What is Bitcoin (BTC)? A complete guide

Bitcoin, a decentralized digital currency, operates on a blockchain with a capped supply of 21 million. Bitcoin relys on cryptographic principles, economic incentives and a global network of users to maintain its value and security.
By Kraken Learn team
12 min
3 de jan. de 2023
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Key takeaways 🔑

  • Bitcoin is a decentralized digital currency protocol launched by the pseudonymous Satoshi Nakamoto in 2009.
  • It uses public-private key cryptography and mining to secure the Bitcoin network, with a maximum supply capped at 21 million BTC.
  • Many use Bitcoin as a store of value or to make payments over the internet.

Intro to Bitcoin 🔍

Bitcoin is a form of digital currency introduced in 2008 by a mysterious person, or group of people, known only as Satoshi Nakamoto.

Unlike traditional currencies, Bitcoin operates as a decentralized system, free from the control of central banks or governments. Instead, it relies on a network of users who collectively maintain its operations via a digital ledger called a blockchain.

The Bitcoin protocol is built on three essential components:

  • Public-private key cryptography: Wallet software assigns Bitcoin owners both a public key and a private key. A public key is used to create a public wallet address for receiving inbound transactions and verifying digital signatures. A private key functions like a password, and is used to create digital signatures that prove you own funds when sending transactions.
  • Peer-to-peer networking: Nodes (computers running the software) review transactions to ensure the software’s rules are being followed. Bitcoin miners (nodes that use a specialized computer program that allows them to verify newly submitted transactions) then compete for the right to propose a new batch of pending transactions to join the blockchain.
  • A finite supply: According to the software rules, no more than 21 million Bitcoin can ever be in circulation—a limit that gives Bitcoin value.

Bitcoin was created to function as a digital medium of exchange, enabling users to buy, sell and trade without centralized intermediaries. Its decentralized nature and strict supply rules contribute to its unique value proposition.

By understanding Bitcoin, you can gain insights into a revolutionary financial technology, explore its potential benefits and risks, and discover how it's reshaping the global financial landscape. In this guide, we'll delve into the fundamentals of Bitcoin, explore its various use cases and discuss the factors that influence its price.

Who created Bitcoin? 👤

Satoshi Nakamoto is the pseudonym used by the unknown creator of Bitcoin and Bitcoin's blockchain technology.

Despite the widespread use and popularity of Bitcoin, the true identity of Satoshi Nakamoto remains a mystery. Over the years, many people have claimed to be the real Satoshi Nakamoto, but none of them have been able to provide convincing evidence to support their claims.

Whoever Nakamoto is or was, they went to great lengths to remain anonymous. This mystery has helped increase the allure and fascination surrounding the origins of Bitcoin. Nakamoto mined the first Bitcoin block, called the Genesis Block, on January 3, 2009.

Notable cryptographers, such as computer programmers Nick Szabo and the late Hal Finney, are often speculated to be Nakamoto. In January 2009, Nakamoto sent 10 BTC to Finney, marking the first recorded Bitcoin transaction. This transaction demonstrated Bitcoin's potential as a digital currency and laid the groundwork for its future use.

The first known usage of Bitcoin as a form of payment occurred when a developer named Laszlo Hanyecz bought two pizzas with 40,000 Bitcoin. The online payment, which occurred on May 22, 2010, is now known as Bitcoin Pizza Day.

While Bitcoin can safely claim its title as the world’s first successful cryptocurrency, its technology is built on decades of ideas for how cryptography could help create digital money.

These formative projects include:

  • B-money (1998): Proposed by Wei Dai, an anonymous, distributed digital cash system.
  • Bit Gold (1998-2005): Created by Nick Szabo, an attempt to create a type of scarce online commodity.
  • eCash (1983): Developed by David Chaum, the first major attempt to create anonymous online payments.
  • Hashcash (mid-1990s): Designed by Adam Back, a proof-of-work system designed to prevent email spam.
  • Reusable proof of work (2004): Developed by Hal Finney, a precursor to Bitcoin’s proof-of-work (PoW) consensus mechanism and network security.

Nakamoto began writing the code for Bitcoin as early as 2007. This work led to the publication of Bitcoin's white paper in 2008, explaining the proposed system, and the release of Bitcoin 0.1, the first version of the software, on January 9, 2009.

Nakamoto authored a trove of emails and forum posts offering his or her thoughts about the future of Bitcoin prior to leaving the project in 2011.

Today, the Bitcoin network is collectively managed by a global network of developers, miners and nodes who contribute to Bitcoin’s code and its operations.

How does Bitcoin work? ⚙️

Bitcoin (BTC) is a virtual currency that operates through the decentralized Bitcoin network, meaning no government or financial institution controls it. All transactions are stored on a public ledger called the Bitcoin blockchain, which serves as a transparent, accessible database.

The Bitcoin network is a decentralized virtual currency system that operates without a central bank, government authority or middlemen. Instead, it relies on a network of computers around the world to maintain the integrity of the system.

A globally distributed community of nodes makes up the Bitcoin network. Nodes are computers that are connected to the Bitcoin network and help validate transactions. Anyone in the world can run their own node and participate in the network, ensuring that no single entity controls the blockchain. This decentralization helps make the system resilient and secure.

When someone sends Bitcoin to another person, the transaction is verified by a network of "miners." Miners use their machines to generate hashes in a trial-and-error process, aiming to produce a hash that meets or exceeds a target set by the network. This process is designed to encourage miners to propose valid new blocks, by requiring them to expend time, energy and money to participate in the network.

This method for generating agreement among users without relying on centralized control is known as a consensus mechanism.

Successful miners who generate winning hashes are granted the right to add their proposed block to the blockchain. The remaining miners in the network then collectively verify the block transactions. They do this by checking that the sender has enough Bitcoin to make the transaction and is not trying to double-spend their balance.

Once the network verifies the proposed block, it permanently joins the Bitcoin blockchain. No one can alter the data stored in blocks once they're committed to the blockchain.

How is new Bitcoin created? ⛏️

There are approximately 20 million Bitcoin in circulation.

To incentivize miners to continue competing against each other to propose new blocks and secure the network, winners of the Bitcoin mining competition are rewarded with a block reward. This reward consists of newly minted Bitcoin, plus any fees attached to the transactions included in the proposed block.

Satoshi Nakamoto designed the Bitcoin network to be self-regulating. Bitcoin’s mining difficulty adjusts automatically every 2,016 blocks (about every two weeks) to maintain a 10-minute average block discovery time. If blocks are mined too quickly, the algorithm raises the difficulty; if too slowly, it lowers it. This ensures a steady and predictable flow of new Bitcoin entering circulation.

As of April 2024, the block reward is 3.125 BTC per block. This reward is halved every 210,000 blocks in a process known as the Bitcoin halving. Once the number of Bitcoin in circulation reaches 21 million, the maximum limit, the protocol will release no more coins.

While Bitcoin mining is energy-intensive, recent advances in technology have reduced the greenhouse gas emissions associated with it. Many major miners now focus on using renewable energy sources. However, those mining at home may still need specialized hardware and software that contribute to higher energy consumption.

How is Bitcoin used? 🤝

Bitcoin was initially designed as a peer-to-peer payment system.

However, its expanding use cases are driven by factors such as its growing value, competition from other blockchains and cryptocurrencies, and advancements in the underlying technology that processes information for the Bitcoin blockchain.

Payments

One of the earliest and easiest uses of Bitcoin was as an electronic cash system. It allows users to transfer funds online without the need for a trusted intermediary like a bank or payment processor. Bitcoin transactions are often faster and more cost-effective than traditional international payment methods.

To make payments with Bitcoin, users need a digital wallet that stores their private keys. This component is essential for accessing and spending their Bitcoin. The Bitcoin network verifies and processes transactions, ensuring their accuracy and security.

Many merchants now accept Bitcoin as a payment method, including online retailers and even some physical stores. However, it is still not as widely accepted as traditional payment methods like credit cards or PayPal.

Store of value

Another use of Bitcoin is as a store of value.

Because the supply is managed by computer code and follows a strict issuance schedule, some people see it as a more stable and secure form of currency.

Bitcoin's limited supply, resistance to counterfeiting, and portability further enhance its appeal as a store of value. Compared to gold, Bitcoin is easier and cheaper to store, more divisible, and highly portable. Some people buy Bitcoin as a speculative investment, hoping that its value will steadily increase over time.

However, Bitcoin's value can be volatile, and its price has fluctuated widely in the past. This price volatility means that it may not be suitable for everyone as a short-term investment.

Other Bitcoin use cases

While Bitcoin serves as a viable medium of exchange and store of value beyond the traditional financial system, it is much more than that.

Today, Bitcoin is being used in a variety of ways, far beyond its initial purpose as "a peer-to-peer electronic cash system." Many forward looking individuals all over the world are building on Bitcoin and finding innovative ways to leverage the reliability of the world's largest blockchain network.

To learn more, check out our article What can you do with Bitcoin?

How do you buy Bitcoin? 🧑‍💻

One of the easiest ways to buy Bitcoin (BTC) is using cryptocurrency trading platforms like Kraken. These platforms often support multiple fiat currencies, allowing users to exchange their local currency for cryptocurrency.

Many centralized cryptocurrency trading platforms will require users to submit personal information before they're able to buy and sell Bitcoin. This process, known as Know Your Customer (KYC), aims to prevent illegal activities such as money laundering.

Bitcoin's increased adoption has led traditional payment services such as PayPal, Cash App and Revolut to allow their clients to directly or indirectly gain exposure to the cryptocurrency.

People can also purchase Bitcoin for cash directly peer-to-peer, but this can pose a significant personal risk and is not generally recommended.

For a complete step-by-step guide to buying bitcoin, check out our article How to buy Bitcoin.

How do you store Bitcoin? 🔒

Bitcoin, like all other cryptocurrencies, exists purely in digital form. To store these assets, holders need specialized Bitcoin wallets. Many Bitcoin startups focus on providing secure storage solutions for users.

Hardware wallet

A hardware cryptocurrency wallet (also known as a cold wallet) is a physical device that securely stores a user's private keys, which are necessary for signing transactions and spending Bitcoin.

Because they stay offline most of the time, hardware wallets are generally considered to be less susceptible to hacking.

To use a hardware wallet, you connect it to a computer or mobile device and sign transactions with your private key, which is protected by a PIN known only to you. To make a transaction, the user connects the hardware cryptocurrency wallet to a computer or mobile device and signs the transaction with their private key.

Since private keys are stored on the device, they are not vulnerable to online attacks. Additionally, hardware wallets are portable, meaning users can carry their Bitcoin with them wherever they go.

To learn more, check out our article What is a crypto hardware wallet?

Software wallet

A software wallet, or hot wallet is a digital wallet stored on a software platform, accessible through a computer, smartphone or tablet.

These wallets are typically free and allow easy access to your Bitcoin from anywhere with internet access. Software wallets are generally considered easier to use than hardware wallets.

However, they are also vulnerable to hacking and malware attacks, making them less secure than hardware wallets.

To learn more, check out our article Web3 wallets: A complete guide.

How to determine the "right" crypto wallet

The main differences between software and hardware wallets are security and convenience.

Software wallets, or hot wallets, are more vulnerable to hacking and malware attacks because they remain connected to the internet at all times. However, hot wallets are more convenient for frequent transactions, as they allow quick access to your Bitcoin from anywhere.

On the other hand, cold wallets, like hardware wallets, are more expensive but offer a higher level of security. They remain offline most of the time, significantly reducing the risk of cyberattacks. While they provide superior security, they can be less convenient for users who need regular access to their funds.

Ultimately, determining the “right” crypto wallet for you is about understanding where on the “absolute security” vs “ultimate convenience” spectrum your crypto strategy most closely aligns.

Check out our article How to keep crypto safe to learn more about the best practices associated with keeping your bitcoin secure.

Start buying Bitcoin

Now that you have learned all about Bitcoin, are you ready to take the next step in your crypto journey? Kraken lets you buy Bitcoin and 300+ other types of cryptocurrencies.

Interested in becoming a Bitcoin holder? Check out our Kraken Learn Center on How to buy Bitcoin (BTC) and sign up for an account with Kraken today.