Bitcoin (BTC) Explained: What It Is and How It Works
by Matt Timmermans
Updated: Aug 22, 2025
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On January 3, 2009, an unknown party with the pseudonym Satoshi Nakamoto released a digital currency called Bitcoin. The first mined bitcoin block contains the message of The Times on that day: "Chancellor on brink of second bailout for banks". Even today, this message is a symbol for the bitcoin community's dream of a new and better monetary system. But what is Bitcoin really and why has it attracted the interest of millions?
Bitcoin is the first decentralized digital currency. It allows anyone to send and receive money online without the need for banks or governments. Instead of a central authority, Bitcoin runs on a global network of computers and uses a technology called blockchain to ensure all transactions are secure, verified, and transparent.
Since it launched in 2009, Bitcoin has grown from an experimental idea into a major global asset. Whether you're simply curious, want to use it, or plan to invest, this guide explains Bitcoin in simple terms, perfect for beginners.
TL;DR
- Bitcoin is a digital currency that works independently from banks or central authorities
- It uses blockchain technology to verify and record every transaction
- You can use Bitcoin to buy goods and services, send money across borders, or invest for the long term
- New bitcoins are created through mining, where computers solve complex problems to confirm transactions
- While Bitcoin is secure, users must protect their digital wallets and private keys
- To get started, you need a Bitcoin wallet and a reliable crypto exchange
- Bitcoin has a fixed supply of 21 million coins, helping protect it from inflation
- It offers benefits like decentralization and censorship resistance, but also comes with risks like price volatility and technical complexity
What Is Bitcoin?
Simply put, bitcoin is digital currency which relies on a database of transactions. This database, which is based on a novel technology called blockchain, boasts many advantages over traditional ones: it is decentral, anonymous and tamper-proof. (We will discuss later on, why this matters.)
Unlike traditional fiat currencies like the dollar or euro, bitcoin is purely digital and does not exist physically. Bitcoins are also created virtually, through a process called mining.
Today, bitcoin is used by millions for payments and as a store of value. Because of the latter it is often referred to as digital gold. Similar to gold (which is naturally limited), the maximum supply of bitcoin is electronically limited to 21 million bitcoins.
How Does Bitcoin Work?
Bitcoin is purely digital and only exists on computers and computer networks. This may sound disconcerting at first. But if you think about it, most of the money we use today is digitally stored on bank accounts, debit cards or credit cars. And even if you withdraw cash, the paper a 50 dollar bill is printed on is worth next to nothing. Consequently, almost all our currencies today are backed by a single factor: our trust.
Cryptography
Trust in the bitcoin network is established through math (sound strange, but it's true!). More specifically, bitcoin makes use of cryptography to secure transactions and its network. Bitcoin's encryption is strong and has never been hacked.
Furthermore, the bitcoin software is available open source, which means that everyone can look into its source code and propose improvements.
Blockchain
Moreover, bitcoin is trusted because of its blockchain which is a special kind of database that records all bitcoin transactions. The blockchain is immutable and distributed to thousands (if not millions) of computers worldwide.
A blockchain consists of a chain of cryptographically secured blocks (hence the name blockchain). Each block thereby contains all the transaction data that took place within a 10 minute timeframe. Once a block is written to the blockchain, it can never be changed again.
The bitcoin blockchain is saved on tens of thousands so called nodes worldwide. This redundancy makes it almost impossible to tamper with the transaction data. And up until today, there was not a single incident where a bitcoin transaction was manipulated.
Bitcoin use in practice
This all sounds nice and well, but what does this mean in practice?
Actually, you do not need to know exactly how bitcoins' underlying technology works. After all, you also don't know how your TV works. But you know how to use it.
Bitcoin and Satoshi
As of writing of this article, a bitcoin is worth around $100,000. It's easy to see that this unit is not really practical in everyday life. Therefore, it is also possible to use fractions of a bitcoin.
The name of the smallest bitcoin unit is satoshi. The satoshi is to the bitcoin, what the cent is to the dollar. Each bitcoin can be split into 100,000,000 satoshi.
Bitcoin Wallets
Bitcoins are securely stored in a so called wallet. Before you can receive or make payments, you need to set up a bitcoin wallet. Bitcoin wallets can be web apps or apps on your computer and phone, but also hardware devices or even a piece of paper. If this sounds a bit complicated, also check our our article on cryptocurrency wallets.
Getting Bitcoin
There are several ways to get bitcoins. The most common one is to buy bitcoin on a cryptocurrency exchange. Cryptoradar lists many popular exchanges where you can buy bitcoins through bank transfer, credit card or other payment methods.
Most of these exchanges also come with a built-in bitcoin wallet, so you don't need to worry about setting up a wallet before your first purchase. However, please do not store larger amounts in the wallets of cryptocurrency exchanges, because they are known to be targeted by hackers.
Receiving and Making Payments
Using a bitcoin wallet to receive or make payments is fairly simple. It's actually quite similar to using a bank account.
If you want to receive a payment, all you need to do is to provide the sender your wallet address (which can be seen as the equivalent of a bank account number). In turn, to make payments, you only need the wallet address of the recipient.
It's important to understand that bitcoin payments are irreversible. Therefore, always be cautious when entering bitcoin addresses — if you send your bitcoins to the wrong address, they will be lost forever.
Advantages of Bitcoin
When you're think about bitcoin, you'll probably think that bitcoin's biggest advantage is security and anonymity. But while these are important features, Satoshi Nakamoto envisioned bitcoin to be far more than this: his goal was to create a low-cost, open, and democratic monetary system.
Security
Traditionally, data is stored in central databases which are managed by one or few entities. For instance, all transaction records on your bank account are safeguarded by your bank. This makes centralized systems vulnerable to malicious actors like hackers. But also human error can result in massive damages.
By contrast, bitcoin's blockchain is an open record of every single transaction which is mirrored to tens of thousands of computers. As a result, an attacker must manipulate transactions on thousands of different systems.
Furthermore, since bitcoin's source code is open, vulnerabilities that might theoretically lead to a loss of data are discovered and resolved faster than in a centralized institution which only has limited capacity dedicated towards information security.
Anonymity
Even though transactions are recorded on the blockchain for everyone to see, bitcoin is practically anonymous. The only piece of information that links a satoshi to its owner is his or her wallet address.
Nevertheless, bitcoin is often not completely anonymous. When you register an account on a bitcoin exchange, you usually are asked to verify your identity (as part of anti money laundering procedures). Consequently, the wallet address used with this exchange is linked to your name.
Peer-To-Peer
The bitcoin network is peer-to-peer. This means that actors on the bitcoin network can make transactions directly with each other and without a trusted third party.
While this may not sound spectacular, it's actually somewhat of a break-through in payment technologies. For centuries, people have trusted banks to safeguard their money and make payments on their behalf, or notaries to certify transactions such as property purchases.
These trusted middle man take a big pie in the economic system. For instance, every time you swipe your credit card at a merchant, the merchant pays between 2% and 5% of the revenue to the payment processor.
With bitcoin, there's no need for a middle man. You can easily manage your account (i.e. your bitcoin wallet) on your own and there's no need for a payment processor. This makes payments cheaper. For instance, if you would transfer $1,000,000 worth of bitcoin at the time of writing, it would cost you only 33 cents.
Even things like the cadaster could one day be managed by a blockchain, facilitating property purchases through so called smart contracts. These smart contracts would be programmed to contain the transaction details. Once a payment is made into the smart contract, the property ownership is changed in the cadaster.
Decentralization
Monetary policy in today's world is controlled by central banks and nation states. Single entities like the central bank of the United States, the Federal Reserve (Fed) or the Europan Central Bank (ECB) can make huge decision over our money overnight. Such as setting interest rates, increasing money supply or enforcing capital movement restrictions.
The chairmen and chairwomen of these institutions are, unfortunately, not elected by the people, but appointed by presidents and prime ministers. This means that, they may not serve the people, but politicians.
Bitcoin is completely different. Nobody is heading bitcoin, and all decisions are made based on a democratic consensus of all miners in the bitcoin networks. As a result, it is not possible that a single entity, or even a single politician, can influence the trajectory of the cryptocurrency.
Censorship Resistance
Unfortunately, politicians sometimes abuse their power over monetary policy to achieve personal objectives (or objectives of an elite class).
This can especially be observed in dictatorships like Venezuela. But even in the Western World monetary policy is more and more used to achieve political objectives. For instance, citizens of Greece from 2010 to 2018 were only allowed to withdraw limited amounts of cash from their bank accounts in order to limit the strain on the Greek financial system.
Bitcoin is in stark contrast to these developments. Being a global and digital currency, bitcoin is not subject to daily politics or national borders. Bitcoin is not controlled by a single entity, cannot be banned (as acknowledged by the US Congress), and is accessible by everyone — all you need is an internet connection.
Fixed Supply
The money supply in today's world is controlled by central banks and banks. A single entity like the central bank of the United States, the Federal Reserve, can decide to increase the monetary supply by trillions of dollars — as seen during the 2020 coronavirus pandemic.
But not only the Fed can increase the money supply, also banks can do so. This process is called credit creation. What this means is that banks can create money by lending it to persons and businesses. To secure this money, the bank has to make a cash deposit of a small fraction of the credit at the Federal Reserve.
The result of this monetary system is inflation. While a certain amount of inflation is not bad at all, the current financial system encourages credit over savings. What's more, big lenders (and the biggest being the nation states) have an incentive to increase money supply in order to reduce their debt. In the past, this resulted into numerous instances of hyperinflation, where currencies became essentially worthless.
By contrast, bitcoin's money supply is fixed. There will never exist more than 21 million bitcoins. (except if the bitcoin community decides in a democratic decision to increase money supply.) This means that users of bitcoin are rewarded by holding onto their coins, instead of spending their coins or taking on debt.
How to Buy Bitcoin Safely
If you've made up your mind about Bitcoin and want to buy some, the process is simpler than you might expect. You don’t need to be a tech expert or financial professional to get started. But before buying your first bitcoins, it’s important to understand the basic steps involved.
This guide walks you through three key actions:
- Finding the best place to buy Bitcoin
- Registering for a Bitcoin broker account
- Making your first purchase at your selected Bitcoin broker
How To Find The Best Place to Buy Bitcoin
Today, Bitcoin can be purchased through a wide variety of providers - not just crypto exchanges. Depending on your preferences, you can buy Bitcoin from:
- Crypto Exchanges – Platforms built for digital asset trading, offering liquidity and advanced features.
- Brokers & Trading Apps – Simplified services where you buy Bitcoin directly without navigating order books.
- Neobanks & Fintech Apps – Many digital-first banks now integrate Bitcoin purchases directly into their mobile apps.
- Traditional Banks – In several countries, established banks have started to offer crypto trading to retail clients.
- Payment Services – Providers like PayPal or Cash App (in some regions) allow small, convenient Bitcoin purchases.
- Peer-to-Peer (P2P) Platforms & ATMs – For those preferring cash or alternative settlement methods.
Since not all providers are the same, compare them across these key criteria:
- Payment Methods: Does the provider support convenient options such as bank transfers, debit/credit cards, PayPal, or instant payments?
- Fees: Consider trading spreads, deposit/withdrawal costs, and potential hidden charges.
- User Experience: A smooth, intuitive interface is crucial—especially if you’re new to Bitcoin.
- Security: Look for measures like two-factor authentication (2FA), cold storage, insurance, and strong custody practices.
- Regulation & Trust: Ensure the provider complies with local regulations and supports your domestic currency.
Cryptoradar
Registering With Your Chosen Provider
Once you’ve selected where to buy Bitcoin, the next step is opening an account. The process is generally similar across providers:
- Basic Signup: Provide details like your name, email, and password.
- Identity Verification (KYC): Most providers require you to confirm your identity before allowing crypto purchases. This can include uploading a passport or ID card, proof of address (e.g., a utility bill), or in some cases completing a quick video verification.
Regulated providers must conduct these checks to comply with anti-money laundering (AML) laws. While it may feel like an extra step, it adds a layer of security for you as a customer.
Buying Bitcoin
Once your account is verified and funded, purchasing Bitcoin is straightforward:
- Instant Purchase: Some platforms allow direct card or PayPal purchases at checkout.
- Pre-Funding Your Account: Others require you to deposit funds first via bank transfer or other supported methods before executing a trade.
- Choosing the Amount: Navigate to the "Buy" or "Trade" section, select Bitcoin, and enter the amount you want to purchase.
The Bitcoin will then appear in your platform wallet. From there, you can either keep it with the provider (custodial) or transfer it to your own private wallet for full control.
One more thing...
Buying Bitcoin is an exciting milestone, but keeping it secure is just as important. While exchanges and trading apps make it easy to purchase, they are also prime targets for hackers. If a platform is ever breached, your funds could be at risk.
To safeguard your investment, consider transferring your Bitcoin to a private wallet that only you control. With your own wallet, you hold the private keys, giving you full ownership and removing reliance on third parties. Wallets come in different forms, including mobile apps, desktop software, and hardware devices that store your coins securely offline.
Team Cryptoradar
FAQs
How many Bitcoins are there?
Bitcoin has a maximum supply of 21 million coins. This limit is written into the Bitcoin code and cannot be changed. Over 19 million bitcoins have already been mined. The remaining coins will be introduced gradually through mining rewards until around the year 2140.
What is a Satoshi?
A satoshi is the smallest unit of Bitcoin, named after its creator, Satoshi Nakamoto. One satoshi equals 0.00000001 BTC. Because Bitcoin is so divisible, you don’t need to own a full coin to use it or invest in it.
Can Bitcoin be Banned?
Bitcoin cannot be banned globally. Some countries have restricted or heavily regulated its use, but since Bitcoin is decentralized and runs on a global network, it cannot be shut down completely. Anyone with internet access can use Bitcoin.
Is Bitcoin Anonymous?
Bitcoin is not anonymous, but it offers privacy to a certain degree. All transactions are recorded on a public blockchain, but wallet addresses are not directly linked to real-world identities. This makes Bitcoin pseudonymous. If you use an exchange that requires identity checks, your wallet may be tied to your name.
What is a Bitcoin Exchange?
A Bitcoin exchange is a platform where you can buy and sell Bitcoin using traditional currencies like euros or dollars. Some also support crypto-to-crypto trading. Exchanges connect buyers and sellers and offer tools for placing orders, managing funds, and tracking prices.
