Bitcoin is a peer-to-peer payment network and digital monetary system powered by its users with no central authority or middlemen. Bitcoin transactions are recorded into a distributed, replicated public database known as the blockchain. The blockchain is shared and maintained by a decentralized network of computers which together form the Bitcoin network.
Bitcoin uses a native currency unit called "bitcoin (₿)", or BTC for short. A Bitcoin balance can be represented as a whole number (e.g. "10 BTC"), or fractionally (e.g. "0.001 BTC").
Bitcoin is divisible to 8 decimal places. The smallest unit of bitcoin is called a "satoshi" or "sat", and represents one hundred millionth of a bitcoin (0.00000001 BTC).
The Benefits of Bitcoin
Bitcoin eliminates the need for a trusted third party or central authority to facilitate digital payments. Payments are peer-to-peer, cryptographically secure, and irreversible. Unlike fiat currency whose supply is controlled by banks and governments, Bitcoin's supply is mathematically limited to twenty-one million bitcoin and this value can never be changed. This hard limit on supply protects the currency from inflation and devaluation. It also makes Bitcoin very attractive as a store of value, especially in countries with unstable currencies.
With Bitcoin, you can be your own bank. You are in complete control of your money, and there is no need to hand over control to a third party.
The price of Bitcoin is determined by supply and demand. When demand for Bitcoin increases, the price increases, and when demand falls, the price falls. There is only a limited number of bitcoin in circulation, and new bitcoin is created at a predictable and decreasing rate, which means that demand must follow this level of inflation to keep the price stable. Because Bitcoin is still a relatively small market compared to what it could be, it doesn’t take significant amounts of money to move the market price up or down, and thus the price of Bitcoin is still very volatile.
How Does Bitcoin Work?
Bitcoin is a decentralized network and protocol. This means that instead of using a trusted central authority to verify and process transactions, it uses a distributed network of computers owned and operated by users. These users run software that is used to record and verify transactions, and then they broadcast these transactions to the network. When a transaction is broadcast to the Bitcoin network, it is grouped together with other transactions and then added to a public ledger called the blockchain.
A Bitcoin user's wallet is like their bank account, except instead of storing money, it stores their Bitcoin balance. A user's bitcoin can be used to make payments, and all transactions are recorded in their wallet as well as on the blockchain. A wallet is often associated with a public Bitcoin address (which is similar to an account number) and a private key (which is similar to a password).
A Bitcoin address is like a bank account number. It is a unique string of numbers and letters that allows you to receive bitcoin. Unlike a bank account number, it is not linked to name, address or other personally identifying information.
Bitcoin addresses can be generated in many different ways, but most commonly they are created by a Bitcoin wallet app on a smartphone, computer or hardware wallet.
Bitcoin mining is the process of adding transaction records to the blockchain. To add records to the blockchain, a miner must solve a mathematical problem using computer hardware.
The Bitcoin network compensates Bitcoin miners for their effort by releasing bitcoin to those who contribute the needed computational power. This comes in the form of both newly issued bitcoin as well as from the fees included in each transaction.
In the early days of Bitcoin, it was possible to use your computer's CPU to mine bitcoin. As the network grew, however, mining power required dedicated hardware. Today, Bitcoin mining can only be done profitably with specialized purpose built hardware.
The Lightning Network is a system of smart contracts built on top of Bitcoin which enables near-instant, low-fee, scalable payments. It works by creating a network of payment channels where users can transact with one another without broadcasting all of their transactions to the blockchain. Lightning Network payments are secured by Bitcoin, so users don’t need to put their money at risk in order to make a payment.
Lightning enables new micro-payments capabilities for the Bitcoin blockchain. This allows for applications such as streaming "pay-per-view" content, instant and secure tipping to social media personalities, and machine-to-machine payments for Internet of Things devices.
How to Get Bitcoin
Bitcoin can be acquired by buying it through an online exchange or through a trading platform. Users can also send bitcoin to others directly, without the need of an intermediary.
To get started buying Bitcoin, take a look at our list of the best rated bitcoin exchanges.