What is Bitcoin: An Intermediate Guide

Introduction

Bitcoin is a decentralised cryptocurrency launched in 2009 by an anonymous figure known as Satoshi Nakamoto. Unlike traditional money managed by banks or governments, Bitcoin operates on a peer-to-peer network, enabling users to send and receive funds directly, with cryptography ensuring the security of each transaction. It’s designed to be a global, digital alternative to cash, independent of any single authority.

How Does Bitcoin Function?

Bitcoin relies on a technology called the blockchain — a distributed public ledger that records every transaction across a network of computers (nodes). Here’s how it works in practice:

Transaction Broadcast: When you initiate a Bitcoin payment, the transaction (sender, receiver, amount) is broadcast to the network of nodes.
Verification: These nodes verify the transaction against Bitcoin’s rules (the protocol) – ensuring, for example, that the sender actually owns the bitcoins they’re trying to spend and hasn’t already spent them elsewhere.
Mining (Proof-of-Work): Special nodes called miners then group a batch of pending transactions into a “block.” Miners compete to solve a complex mathematical puzzle (a cryptographic hash problem) for that block – this process is known as proof-of-work. The first miner to solve the puzzle wins the right to add the new block to the blockchain.
Block Addition & Reward: Once a valid solution is found, the block is added to the blockchain. The winning miner broadcasts this to all other nodes, which then update their copies of the ledger. As a reward for securing the network, the miner earns newly minted bitcoins (the “block reward”) plus the transaction fees from the included transactions.
Consensus & Security: Each added block links to the previous one (hence blockchain), and the network reaches consensus on the official ledger. Once confirmed, transactions become extremely difficult to alter because changing a past block would require redoing the proof-of-work for that block and all blocks after it, across the majority of miners. This makes the transaction history immutable and tamper-resistant.

This system of distributed verification and proof-of-work consensus ensures Bitcoin transactions are secure, transparent, and censorship-resistant. No central authority is needed – trust is placed in the network’s rules and cryptography rather than in any single intermediary.

Key Characteristics

Decentralization: Bitcoin is not controlled by any single entity or central bank. Thousands of independent nodes around the world maintain the network, so no government or corporation can arbitrarily change its rules or supply. The network is run by its users, and decisions are made through community consensus.
Fixed Supply: There will only ever be 21 million bitcoins in existence, a limit coded into the protocol. New coins are released gradually as mining rewards, and this issuance rate is cut in half approximately every four years (a process called the halving).
Pseudonymity: Bitcoin transactions are not tied to real-world identities. Instead, they use addresses – strings of letters and numbers – that act like one-time pseudonyms. Anyone can view transactions on the public ledger, but it’s not immediately obvious who owns which address.
Immutability: Once a transaction is confirmed on the blockchain, it’s extremely difficult to reverse or alter. Each block is cryptographically linked to the previous one, creating a tamper-resistant ledger.
Divisibility: Each BTC is divisible into 100 million units, called satoshis (sat). This allows for very small transactions even when Bitcoin’s price is high.

Using Bitcoin

Wallet: A Bitcoin wallet stores your private keys – passwords for accessing your bitcoins. Wallets can be mobile apps, hardware devices, or paper backups. Protect these keys.
Bitcoin Address: A string of characters generated by your wallet to receive funds – similar to an email address. A new address can be generated for each transaction to increase privacy.
Acquiring Bitcoins: Common methods include buying through exchanges (e.g. Coinbase, Kraken), peer-to-peer trades, or accepting bitcoin for goods/services. Mining is also possible but generally not practical for most newcomers.
Making Transactions: Transactions are signed with your private key and broadcast to the network. You’ll attach a miner fee – higher fees get faster confirmation. Most wallets recommend a fee amount automatically.

Practical Applications

Payments: Bitcoin is accepted by thousands of merchants globally, including online and brick-and-mortar businesses. Its use for payments is growing, with solutions like the Lightning Network helping improve scalability.
Remittances: Bitcoin allows faster, cheaper international money transfers, avoiding the fees and delays of traditional remittance services.
Store of Value: Often called “digital gold,” Bitcoin’s fixed supply and decentralised nature make it appealing for long-term holding and hedging against inflation.
Smart Contracts: Bitcoin supports basic smart contracts through scripting – including multi-signature, time-locks, and hashed time-lock contracts for tools like the Lightning Network.

Challenges to Understand

Volatility: Bitcoin’s price is highly volatile, with large swings influenced by market sentiment, regulation, and macroeconomic news.
Scalability: Bitcoin’s on-chain capacity is limited to around 3–7 transactions per second. Scaling solutions like Lightning Network help address this, but base-layer throughput remains a constraint.
Energy Use: Bitcoin’s proof-of-work system consumes significant electricity. While some mining uses renewables or stranded energy, environmental concerns remain a key debate.

Next Steps

You now have an intermediate-level overview of what Bitcoin is, how it works, and the key considerations around it. From the basics of blockchain and mining to its use cases and challenges, you’re better equipped to understand this revolutionary digital currency.

For more advanced knowledge, check out our Expert Guide to Bitcoin.

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