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Bitcoin: what it is, how it works, and how to use it

Bitcoin: what it is, how it works, and how to use it

What is Bitcoin?

Bitcoin (BTC) is a cryptocurrency, a virtual currency designed to function as money and a form of payment outside the control of any single person, group, or entity, thus removing the need for third-party involvement in financial transactions. It is rewarded to blockchain miners for the work they do in verifying transactions and can be purchased on various exchanges.

Bitcoin was introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto.

It has since become the most well-known cryptocurrency in the world. Its popularity has inspired the development of many other cryptocurrencies. These competitors seek to replace it as a payment system or are used as utility or security tokens in other emerging blockchain and financial technologies.

Learn more about the cryptocurrency that started it all: the story behind it, how it works, how to obtain it, and what it can be used for.

Key Concepts

  • Launched in 2009, Bitcoin is the world's largest cryptocurrency by market capitalization.
  • Unlike fiat currency, Bitcoin is created, distributed, exchanged, and stored using a decentralized ledger system known as the blockchain.
  • Bitcoin and its ledger are secured by the proof-of-work (PoW) consensus, which is also the process of "mining" that introduces new bitcoins into the system.
  • Bitcoin can be purchased through various cryptocurrency exchanges.
  • Bitcoin's history as a store of value has been turbulent; it has gone through several boom and bust cycles over its relatively short lifespan.
  • As the first widely successful and popular decentralized virtual currency, Bitcoin has inspired a host of other cryptocurrencies in its wake.

Understanding Bitcoin

In August 2008, the domain Bitcoin.org was registered. Today, at least, this domain is protected by WhoisGuard, which means the identity of the person who registered it is not public information.

In October 2008, an individual or group using the pseudonym Satoshi Nakamoto announced on the Cryptography Mailing List at metzdowd.com: "I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party." This famous white paper published on Bitcoin.org, titled "Bitcoin: A Peer-to-Peer Electronic Cash System," would become the Magna Carta for how Bitcoin works today.

On January 3, 2009, the first Bitcoin block - Block 0 - was mined. This is also known as the "genesis block" and contains the text: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks," perhaps evidence that the block was mined on or after that date, and perhaps also a relevant political commentary.

Bitcoin rewards are halved every 210,000 blocks. For example, the block reward was 50 new bitcoins in 2009. On May 11, 2020, the third halving occurred, reducing the reward for each block discovery to 6.25 bitcoins.

One bitcoin is divisible into eight decimal places (one hundred millionth of a bitcoin), and this smaller unit is called a satoshi. If necessary, and if participating miners agree to the change, Bitcoin could eventually become divisible into even more decimal places.

Bitcoin, as a form of digital currency, is not too complicated to understand. For example, if you own one bitcoin, you can use your cryptocurrency wallet to send smaller portions of that bitcoin as payment for goods or services. However, it becomes much more complex when trying to understand how it works.

The Blockchain Technology of Bitcoin

Cryptocurrencies are part of a blockchain and the network required to power it. A blockchain is a distributed ledger, a shared database that stores data. The data within the blockchain is protected by cryptographic methods.

When a transaction occurs on the blockchain, the information from the previous block is copied into a new block with the new data, encrypted, and the transaction is verified by validators - called miners - in the network. When a transaction is verified, a new block is opened, and a bitcoin is created, which is given as a reward to the miners who have verified the data within the block - who are then free to use, hold, or sell it.

Bitcoin uses the SHA-256 hashing algorithm to encrypt the data stored in the blocks on the blockchain. In simple terms, the transaction data stored in a block is encrypted into a 256-bit hexadecimal number. That number contains all the transaction data and information linked to the previous blocks up to that block.

Transactions are placed in a queue to be validated by miners within the network. Miners in the Bitcoin blockchain network all try to verify the same transaction simultaneously. The mining software and hardware work to solve the nonce, a four-byte number included in the block header that miners are trying to solve.

The block header is hashed, meaning it is randomly regenerated by a miner repeatedly until it reaches a target number specified by the blockchain. The block header is "solved," and a new block is created to encrypt and verify further transactions.

How is Bitcoin Used?

Bitcoin was initially designed and released as a peer-to-peer payment method. However, its use cases are expanding due to its growing value and competition from other blockchains and cryptocurrencies.


To use your bitcoins, you need to have a cryptocurrency wallet. Wallets contain the private keys to the bitcoins you own, which need to be inputted when making a transaction. Bitcoin is accepted as a means of payment for goods and services at many merchants, retailers, and stores.

Physical stores that accept cryptocurrencies usually display a sign that says "Bitcoin Accepted Here"; transactions can be handled with hardware terminals or wallet addresses through QR codes and touchscreen apps. An online company can easily accept Bitcoin by adding this payment option to its other online payment options: credit cards, PayPal, etc.

El Salvador became the first country to officially adopt Bitcoin as legal tender in June 2021.

Investments and Speculation

Investors and speculators have become interested in Bitcoin as it has grown in popularity. Between 2009 and 2017, cryptocurrency exchanges emerged that facilitated the buying and selling of bitcoins. Prices began to rise, and demand slowly grew until 2017 when its price surpassed $1,000. Many people believed that Bitcoin prices would continue to rise and began buying them to hold. Traders started using cryptocurrency exchanges to make short-term trades, and the market took off.

In 2022, the price of Bitcoin crashed. By March 2022, it had reached as high as $47,454, and as of November 2022, it is at $15,731. The decline in Bitcoin is partly due to broader market turbulence related to inflation, rising interest rates, supply chain issues caused by Covid, and the war in Ukraine. Additionally, some major tokens have crashed in the cryptocurrency world, as well as one of the major exchanges, raising concerns about the stability of digital currencies.


Bitcoin was the first cryptocurrency designed to be used as a form of payment outside of legal tender. Since its introduction in 2009, Bitcoin's popularity has grown, and its applications have expanded, leading to the creation of many new competing cryptocurrencies.