What Is Bitcoin? BTC Price and How It Works

Bitcoin, the first and most valuable cryptocurrency, has grown from a fringe experiment into one of the hottest tickets in global finance.
Jun 1, 2022

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BTC definition: What is Bitcoin?

Bitcoin is a form of digital cash that eliminates the need for central authorities such as banks or governments. Instead, Bitcoin uses a peer-to-peer internet network to confirm purchases directly between users.

Launched in 2009 by a mysterious developer known as Satoshi Nakamoto

, Bitcoin (BTC) was the first, and most valuable, entrant in the emerging class of assets known as cryptocurrencies.

Bitcoin price today

The following chart shows current and historical Bitcoin price data.

How does Bitcoin work?

Each Bitcoin is a file stored in a digital wallet on a computer or smartphone. To understand how the cryptocurrency works, it helps to understand these terms and a little context:

  • Blockchain: Bitcoin is powered by open-source code known as blockchain, which creates a shared public history of transactions organized into "blocks" that are "chained" together to prevent tampering. This technology creates a permanent record of each transaction, and it provides a way for every Bitcoin user to operate with the same understanding of who owns what.

  • Private and public keys: A Bitcoin wallet contains a public key and a private key, which work together to allow the owner to initiate and digitally sign transactions. This unlocks the central function of Bitcoin — securely transferring ownership from one user to another.

  • Bitcoin mining: Users on the Bitcoin network verify transactions through a process known as mining, which is designed to confirm that new transactions are consistent with other transactions that have been completed in the past. This ensures that you can’t spend a Bitcoin you don’t have, or that you have previously spent.

» Ready to invest in Bitcoin? Our picks for the best Bitcoin and cryptocurrency exchanges.

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How does Bitcoin make money?

New Bitcoins are created as part of the Bitcoin mining process, in which they are offered as a lucrative reward to people who operate computer systems that help to validate transactions.

Bitcoin miners — also known as "nodes" — are the owners of high-speed computers which independently confirm each transaction, and add a completed "block" of transactions to the ever-growing "chain," which has a complete, public and permanent record of every Bitcoin transaction.

Miners are paid in Bitcoin for their efforts, which incentivizes the decentralized network to independently verify each transaction. This independent network of miners also decreases the chance for fraud or false information to be recorded, as the majority of miners need to confirm the authenticity of each block of data before it's added to the blockchain, in a process known as "proof of work."

How do I start mining Bitcoin?

As Bitcoin has grown in popularity and value, competition for the rewards offered by mining has grown steeper. Most miners now use specialized computers designed just for that purpose. This equipment uses a huge amount of energy, a cost that can be another barrier to entry.

All of this means Bitcoin mining is a difficult proposition for a beginner, though some smaller operators choose to join mining pools in which they combine their computing power with others in an attempt to compete for rewards.

If you’re interested in getting started, a first step would be to research some popular mining pools and what they require.

Can Bitcoin be converted to cash?

Like many other assets, Bitcoin can be bought and sold with fiat currencies such as the U.S. dollar. The price will depend on the current market value, which can fluctuate significantly from day to day.

If you’re looking to buy or sell Bitcoin, you have a handful of choices. But for most beginners, the simplest approach is using a cryptocurrency exchange.

Some of these are operated by online stock brokerages, and others are independent. But given Bitcoin’s prominence in the market, you can trade it at pretty much any platform that offers crypto.

Here are some other options for buying and selling Bitcoin:

You decide: Is Bitcoin a good investment?

Buying cryptocurrency exposes you to a volatile asset class. A common rule of thumb is to devote only a small portion of a diversified portfolio to risky investments such as Bitcoin or individual stocks.

Whether or not Bitcoin is a good investment for you depends on your individual circumstances, but here are a few pros and cons of Bitcoin to consider.

Bitcoin pros

  • Private, secure transactions anytime — with fewer potential fees. Once you own Bitcoin, you can transfer them anytime, anywhere, reducing the time and potential expense of any transaction. Transactions don’t contain personal information like a name or credit card number, which eliminates the risk of consumer information being stolen for fraudulent purchases or identity theft.

  • The potential for big growth. Some investors who buy and hold the currency are betting that once Bitcoin matures, greater trust and more widespread use will follow, and therefore Bitcoin’s value will grow.

  • Decentralization. After the financial crisis and the Great Recession, some investors are eager to embrace an alternative, decentralized currency — one that is essentially outside the control of regular banks, governing authorities or other third parties.

Bitcoin cons

  • Price volatility. While Bitcoin's value has risen dramatically over the years, buyers' fortunes have varied widely depending on the timing of their investment. Those who bought in 2017 when Bitcoin’s price was racing toward $20,000, for example, had to wait until December 2020 to recover their losses. And even though 2021 was a strong period for Bitcoin, it has since fallen substantially off of its all-time highs.

  • Hacking concerns. While backers say the blockchain technology behind Bitcoin is even more secure than traditional electronic money transfers, there have been a number of high-profile hacks. In May 2019, for instance, more than $40 million in Bitcoin was stolen from several high-net-worth accounts on cryptocurrency exchange Binance. (The company covered the losses.)

  • Limited (but growing) use. A handful of merchants have begun accepting Bitcoin as payment. But these companies are the exception, not the rule.

  • Not protected by SIPC. The Securities Investor Protection Corporation insures investors up to $500,000 if a brokerage fails or funds are stolen, but that insurance doesn’t cover cryptocurrency

    .

Storing your Bitcoins: Hot wallets vs. cold wallets

If you decide to buy Bitcoin, you’ll need a place to store it. Bitcoins can be stored in two kinds of digital wallets:

  • Hot wallet: You can often store cryptocurrency on exchanges where it is sold. Other providers offer standalone online storage. Such solutions provide access through a computer browser, desktop or smartphone app.

  • Cold wallet: An encrypted portable device much like a thumb drive that allows you to download and carry your Bitcoins.

Basically, a hot wallet is connected to the internet; a cold wallet is not. But you need a hot wallet to download Bitcoins into a portable cold wallet.

Neither the author nor editor held positions in the aforementioned investments at the time of publication.

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