Bitcoin is a digital currency (also known as BTC) that operates without a central authority or intermediary to facilitate transactions. Instead, those transactions are verified by distributed nodes on the Bitcoin network and added to a public ledger called a blockchain.
This process and the associated jargon can be intimidating for newcomers. But anyone can use Bitcoin and understand how Bitcoin works. All you need to know are a few key concepts.
This article explains how Bitcoin works in a way that anyone can understand. For more information, check out our Bitcoin guide for new users(nova janela). At the end of the article, we’ll share simple steps to get started transacting with BTC.
- How are BTC created?
- Bitcoin mining explained
- Bitcoin halving
- The role of the blockchain
- Why do BTC have value?
- How to start using Bitcoin
How are BTC created?
BTC is created through a process called mining, in which computers solve complex mathematical challenges for the chance to be rewarded with newly minted BTC. BTC is the incentive for carrying out these challenges, which require substantial computational power.
Bitcoin mining explained
Bitcoin mining is not like mining for gold and silver, but it does require an investment of energy and tools. The computational difficulty of extracting value from the Bitcoin network is akin to the effort that makes precious metals scarce and valuable.
Mining relies on a concept called proof of work. Here’s how it works:
- When people send BTC to each other, those transactions are grouped together into blocks and broadcast online to the Bitcoin network. Before these blocks can be added to the blockchain (the public ledger of all transactions discussed below), they need to be verified through a computationally intense process called mining.
- Miners are typically companies that invest heavily in computers powerful enough to work out the solution to hash functions, which you can learn more about here(nova janela). The first miner to solve the problem gets the right to add the block to the blockchain and is rewarded with BTC.
- As miners solve the problem one at a time and add more blocks to the chain, the validity of each previous block is confirmed. The updated blockchain is then propagated throughout the Bitcoin network. Because the blockchain exists on many computers around the world, it’s virtually impossible to tamper with the ledger, making transactions highly secure.
The original creators of Bitcoin wanted to ensure new blocks are added to the blockchain roughly every 10 minutes and prevent inflation due to increasing BTC supply. For this reason, the Bitcoin network adjusts the difficulty of the mathematical problems miners must solve. As more miners join the network and computational power increases, the difficulty level also increases.
Bitcoin halving
In addition to increasing the difficulty of mining, the reward for Bitcoin mining is reduced by half every four years. These “halvings” are written into Bitcoin’s code and are another way to prevent inflation and ensure a steady production of BTC.
The most recent Bitcoin halving occurred in April 2024, reducing the reward for mining a block from 6.25 BTC to 3.125 BTC. The next halving is expected to occur in 2028.
Eventually there will be no more BTC to mine: The number of BTC is capped at 21 million. Assuming the rate of halvings continues every four years, the last fractions of BTC will be mined around 2140.
The role of the blockchain
The Bitcoin blockchain is a distributed database or ledger shared among a network of Bitcoin nodes (also known as full nodes, as they contain a full copy of the blockchain). These nodes are generally peer-to-peer, meaning any node can act as a server for the entire network, and they validate and propagate transactions.
A blockchain is the technology that underpins the Bitcoin network, and it keeps track of the flow of BTC among miners and users.
Here are some basic features of the Bitcoin blockchain:
- Blocks: A block is a group of transactions that have been verified and added to the blockchain. Each block contains a reference to the previous block, creating a chain of blocks. Blocks are added to the blockchain through the proof of work process described above.
- Transactions: Every Bitcoin transaction is recorded on the blockchain and is transparent to all users on the network. Once a transaction has had several block confirmations, it’s considered irreversible.
- Transparency: The blockchain is fully transparent, meaning anyone can view the entire history of Bitcoin transactions. This transparency helps ensure trust and security.
- Decentralization: The blockchain is decentralized, meaning no single entity controls it. Instead, it’s maintained by the network of full nodes that collectively verify and record transactions.
Why do BTC have value?
The value of BTC is ultimately determined by supply and demand. But why is there demand for Bitcoin in the first place? There are many factors that contribute to the value people assign to Bitcoin:
- Bitcoin has the properties of money. It can be used as a store of value and a medium of exchange for goods and services. It has been used as a valid alternative to traditional government-issued currencies, and the nation of El Salvador has adopted Bitcoin as one of its official currencies. As more businesses, financial institutions, and even governments begin to accept and integrate Bitcoin into their operations, the demand for it continues to grow.
- There is a low barrier to entry. Unlike traditional finance and banking institutions, Bitcoin is an open, permissionless network. This means anyone can get, hold, and start transacting with BTC. This ease of use has led to wide adoption around the globe, giving BTC a strong network effect, which leads to even more demand, creating a virtuous cycle.
- There is a limited supply of BTC. The Bitcoin code restricts the rate at which Bitcoin can be mined and caps the total supply at 21 million. This scarcity contributes to its desirability as a store of value. This unavoidable cap doesn’t exist with fiat currencies, which governments can print at their discretion to cover their debts, leading to high inflation.
How to start using Bitcoin
It’s easier than you might think to start using Bitcoin for investing and transacting.
1. Get a Bitcoin wallet
The first step to owning BTC is to get a Bitcoin wallet. We previously wrote an article explaining Bitcoin wallets(nova janela), which are apps that use encryption(nova janela) to secure your Bitcoin. We recommend using one that is secure and easy to use. Cryptocurrency exchanges can be risky because you don’t actually own your BTC. And hardware wallets can be complicated for first-time users.
We created Proton Wallet(nova janela) to offer a simple self-custodial wallet for you to buy, hold, and transact with BTC. You can try it by signing up here.
2. Buy BTC
For most people, the cost to mine BTC is prohibitive. But it’s easy to buy BTC from an exchange using fiat currency and then transfer your Bitcoin to your wallet.
With Proton Wallet, we made it simple to buy BTC. You can get started in the app and complete the purchase through one of our secure partners. Learn how to buy BTC in Proton Wallet.(nova janela)
3. Transact with BTC
To send and receive BTC, all you need to know is a Bitcoin address — an alphanumeric string that identifies specific Bitcoin wallets. When sending BTC, you’ll enter the address of your recipient. When receiving BTC, you’ll need to share your address with the sender.
In Proton Wallet, you can transact BTC using either Bitcoin addresses or email addresses. Our goal is to make sending BTC as easy as sending an email. Learn how to send and receive BTC.(nova janela)
With these concepts, you can understand Bitcoin and start using digital currency. If you’d like to learn more about the benefits of our wallet app, check out our overview of Proton Wallet security(nova janela).
