What is cryptocurrency Bitcoin (BTC) and how does it work?

What is Bitcoin (BTC)?

On October 31, 2008, a person or group under the pseudonym Satoshi Nakamoto published a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. The whitepaper was distributed to a cryptography mailing list, just a month after investment bank Lehman Brothers filed for the largest bankruptcy in U.S. history and the government authorized a $700 billion bailout for the industry.

A few months later, on January 3, 2009, the Bitcoin network went live, introducing a new system of decentralized digital currency with no central authority (like a bank or other intermediary). Bitcoin can be transferred quickly and securely to anyone with a Bitcoin address (like an account) anywhere in the world, without needing permission or paying unnecessary fees. In a nod to the economic environment at the time, the first transaction included a note referencing a prominent newspaper headline: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

BTC is the unit of currency in the Bitcoin system for which there is a finite supply of 21 million. Each Bitcoin is divisible into 100 million satoshis or sats – the smallest unit of a Bitcoin, like cents are to the dollar. Just as physical cash allows you to pay for and settle a transaction instantly, Bitcoins operate as electronic cash, making this process borderless on a global scale with a universal currency.

How does Bitcoin work?

Similar to cash, Bitcoin is held in wallets, albeit a digital version. A Bitcoin wallet operates like a bank account, storing funds and providing the ability to transact with other accounts (called addresses) in the peer-to-peer-network. These addresses allow funds to be sent from one wallet to another, similar to how emails are sent from one address to another but secured using a system of public and private key cryptography.

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The hash of the public key produces the alphanumeric character address you give out to receive Bitcoin. The private key is a type of password that allows you to authorize transactions by digitally signing them, just as you may have signed for card transactions in the past, protecting unauthorized access to funds. You NEVER share your private key – it allows access to all funds in your wallet address. Take practical steps to ensure your private key is never compromised and, contrary to the traditional banking system, the Bitcoin system is so secure that it would take billions of years to crack a single address.

Users can open their Bitcoin wallet, enter a recipient’s public address, and then the wallet uses the private key digital signature to authorize the transaction and it is broadcast to the network for processing. Initially, the transactions are verified and held in a pending status in what’s called the mempool, waiting to be confirmed. Then, approximately every ten minutes, they are confirmed in a block of transactions, and together the blocks form the Bitcoin blockchain.

Bitcoin Blockchain

Bitcoin’s big breakthrough was in solving the double-spend problem, allowing Bitcoin to be sent directly from one user to another, without any third party.

Imagine a group of strangers, each with a ledger or notebook of Bitcoin address balances and transactions. One of the strangers transfers 1 BTC to a Bitcoin address of another. The rest of the group records that transaction too. They then compare their ledgers to ensure they match.

If all the ledgers match, the transaction is validated. If one of the strangers’ ledgers is different, however, they may be trying to deceive the group and spend money they don’t have, or re-spend the same money – known as “the double-spend problem.” In Bitcoin, this problem is solved as the other strangers in the group ignore the ledger that does not match, rejecting the transaction and moving on to the next.

Now, imagine this system of ledgers on a worldwide distributed network, and that is how Bitcoin technology works. Each computer node on the network has an identical copy of the Bitcoin ledger which publicly records all transactions pseudonymously, constantly comparing ledgers to ensure they match and retaining a permanent record of past transactions to prove which addresses own what amount of Bitcoin. With the Bitcoin blockchain, strangers can transact worldwide, trustlessly, and without the need for a costly third party.

Who are the founders of Bitcoin?

Bitcoin delivered the world’s first successful cryptocurrency but it didn’t just happen overnight. It was the culmination of decades of advancement in cryptography and cypherpunk history going back to the 1970s, including formative projects like B-money, Bit Gold, eCash, and HashCash.

Then, in 2006, the person or group known as Satoshi Nakamoto, still pseudonymous to this day, began writing the code for this new digital cash system, culminating in the whitepaper release in 2008 and network launch in 2009. Several renowned cryptographers such as Hal Finney, Nick Szabo, Wei Dai, and Adam Back have been cited as potential Satoshi candidates, all of whom have denied this.

Satoshi continued to collaborate with other developers on Bitcoin until mid-2010, before handing over control of the source code repository. Satoshi also authored archives of emails and forum posts on the future of Bitcoin before leaving the project completely in 2011. Hundreds of developers now contribute to Bitcoin among a community of millions of users.

What makes Bitcoin unique?

Bitcoin is a zero to one innovation, making peer-to-peer digital money truly possible for the first time in what is a major technological advance that was more than a ten times improvement on what came before. Further innovation is always possible with Bitcoin, and occasionally results in a “fork” of the bitcoin code, allowing an entirely new cryptocurrency to be born that is based on Bitcoin but can never truly be Bitcoin.

With no centralized figurehead or organization, Bitcoin has no single point of failure, delivering a system that is truly decentralized with software that allows anyone to have control over their own money and trustlessly verify the authenticity and scarcity of the bitcoins they receive.

Bitcoin is antifragile, with the Lindy Effect of its longevity demonstrating an ability to survive, even in a hostile environment of contentious hard forks and government bans. Combined with the trust and familiarity that comes with the brand, Bitcoin’s network effect drives more people to consider it a store of value, incentivizing more participants in return, and so on, increasing utility from an expanding user base.

What gives Bitcoin value?

In addition to its decentralization and network effects, bitcoin presents several other characteristics that add to its value.

Its finite supply of 21 million BTC provides a level of scarcity that is greater than traditional commodities, in stark contrast to the inflationary fiat currencies we are used to that can be printed at will by a central authority, debasing their value. The supply is also fungible, with each unit being uniformly valuable and interchangeable, as opposed to the coin clipping or dilution of quality in metal coins of the past.

Like gold, bitcoin is durable enough to be used over time. Unlike gold, bitcoin is divisible into 100 million pieces per BTC, with a portability property that makes it efficiently transferable over space and time.

Finally, bitcoin enjoys the increasing acceptability that it has worth, allowing it to operate as a store of value and medium of exchange accepted at thousands of businesses worldwide. A value that is only compounded with further adoption.

How many Bitcoin (BTC) coins are in circulation?

The total supply of Bitcoin is limited by its software to a maximum of 21 million BTC. Bitcoin was not pre-mined, so no bitcoins were minted or distributed before it became available to the public.

New bitcoins are released slowly to the network through a process called mining, where special mining nodes on the Bitcoin network are rewarded for providing the computational power to process pending transactions into blocks that are successfully added to the blockchain.

At Bitcoin’s launch, that miner reward was 50 bitcoins per block, a number that is reduced over time, so it will take until around the year 2140 for all 21 million BTC to be mined. As the reward diminishes over time, distribution is front-loaded, meaning that the current circulating supply is approximately 18.6 million bitcoins.

Bitcoin halving

The Bitcoin halving, or halvening, is the process by which the miner block rewards are reduced over time. Every 210,000 blocks that are mined, or approximately every four years, the reward is cut in half, meaning that the new daily supply of bitcoins added to the network each day is reduced by half. The last Bitcoin halving event, and third in Bitcoin’s history, was on May 11, 2020, with the block reward reduced from 12.5 bitcoins per block to 6.25. The next halvening is currently on a course for March 2024. Again, this fixed monetary policy and predictable inflation schedule are in stark contrast to those of central banks around the world and their history of intervention.

Once the 32nd halving is complete, projected for 2140, the reward will go from 0.00000001 BTC to zero. There will then be no more new bitcoins created, and the total supply of 21 million BTC will have been reached. At that point, Bitcoin miners will be reliant upon network transaction fees alone to compensate for their computational power.

As the amount of new BTC mined shrinks after a Bitcoin halving event, historically there is an increase in price (not surprising given the mechanics of supply and demand). While there are many supply dynamics in the market, and the effect of future halvenings may be dampened as the reduction in new BTC supply is smaller, it seems to have been a driver of the three main bitcoin market cycles so far.

Other technical data

Full nodes on the Bitcoin network run the Bitcoin Core software, enforcing the rules and deciding on future upgrades. These computer nodes keep a permanent copy of past transactions and address balances, fully validate all Bitcoin transactions and blocks, and relay that data to other full nodes so that pending transactions are spread around the network quickly.

Anyone can run a full node using relatively basic computer equipment and downloading the free Bitcoin Core software. Nodes should run 24/7, so for security purposes and to avoid taking up required processing power and memory on your main computer, they are preferably built using dedicated hardware like a Raspberry Pi controlling high-end graphics cards, or by using a cloud computing service. The global spread of these nodes enables the truly decentralized nature of the network, with every participant holding and distributing the same copy of the transaction record and rejecting malicious behavior across a network that is at least 10,000 nodes strong.

Light nodes further help to decentralize the network, connecting to full nodes. Though they only contain the latest portion of the Bitcoin blockchain, rather than keeping an entire copy. In reality, many users will choose to rely on nodes managed by other parties such as exchanges and wallet providers, though the number of independent nodes is increasing over time.

How is the Bitcoin network secured?

The Bitcoin network is secured through mining – the process of spending computational power to secure transactions against conflict and introduce new Bitcoins to the system. Bitcoin mining uses a Proof-of-Work consensus mechanism based on the SHA-256 hashing algorithm.

Miners use specialized mining nodes. They are incentivized to provide the computational power required to secure the network in block rewards and transaction fees, producing blocks of validated transactions and adding them to the Bitcoin blockchain.

Miners use their computational power in competing to produce blocks by solving complex calculations, the difficulty of which is variable and automatically set by the Bitcoin software. This is known as the difficulty adjustment with the complexity of the calculations increased or decreased every 2016 blocks (approximately two weeks), depending on the overall computational power deployed on the network at that time.

Once the latest calculation is solved by a miner, it’s like winning the network lottery to produce the next block. They publish the result as proof and include the recent valid pending transactions they have added to a new block for the Bitcoin blockchain. This is broadcast to nodes across the network to verify that both the solution – the proof of work – and the transactions included in the block are valid. While difficult to solve, the solution itself is then easy for any node to prove valid.

When a block is solved, the transactions included show as having one confirmation on the network, visible on wallet software, and block explorers. Each block that follows it adds a further confirmation. After six confirmations, transactions are understood to be irreversibly confirmed. In case of conflict, nodes on the Bitcoin network consider the longest chain with the greatest proof of work effort to be the true and valid one.

How to use Bitcoin

Bitcoin offers different use cases for different individuals. It enables an alternative, decentralized payment method outside of the interference of central authorities and intermediaries, providing control over your own money.

BTC can be used for speculation and investment, delivering rare asymmetric risk that has seen it outperform every other asset class over the last ten years. Bitcoin can also provide a long-term store of value to protect savings from the debasement of fiat currencies and loss of purchasing power.

Bitcoin can offer an alternative to expensive and slow international transfers or exorbitant foreign exchange fees. It can also provide an alternative financial system for the hundreds of millions of people that have access to smartphones but not to a bank account.

It introduces a new industry and opportunity for income generation or supplementation in Bitcoin mining, and it allows merchants to take direct electronic payments from their customers, removing the threat of charge-backs and avoiding payment provider fees – anywhere in the world.

How to choose a Bitcoin wallet

The type of Bitcoin wallet you choose will likely depend on what you want to use it for and how much you need to store.

Hardware wallets (aka cold wallets), like Ledger and Trezor, provide the most secure option with offline storage and backup. Hardware wallets can involve a bit more of a learning curve and are a more expensive option, however. As such, they may be better suited to storing larger amounts of bitcoin for more experienced users.

While convenient, software wallets are seen as less secure than hardware wallets and may be better suited to small amounts of Bitcoin or more novice users.

Online/web wallets and exchanges are another free and easy to use option, while having the added accessibility of being usable on any device with a web browser. They are considered hot wallets and can be less secure than hardware or software alternatives, however. As you are trusting the platform to manage your Bitcoin, you should select a reputable service with an established track record in security and custody. As such, they are most suited for holding small amounts or for more experienced frequent traders.

Paper wallets were also once popular as they are completely offline. They are hard to use, easy to damage or destroy, and not recommended other than for advanced users in niche situations.

Bitcoin mining

Bitcoin mining is analogous to gold mining in that more Bitcoins exist in the protocol but haven’t been released to the market yet. Unfortunately, the time when Bitcoins could be mined on a personal computer is long gone, with miners now requiring specific computer units called ASICs (application-specific integrated circuits) and mining software to provide the level of computational power required to remain competitive and profitable.

Unless exceptionally large, miners will also combine their hash rate (processing performance) in mining pools like Slush Pool to increase the likelihood of solving a block, sharing the rewards between participants in proportion to the computational power they provide.

As a result, Bitcoin mining has become difficult (though not impossible) for individual miners outside of an industrial setting, due to the energy resources, space, ventilation, and capital required to run large mining businesses. Some mining companies offer access to their operations, providing a mining investment opportunity in return for a share in the profits. Given the cyclical nature of Bitcoin cycles, these are only really suitable for the long-term investor.

Bitcoin ATMs

Bitcoin ATMs provide a convenient and familiar fiat kiosk for users to buy and sell Bitcoin using cash or debit cards, and an additional service offering for merchants hosting them at their locations. Some machines are unidirectional and only offer purchases. Others operate bi-directionally, enabling the selling of Bitcoin too.

Depending on the ATM provider, customers can use existing wallets or set one up using the ATM. Whether you are buying or selling Bitcoin, be sure to get a receipt from the machine in case of any issues.

While they can be an expensive option in terms of fees compared to online counterparts, with approximately 14,000 ATMs worldwide and counting, competition and continued adoption should bring fees down over time. They also provide an essential service for those who do not have regular access to a personal computer or mobile device.

The bottom line

Bitcoin is ushering in a monetary and technological revolution, allowing anyone to take control over their own money, opting-out of potentially rigged systems of central authorities and expensive intermediaries.

Since pioneering blockchain technology, there have been many other cryptocurrency projects rising to fill various needs. Some are born directly from modifying the Bitcoin Core codebase, such as Bitcoin Cash (BCH). Others are built from the ground up to use the concept of blockchain in new ways, like Ethereum (ETH). Whether directly or indirectly, all projects owe it to Bitcoin for starting this cryptocurrency revolution.

Bitcoin is decentralizing money, just as the internet decentralized information before it. The technology powering it all allows transactions to be sent securely peer-to-peer, anywhere in the world – near instantly.

Bitcoin represents the best performing asset class of the last decade, offering asymmetric risk that has allowed participants to escape the debasement of fiat currencies and protect their savings with a deflationary asset. Bitcoin is scarce, fungible, durable, divisible, and portable, with increasing acceptance. It presents speculative, investment, and business use cases as part of its growing network effects and can be as easy to use as any smartphone app.

Bitcoin FAQ

How to buy Bitcoin

There are three main methods you can use to buy Bitcoin:

Bitcoin exchanges, like Kriptomat, provide a platform where you can register and create an account, add your payment method, and buy Bitcoin.

Bitcoin ATMs offer another option where you simply select an ATM at a convenient location, add your wallet information or set one up, verify your identity, and buy bitcoin.

Alternatively, you can take advantage of local bitcoin sellers or online peer-to-peer services to exchange cash or bank transfers for bitcoin.

How to sell Bitcoin

Just as there are three main methods to buy bitcoin, the same options are available to sell Bitcoin instead: using an online exchange platform like Kriptomat, bitcoin ATMs, or via local bitcoin buyers or online peer-to-peer services.

Bitcoin price

Several different factors influence the Bitcoin price including the level of supply pressure from bitcoin miners, exchange inflows and outflows, retail and institutional sentiment, technical and fundamental developments, the news cycle, and the general economic environment.

Ultimately, the bitcoin price is decided at any given moment by the cumulative buying and selling of millions of participants worldwide. You can keep up to date on the latest price action using bitcoin exchanges like Kriptomat or one of the many different cryptocurrency tracking services.

The current Bitcoin price is EUR.

The 24-hour trading volume of BTC is EUR. BTC is currently ranked of all cryptocurrencies by total market capitalization, with a market cap of EUR. It has a circulating supply of BTC.

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