Bitcoin Explained Simply

What is Bitcoin? It is a digital currency that runs on a public network with no central operator, launched in January 2009 by a pseudonymous creator known as Satoshi Nakamoto. Ownership is recorded on a blockchain that anyone can inspect, new coins are released according to rules written into the software, and the total supply can never exceed 21 million. Those three facts explain most of what makes it unusual.

What is Bitcoin at the level of mechanics?

A bitcoin transfer is a signed message saying that coins controlled by one key should now be controlled by another. The message is broadcast to the network, checked by thousands of independent nodes against the ledger, and then waits to be included in a block. Once it sits inside a block, and more blocks are stacked on top, reversing it becomes practically impossible.

Nothing in the network knows your name. Addresses are strings of characters, and the link between an address and a person comes only from outside, for example through an exchange that verified your identity. That is why Bitcoin is better described as pseudonymous than anonymous.

Blocks, miners and the ten-minute rhythm

Miners are computers competing to add the next block. Each tries trillions of guesses to find a number that gives the block's fingerprint a required pattern. The first to succeed publishes the block and collects the block reward plus the fees attached to the transactions inside it.

The network targets one block about every 10 minutes. Every 2,016 blocks, roughly every two weeks, the puzzle's difficulty is recalculated so that blocks keep arriving at that pace however much computing power joins or leaves. At about 144 blocks a day and a reward of 3.125 BTC, the network currently issues around 3.125 × 144 = 450 new bitcoin a day.

The supply schedule in numbers

The block reward halves every 210,000 blocks, which works out to about every four years. Halvings took place in 2012, 2016, 2020 and April 2024; the next is expected around 2028.

A predictable, shrinking issuance is the core of the argument some holders make for Bitcoin as a scarce asset. A fixed supply does not fix the price, though: price depends on demand, which can fall as quickly as it rises. Halvings are widely anticipated, and there is no rule that says the market must react to them in any particular way.

Satoshis: you never need a whole coin

One bitcoin divides into 100,000,000 units called satoshis or "sats". An amount of 0.005 BTC is 500,000 satoshis. Exchanges let you buy in currency amounts, so a purchase of any size simply becomes a fraction of a coin. That also means the price of one whole bitcoin says nothing about whether it is "cheap" or "expensive" for a small investor.

Wallets, addresses and self-custody

To hold bitcoin you need a key that can sign transfers. You can leave that to an exchange (custodial), keep it in a phone or desktop app, or store it on a dedicated hardware device. The more control you take, the more responsibility you carry: lose the key and its backup seed phrase and the coins cannot be recovered by anyone. Our crypto guide compares the custody options, and the scam guide lists the tricks used to steal seed phrases.

Why the price moves so much

• No earnings anchor. A company's value can be estimated from its profits; Bitcoin has no cash flow, so price rests on what the next buyer will pay.
• Leverage elsewhere. Heavily leveraged futures positions on some platforms can force selling or buying in a cascade when prices move quickly.
• Round-the-clock trading. Prices react to news at any hour, including weekends when traditional markets are shut.
• Shifts in rules and access. Regulatory decisions and new investment products can change who is able to buy.

To see what a given price move would mean for a real-sized position after fees, use the crypto profit calculator.

Four common misconceptions

"Bitcoin is stored in my wallet"

The coins exist only as entries on the blockchain. A wallet stores the keys that allow you to move them. Lose the keys and the coins stay on the ledger, permanently out of reach.

"A halving makes the price go up"

A halving cuts the flow of new coins. Whether the price rises depends on demand, which no rule controls. Because halvings are scheduled years ahead, markets have plenty of time to anticipate them.

"Transactions are free"

Every on-chain transfer pays a fee to miners, and it rises when the network is busy. Exchanges also charge their own withdrawal fees.

"Fixed supply means it cannot lose value"

Scarcity only supports a price if people want the asset. Bitcoin has fallen by large fractions of its value several times in its history, despite its supply rules never changing.

How Bitcoin sits alongside shares and funds

For readers whose main interest is shares and index funds, it helps to be clear about the category. A share is a claim on a business's profits; an index fund is a basket of such claims; bitcoin is a scarce digital token whose value depends only on demand. They respond to different forces and belong in different mental boxes, whatever the headlines put side by side on a markets overview.

Sources

• Bitcoin white paper, Satoshi Nakamoto, 2008
• Bitcoin Core developer documentation on block rewards and difficulty adjustment