What Is Bitcoin? How It Works and Getting Started

Bitcoin is the first established and most well-known digital currency, built on peer-to-peer, decentralized blockchain technology. Its beginnings were modest —- early adoption was slow, its value was low, and its use-cases were unclear. But over the past decade and a half, Bitcoin has evolved into a fixture of the financial and tech worlds, influencing everything from digital payments to blockchain innovation.

Bitcoin can be used for trading, making purchases, and facilitating international fund transfers. But before using Bitcoin, it’s worth understanding exactly what it is, how it works, and what risks are involved.

What Is Bitcoin in Simple Terms?

In simple terms, Bitcoin is a type of digital asset that operates independently of any central bank or government. It’s the most recognized type of cryptocurrency and allows people to send and receive payments directly with one another over the internet.

It’s Decentralized Digital Money

Unlike the U.S. dollar, which is created, controlled, and distributed by the Federal Reserve, Bitcoin has no central issuer. Instead, it enables peer-to-peer transactions, meaning users can send or receive Bitcoin directly without needing central intermediaries (like a commercial or central bank) for clearing and settlement.

Bitcoin has no physical form. It also has no intrinsic value — it’s simply worth what people are willing to pay for it in the market. This is in contrast to fiat (government-backed) currencies, which get part of their value from being legislated as legal tender.

It Has a Scarce Supply Capped at 21 Million Coins

Only 21 million Bitcoins will ever exist. More than 19 million have already been mined, and the last Bitcoin will not be mined until around the year 2140 due to gradual reductions in the rate at which new bitcoins are created (called “halving” events).^[1]

Modeled after precious metals like gold, this built-in scarcity contrasts sharply with fiat currencies, which central banks can print without an upper limit.

It Was Created by the Mysterious Satoshi Nakamoto

Bitcoin was introduced in a 2008 whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System.^[2] The author — Satoshi Nakamoto — has never been identified. Their disappearance has added mystery to Bitcoin’s origins, though the project continues to operate without a central figure.

How Does Bitcoin Actually Work?

Bitcoin depends on blockchain to store, verify, and secure data. Understanding how blockchain and mining work is essential to understanding Bitcoin itself.

Bitcoin Runs on a Technology Called Blockchain

Blockchain was originally developed as the underlying technology for Bitcoin, enabling peer-to-peer transactions without needing a central intermediary like a central bank. A blockchain is a digital ledger that securely records all transactions. This ledger is copied across a vast network of computers called “nodes,” which collectively verify each Bitcoin transaction.

Transactions are grouped into “blocks,” which are then cryptographically linked — or “chained” — in chronological order. The blockchain system itself is considered highly secure because all participating nodes must agree on the contents of the ledger. If one user were to alter the data on the blockchain, that alteration would be immediately rejected by the network because it would be inconsistent with the copies held by the majority of other participants.

This consensus mechanism helps ensure data integrity and supports a core principle of blockchain technology known as immutability.

Bitcoin and other cryptocurrencies aren’t free from security risks, however. Crypto users are frequently the targets of scams, phishing schemes, or attempts to access private keys and personal funds. It’s crucial to be vigilant when interacting with cryptocurrencies in any way.

How New Bitcoins Are Mined and Transactions Are Verified

Bitcoin uses a proof-of-work (PoW) system to validate transactions and secure its blockchain. Here’s how it works:

That reward is the incentive for mining, and for participants to verify the data on the blockchain. Other types of cryptocurrency use a staking system (which requires participants to lock up some of their crypto holdings), rather than mining, to validate transactions and secure their blockchain.

The Role of Bitcoin Wallets and Private Keys

To own Bitcoin, you need a crypto wallet. A wallet is either a software program or a physical device that stores the private keys that grant you access to your cryptocurrency on the blockchain. Your private key proves ownership of your crypto and is required to authorize (or sign) transactions. It’s also used to generate your public key and subsequently your public wallet address (a shortened version of your public key). This address functions like an email address for crypto, allowing others to send you funds securely.

Crypto wallets come in two main types: software-based “hot” wallets (online and convenient) and physical hardware “cold” wallets (offline and therefore less vulnerable to hackers).

What Are the Main Uses for Bitcoin?

Here’s a look at some of the most common ways Bitcoin is used:

For Buying, Holding, and Selling

Many people buy and hold Bitcoin, while others actively buy and sell Bitcoin to try to benefit from rapid price changes.

However, Bitcoin’s value is extremely volatile, and its price can rise or fall dramatically in short periods. Predicting the price movements of Bitcoin is impossible. As a result, you only want to buy Bitcoin with money you can afford to lose.

For Sending Money Anywhere in the World

You can also use Bitcoin to send money to someone located in another part of the world as long as they have a crypto wallet and internet access. One way to make an international transfer using Bitcoin is to simply buy Bitcoin and then send it to the recipient’s wallet address. The recipient receives the Bitcoin and can either hold it or convert it to local currency via an exchange.

Bitcoin transfers may be faster and cheaper than traditional bank transfers, especially for international payments, because they can bypass intermediaries. They can also be more accessible in regions with limited banking infrastructure, as they only require an internet connection.

However, using Bitcoin in this way comes with downsides, primarily its price fluctuations. Bitcoin’s value is highly volatile, meaning the amount of local currency received by the recipient may be significantly different from what was sent due to price swings before the transaction is completed.

Relatedly, there are also alternative blockchain-powered services for sending money internationally. As with using Bitcoin itself to send money, crypto-based global remittance services can allow for rapid international money transfers. However, it’s important to consider how any service manages payments, exchange rates, and fees.

For Making Purchases (Less Common but Possible)

Some retailers, both online and in-store, accept Bitcoin as a payment method. Paying directly with Bitcoin typically involves opening your digital wallet, scanning a QR code or inputting the recipient’s wallet address, then sending the payment.

However, it’s more common for companies to accept Bitcoin indirectly through third-party payment processors or crypto debit cards. These services typically convert the cryptocurrency into fiat currency (like U.S. Dollars) immediately, which can help protect the merchant from Bitcoin’s price volatility.

A Look at Bitcoin’s Price History and Volatility

Since coming onto the scene in 2009, Bitcoin has experienced massive rallies along with spectacular crashes. The price of Bitcoin is influenced by multiple factors, including supply (scarcity), market demand, competition from other cryptocurrencies, media and news, and regulatory changes.

While Bitcoin price has increased significantly over its history, reaching record highs in 2025, it has also experienced significant fluctuations. For example, on Oct. 6, 2025, Bitcoin hit an all-time high of approximately $126,270. However, the excitement surrounding that milestone was short-lived because on November 18, 2025, Bitcoin significantly dipped to below $92,000.

Recommended: How Will the Genius Act Impact Stablecoin and Bitcoin?

The Potential Upsides of Bitcoin

Some of the advantages of owning Bitcoin include:

Recommended: The Pros and Cons of Cryptocurrency

The Key Risks of Bitcoin

Bitcoin also comes with meaningful risks:

How to Get Your First Bitcoin

Buying Bitcoin is relatively simple. Here’s how:

Step 1: Buy Bitcoin

A common way to buy Bitcoin is through a cryptocurrency exchange, and financial institutions are additionally becoming an option as a result of the 2025 GENIUS Act. To get started, you simply create an account, verify your identity (required by banks and most crypto exchanges), and connect a funding method. Next, you’ll need to find Bitcoin (ticker: BTC) on the platform and purchase the desired amount. You can buy a fraction of a Bitcoin.

Step 2: Securing Your Bitcoin in a Wallet

Exchanges often offer built-in wallets, but many users prefer to transfer Bitcoin to a separate wallet they can fully control. There are two main types of wallets:

•  Cold (hardware) wallet: This is a physical device (often resembling a USB drive) that stores your cryptocurrency’s private keys offline, which may help safeguard your information from hackers.

•  Hot (software) wallet: Hot wallets include mobile wallets (apps you download and use on your phone) and desktop wallets (programs that you install on a computer). Because they are connected to the internet, these wallets may be more vulnerable to cyber threats.

Step 3: Using Your Bitcoin

Once you own Bitcoin, here are some things you can do with it:

•  Hold it in your account

•  Send it others

•  Convert it to other cryptocurrencies

•  Spend it with merchants that accept it

The Takeaway

Bitcoin is the first established cryptocurrency and its blockchain design is the foundation of the entire crypto ecosystem. Its decentralized design, limited supply, and global accessibility have made it both a technological milestone and a popular financial tool.

While Bitcoin offers potential benefits — including accessibility and fast, low-cost transactions — it also carries significant risks, especially price volatility and regulatory uncertainty. Understanding these trade-offs is essential before buying and using Bitcoin.

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FAQ

What is the purpose of Bitcoin’s limited supply?

Bitcoin’s supply is limited to 21 million coins by its underlying protocol. This scarcity is a key feature of its design, intended to mimic the characteristics of precious metals like gold (why it’s often referred to as “digital gold”). The limited supply is meant to be deflationary over time, contrasting with fiat currencies whose supply can be increased by central banks, which may lead to inflation and a decrease in purchasing power.

How is Bitcoin price determined?

The price of Bitcoin is determined by the forces of supply and demand in the open market (primarily cryptocurrency exchanges). Its value is influenced by several factors: the capped supply of 21 million coins, which creates scarcity; market sentiment, which can be driven by media coverage and major news events; regulatory developments; and its adoption rate as a means of exchange or a store of value. Unlike fiat currency, there is no central authority setting or stabilizing its price.

Can Bitcoin transactions be reversed?

No. One of the fundamental characteristics of the Bitcoin blockchain is the finality of transactions, meaning once a transaction is verified and added to the blockchain, it cannot be reversed, canceled, or undone by anyone — including miners, network nodes, or the sender.

This immutability is a core feature of a decentralized ledger. However, it also means that if you make a mistake (like sending Bitcoin to the wrong address), the funds may be permanently lost.

Is it possible to lose access to your Bitcoin?

Yes. It’s possible to lose access to your Bitcoin if you lose your private key and seed (recovery) phrase. You need your private key to access your holdings and authorize transactions; you need your seed phrase to recover your private keys in the event that you lose them.

You may also lose your access to your Bitcoin if you keep your holdings on an exchange and that exchange fails or gets hacked. Some exchanges carry private insurance policies against hacking, but these policies typically come with significant limitations. It’s also important to know that cryptocurrencies are not covered by the FDIC or SIPC, whether they’re at an exchange or a financial institution.

How does Bitcoin differ from other cryptocurrencies?

Bitcoin is the first and most widely recognized cryptocurrency. It is also distinguished by its use of the proof-of-work (PoW) consensus mechanism for transaction validation and its strictly limited supply of 21 million coins. In contrast, many other cryptocurrencies employ different mechanisms, like proof-of-stake (PoS), and may have different supply limits and technological focuses, such as enabling smart contracts.

Bitcoin’s primary aim is often seen as a digital store of value and a medium for peer-to-peer electronic cash, while other cryptos often focus on specialized functions within the broader decentralized finance (DeFi) ecosystem.

Is Bitcoin legal everywhere?

In many countries — including the United States, Canada, and most of Europe — Bitcoin is legal to own, buy, and sell, though it is often subject to specific regulations regarding taxation and financial oversight. However, there are a number of nations that completely ban transactions through cryptocurrencies. These include China, Pakistan, Morocco, Algeria, and Egypt, among others.

How can I keep my Bitcoin safe?

The safest way to store Bitcoin may depend on how and how often you plan to access it. Storing your private keys in a hardware wallet may offer protection from online threats like hacking and malware. Other considerations include: storing your seed phrase in a fireproof safe or bank safety deposit box; enabling two-factor authentication (2FA) for exchange accounts and online wallets; and verifying the authenticity of all websites and communications before entering your login credentials or sending funds.

Why does Bitcoin use so much energy?

Bitcoin’s proof-of-work (PoW) security model, which is how transactions are validated and new blocks are added to the blockchain, requires specialized computing hardware and significant electrical power. The miners on the network compete to solve complex mathematical problems to validate transaction blocks, which drives high energy consumption.

About the author

Samuel Becker

Sam Becker is a freelance writer and journalist based near New York City. He is a native of the Pacific Northwest, and a graduate of Washington State University, and his work has appeared in and on Fortune, CNBC, Time, and more. Read full bio.

Photo credit: iStock/Aleksandra Zhilenkova

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