What is Bitcoin?

Bitcoin was the first cryptocurrency and remains the leading investment in the market, hitting new highs in 2025. Learn about Bitcoin in our beginner's guide.

What is Bitcoin?

Bitcoin is a decentralized digital currency that enables peer-to-peer transactions without the need for intermediaries like banks or payment processors. It functions on a distributed ledger called the blockchain, which records all transactions in a transparent and tamper-resistant way.

Unlike fiat currencies, which can be printed at will by central banks, Bitcoin has a fixed supply cap of 21 million coins, enforced by the network’s protocol. This scarcity, combined with its decentralized design, is one reason Bitcoin is often described as “digital gold.”

How Bitcoin started

Bitcoin emerged in January 2009 with the release of the Bitcoin software and the mining of the first block, known as the Genesis Block (Block 0). Embedded in that block’s data was a reference to a headline from The Times newspaper: “Chancellor on brink of second bailout for banks”. This was widely interpreted as commentary on the instability of the traditional financial system and a statement of purpose for Bitcoin as an alternative.

Initially, Bitcoin circulated among cryptography enthusiasts on online forums. For over a year, it had virtually no market value. The first known commercial transaction occurred in 2010 when Laszlo Hanyecz traded 10,000 BTC for two pizzas. As exchanges began to form, Bitcoin gained liquidity and price discovery, setting the stage for broader adoption.

Read next: Why Does Bitcoin Have Value?

Bitcoin’s evolution and history

• 2008 – The Bitcoin whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” is published by Satoshi Nakamoto.

• 2009 – The Bitcoin network launches with the mining of the Genesis Block on January 3rd. The first Bitcoin transaction occurs between Satoshi Nakamoto and Hal Finney.

• 2010 – The first commercial use of Bitcoin takes place when 10,000 BTC are exchanged for two pizzas. Later this year, the first Bitcoin exchanges (like Mt. Gox) emerge.

• 2011 – Bitcoin reaches price parity with the U.S. dollar (1 BTC = $1). Rival cryptocurrencies such as Litecoin begin to appear, inspired by Bitcoin’s design.

• 2012 – The first halving event occurs, reducing block rewards from 50 BTC to 25 BTC. The Bitcoin Foundation is founded to promote adoption and development.

• 2013 – Bitcoin’s price surpasses $1,000 for the first time, attracting major media attention.

• 2014 – The Mt. Gox exchange collapses after a massive hack, shaking trust in Bitcoin infrastructure. Despite this, merchant adoption grows, with companies like Overstock.com accepting Bitcoin.

• 2016 – The second halving reduces block rewards to 12.5 BTC. Scaling debates intensify within the community.

• 2017 – Bitcoin undergoes its first major network split, resulting in the creation of Bitcoin Cash. Later that year, Bitcoin’s price surges to nearly $20,000.

• 2020 – The third halving reduces rewards to 6.25 BTC. Institutional interest grows, with companies like MicroStrategy and Tesla purchasing Bitcoin as a treasury asset.

• 2021 – Bitcoin reaches an all-time high above $68,000. El Salvador becomes the first country to adopt Bitcoin as legal tender.

• 2022 – A major bear market follows, with Bitcoin falling below $20,000 amid broader crypto market turmoil and exchange collapses.

• 2024 – The fourth halving reduces block rewards to 3.125 BTC, reinforcing Bitcoin’s scarcity narrative.

• 2025 – Bitcoin surpasses previous highs, consolidating its position as the leading cryptocurrency and most recognized digital asset globally.

Who created Bitcoin?

Bitcoin was created by an individual or group using the pseudonym Satoshi Nakamoto. In 2008, Nakamoto published the whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System”, which outlined the technical framework of the network.

Satoshi’s key innovations included combining existing technologies like public-key cryptography, hash functions, and proof-of-work consensus into a working decentralized payment system. After launching the software in 2009 and communicating with developers for about two years, Nakamoto disappeared in 2011, leaving the project in the hands of the open-source community.

Read next: Who Founded Bitcoin?

How Bitcoin works

Bitcoin works by maintaining a distributed consensus across thousands of nodes worldwide. Every time a transaction is made, it is broadcast to the network, where miners and full nodes validate it.

Transactions are grouped into blocks, which are cryptographically linked in a chronological chain. The consensus mechanism, proof of work (PoW), ensures that only valid blocks are added and prevents double-spending.

Key technical components include:

• UTXO (Unspent Transaction Output) model: Instead of tracking account balances, Bitcoin tracks spendable outputs from prior transactions; new transactions consume specific UTXOs as inputs and create new outputs (UTXOs). This enables parallelism, simpler validation, and coin-control.

• Digital signatures: Each input authorizes spending with elliptic-curve cryptography (secp256k1). Bitcoin historically used ECDSA; Taproot (2021) adds Schnorr signatures (BIP340), enabling key/path spending and signature aggregation benefits.

• Decentralized verification: Full nodes independently verify transaction syntax, scripts, signatures, and consensus rules; miners propose blocks, but nodes ultimately accept or reject them by the rules they enforce.

Bitcoin’s blockchain technology

Bitcoin’s blockchain may sound intimidating at first, but it can be understood step by step:

1. Keys, addresses, and wallets: A wallet creates a private key and a corresponding public key. From the public key, you can generate an address (like an account number). Formats include older addresses that start with “1,” SegWit addresses that start with “bc1q,” and Taproot addresses that start with “bc1p.” Whoever controls the private key can authorize the spending of funds tied to that address.

2. UTXOs and transaction construction: Bitcoin doesn’t track balances like a bank. Instead, it uses “unspent transaction outputs” (UTXOs). A new transaction picks inputs (UTXOs you own) and creates outputs (new UTXOs for the recipient and usually some “change” back to you). The fee is the difference between inputs and outputs.

3. Scripts and signatures: Every Bitcoin output has a rule (script) defining how it can be spent, usually requiring a valid digital signature. When spending, you provide the unlocking data, your signature, and public key, to prove you own it. Bitcoin’s scripting language is limited on purpose but supports features like multi-signature wallets and time-locked transactions. Upgrades such as SegWit and Taproot improved efficiency, privacy, and flexibility.

4. Broadcast and mempool: When you create a transaction, your wallet broadcasts it to the network. Each node checks it for validity. If valid, it sits in the “mempool” (a waiting area) until a miner includes it in a block. Miners prioritize transactions that pay higher fees.

5. Block structure: A block is a package of transactions plus a block header. The header contains technical details such as the hash of the previous block, a summary hash of all transactions (the Merkle root), a timestamp, and a number miners adjust called the nonce. The first transaction in every block is the “coinbase,” which issues the block reward to the miner.

6. Merkle trees and light clients: Transactions in a block are organized into a Merkle tree, which compresses all the data into a single hash. This allows simplified clients (SPV wallets) to verify transactions without downloading the entire blockchain, using just a proof and the block headers.

7. Proof of Work (mining): Miners compete to find a block hash that is below the current difficulty target by repeatedly hashing the block header. This requires enormous computational effort, making it costly to attack the network. Once a valid block is found, it is broadcast and independently verified by all nodes.

8. Difficulty and issuance: The network aims for a new block roughly every 10 minutes. To maintain this, difficulty automatically adjusts every 2,016 blocks (about two weeks). Block rewards halve every 210,000 blocks (around four years), gradually reducing issuance until the maximum of 21 million BTC is reached.

9. Chain selection and confirmations: Nodes follow the valid chain with the most accumulated proof of work. Sometimes two miners produce a block at the same time, causing a short-lived fork, but the longest valid chain wins. Each block that follows your transaction adds a “confirmation,” making it increasingly difficult to reverse. Six confirmations are often considered secure for large transfers.

10. Fees and block space: Block space is limited, so users bid with transaction fees to get included. Wallets usually estimate an appropriate fee. Transactions paying more are confirmed faster, while low-fee transactions may wait longer or be replaced with a higher fee.

How to get Bitcoin

There are several ways to get Bitcoin:

1. Exchanges: Centralized platforms (e.g., Coinbase, Binance) allow users to buy Bitcoin using fiat currencies. Decentralized exchanges also exist, but are less common for Bitcoin.

2. Mining: Providing computational resources to the network in exchange for block rewards.

3. Peer-to-peer transfers: Directly receiving Bitcoin from another individual.

4. Merchant income: Accepting Bitcoin as payment for goods and services.

Bitcoin mining

Bitcoin mining is the process that both secures the network and issues new coins into circulation.

The network is designed to produce a new block roughly every ten minutes. To keep this timing stable, the difficulty automatically adjusts every 2,016 blocks (about once every two weeks), increasing if blocks are found too quickly and decreasing if they are too slow.

Learn more in our complete guide to Bitcoin mining.

How to buy Bitcoin

It’s simple to buy Bitcoin, though the steps may vary a little depending on the specific exchange you’re using, but here’s a general overview of how it works.

1. Choose an exchange or broker. Centralized exchanges are the most common entry point for beginners.

2. Verify identity (KYC). Regulatory compliance often requires proof of identity.

3. Deposit fiat currency. Most platforms support bank transfers, credit cards, or other payment methods.

4. Purchase Bitcoin. You can buy at the market price or set a limit order.

5. Transfer to a wallet. While leaving funds on an exchange is convenient, the best practice is to move coins to a self-custodied wallet for security.

Read next: How to Buy Bitcoin With No Verification

How to use Bitcoin

Bitcoin can be used in multiple ways, including:

• Payments: Many online and some physical merchants accept Bitcoin. Payment processors like BitPay simplify merchant adoption.

• Remittances: Sending money across borders without intermediaries or high fees.

• Investment and trading: Holding Bitcoin as a long-term store of value or trading it on exchanges.

• Collateral: In crypto lending and DeFi platforms, Bitcoin can be used as collateral to borrow other assets. Some of the best crypto lending platforms provide BTC as a borrowable asset.

What do I need to use Bitcoin?

The essential tool is a Bitcoin wallet, which stores your private keys. Hot wallets (mobile, desktop, or web-based) offer convenience but expose keys to the internet, while cold wallets (hardware devices like Ledger or Trezor, or paper wallets) keep keys offline, greatly reducing the risk of theft.

To transact, you’ll also need a Bitcoin address, which is a hashed version of your public key. Addresses can be legacy (starting with 1), SegWit (3), or Bech32 (bc1), each with different efficiency benefits.

Benefits and risks of Bitcoin

What makes Bitcoin different from other cryptocurrencies?

Although thousands of cryptocurrencies have been launched since 2009, Bitcoin continues to stand apart. As the first cryptocurrency, it established itself early and built the strongest network effect, making it the most widely recognized and trusted digital asset. Its security is unmatched, backed by the highest proof-of-work hash rate of any blockchain, which makes it extremely resistant to attacks.

Another key distinction is Bitcoin’s monetary policy. Unlike fiat currencies that can be inflated at will, or many other crypto assets that allow flexible issuance, Bitcoin’s supply is hard-capped at 21 million coins. This predictable schedule of halving events creates digital scarcity.

Bitcoin also maintains a narrower focus than most of its competitors. While platforms like Ethereum experiment with programmability, decentralized applications, and smart contracts, Bitcoin’s design remains concentrated on being a censorship-resistant form of money.

Finally, Bitcoin continues to dominate in terms of liquidity, trading volume, and institutional adoption. It is the cryptocurrency most often recognized by regulators and embraced by large investors, giving it a level of legitimacy that other projects are still striving to achieve.

Don’t forget the tax bill…

If you invest in Bitcoin, remember that any profits are taxable. For mining rewards, this will generally be taxed as income and subject to Income Tax. Meanwhile, profits from selling or trading Bitcoin will generally be taxed as a capital gain and subject to Capital Gains Tax. A crypto calculator can figure out your profits, losses, income, and more.

You can learn more about the specific rules in your country in our crypto tax guides, or sign up for Koinly for free to let it calculate your Bitcoin taxes for you.