What Is Bitcoin? How Does It Work?
What Bitcoin is, who created it and how a payment works, explained through a simple example.
You may have heard about Bitcoin (BTC) because its price went up or down. But what exactly is moving between people when they send it? Bitcoin is digital money that can be sent directly between people, without a bank processing the payment. A network of computers keeps the shared record instead.
Who created Bitcoin?
Bitcoin was introduced under the pseudonym Satoshi Nakamoto. On 31st October 2008, Satoshi shared a paper explaining the idea. You can read the original Bitcoin whitepaper here. The first software release was announced in January 2009, turning that proposal into something people could run.
Let's start with a bank transfer
Let's assume you are A and your friend is B. A wants to send $100 to B. In our example, A opens a banking app, enters B's account details and requests the transfer. A relies on the banks and their payment system to move the money. The Bank of England explains how that works between providers in the UK.
What happens with Bitcoin instead?
This time, imagine A sends an amount of BTC worth $100 at that moment. A is sending bitcoin, so its dollar value can change. B gives A a Bitcoin receiving address. A's wallet prepares the payment and signs it using a private key, secret information that authorises spending. It then sends the transaction to the network.
Computers called full nodes check transactions and blocks against Bitcoin's rules, including whether the coins can be spent. Miners do a different job: they compete using computing power to add a batch of transactions, called a block, to the shared record. This competition is called proof of work.
A miner that produces an accepted block can receive newly created bitcoin and transaction fees. Simply checking a payment doesn't earn that reward. Each block links to the previous one, forming the blockchain, Bitcoin's public transaction record. Nodes also check the blocks miners produce.
That's what decentralised means here: there is no single central operator keeping the record or deciding which rules everyone must use. It doesn't mean there are no rules, or that a miner can create as much bitcoin as it likes.
So what does a wallet actually hold?
Your bitcoin isn't a file sitting inside a wallet app. The coins are accounted for on the blockchain. The wallet helps you manage the keys used to spend them and can generate receiving addresses. An address is something you share to receive a payment. A private key is a secret.
With self-custody, you control the keys and must protect them. Some wallets use a recovery phrase, such as 12 or 24 words, to restore their keys. Losing the keys and the means of recovering them can mean losing access to the bitcoin.
With an exchange holding bitcoin for you, the company controls the keys. You depend on its security, solvency and willingness to honour withdrawals. Buying through an exchange or a wallet's purchase service may also involve identity checks. Buying and holding are separate questions.
Does that make Bitcoin anonymous?
Bitcoin uses addresses rather than account names, but its transactions are publicly visible. An address can be linked to a person through a purchase provider or other information they reveal. Holding your own keys doesn't make your payments invisible.
Why does Bitcoin have value?
Bitcoin's rules limit its total supply to 21 million coins. That scarcity is part of its design. Its market price still depends on what people are willing to pay. A limited supply doesn't guarantee demand or a rising price, and Bitcoin's dollar value can change sharply. Sending BTC worth $100 doesn't promise that B will later be able to exchange it for $100.
What does that mean for A and B?
A can send bitcoin across borders without a bank processing the transfer. But seeing the payment arrive in a wallet isn't the same as confirmation in a block. Blocks arrive about every ten minutes on average, with no guaranteed wait for an individual payment. Fees vary with demand for block space.
There's also no central authority to reverse a mistaken payment. Getting the money back normally requires the recipient to return it. A and B can transact without a bank handling the payment, but they also take on responsibilities that a banking app usually keeps out of sight.
Where can you check Bitcoin and find trading routes?
For native BTC, the network is Bitcoin, and your wallet supplies a Bitcoin receiving address. mempool.space is a Bitcoin transaction explorer. CoinGecko's Bitcoin page tracks its price and trading markets.
Kraken is one example of a centralised exchange offering BTC, subject to residency, verification and funding restrictions. Bisq is a decentralised route for trading bitcoin directly with other people. It handles the bitcoin side while national currency payments use outside services. Its payment methods vary by region. These are examples, not recommendations or a promise of availability in your country.
Where can you follow Bitcoin?
- Network information: Bitcoin.org is an independent information resource. It does not speak for the whole Bitcoin network.
- Software updates: Bitcoin Core lists @bitcoincoreorg on X. This is the software project's account, not an official account for the BTC asset.
- Technical learning: the developer documentation explains Bitcoin's workings. Bitcoin Core also points readers to Bitcoin Stack Exchange for community questions.
