Bitcoin Explained Simply

What is Bitcoin? It is a digital asset that lives on a public ledger maintained by thousands of independent computers. There is no issuing company, no central server and no customer service desk. The rules for creating and moving bitcoin are written into open-source software that anyone can inspect, and changing them requires broad agreement across the network.

Where it came from

Bitcoin was described in a 2008 paper by someone using the name Satoshi Nakamoto, and the network started running in early 2009. The aim was electronic cash that could be sent between people without a bank in the middle. Whoever Nakamoto was, they stopped taking part publicly within a few years, and the project has been maintained by volunteers and companies since.

How the network agrees on who owns what

Transactions are grouped into blocks, and a new block is added roughly every ten minutes. Miners compete to add each block by running specialised computers that make trillions of guesses to solve a puzzle; the winner earns newly created bitcoin plus the fees attached to the transactions. This process, proof of work, makes rewriting history extremely expensive, because an attacker would need to out-compute the rest of the network.

The puzzle's difficulty adjusts every 2,016 blocks, about every two weeks, so blocks keep arriving about ten minutes apart however much computing power joins or leaves.

What happens when you send bitcoin

A bitcoin transfer is a message signed with your private key, saying which coins move to which address. Your wallet broadcasts it to the network, where it waits in a queue of unconfirmed transactions. Miners pick transactions to include in the next block, generally favouring those that pay higher fees, so the fee you attach affects how quickly your payment is confirmed when the network is busy.

Once your transaction is in a block it has one confirmation; each later block adds another. Platforms often wait for several confirmations before crediting a deposit, because each extra block makes reversal by an attacker more impractical. From then on, only the recipient can send the coins back.

Two practical consequences follow. First, nobody can cancel a payment once it is confirmed: not the sender, not a platform, not a court acting through the network. Second, anyone promising to "reverse" a bitcoin transaction or "unlock" coins for a fee is attempting fraud.

The 21 million cap and the halving

Only 21 million bitcoin will ever exist. New coins enter circulation through the mining reward, which halves every 210,000 blocks, roughly every four years:

At about 144 blocks a day, today's reward adds roughly 144 × 3.125 = 450 new bitcoin per day. The next halving is expected around 2028. Halvings are often described as bullish events, but the date is known years ahead, so claims that one "guarantees" a price rise deserve scepticism.

Units: you do not need to buy a whole coin

One bitcoin divides into 100 million units called satoshis. Illustration: at a price of $62,500, a $50 purchase buys 50 ÷ 62,500 = 0.0008 BTC, which is 80,000 satoshis. A high price per coin says nothing about whether the asset is expensive or cheap; it just reflects how the supply is divided.

Ways people hold bitcoin

• On an exchange: easy, but the exchange holds the keys. If it fails or freezes withdrawals, you wait in line with other creditors.
• In your own wallet: you hold the keys through a seed phrase. Nobody can freeze your coins, but nobody can help if you lose the phrase or give it away.
• Through funds: some countries allow exchange-traded products that track the bitcoin price. You get price exposure within a regulated wrapper but cannot send the coins anywhere.
• Through derivatives: futures and CFDs give exposure to the price only, often with leverage. UK and EU retail CFD leverage on crypto is capped at 2:1, and the UK bans crypto derivatives for retail consumers altogether.

Our guide to how crypto works compares custody options in more detail.

Security basics for bitcoin holders

Most losses of bitcoin come not from the network being broken but from people being tricked or careless. Use a wallet from a well-known source, installed directly from the official app store or the maker's own site typed into your browser. Write the seed phrase on paper, store it where fire and flood are unlikely to reach, and tell a trusted person how to find it in an emergency without telling them the words themselves. Hardware wallets bought second-hand, or supplied with a seed phrase already printed, should never be used: a genuine device generates the phrase itself.

What drives the price

Bitcoin produces no earnings and pays no interest, so its price rests entirely on what buyers will pay. That depends on demand as a store of value, general appetite for risk, interest rates, regulation, flows into funds, and the actions of large holders. The result is volatility far above that of major currencies or broad stock indices. Falls of more than half from a peak have happened several times in Bitcoin's history.

To see how a price move translates into profit or loss after fees, use the crypto profit calculator.

What is Bitcoin not? Common misunderstandings

• "Bitcoin is anonymous." It is pseudonymous. Every transaction is public, and analysts routinely link addresses to people, especially when coins pass through exchanges that verify identity.
• "Bitcoin mining pays passive income." Cloud-mining contracts and "mining pools" promising fixed daily returns are a long-running scam format. Real mining is a capital-heavy industrial business.
• "There is an official Bitcoin company." There is not. Anyone claiming to represent "Bitcoin" and asking for money is lying.

Sources

• Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (2008)
• Bitcoin Core open-source software, consensus rules
• UK Financial Conduct Authority, retail crypto-derivatives ban