in sync because the computers are constantly talking to each other.
Bitcoin mining
Mining is how the network stays secure. It’s also how new bitcoins are brought into the world. When you send a transaction, it gets broadcast to the network. Then, users known as miners pick up these transactions and group them into a block.
To add this block to the blockchain, they must solve a specific puzzle. The first miner to solve the puzzle gets to add the block and is rewarded with brand new bitcoins. This reward is the only way new bitcoins are created.
However, the supply is limited. There will never be more than 21 million bitcoins. Once all 21 million bitcoins are mined (estimated around the year 2140), miners will no longer receive block rewards and will be compensated solely by transaction fees paid by users.
Proof of Work (PoW) and energy consumption
To maintain the security and integrity of the blockchain, Bitcoin uses a consensus mechanism known as Proof of Work (PoW). It’s an essential part of the mining process described above.
PoW is a mechanism created along with Bitcoin to prevent double-spending in digital payment systems. Besides Bitcoin, many cryptocurrencies use PoW as a method for securing their blockchain network.
When we talk about a “puzzle” that miners have to solve, we are basically talking about PoW. It was designed to make it expensive to create a block, but cheap to verify that it's valid. Suppose someone tries to cheat with an invalid block. In that case, the network immediately rejects it and the miner is unable to recover the cost of mining.
Because PoW requires a lot of computational power, it consumes a large amount of electricity. This has led to debates regarding Bitcoin's environmental impact. However, in more recent years, the mining industry has shifted heavily toward using renewable energy sources and stranded energy that would otherwise go to waste.
What Is Bitcoin Used For?
Bitcoin is primarily used as a digital currency and store of value. It can be used to make purchases online or in person, similar to traditional currencies. More and more businesses are accepting Bitcoin as a payment method, from online retailers to brick-and-mortar stores.
While the main Bitcoin network (Layer 1) can sometimes be slow or expensive for small purchases, "Layer 2" solutions like the Lightning Network have been developed to address such limitations.
As an investment, many buy BTC hoping its value will continue to rise. While the price of bitcoin can be volatile, some investors see it as a way to diversify their portfolios and hedge against inflation in the long term.
Who Created Bitcoin?
Bitcoin was first seen in October 2008 when Satoshi Nakamoto published a whitepaper entitled "Bitcoin: A Peer-to-Peer Electronic Cash System". This paper introduced a new digital currency that would operate on a decentralized system without relying on governments or the banking system.
In January 2009, the Bitcoin protocol was officially launched with the mining of the "Genesis Block." The first bitcoin transaction took place between Satoshi Nakamoto and a programmer named Hal Finney. The transaction involved sending ten bitcoins from Nakamoto to Finney.
After the first transaction, more people began to discover Bitcoin and join the network. The digital currency gained popularity among a small community of tech enthusiasts by demonstrating that Bitcoin could function without a central authority or intermediary.
Bitcoin Pizza is another important milestone in the history of Bitcoin, as it marked the first time bitcoins were used as a medium of exchange for a real-world transaction. On May 22, 2010, a programmer named Laszlo Hanyecz made history by using 10,000 bitcoins to buy two pizzas. The transaction became known as "Bitcoin Pizza Day" and is now commemorated every year on May 22.
Who Is Satoshi Nakamoto?
Satoshi Nakamoto's identity remains a mystery. Satoshi could be a person or a group of developers anywhere in the world. The name is of Japanese origin, but Satoshi's mastery of English has led many to believe that he or she is from an English-speaking country. Despite many theories and investigations over the years, the true identity of the creator remains unconfirmed.
Did Satoshi invent blockchain technology?
Bitcoin combines a number of existing technologies that have been around for a long time, and this includes blockchain technology. The use of such immutable data structures can be traced back to the early 1990s when Stuart Haber and W. Scott Stornetta proposed a system for time-stamping documents.
Bitcoin also uses Merkle Trees, a concept developed by Ralph Merkle. Much like today's blockchains, these early systems relied on cryptographic techniques to secure data and prevent it from being tampered with. But Bitcoin was revolutionary in combining these technologies to solve the double-spending issue that plagued other digital payment systems at the time.
How Many Bitcoins Are There?
The protocol sets the maximum supply of bitcoins at 21 million coins. As of January 2026, just over 95% of these have been mined, but it will take over a hundred years to produce the rest. This is due to periodic events known as Bitcoin halving, which reduce the mining rewards roughly every four years.
What Is Bitcoin Halving?
Bitcoin halving refers to the periodic halving events that reduce the block rewards offered to miners. The next Bitcoin halving is expected to happen in 2028, roughly four years after the last halving, which took place on April 19, 2024.
Bitcoin halving is at the core of its economic model as it ensures that coins are issued at a steady pace, getting increasingly difficult at a predictable rate. Such a controlled rate of monetary inflation is one of the key differences between Bitcoin and traditional fiat currencies, which have an essentially infinite supply.
Is Bitcoin Safe?
One of the main risks associated with Bitcoin is the potential for hacking and theft. For example, in phishing scams, hackers use social engineering techniques to trick users into revealing their login credentials or private keys. Once the hacker has access to the user's account or crypto wallet, they can transfer the victim's bitcoins to their own wallet.
Another way hackers can steal bitcoins is through malware or ransomware attacks. Hackers can infect a user's computer or mobile device with malware that allows them to access the user's Bitcoin wallet. In some cases, hackers can also use ransomware to encrypt a user's files and demand payment in bitcoins to unlock them.
Because bitcoin transactions are irreversible and not insured by any government agency, users must take precautions to protect their bitcoin holdings. This includes using strong passwords, two-factor authentication, and using "cold storage" or hardware wallets (devices that keep keys offline) to ensure funds are inaccessible to online hackers. It's also important to only download Bitcoin-related software from trusted sources.
Another risk associated with bitcoin is price volatility. The value of bitcoin can fluctuate highly over short periods of time, making it a risky investment for those who are not prepared for the price fluctuations and potential losses. But historically, volatility has tended to decrease as the asset matures and market liquidity increases.
Closing Thoughts
Bitcoin has come a long way from its humble beginnings, growing into a globally recognized cryptocurrency with numerous use cases and increasing institutional adoption. Whether you’re considering using Bitcoin for everyday transactions, short-term trading, investing for the future, or simply interested in the technology, it’s certainly worth learning more about it.
Further Reading
What Is Blockchain and How Does It Work?
What Is Proof of Work (PoW)?
What Is Cryptocurrency Mining and How Does It Work?
Who Is Satoshi Nakamoto?
Disclaimer: This content is presented to you on an “as is” basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial, legal or other professional advice, nor is it intended to recommend the purchase of any specific product or service. You should seek your own advice from appropriate professional advisors. Products mentioned in this article may not be available in your region. Where the article is contributed by a third party contributor, please note that those views expressed belong to the third party contributor, and do not necessarily reflect those of Binance Academy. Please read our full disclaimer for further details. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance Academy is not liable for any losses you may incur. This material should not be construed as financial, legal or other professional advice. For more information, see our Terms of Use and Risk Warning.
Bitcoin is the very first cryptocurrency ever created. It was introduced via a whitepaper in 2008 and officially launched in January 2009. Bitcoin’s creator is only known by the pseudonym Satoshi Nakamoto.
Bitcoin runs on blockchain technology, which works like a public ledger. Instead of a bank checking transactions, a global network of computers does the work.
Bitcoin isn’t owned by any company or government. It’s decentralized, transparent, and open source, making it a popular alternative to traditional financial systems.
What Is Bitcoin?
Think of Bitcoin as cash for the internet. It was the first digital currency ever invented, introduced to the world in 2008 and launched a few months later in 2009. It lets you send money directly to someone else without needing a middleman.
It's worth noting that people usually write "Bitcoin" with a capital B when talking about the network or the technology, and "bitcoin" with a lowercase b when talking about the coins themselves. The ticker symbol you see on exchanges is BTC.
Unlike the dollars or euros in your wallet, which are printed and controlled by governments, Bitcoin is decentralized. This just means no single boss, bank, or government runs the Bitcoin network. It’s a peer-to-peer system.
Why do people like Bitcoin so much? You can own and control your money. You can use Bitcoin to send money anywhere, anytime, without relying on an intermediary. The system is also immune to double-spending attacks, so once you spend a coin, you can’t try to spend that same coin again somewhere else.
How Does Bitcoin Work?
Bitcoin relies on a technology called blockchain. You can think of a blockchain as a digital notebook that everyone can read but no one can erase.
Every time a transaction happens, it gets written onto a "block." That block is linked to the previous one, forming a chain. This record is copied onto thousands of computers around the world (called nodes).
Because so many computers have a copy of the notebook, nobody can cheat. If one person tries to change the numbers to give themselves more money, the other computers reject it. Also, anyone can participate in the ecosystem by downloading Bitcoin's open-source software.
Decentralization: Bitcoin's blockchain is maintained by a distributed network of computers, ensuring no central authority controls the ledger.
Immutability: Once a transaction is added to the blockchain, it cannot be altered or deleted.
Security: Transactions are secured using cryptography, and verifying each block requires a lot of resources and repetitive work (i.e., solving some puzzles in a process known as mining).
BTC transaction example
Technically, Bitcoin doesn't use bank accounts with balances. It uses a system called UTXO (Unspent Transaction Output), which is more like keeping track of individual digital coins in a wallet. But for simplicity, let’s look at it like a transfer.
Let’s say Alice wants to send 1 BTC to Bob.
The blockchain updates to show that Alice has 1 less BTC and Bob has 1 more. It’s like Alice writing on a public billboard, "I gave Bob 1 Bitcoin," so everyone knows the money moved.
When Bob wants to send that money to Carol later, the network checks the history to make sure he actually received it from Alice first. Everyone’s ledger stays in sync because the computers are constantly talking to each other.
Bitcoin mining
Mining is how the network stays secure. It’s also how new bitcoins are brought into the world. When you send a transaction, it gets broadcast to the network. Then, users known as miners pick up these transactions and group them into a block.
To add this block to the blockchain, they must solve a specific puzzle. The first miner to solve the puzzle gets to add the block and is rewarded with brand new bitcoins. This reward is the only way new bitcoins are created.
However, the supply is limited. There will never be more than 21 million bitcoins. Once all 21 million bitcoins are mined (estimated around the year 2140), miners will no longer receive block rewards and will be compensated solely by transaction fees paid by users.
Proof of Work (PoW) and energy consumption
To maintain the security and integrity of the blockchain, Bitcoin uses a consensus mechanism known as Proof of Work (PoW). It’s an essential part of the mining process described above.
PoW is a mechanism created along with Bitcoin to prevent double-spending in digital payment systems. Besides Bitcoin, many cryptocurrencies use PoW as a method for securing their blockchain network.
When we talk about a “puzzle” that miners have to solve, we are basically talking about PoW. It was designed to make it expensive to create a block, but cheap to verify that it's valid. Suppose someone tries to cheat with an invalid block. In that case, the network immediately rejects it and the miner is unable to recover the cost of mining.
Because PoW requires a lot of computational power, it consumes a large amount of electricity. This has led to debates regarding Bitcoin's environmental impact. However, in more recent years, the mining industry has shifted heavily toward using renewable energy sources and stranded energy that would otherwise go to waste.
What Is Bitcoin Used For?
Bitcoin is primarily used as a digital currency and store of value. It can be used to make purchases online or in person, similar to traditional currencies. More and more businesses are accepting Bitcoin as a payment method, from online retailers to brick-and-mortar stores.
While the main Bitcoin network (Layer 1) can sometimes be slow or expensive for small purchases, "Layer 2" solutions like the Lightning Network have been developed to address such limitations.
As an investment, many buy BTC hoping its value will continue to rise. While the price of bitcoin can be volatile, some investors see it as a way to diversify their portfolios and hedge against inflation in the long term.
Who Created Bitcoin?
Bitcoin was first seen in October 2008 when Satoshi Nakamoto published a whitepaper entitled "Bitcoin: A Peer-to-Peer Electronic Cash System". This paper introduced a new digital currency that would operate on a decentralized system without relying on governments or the banking system.
In January 2009, the Bitcoin protocol was officially launched with the mining of the "Genesis Block." The first bitcoin transaction took place between Satoshi Nakamoto and a programmer named Hal Finney. The transaction involved sending ten bitcoins from Nakamoto to Finney.
After the first transaction, more people began to discover Bitcoin and join the network. The digital currency gained popularity among a small community of tech enthusiasts by demonstrating that Bitcoin could function without a central authority or intermediary.
Bitcoin Pizza is another important milestone in the history of Bitcoin, as it marked the first time bitcoins were used as a medium of exchange for a real-world transaction. On May 22, 2010, a programmer named Laszlo Hanyecz made history by using 10,000 bitcoins to buy two pizzas. The transaction became known as "Bitcoin Pizza Day" and is now commemorated every year on May 22.
Who Is Satoshi Nakamoto?
Satoshi Nakamoto's identity remains a mystery. Satoshi could be a person or a group of developers anywhere in the world. The name is of Japanese origin, but Satoshi's mastery of English has led many to believe that he or she is from an English-speaking country. Despite many theories and investigations over the years, the true identity of the creator remains unconfirmed.
Did Satoshi invent blockchain technology?
Bitcoin combines a number of existing technologies that have been around for a long time, and this includes blockchain technology. The use of such immutable data structures can be traced back to the early 1990s when Stuart Haber and W. Scott Stornetta proposed a system for time-stamping documents.
Bitcoin also uses Merkle Trees, a concept developed by Ralph Merkle. Much like today's blockchains, these early systems relied on cryptographic techniques to secure data and prevent it from being tampered with. But Bitcoin was revolutionary in combining these technologies to solve the double-spending issue that plagued other digital payment systems at the time.
How Many Bitcoins Are There?
The protocol sets the maximum supply of bitcoins at 21 million coins. As of January 2026, just over 95% of these have been mined, but it will take over a hundred years to produce the rest. This is due to periodic events known as Bitcoin halving, which reduce the mining rewards roughly every four years.
What Is Bitcoin Halving?
Bitcoin halving refers to the periodic halving events that reduce the block rewards offered to miners. The next Bitcoin halving is expected to happen in 2028, roughly four years after the last halving, which took place on April 19, 2024.
Bitcoin halving is at the core of its economic model as it ensures that coins are issued at a steady pace, getting increasingly difficult at a predictable rate. Such a controlled rate of monetary inflation is one of the key differences between Bitcoin and traditional fiat currencies, which have an essentially infinite supply.
Is Bitcoin Safe?
One of the main risks associated with Bitcoin is the potential for hacking and theft. For example, in phishing scams, hackers use social engineering techniques to trick users into revealing their login credentials or private keys. Once the hacker has access to the user's account or crypto wallet, they can transfer the victim's bitcoins to their own wallet.
Another way hackers can steal bitcoins is through malware or ransomware attacks. Hackers can infect a user's computer or mobile device with malware that allows them to access the user's Bitcoin wallet. In some cases, hackers can also use ransomware to encrypt a user's files and demand payment in bitcoins to unlock them.
Because bitcoin transactions are irreversible and not insured by any government agency, users must take precautions to protect their bitcoin holdings. This includes using strong passwords, two-factor authentication, and using "cold storage" or hardware wallets (devices that keep keys offline) to ensure funds are inaccessible to online hackers. It's also important to only download Bitcoin-related software from trusted sources.
Another risk associated with bitcoin is price volatility. The value of bitcoin can fluctuate highly over short periods of time, making it a risky investment for those who are not prepared for the price fluctuations and potential losses. But historically, volatility has tended to decrease as the asset matures and market liquidity increases.
Closing Thoughts
Bitcoin has come a long way from its humble beginnings, growing into a globally recognized cryptocurrency with numerous use cases and increasing institutional adoption. Whether you’re considering using Bitcoin for everyday transactions, short-term trading, investing for the future, or simply interested in the technology, it’s certainly worth learning more about it.
Further Reading
What Is Blockchain and How Does It Work?
What Is Proof of Work (PoW)?
What Is Cryptocurrency Mining and How Does It Work?
Who Is Satoshi Nakamoto?
Disclaimer: This content is presented to you on an “as is” basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial, legal or other professional advice, nor is it intended to recommend the purchase of any specific product or service. You should seek your own advice from appropriate professional advisors. Products mentioned in this article may not be available in your region. Where the article is contributed by a third party contributor, please note that those views expressed belong to the third party contributor, and do not necessarily reflect those of Binance Academy. Please read our full disclaimer for further details. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance Academy is not liable for any losses you may incur. This material should not be construed as financial, legal or other professional advice. For more information, see our Terms of Use and Risk Warning.
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