What’s Bitcoin? An in-depth 101 on BTC

Digitization defines 21st-century life. Everything from shopping to socializing is online, so it’s no surprise that finance has gone digital, too. Even centuries-old sectors like banking are adapting to this global shift with high-tech products and services. And one of the most transformative changes came when, in 2009, a pseudonymous creator – Satoshi Nakamoto – brought Bitcoin (BTC) to life. That moment sparked a new era of digital currency and continues to reshape how the world thinks about money.

From solo investors to government agencies, more of the world is warming up to Bitcoin’s potential than ever before. But before buying BTC or using a cryptocurrency exchange, it’s important to understand exactly what Bitcoin is – and how it works – to make sense of both the opportunities and risks.

Here, we’ll tell you what you need to know.

When did Bitcoin come out, and what's its purpose?

Bitcoin’s origin story remains one of the biggest mysteries in modern finance. While it’s clear that someone – or a group – called Satoshi Nakamoto created the Bitcoin protocol, the true identity behind the name is still unknown. Tech historians have only theories about the who, what, and why behind Bitcoin’s beginnings. Still, a few early milestones help piece together how this cryptocurrency came to be.

The idea of Bitcoin first surfaced in 2008 when Nakamoto published a white paper describing the protocol as a peer-to-peer (P2P) "electronic cash system." From the beginning, Nakamoto envisioned Bitcoin as a trustless and tamper-resistant form of payment that doesn’t rely on banks or centralized oversight. Instead, people could store BTC in private digital wallets and transact directly online without intermediaries. 

To counter the inflation qualities of fiat currencies, Nakamoto deliberately capped Bitcoin’s supply at 21 million coins. That built-in scarcity, combined with transparency on a public blockchain, gave Bitcoin the foundation to grow as both a currency and a long-term store of value.

Nakamoto turned theory into reality in 2009 by launching the open-source Bitcoin Network. Early contributors – mostly cryptography enthusiasts and curious developers – began mining BTC using their personal computers to validate transactions and secure the blockchain. Some of Bitcoin’s first adopters distributed BTC for free to encourage experimentation with the new digital currency. One of the most famous early use cases came in 2010 when developer Laszlo Hanyecz paid 10,000 BTC for two Papa Johns pizzas – the first documented real-world purchase using cryptocurrency as a form of payment.

Bitcoin’s growth was gradual at first, spreading across online forums and niche tech communities before capturing mainstream attention. Despite Bitcoin's price volatility and regulatory uncertainty, BTC has continued to gain traction as a decentralized alternative to fiat currency like the U.S. dollar and the euro. Now widely viewed as both a legitimate store of value and a speculative digital asset, Bitcoin’s total market cap surpassed $1 trillion for the first time in 2021. By 2024, it reached a record-breaking price of $100,000, cementing its status as the world’s flagship cryptocurrency,

How does Bitcoin work?

Although Bitcoin uses complex cryptography, understanding this decentralized tech’s inner mechanisms doesn't have to be cryptic. Here’s a breakdown of Bitcoin functions, from blockchain basics to how miners validate transactions and create new BTC.

Blockchain technology

At the heart of Bitcoin – and all cryptocurrencies – is a virtual ledger called the blockchain. This system records every transaction in data “blocks” that are linked together in the chronological order. Each block includes a cryptographic code (or “hash”) generated from its content and the previous block’s hash, creating a chain that’s nearly impossible to alter once published. 

The blockchain payment ledger is not only transparent and tamper-resistant – it's also distributed across a global network of independent computers (or nodes) that power the system. Each node stores a copy of the full transaction history, making it even more difficult for bad actors to interfere.

Blockchains use specific consensus algorithms to determine how nodes validate and publish new transaction details – and typically reward participants with the chain’s native cryptocurrency. For Bitcoin, that’s BTC, which miners earn by maintaining the network. Its consensus algorithm is proof-of-work (PoW), commonly known as “Bitcoin mining.”

Bitcoin mining 

In Bitcoin's PoW model, blockchain miners compete roughly every 10 minutes to solve a complex algorithmic puzzle for the chance to publish the next block of transactions. When a miner successfully creates a block, they receive BTC as a block reward—this is how new bitcoins enter circulation.

When Bitcoin launched, the reward amount started at 50 BTC per block. Every four years, the protocol triggers a “halving event,” which reduces the reward amount by half. This built-in schedule will continue until miners have brought all 21 million coins into circulation.

In Bitcoin’s early days, anyone with a basic personal computer could mine blocks and potentially earn BTC. But as the cryptocurrency’s value increased, Bitcoin mining became more competitive. Now, only miners with specialized machines called Application-Specific Integrated Circuits (ASICs) are likely to win block rewards. 

The Bitcoin Network

To send or receive Bitcoin, users need a crypto wallet to store BTC securely. Two types of wallet exist: digital (or “hot”) wallets, which stay connected to the internet for quick access, and hardware (or “cold”) wallets, which store private keys offline for added security.

Bitcoin wallets contain a pair of cryptographic keys: a public key, which acts like an address for receiving payments, and a private key, which functions like a password to digitally sign and approve transactions. While sharing a public key to receive BTC is safe, private keys must be kept secret. If someone else gains access to your private key, they can spend your cryptocurrency.

When a user transfers BTC, their wallet broadcasts the data to the Bitcoin Network. Nodes verify that the sender has enough BTC and that the sender’s wallet has digitally signed the transaction using the correct private key. Once validated, the winning miner bundles the transaction into a new block, mines it, and adds it to Bitcoin’s public ledger.

Commodity or security: What's the legal status of Bitcoin? 

Although no centralized authority issues or manages the Bitcoin blockchain, governments still influence how people can legally buy, sell, and trade BTC. For example, in the United States, the Commodity Futures Trading Commission (CFTC) officially classifies Bitcoin as a commodity and regulates BTC accordingly in futures and derivatives markets. This stance reflects a broader global trend: While regulatory views vary from country to country, many authorities categorize Bitcoin this way because its mining process intentionally mirrors how miners extract precious metals like gold.

Classifying Bitcoin as a commodity has major regulatory implications. Unlike securities – such as stocks or bonds – commodities aren’t subject to the same strict disclosure rules or ongoing oversight. In the United States, that oversight falls to the Securities and Exchange Commission (SEC), which monitors companies that issue securities and enforces laws that govern them.

Because Bitcoin lacks a central issuer and operates independently of any controlling entity, many legal experts argue it doesn't meet the definition of a security. The SEC relies on the Howey Test – a legal framework for identifying securities – to make that determination. Since Bitcoin doesn’t involve an investment contract or a centralized enterprise, it falls outside that classification.

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How to use Bitcoin: Three ways to get involved with BTC

The original vision for Bitcoin was to serve as a P2P digital currency. And while it’s still possible to use BTC for purchases, its long-term price appreciation and short-term volatility have made it more attractive as an asset for investors and traders alike.

1. Investing in Bitcoin

From 2009 to 2024, Bitcoin’s per-coin price surged from $0.0009 to $100,000 – more than 11 billion percent. Gains like that probably won’t happen again, but many investors still believe in BTC’s long-term potential, pointing to its fixed supply, growing adoption, and increasing accessibility. That outlook especially resonates with those who accept the volatility that comes with crypto and prefer to hold onto their assets over time rather than trade frequently. In crypto culture, that buy-and-hold strategy is known as “HODLing” – short for “hold on for dear life”).

More recently, derivative contracts like spot Bitcoin ETFs have made it easier to gain exposure without directly buying and storing coins through crypto exchanges. Instead, Bitcoin ETFs allow investors to purchase shares in a trust that holds Bitcoin on their behalf, eliminating the need to set up a crypto wallet, manage private keys, or worry about securely storing BTC. For those not ready to self-custody digital assets, this can be a far more accessible and familiar way to invest in Bitcoin.

2. Bitcoin trading 

Trading Bitcoin is a more active strategy focused on short-term price movements. Unlike investing, this approach aims to capitalize on volatility and requires a disciplined strategy, risk management skills, and technical analysis tools. Traders often use chart patterns, indicators, and automated buy or sell orders to avoid emotional decision-making.

Beyond providing a platform for traders to buy and sell Bitcoin directly, many crypto exchanges also offer options, futures, and perpetuals. These products track Bitcoin’s price and allow traders to increase their position sizes by borrowing funds on margin. That said, margin trading comes with added risk – if the market moves against the trader, they could lose their entire position.

3. Bitcoin for transactions 

Paying for everyday purchases directly from a self-custodial Bitcoin wallet has yet to go mainstream in most places, but a few tools offer workarounds. Some crypto exchanges, like Coinbase, offer crypto debit cards that let users spend BTC by pulling from their crypto balance  – just like a regular Visa or Mastercard. Fintech apps like PayPal also support crypto payments if the vendor accepts PayPal. In both cases, users spend their BTC, but a third-party provider – like Coinbase or PayPal – instantly sells the crypto and delivers the fiat equivalent to the merchant.

For P2P Bitcoin transactions, users can send BTC directly between wallets. To do this, the sender copies or scans a QR code representing the recipient’s Bitcoin wallet address and enters it into their own wallet. For example, if you wanted to transfer BTC from a Coinbase account to a Trezor wallet, here are the steps you’d follow:

1. Copy the Bitcoin address from the Trezor wallet.
2. Log in to Coinbase and navigate to the Bitcoin page.
3. Choose the option to send Bitcoin.
4. Enter the amount of Bitcoin to send and paste the Trezor wallet address.
5. Confirm the transaction and pay any applicable transfer fees.

Advantages and disadvantages of Bitcoin

Despite Bitcoin's successes, the world's first cryptocurrency still faces many questions and critiques. If you’re considering buying BTC, it’s important to weigh its pros and cons first:

Bitcoin pros

• Long history of security: Bitcoin's PoW mining system has operated reliably since its 2009 launch, with no successful hacks or exploits. As the number of nodes on Bitcoin's blockchain grows, threats like 51% attacks – where one party controls the majority of mining power to manipulate transactions – become less likely due to the steep energy and hardware demands.
• No intermediaries: One of Bitcoin's core characteristics is its P2P design. There's no need for a bank, payment processor, or government to approve transactions, giving people full control over their digital currency. 
• Global scale and network effect: Bitcoin doesn't have the same border restrictions as traditional financial systems. Anyone with internet access can participate, making Bitcoin one of the most accessible forms of capital. 
• Growing mainstream adoption: More companies and governments than ever are simplifying the process of buying and storing Bitcoin. From user-friendly wallets to trading platforms and legalization efforts, joining the crypto economy is becoming easier by the day.

Bitcoin cons 

• Scalability challenges: Despite upgrades like SegWit and Taproot, the Bitcoin blockchain still handles only about seven transactions per second. And during times of congestion, transaction fees often spike. Layer 2 solutions like the Lightning Network aim to improve scalability, but development remains early-stage. 
• Irreversibility: Once confirmed, a Bitcoin transaction can't be undone. If someone sends funds to the wrong crypto address or falls victim to a scam, there's no way to recover them.
• Uncertain future: While the list of countries that welcome Bitcoin continues to grow, there are still many unknowns over how the network will evolve in the coming years. Advances in technologies like quantum computing could introduce new challenges or vulnerabilities in Bitcoin's code. 
• Steep learning curve: Managing BTC isn’t always intuitive for those used to traditional finance. Concepts like crypto wallets, private keys, and network fees can be difficult to grasp, and mistakes – like losing a private key – can lead to permanent loss of funds. 

Bitcoin vs. altcoins: A 101 on BTC alternatives

Between 2009 and 2011, Bitcoin was virtually synonymous with cryptocurrency. But as more developers began exploring blockchain technology, they started launching alternative coins – also known as altcoins – with different designs, use cases, and consensus models.

Currently, thousands of altcoins exist, each with its own mission statement and risk profile. Because of their smaller market caps and more speculative nature, altcoins generally experience greater price volatility than Bitcoin. But that doesn’t mean they’re not worth considering.

Here are a few of the dominant players in the altcoin space:

Ethereum

Second only to Bitcoin by market cap, Ethereum (ETH) introduced smart contracts – self-executing agreements stored on the blockchain. This innovation turned Ethereum into more than just a P2P digital currency exchange. Instead, it became a programmable platform for building decentralized applications (dApps), laying the groundwork for a decentralized internet (web3). Since its launch, Ethereum has given rise to new sectors like decentralized finance (DeFi), GameFi, and non-fungible tokens (NFTs).

Solana

Launched in 2020 by software engineer Anatoly Yakovenko, Solana (SOL) aimed to create a more scalable smart contract blockchain. It stands out for its proof-of-history (PoH) system, which enables the network to process thousands of transactions per second with low fees and significantly faster throughput than many other blockchains.

Ripple

Ripple Labs created the XRP Ledger to be a faster and more energy-efficient alternative to Bitcoin. Built into the ledger is its native coin, XRP (XRP), which facilitates international transfers, especially between financial institutions. Instead of using a mining-based consensus system, the XRP Ledger relies on a unique protocol where trusted validators – some of which are banks – help confirm and process cross-border payments.

Dogecoin (DOGE)

Dogecoin (DOGE) began as a joke about crypto investing, but it quickly grew into one of the most recognizable cryptocurrencies. Built by Billy Markus and Jackson Palmer using the Litecoin (LTC) codebase, Dogecoin takes its name from the viral "Doge" meme and has long been used for tipping on platforms like Reddit. In 2021, Dogecoin gained widespread attention thanks to media buzz and several celebrity endorsements.

Getting into Bitcoin? Use CoinTracker for your taxes

One of the biggest challenges of investing in Bitcoin – or any altcoin – is understanding crypto’s unique tax implications. Regulations are constantly evolving, and tax treatment depends on both where you live and how you use digital assets. But for crypto traders in the U.S., one thing’s for sure: The IRS requires you to report every transaction. And that can get complicated – fast.

But CoinTracker makes crypto tax reporting simple.

With CoinTracker’s Portfolio Tracker, you can connect your wallets and exchange accounts to see real-time data across your entire web3 portfolio. CoinTracker uses advanced algorithms to identify and log different transaction types, such as buys, sells, swaps, airdrops, and staking rewards. It also organizes everything into IRS-compliant forms that are ready for your CPA or tax software like TurboTax and H&R Block.

Start using CoinTracker for free and see how easy it is to take the stress out of crypto taxes. 

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.