What is bitcoin? How it works, who controls it and how it's regulated

Bitcoin was the first cryptocurrency and is still the largest. You can buy it in a few minutes on an exchange, but it’s worth understanding what you’re actually buying. This guide explains bitcoin from its primary sources: the original white paper, the reference software and what regulators say about it.

Where bitcoin came from

In 2008, someone using the name Satoshi Nakamoto published a short paper titled Bitcoin: A Peer-to-Peer Electronic Cash System. Its abstract begins:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.

The network went live with its first block, the genesis block, timestamped 3 January 2009. Satoshi Nakamoto’s real identity has never been confirmed.

The problem bitcoin solves

Digital money has an obvious weakness: a digital file can be copied. Without a bank keeping the books, what stops someone from spending the same coin twice? The white paper calls this the double-spending problem, and proposes a solution:

• Every transaction is broadcast to a peer-to-peer network.
• The network timestamps transactions by hashing them into an ongoing chain of proof-of-work, which can’t be changed without redoing that work.
• Nodes treat the longest chain, the one with the most work behind it, as the true history. As long as most computing power is honest, the honest chain stays ahead of attackers.

That chain of blocks is the bitcoin blockchain. For how blocks link together, see what is a blockchain?

How new bitcoins are created

The white paper explains the incentive: by convention, the first transaction in each block creates new coins owned by whoever created the block. That rewards miners for securing the network and is how coins enter circulation, since there’s no central authority to issue them.

The rules in Bitcoin Core, the reference software, set the reward:

• It started at 50 BTC per block.
• It’s cut in half every 210,000 blocks, roughly every four years.
• Bitcoin.org states that only 21 million bitcoins will ever be created. Because of rounding, the true total is very slightly below that.

Blocks are found about every 10 minutes on average. Miners also collect the transaction fees paid by users. Our guide to the bitcoin halving explains the schedule in detail.

Keys, addresses and wallets

You never hold a bitcoin as a file. What you hold is a private key: a secret number that lets you sign transactions moving bitcoin from your address.

• Your address is like an account number you can share to receive bitcoin.
• Your private key must never be shared. Whoever has it controls the funds.
• A wallet is software or a device that stores keys and signs transactions. Most wallets give you a recovery (seed) phrase that can rebuild all your keys.

You can let an exchange hold the keys for you (custodial), or hold them yourself (self-custody). Each has risks: see hot vs cold wallets and how to store your seed phrase.

What a bitcoin transaction looks like

1. You enter the recipient’s address and the amount in your wallet.
2. Your wallet signs the transaction with your private key and broadcasts it, with a fee.
3. Miners include it in a block, usually choosing transactions with higher fees first.
4. Each later block adds a confirmation. Many services wait for several confirmations before treating a payment as final.

There’s no “undo”. If you send to the wrong address, or to a scammer, there’s normally no way to get it back.

Is bitcoin private?

Less than many people think. The white paper explains the trade-off: because every transaction must be announced publicly, bitcoin can’t keep information private the way a bank does. Instead, privacy comes from keeping public keys anonymous:

• The public can see that someone is sending an amount to someone else, but not who they are, much as a stock exchange publishes the time and size of trades without naming the parties.
• As an extra safeguard, the white paper says a new key pair should be used for each transaction, so payments can’t easily be linked to one owner.
• But some linking is unavoidable: a transaction that combines several inputs reveals they belonged to the same owner. And if the owner of one key is revealed, other transactions could be traced back to them.

In practice, exchanges verify your identity, so the addresses you use with them can be linked to you. See block explorers and why exchanges ask for ID.

How bitcoin changes: SegWit and Taproot

There’s no company that can update bitcoin. Changes are proposed as Bitcoin Improvement Proposals (BIPs) and only take effect if the network adopts them. The two biggest upgrades so far were soft forks, backward-compatible changes:

• Segregated Witness (SegWit), BIP 141, activated at block 481,824 on 24 August 2017. It moved signatures into a separate structure called the “witness”. Because signature data is no longer part of the transaction ID, it fixed a long-standing problem called unintentional transaction malleability, where changing how a transaction was signed could change its ID.
• Taproot, BIPs 340 to 342, activated at block 709,632 on 14 November 2021. It introduced a new output type using Schnorr signatures and Merkle branches, aiming to improve the privacy, efficiency and flexibility of bitcoin’s scripts. For example, when everyone involved agrees, a payment with complex spending conditions can look like an ordinary one on the blockchain.

For how upgrades can split a chain when people disagree, see what is a hard fork?

Bitcoin’s timeline

See the bitcoin halving, bitcoin ETFs and the US Strategic Bitcoin Reserve.

How authorities treat bitcoin

Bitcoin isn’t regulated as a single thing everywhere. The same coin can fall under different rules depending on what you do with it:

• US tax (IRS): digital assets, including bitcoin, are property, not currency. Selling, swapping or spending it can create a capital gain or loss. See US crypto tax.
• US derivatives (CFTC): in 2015 the CFTC found, for the first time, that bitcoin and other virtual currencies are commodities under the Commodity Exchange Act. That’s why bitcoin futures fall under the CFTC.
• UK tax (HMRC) and Canada (CRA): both tax bitcoin gains, mainly as capital gains for investors. See UK and Canada.
• Exchanges: platforms that sell bitcoin must be registered or licensed in each country. See how to check.

Bitcoin is not legal tender in the US, the UK or Canada: shops don’t have to accept it, and it isn’t backed by a government. See is crypto legal?

The risks to understand first

• Volatility: the CFTC notes that virtual currencies’ value is driven purely by supply and demand and is more volatile than traditional currencies.
• No protection: bitcoin held on an exchange isn’t covered by deposit insurance. See is your crypto insured?
• Scams: fake platforms and impersonators target bitcoin buyers. See crypto scams and where to report them.
• Irreversibility: mistakes and thefts are usually permanent.

If you’re starting out, our start-here path goes through the basics in order.