Bitcoin – What is it and how does it work?

Bitcoin gets its own section because frankly, it’s the most famous cryptocurrency out there.  Sure, Ethereum, Cardano and lots of others are worthy projects, but every time bitcoin goes up in price, the alternative cryptocurrencies (commonly called ‘altcoins’) go up too. Every time bitcoin goes down, the altcoins follow. Bitcoin is currently a significant influence on the value of all digital assets.

This is the sixth section of the Cryptocurrency and Blockchain awareness programme,
How to Crypto.

People who only believe in Bitcoin are referred to as ‘Bitcoin maximalists’ and those that think Bitcoin is outdated in favour of alternatives are known as, ‘Altcoin Maximalists’. In this section we concentrate on Bitcoin.

Simple Question, What Is Bitcoin?

Bitcoin logoBitcoin is a digital asset or cryptocurrency which operates without the need of a central bank or government. It uses a peer-to-peer network and software that utilises cryptography when generating coins and validating transactions on its network.

A public ledger records all bitcoin transactions which are stored as blocks and these are also “chained” together for security. Copies of the ledger are held on servers all around the world – not in any central location.

Bitcoin was the first blockchain cryptocurrency. It has since become a currency for investors and not is really used very much as a currency to buy things.  It’s mostly used to transfer money, trade on exchanges and is regularly compared to gold as a store of value.

A Brief History of the Bitcoin Cryptocurrency

Bitcoin was created in 2009 at the end of an economic recession. Its creator, Satoshi Nakamoto, designed it to be an electronic peer-to-peer cash system which could not be controlled by any one organisation or government.

When the whitepaper explaining the concept was published in 2008 to a cryptographic bulletin board on the internet. The curious readers encouraged it’s further development and when Satoshi Nakamoto created the Genesis block (first block on the blockchain) on January 3rd 2009, the first Bitcoins were generated (mined).

Satoshi Nakamoto is notoriously anonymous.  Nobody knows who he is – or who they are. Mr. Nakamoto could be a group of people!

Damian Nakamoto - Not Satoshi Nakamoto
In 2014, Newsweek printed a story claiming that Damian Nakamoto was Satoshi Nakamoto. He isn’t and had not even heard of bitcoin until the article was published. It seems to have stuck to the poor guy though, if you search Google for Satoshi Nakamoto, you will usually see a picture of Damian. Newsweek have always claimed that that the story is true.  {Picture credit: CBC.CA}

It’s believed however that the author of the whitepaper is British, or was educated in Britain, or was at least taught English using British spellings, double spaces after full stops etc. Even though written in the correct English syntax ( 🙂 ) I’ve personally tried to understand the whitepaper and found it a little too technical. I’m told it’s very clear to those interested in mathematics and cryptography.

How Bitcoin Works

Bitcoins are created as a reward from a complex mathematical process called ‘Mining’. Lots of computer systems are working at this although there will never be any more that 21 million bitcoin mined. At the moment, there are around 19 million coins and it will take approximately 120 years to mine the rest.

The term Blockchain refers to the viewable ledger that stores all bitcoin transactions. All of them are traceable – every single one.  The idea that criminals use bitcoin to be able to hide their naughty deeds is ludicrous since each bitcoin transaction is recorded on a public ledger – many, many criminals have been caught because they failed to remember this, and because the tools to interrogate the blockchain ledger are becoming more and more sophisticated.

Introduction to Crypto Currency

When Bitcoin was originally released, Satoshi Nakamoto ensured that specific parameters were set and that these couldn’t be changed without mass consensus (i.e. by bitcoin miners on the network – at least 51% of them).  Those parameters determine how many bitcoins could be mined, how they could be created, transferred and stored. Since there will only ever be a finite amount, bitcoins are regarded as a scarce resource.  Although regularly compared to gold, bitcoins are, in fact, even scarcer since gold as gold veins are discovered regularly (which may explain why the gold price has stayed at roughly the same over the last 10 years).

Public Wallet addressBitcoins are stored in wallets which, to me, are rather like an email account. Bitcoin wallets have a Public Key and a Private Key.  The public key of your bitcoin wallet is like an email address ( and the Private Key would be like the email account password.  You would be ok with letting people know your address (or Public Key) but you would never let anyone see your email account password (Private Key). If you wanted someone to send you some bitcoin, you would provide your public key rather than the private key. This is perhaps an oversimplification but hopefully, it should make it easier to understand.

Secure storage of your cryptocurrency is very important, especially when you consider that there are no cryptocurrency banks! Although this is considered a positive thing by most cryptocurrency advocates, it can be concerning when you realise that only you can be responsible for securing your cryptocurrency fortune.  If you lose your wallet or forget the keys, or send the currency to the wrong address, you will lose your currency.

It’s estimated that of the 19,000,000 bitcoin out there, at least 3,500,000 have already been lost forever (that’s over 100 Billion dollars worth!).  Mind you, for the first few years, bitcoin didn’t have much of a value and there was little concern for security and custody of the coins.

Bitcoins are created by miners as a reward each time they solve a complex mathematical equation.  Strictly speaking, the ‘equation’ is actually complex computers guessing the answer to a mathematics problem – they do this at huge speeds in the hope that they can beat other miners to get the answer. If they get the answer right, they are rewarded with a specific amount of Bitcoin which they can then trade or hold in their wallets. Meanwhile a block is created and consensus from other mining operations is achieved (i.e. the block is validated) and the block is written to the blockchain.  This mechanism of consensus is known as ‘Proof of Work’.

You could become a bitcoin miner yourself but the bitcoin mining computer systems (also known as ‘nodes’) are very powerful and expensive to run. They use huge amounts of electricity – some bitcoin mining operations use as much electricity as a city!

Crypto Mining Setup Building

Currently, around 900 new bitcoins are rewarded each day to many mining operations spread all over the world. This means that around 144 blocks are created on the bitcoin blockchain.  This equates to 6.25 Bitcoins per block.

It hasn’t always been 6.25 bitcoin per block.  Satoshi Nakamoto built into the code a condition that for every 210,000 blocks created on the blockchain, the value of bitcoins rewarded should be cut in half.  It takes approximately 4 years to create that many blocks and the next one is due in the second half of 2024.  The rewards for creating a block will then be cut from 6.25 to 3.125.  Eventually, the reward will go to 0 (it’s estimated that this will take around 120 years).

Bitcoin, Cryptocurrency to the Moon

Bitcoin halving’s have happened three times so far and every time they do, the currency becomes more scarce – when this happens, price goes up considerably.  Notably, the price never returns to the previous cycle highs, it just goes higher.  Some say that in the next few years, certainly within our lifetime, bitcoin will reach over $1,000,000.

Because most cryptocurrency enthusiasts view bitcoin as a store of value, you wouldn’t use it as a currency to for instance, buy a coffee. Bitcoin is more valuable that your fiat currency. This is because it increases in value over time in comparison to fiat assets. We should use fiat money to to pay for things as this is an inflationary asset, it de-values over time. Fiat cash is for spending, bitcoin is for saving.

Bitcoin graphic

The reason Bitcoin is so volatile (it can have price swings of 20% – 80% up or down!) is because the market is still immature.  A lot of investors expect to buy cryptocurrency and get-rich-quick. Although there are an estimated 100,000 wallets with more than a million dollars worth of bitcoin in them, most people behave very poorly when they invest in cryptocurrencies.  They buy when everyone else is buying (when the price is near the top) and sell when the price starts to drop rapidly. This adds to bitcoins volatility.

As the market matures, such volatility is expected to get better in the next few years as more people become familiar with the technology and the currency but until then, we will continue to hear terrible stories of people who invested poorly and have lost all their money.

Interesting facts about the Bitcoin Cryptocurrency

There are lots of interesting facts about Bitcoin as it has increased in value over the years;

    • HODL is a term that was started by a bitcoin investor who posted on a bulletin board that he would hold onto his bitcoin for dear life!  He mistyped the word hold and the term has stuck.  If you hold bitcoin (in fact any cryptocurrency) for the long term, you are known as a hoddler.
    • Headline: 2019 “Bitcoin will soon be worth zero” – New York Post (Value at the time: $7,995).  When you consider that bitcoin subsequently went down by almost $4000 dollars, The New York Post may be forgiven for it’s doom-and-gloom headline.  At the time of writing this article, we are at the start of a bear market and the press are writing similar types of headlines.  Bitcoin has crashed almost 60% and in now valued at a poultry $30,000 (down from a recent high of $69,000).
    • In 2009, Satoshi Nakamoto generated the first bitcoin block (Genesis Block) in the blockchain and to mark the historic event, he recorded in the block, a headline from the London Times, “The Times 03 Jan 2009, Chancellor on Brink of Second Bailout for Banks.”
    • In 2009, if you mined a Bitcoin cryptocurrency block it could have been done on any old cheap computer and you would have been rewarded with 50 Bitcoins.  In 2013 it became a little more competitive as the price of bitcoin increased – rewards were cut to 25 Bitcoin.  In 2017 the rewards for creating a block dropped to 12.5 and today they stand at 6.25.  In 2009 bitcoin was worth a fraction of a cent.  In 2013 it was worth about $1000, In 2017 it shot up to just under $20,000.  Last halving, Bitcoin rose to over $65,000.
    • On May 22nd of 2010, Laszlo Hanyecz paid 10,000 BTC for two Papa John’s pizzas, which cost about $41. If those pizzas were bought today, they would cost more than $300 million. May 22nd is now known by cryptocurrency fans as ‘Bitcoin Pizza Day’.
    • You can buy fractions of a bitcoin.  A Satoshi is a 100,000,000th of a bitcoin.
    • The only known bug: On 15 August 2010, the vulnerability was spotted after it was exploited by creating billions of bitcoin in two separate accounts. Within hours, the transactions were spotted and the bug was fixed and the blockchain was updated by with a new version of the software. It was the only major exploit in the history of bitcoin.
    • Bitcoins don’t actually exist (either digitally or physically).  Only their transaction information exists on the Bitcoin blockchain.  When coins are minted (as a reward for the creation of a block), the Bitcoin software and consensus mechanism rewards the miner by creating and recording a transaction that deposits bitcoin in the miners bitcoin wallet address.  No actual bitcoins are sent, a transaction is simply recorded on the blockchain.
    • Bitcoins don’t have serial numbers or denominations etc. since the only reason that they exist is to form part of a financial transaction. You will never be able to list all the bitcoins in your wallet as they simply don’t exist.  You can however trace every financial transaction to and from any wallet as this is all recorded on the Blockchain since the very first bitcoin was minted.


In section seven will look at the considerations you need to address before you begin the process of investing in cryptocurrencies: Investment in Cryptocurrencies – Basic Awareness.


This article is copyright 2022 by Tony Fawl, CryptoNET.

This page is part of the How to Crypto Web Series, an awareness course for beginners interested in blockchain projects and cryptocurrency investment. Please checkout the Bibliography and Glossary of Terms pages for other useful resources and links. To find out what we do, take a look at the About Us page.

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