What Is Bitcoin?

What is Bitcoin? It is a digital currency that lives on a public network of computers, with no bank, government or company in control. It was described in a 2008 paper published under the name Satoshi Nakamoto, whose real identity has never been confirmed, and the network started running in January 2009. This guide explains how it works, why its supply is limited and what that means for anyone thinking about it alongside a share portfolio.

What is Bitcoin made of?

At its core, Bitcoin is a ledger, the blockchain, that records every transfer ever made. Thousands of independent computers keep a copy and follow the same rules to decide which transactions are valid. There is no physical coin; "owning bitcoin" means that the ledger links an amount to an address that only your private key can spend from.

Each bitcoin can be split into 100 million smaller units called satoshis, so you do not need to buy a whole coin.

Mining and blocks

New transactions are bundled into blocks, and a new block is added roughly every ten minutes. The computers that compete to add blocks are called miners. They use specialised hardware to solve a numerical puzzle, a system called proof of work. The winner adds the block and collects a reward in new bitcoin plus the fees paid by the transactions inside it.

The network adjusts the difficulty of the puzzle about every two weeks so that blocks keep arriving at around the ten-minute pace, however much computing power joins or leaves. Proof of work uses a large amount of electricity, which is one of the most debated aspects of Bitcoin.

The 21 million limit and the halvings

Bitcoin's rules cap the total supply at 21 million coins. The reward for each block halves after every 210,000 blocks, roughly every four years:

At about 144 blocks a day, the current reward creates roughly 144 × 3.125 = 450 new bitcoin a day. The next halving is expected around 2028. Because of this schedule, new supply keeps shrinking, and the last fraction of a coin is not expected to be mined until well into the next century.

A fixed supply is often described as making Bitcoin scarce. Scarcity alone does not set a price, though: demand can fall as well as rise, and it has done so sharply several times.

Wallets, keys and custody

To use Bitcoin you need a wallet, which stores the private keys that authorise spending. You can hold bitcoin in three broad ways:

• On an exchange or app, which holds the keys for you. Convenient, but you depend on that firm's security and solvency.
• In a self-custody wallet on your phone, computer or a hardware device. You control the keys and bear full responsibility for the recovery phrase.
• Through a fund. US regulators approved spot bitcoin exchange-traded products in January 2024, and similar products exist in some other countries. You own units of a fund that holds the coins, bought through a normal broker. Availability depends on where you live; UK rules, for instance, differ for retail investors.

Transactions on the Bitcoin network cannot be reversed. If you send coins to the wrong address or to a scammer, they are almost always gone for good.

Why the price moves so much

A share's value is anchored, at least loosely, to the profits a business earns. Bitcoin produces no profits, interest or dividends, so there is no cash flow to anchor its value. Its price reflects what buyers are prepared to pay at any moment, which is influenced by adoption, regulation, interest rates, the flow of money into funds and plain sentiment.

As a result, Bitcoin has had several declines of well over half its value, and it trades every hour of every day, so big moves often happen over weekends when stock markets are shut. Our crypto profit calculator lets you test what a given move, and the fees around it, would mean for a sum you have in mind.

What people use Bitcoin for

Supporters describe several uses. Some see it as a store of value outside the control of any government, sometimes called "digital gold". Some use it to send value across borders at any hour. Others simply hold it as a speculative asset in the hope that demand grows. Each view has critics: the price has been too volatile for a reliable store of value over short periods, transaction fees and confirmation times vary with network demand, and speculative demand can disappear as quickly as it arrives. For most investors, the practical question is not which story is right but how much of a loss they could absorb if the price fell sharply.

How Bitcoin compares with shares

Questions to ask yourself first

• Could I cope, financially and emotionally, if this fell by 70% and stayed there for years?
• Do I understand where my coins or fund units are held, and by whom?
• Am I buying because of a plan, or because of a headline or a friend's gains?

For the broader picture of blockchains, tokens and stablecoins, continue with our crypto guide and USDT explainer.

Sources

• Bitcoin: A Peer-to-Peer Electronic Cash System (2008 white paper)
• US Securities and Exchange Commission, approval of spot bitcoin exchange-traded products, January 2024