Bitcoin Explained Simply

What is Bitcoin? It is two things with one name: a network of computers that agree on a public ledger of payments, and the asset, bitcoin, recorded on that ledger. It was described in a 2008 paper by the pseudonymous Satoshi Nakamoto and the network began running in January 2009. No company owns it; changes to its rules need broad agreement from the people who run its software.

How the network agrees on payments

When you send bitcoin, your wallet signs a transaction with your private key and broadcasts it. Nodes check the signature and confirm the coins have not already been spent. Miners gather valid transactions into a block and compete to find a number that makes the block's cryptographic fingerprint fall below a target. This search, called proof of work, costs real electricity. The winner adds the block and collects a reward.

A new block arrives roughly every ten minutes. Every 2,016 blocks, about two weeks, the network adjusts the difficulty of the search so that the pace stays near that target whether more or fewer miners join. Each new block on top of yours makes reversing your payment more expensive, which is why platforms wait for several confirmations before crediting a deposit.

The supply schedule and halvings

New bitcoin enters circulation only through block rewards, and the reward halves every 210,000 blocks, roughly every four years. The total can never exceed 21 million coins.

At about 144 blocks a day, today's reward produces roughly 144 × 3.125 = 450 new bitcoin daily. Miners also collect transaction fees, and as rewards shrink those fees are expected to matter more for the network's security budget. Whether halvings affect price is widely debated; the schedule is known years in advance, so treat claims of a guaranteed "halving rally" with suspicion.

Units and addresses

Bitcoin is divisible to eight decimal places. The smallest unit, one hundred-millionth of a bitcoin, is called a satoshi. With an illustrative price of $62,500, a $50 purchase buys 0.0008 BTC, or 80,000 satoshis. Addresses come in several formats, and modern wallets handle them automatically, but the discipline is the same as for any crypto: check the address, and send a test for large amounts.

Ways to hold bitcoin

• On a trading platform. Easy to buy and sell, but the platform controls the keys and you hold a claim on it.
• In a software wallet. You control the key on your phone or computer; convenient but exposed to malware and device loss.
• In a hardware wallet. The key stays on a dedicated device that signs transactions offline; better for larger amounts, provided the recovery phrase is stored safely.
• Through a fund or ETF. Price exposure via a regulated product in a brokerage account, with fund fees and no keys to manage.

The trade-offs between platform and self-custody are covered in the crypto module.

What drives the price

Bitcoin produces no earnings and pays no interest, so its price reflects what buyers are willing to pay at any moment. Liquidity conditions, interest rates, regulation, the flows into and out of investment products and the general appetite for risk all feed in. Moves of ten percent or more in a week are not unusual. No model reliably forecasts the price, and we do not publish predictions.

If you want to see what a move does to a position, including fees on both sides, use the crypto profit calculator.

Risks worth naming

• Volatility. Large drawdowns have happened repeatedly, and recovery has never been guaranteed.
• Custody. Lost keys mean lost coins; failed platforms have left customers as creditors.
• Irreversibility. A confirmed payment to the wrong address or a scammer cannot be recalled.
• Regulation and tax. Rules differ by country and change; gains are taxable in many places.
• Leverage. Retail crypto CFDs in the UK are banned, and capped at 2:1 in the EU; offshore platforms offering far more are a common route to rapid losses.

Fees and the queue of waiting transactions

Blocks have limited space, so transactions compete to be included. Unconfirmed transactions wait in a pool, and miners generally choose those paying the highest fee per unit of data. When demand is high, fees rise and low-fee transactions can wait for hours. Fees depend on the transaction's data size, not on the amount of bitcoin being sent, so moving a small amount can cost as much as moving a large one. Many wallets let you choose a fee level, trading cost against speed.

Second-layer systems built on top of Bitcoin, such as payment channels, aim to make small, fast payments cheaper by settling most activity off the main chain. They add their own complexity and are not needed to understand the base network.

Common misunderstandings

• "Bitcoin is anonymous." It is pseudonymous. Every transaction is public, and addresses can often be linked to identities through platforms that verify their customers.
• "The cap makes the price go up." A fixed supply says nothing on its own about demand. Price depends on both.
• "My coins are on my hardware wallet." The coins are recorded on the blockchain; the device holds the key that controls them. Lose the device but keep the recovery phrase and you can restore access.

Sources

• Bitcoin: A Peer-to-Peer Electronic Cash System (Nakamoto, 2008)
• Bitcoin Core protocol documentation
• UK Financial Conduct Authority, ban on crypto-derivatives for retail consumers