What Is Bitcoin? (How It Works, Benefits, and Uses)

As the world becomes increasingly digital, many parts of our life may become less tangible. From social interactions on Facebook and video conferencing to buying digital property in the metaverse, many aspects of our lives have a virtual component.  We've moved from dealing with cash and debit cards for payment to tapping our smartphones and watches to pay for goods. 

Following the 2009 introduction of Bitcoin—the popular cryptocurrency that has been around the longest and is still active today. In this article, learn about Bitcoin cryptocurrency, what it’s used for, its history, how to earn it, and more. 

What is Bitcoin?

Bitcoin is one of the world’s largest cryptocurrencies, according to market capitalization. It’s a digital currency that works like real-world dollars and other currencies (called fiat) but is not regulated by a third party like banks, the government, or a company. You can earn Bitcoin as a reward for mining it, which involves verifying Bitcoin transactions. You can also purchase Bitcoin on various open exchanges or receive it when you sell something. 

The history of Bitcoin

Satoshi Nakamoto (assumed to be a pseudonym) created Bitcoin in 2008. It was born from distrust of centralized banks following the Great Recession. Then, on January 3, 2009, Bitcoin launched its first blockchain, dubbed the genesis block. 

Bitcoin had no real monetary value in its early years, and only miners could access the blockchain. Over a year later, the first Bitcoin transaction occurred. A Florida man negotiated to have $25 in Papa John’s Pizza delivered for 10,000 Bitcoins, which had a value of four coins per penny. As of March 2023, that amount of Bitcoin would be worth about $248 million [1]. 

Over the years, Bitcoin’s value has fluctuated wildly over the years, rising to a high of over $68,900 in November 2021 [2].

What is Bitcoin mining?

Bitcoin mining is when a Bitcoin miner uses a computer—called a mining rig—to solve complex mathematical puzzles to mine blocks of Bitcoin. The first computer to solve the puzzle will be able to confirm the Bitcoin transactions held within the blocks and receive Bitcoin as a reward. This verification process ensures the security of this cryptocurrency

Keep in mind that cryptocurrency mining is costly and its reward rate is sporadic. 

What is peer-to-peer technology?

Peer-to-peer (P2P) technology connects multiple computers and share resources. In the case of Bitcoin, the P2P basis is that users exchange the currency directly with no single entity controlling the transaction. Another peer who verifies the transaction through the mining process is the only regulating entity.  

Why is Bitcoin valuable? 

Bitcoin is valuable because it has all the essential properties of paper money: acceptability, divisibility, durability, fungibility (interchangeability), portability, and scarcity. Whether you can physically touch the currency does not affect these six characteristics. Additional factors that give Bitcoin value are its eventual scarcity since there is a limited supply and the near impossibility of counterfeiting it.

Read more: Cryptocurrency: What Is It and How Does It Work

Learn how Bitcoin works

Using Bitcoin is different from other currencies. You acquire it, store it, and use it. Let’s review how each of these stages works in Bitcoin’s context. 

How to create Bitcoin.

A mining process makes new Bitcoins. The Bitcoin creators set its system to create coins at a fixed rate until miners release all 21 million allotted Bitcoins.

Bitcoin is mined by solving complex mathematical puzzles using a mining rig, a powerful computer that can create thousands of random strings per second to solve the puzzle. This process verifies cryptocurrency transactions and creates new Bitcoin as a reward. 

Mining rigs can range from a computer with a powerful core processing unit to an application-specific integrated circuit specially built just for mining crypto. 

How to earn Bitcoin

You can earn Bitcoins in several ways besides mining, including: 

• Odd jobs: Some companies offer Bitcoins as a reward for completing tasks, like testing their website or retweeting posts. Sometimes, the task is as easy as answering a question. 

• Form of payment: Many major payment apps now allow people to pay each other with Bitcoin and other digital currencies. If you perform a service for someone or sell a product, you can request payment in Bitcoin via CashApp, Venmo, or PayPal.

• Online games: Some online games offer Bitcoin rewards for completing tasks or winning games. 

How to store Bitcoin

After you’ve acquired Bitcoin, it needs to be placed in a digital wallet. However, not all digital wallets are the same. There are two types of digital wallets: hot and cold wallets. 

Hot digital wallet

A hot wallet is connected to the internet and gives you immediate access to your funds for purchases and trading. This is generally on a computer, cell phone, or tablet but can also be on a crypto exchange.

You will have a set of keys to your hot wallet, which helps keep it secure. However, if the keys are lost, so will the crypto. Crypto can also be lost due to computer malfunctions, glitches, and even hacks, so keeping a small amount of crypto in a hot wallet is common. 

When you hold your Bitcoin in an exchange, your currency is less secure because the exchange own the keys, not the user. If that exchange gets hacked or experiences a server malfunction, you could lose all your crypto. 

Cold Wallet

A cold wallet is a crypto wallet with no internet connection, making it immune from hacks and hardware failure. These are typically USB devices that store your private keys. 

You can also opt for a paper wallet, which is the most secure storage. This wallet can be generated from a cold wallet website, which creates public and private keys that can be printed out. The printed keys can be laminated and stored in a safety deposit box or safe to protect it. Without these printed keys, no one can access your wallet. 

Where to buy Bitcoin

Mining Bitcoin isn’t the only way to obtain it. Bitcoin can be purchased on the open market. Here are a few places where it can be bought.

• Cryptocurrency exchange: Bitcoin can be purchased on various crypto exchanges using fiat money. Sign up for an account and purchase Bitcoin. 

• Investment firms: Some investment firms have begun offering Bitcoin as an option. Sign up to buy and sell Bitcoin—and other cryptocurrencies—like any stock or bond. 

• Bitcoin ATMs and retail stores: Bitcoin can be purchased through Bitcoin ATMs. Use your debit or credit card at the ATM to purchase Bitcoin, and it will deposit the currency into your preferred digital wallet. You can also go to a retail store that sells Bitcoin and purchase it there. 

• Banks: Select banks now support Bitcoin buying and selling. If you have a bank that offers this service, you can buy Bitcoin through your online banking interface. 

How to use Bitcoin

While Bitcoin isn’t a widely accepted payment form, it can be spent in several ways other than liquidating it to fiat currency. 

• Debit card: A Bitcoin debit card allows you to spend crypto anywhere that accepts debit cards. When the card is used, the proper amount of Bitcoin to local fiat currency is converted. 

• Retail stores: Some online stores, such as Newegg and Overstock, now accept Bitcoin as a payment option. There is no need for a special debit card—simply choose Bitcoin and check out that way. 

• Donation: Some charities now accept Bitcoin as a donation method. You may also be eligible for a tax deduction, and the charity pays no capital gains tax on the Bitcoin it receives. 

How to create a Bitcoin wallet

Creating a wallet varies with the wallet type. If you select a hot digital wallet—a software wallet—you must download the software to your computer, smartphone, or tablet. The software will automatically install the wallet, and you can deposit Bitcoin into it. 

If you choose a cold or hardware wallet, you’ll have to order the hardware and pay the required fee. Once the hardware is received, install the software and transfer the crypto to your cold wallet. It can now be stored somewhere safe. 

What's a non-custodial Bitcoin wallet?

Another wallet option is the non-custodial or self-custody wallet. These wallets have no third party to secure your wallet—it only offers the software to store it. You’re responsible for remembering and protecting your wallet keys—also referred to as a password or seed phrase. If you lose the key, you lose access to your crypto. 

Some Bitcoin holders prefer these wallets because they control all the security. It also opens additional activities, including yield farming, staking, lending, borrowing, and more.

How a Bitcoin exchange works

A Bitcoin exchange is an online marketplace that facilitates the exchange of cash or other digital currency for Bitcoin. It acts as an intermediary between a Bitcoin buyer and seller and accepts a transaction fee as its payment. 

To purchase Bitcoin on the exchange, here is what you’ll need to do:

1. Deposit funds—fiat money or another cryptocurrency—into the exchange via a wire transfer.

2. Use that balance to purchase Bitcoin. 

3. Once you buy the Bitcoin, you can transfer it to your hot or cold wallet. 

To purchase Bitcoin, place a market order or a limit order. The exchange will pair your order with a seller with the best available exchange pricing. Once it’s located by a matching seller, the exchange executes the transaction, and you then own that Bitcoin. 

Understand the risks of Bitcoin

Before purchasing Bitcoin it’s important to also consider the risks. 

Fraud risks

Like many digital activities, Bitcoin is open to hacking and online fraud. According to the Federal Trade Commission (FTC), crypto scams skyrocketed between October 2020 and May 2021, as nearly 7,000 people reported crypto losses totaling over $80 million. That is 12 times the number of people who reported losses in the preceding 12 months and a 1,000 percent increase in financial losses [4]. 

Insurance risks

If your bank loses all your fiat money, the Federal Deposit Insurance Corporation will cover up to $250,000 per depositor per bank [5]. However, the FDIC does not cover cryptocurrency theft or fraud. If you lose your Bitcoins, they're gone forever. 

Market risks

Bitcoin’s market price is highly volatile, resulting in huge gains and losses. For example, between March 2022 to March 2023, Bitcoin experienced a high of $39,309.01 per coin to a low of $24,771.03 [3]. If you owned 100 coins, that would be a $1.5 million loss. 

Regulatory risks

Bitcoin remains highly unregulated, but the value drops every time a country imposes regulations on it. For example, Bitcoin fell to an all-time low in November 2019 when China cracked down on crypto businesses. 

Learn more about Bitcoin 

If you’re interested in learning more about Bitcoin, online courses can help. Wharton University of Pennsylvania’s Cryptocurrency and Blockchain: An Introduction to Digital Currencies course on Coursera is a good place to start exploring the digital currency space. University of Michigan’s course Blockchain and Cryptocurrency Explained also provides knowledge on how blockchain works and the strengths and weaknesses of crypto as an asset.