What Is Bitcoin? The Simplest Explanation for Beginners

You’ve probably heard of Bitcoin before, but understanding how it really works is a different story. You hear about it in the news, see the price pop up, and maybe know people who have bought Bitcoin. Still, for a lot of people, it’s hard to really understand what Bitcoin actually is.

As soon as you try to look it up, you quickly get hit with terms like blockchain, mining, private keys, and Proof-of-Work. For someone who doesn’t know much about crypto yet, Bitcoin can start to seem a lot more complicated than it really is.

That’s why this article starts at the very beginning. You don’t need to know anything about crypto, investing, or technology to read it. We’ll explain it so simply that you’ll be able to explain it to your uncle, coworker, or mother-in-law afterward too. Step by step, we’ll go over what Bitcoin is, why it exists, how it works, why people want it, and how you can get some yourself.

The goal of this article is not to turn you into a Bitcoin developer, but to make sure you finally understand what Bitcoin is. That’s why we’re keeping the tech intentionally simple and focusing on the basics. Want to go deeper into topics like mining, blockchain, wallets, or Proof-of-Work after that? Then you can take a look at our extensive crypto academy.

Key Takeaways

• Bitcoin is digital money that you can send directly to someone else without a bank.
• The Bitcoin network is made up of computers that verify transactions and record them on the blockchain.
• There can never be more than 21 million Bitcoins, which makes Bitcoin scarce.
• People use Bitcoin to send value, but a lot of people now also see it as an investment or a hedge against inflation.
• You can buy, receive, or earn Bitcoin through mining and store it through a crypto platform or crypto wallet.

What Is Bitcoin?

You can basically think of Bitcoin as digital money (or gold). Bitcoin is also called the first cryptocurrency (a cryptographic currency) ever, and later in this story we’ll explain exactly what Bitcoin has to do with cryptography. But for now, the only thing that matters is that you understand what Bitcoin actually is.

With bitcoin, you can send money directly to someone else without a bank in between, even if that person is on the other side of the world on a deserted island. As long as there’s an internet connection, it’s possible.

The abbreviation (also called a ticker) for Bitcoin is BTC. You’ll see it, for example, in the price or when you buy or send Bitcoin. So BTC is just the abbreviation for Bitcoin. Every cryptocurrency has its own ticker (abbreviation).

But how does paying without a bank actually work? It helps to first compare Bitcoin to regular money. With euros, the bank keeps track of how much money you have and processes your payments. If you send €20 to someone else, the bank makes sure the amount moves from your account to the recipient’s account. So with digital payments, you usually need a bank or another financial party to process the payment for you.

In cases like that, we also call the bank a third party or a centralized party. All transactions go through this party, and in theory, that party also has the power to stop or reverse your transactions. The bank also keeps the records and decides who gets access to the system.

Why Bitcoin Works Differently Than a Bank

Bitcoin works differently. Instead of one bank or company, many independent computers spread across the world work together to check whether transactions are valid. That means there isn’t one central administrator who can change the records on their own. So there is no central party with the power to block, change, or reverse transactions. We call this decentralization. So Bitcoin is a decentralized network, and the bank where you store your money is a central party.

Example: The difference between centralized and decentralized is that in a centralized system, power and control are with one central party, while in a decentralized system, power and decisions are spread across multiple participants or computers within a network.

But What Exactly Is a Blockchain?

Of course, transactions have to be stored somewhere, and with cryptocurrencies we do that through a blockchain.

A blockchain is a database where information can be stored. You can think of it as small pieces of information that are added to a long chain. Each new piece that gets added contains information about the previous and current piece (like time and the address, etc.). Do all the details match? And does everyone agree on them? Then the new piece gets added to the existing chain. That’s what we call a blockchain.

So you can think of the blockchain as a big digital ledger where Bitcoin transactions are recorded. Since Bitcoin started, you can see in it that Bitcoin has been sent from one address to another. All Bitcoin transactions are public and can be viewed by anyone.

You can see Bitcoin addresses and amounts, but not automatically the names of the people behind those addresses. That’s why Bitcoin is not fully anonymous, but pseudonymous: transactions are public and addresses can sometimes still be linked to people.

Want to go deeper into what a blockchain actually is and how it works? Then read more about it in our article about blockchain.

Fun fact: Bitcoin exists only digitally and isn’t physical. So it’s not a coin you can keep in your actual wallet. That’s what crypto wallets are for. We’ll explain how a wallet works and the different ways to store your Bitcoin later in this article.

Who Invented Bitcoin?

To this day, this is still one of the biggest mysteries of the last 15 years. Bitcoin was invented by someone using the name Satoshi Nakamoto. This is a pseudonym, and it’s still unknown who this is. It could have been one person, but also a group of developers.

Bitcoin was developed as a response to the financial crisis in 2008, when many banks collapsed and there were major economic consequences for people who could no longer access their money. Bitcoin was invented to make sure something like that could never happen again. You control your own money, and nobody else can get to it.

In 2008, Satoshi published the Bitcoin white paper. He shared it on an online mailing list for people working on cryptography and digital privacy. In it, he explained his idea for digital money that people could send directly to each other, without one bank or company having to manage everything.

Satoshi saw several problems with existing money. If you want to send digital money to someone, you normally need a bank or another central party to process the payment and keep the records. He also pointed out that you have to trust central banks to handle the amount of money in circulation carefully. If a lot of extra money is added, that can contribute to inflation, which means you can buy less later with the same amount.

That’s why Satoshi designed Bitcoin differently. No single party manages the transactions, and the issuance of new Bitcoin is also fixed in advance. On top of that, there can be a maximum of 21 million Bitcoin. This is built into Bitcoin’s code and will not change.

Satoshi stayed involved in Bitcoin’s development for a while after that and communicated online with other developers. Then he disappeared from view and gradually left the project to others. Now, years later, nobody still knows who Satoshi is, or whether this person is even still alive. Some people believe Satoshi has died. Bitcoin didn’t stop because of that. The software was publicly available, and other developers and users kept maintaining and using the network.

Who Is the CEO of Bitcoin?

An important feature of Bitcoin is that it doesn’t need a CEO, headquarters, or owner to keep the network running. Satoshi Nakamoto created and launched Bitcoin, but Bitcoin was designed so that it can keep working without him.

The software behind Bitcoin is open-source and is maintained by developers all over the world. They can suggest improvements and write code, but they can’t just force changes onto the network. New rules or updates only become part of Bitcoin if enough participants in the network, such as node operators, miners, and other users, accept them.

So Bitcoin is not run by one person or organization. Dozens to hundreds of developers have contributed to the software over the years, and anyone can publicly view the code and proposed changes.

How Does Bitcoin Work?

So Satoshi designed Bitcoin as a network without a central bank or another party that manages all payments. But how can a system like that check whether a payment is correct?

To make Bitcoin work, the network actually has to do three things:

1. check whether someone is allowed to spend Bitcoin;
2. prevent the same Bitcoin from being spent twice;
3. keep track of which transactions have already happened.

That happens because thousands of computers around the world work together and follow the same rules.

Let’s say you want to send Bitcoin to a friend. From your crypto wallet, you enter how much Bitcoin you want to send and which Bitcoin address it should go to. Your wallet then turns that into a transaction and sends it to the Bitcoin network.

Computers in that network check whether the transaction follows the rules and whether, for example, you’re not trying to spend the same Bitcoin twice. These computers are called nodes.

Valid transactions can then be included in a new block on the blockchain. You can think of the blockchain as the digital ledger we talked about earlier. New transactions aren’t added one by one, but collected into blocks. You can think of a block as a new page in the ledger with the latest Bitcoin transactions on it.

To add a new block to the blockchain, there are miners. They use specialized computers to create new blocks and add them to the existing blockchain. Once your transaction is included in a block, it gets recorded on the blockchain. Miners receive a reward for their work. That reward consists of new Bitcoin and the transaction fees from the transactions included in the block.

Anyone sending Bitcoin usually pays transaction fees. Those fees can vary and depend, among other things, on how busy the Bitcoin network is at that moment.

Still sounds a bit technical? That’s okay. For now, it’s enough to remember that the Bitcoin network checks transactions and records them on the blockchain. As a beginner, you don’t need to know exactly how nodes and miners do that technically yet.

Why Do People Choose Bitcoin?

People choose Bitcoin for different reasons. Originally, Bitcoin was mainly designed as a digital payment method and as a response to the financial crisis in 2008. Satoshi Nakamoto described it as a way to send money directly to someone else, without needing a bank or other financial institution in between.

Bitcoin can still be used for that. You can send Bitcoin directly to someone else anywhere in the world. Still, a lot of people today don’t mainly use Bitcoin to pay for everyday groceries. The price can rise and fall sharply, which can make it less practical as an everyday payment method.

For many people, Bitcoin is therefore mainly interesting as an asset or investment. It’s also called digital gold. One important reason for that is scarcity. In the end, there can only ever be 21 million Bitcoin. So new Bitcoin can’t just be created endlessly.

But why does Bitcoin have value at all? In the end, the price is determined by supply and demand. As long as people want to own Bitcoin and are willing to pay for it, it has market value, just like gold or silver. If demand increases, the price can go up. If demand drops, the price can also go down.

Because of that scarcity, Bitcoin is sometimes called digital gold. Just like gold, Bitcoin is limited in supply and people assign value to it. Some people therefore hold Bitcoin for a long time in the hope that it will keep its value or increase.

Other people are mainly interested in the independence. Bitcoin isn’t managed by one bank, company, or government, and you can choose to manage access to your Bitcoin yourself. The fact that no government can get to your money is already reason enough for many people to start using Bitcoin.

So why someone wants Bitcoin differs from person to person. One person sees it as a way to send value directly, another values the scarcity and independence, while many people today mainly hold Bitcoin as an investment.

So in short:

1. Limited supply: there can be a maximum of 21 million Bitcoin.
2. Investment: many people buy Bitcoin hoping it will rise in value over the long term.
3. Digital gold: Bitcoin is sometimes seen as a scarce asset that can hold value.
4. Independence: Bitcoin isn’t managed by one bank, company, or government.
5. Send worldwide: Bitcoin can be sent directly to someone else without a bank as an intermediary.
6. Self-management: users can choose to manage access to their Bitcoin themselves.

How Do You Get Bitcoin?

If you want Bitcoin yourself, there are basically three ways to get it: you can buy Bitcoin, receive it from someone, or earn it through mining.

For most beginners, buying through a crypto platform is the most accessible way. That’s where parties like Finst come in. We make sure the Bitcoins end up in your personal account without any hassle. It’s extremely easy.

Way 1: Buy Bitcoin

You can buy Bitcoin through a crypto exchange or broker. You create an account there, deposit euros for example, and choose how much Bitcoin you want to buy.

You don’t have to buy a whole Bitcoin. One Bitcoin can be divided into 100 million smaller pieces. The smallest piece is called a satoshi. That means you can also buy Bitcoin for €10, €50, or €100, for example. You can decide the amount completely yourself. You can even choose to buy a small piece of bitcoin every day, week, or month (for example 0.00033421 btc each time).

When choosing a crypto platform, it’s smart to look at things like fees, the provider’s reliability, and how your Bitcoin is stored.

After your purchase, you can usually leave your Bitcoin on the platform or send it to your own crypto wallet. We explain exactly how storing it works later in this article.

Way 2: Receive Bitcoin

You can also get Bitcoin because someone sends it directly to you.

For that, you need a Bitcoin address from your crypto wallet. You can think of such an address a bit like an account number: you give it to the person who wants to send Bitcoin to you.

A Bitcoin address usually consists of a long string of letters and numbers, but it can also be shared as a QR code. The sender enters your address, chooses how much Bitcoin should be sent, and sends the transaction to the network.

It’s important to check a Bitcoin address carefully. If you send Bitcoin to the wrong address, you usually can’t just reverse that transaction.

Way 3: Mine Bitcoin

The third way is Bitcoin mining. As we saw earlier, miners help add new blocks to the blockchain.

The word mining might make it sound like Bitcoin is literally being dug out of the ground somewhere, like gold from a mine. Of course, that’s not the case. Mining happens completely digitally with computers.

Those computers are programmed to perform a huge number of calculations very quickly. You can think of it simply as a kind of competition: miners try to be the first to solve a difficult digital puzzle. The miner who succeeds gets to add a new block of transactions to the blockchain.

As a reward, also called a block reward, that miner gets new Bitcoin and the transaction fees from that block. That’s how new Bitcoin also enter circulation.

In Bitcoin’s early years, you could still mine with a regular computer. Today, you mainly need powerful, specialized computers that use a lot of electricity.

For most beginners, mining is therefore not a practical way to get Bitcoin. The main thing to remember is that miners help keep the network running and can be rewarded with new Bitcoin for doing so.

How Much Bitcoin Is There?

There can be a maximum of 21 million Bitcoin. According to Bitcoin’s rules, no more than that can ever be created.

Those Bitcoins don’t all enter circulation at once. New Bitcoin are issued step by step as a reward to miners when they add a new block to the blockchain.

When Bitcoin started in 2009, that reward was 50 BTC per block. On average, a new block is added about every ten minutes.

After every 210,000 blocks, about once every four years, that reward is cut in half. We call that the Bitcoin halving. That’s how the reward went from 50 BTC to 25 BTC, then to 12.5 BTC, and then kept going down.

Because of those halvings, fewer and fewer new Bitcoin are added over time. Eventually, the reward will become so small that no new Bitcoin will be issued anymore. That’s expected to happen around the year 2140.

That fixed limit of 21 million makes Bitcoin scarce. Unlike regular money, no one can just decide to create a bunch of extra Bitcoin.

How Do You Store Bitcoin?

You don’t store Bitcoin exactly the same way you store cash in a wallet. Because Bitcoin only exists digitally, storing it is mostly about this question: who controls access to your Bitcoin?

Basically, you have two options.

The first is that a crypto platform stores your Bitcoin for you. You log in to your account, and the platform handles the technical security and access for you. That’s the easiest option for many beginners.

The second option is your own crypto wallet. With that, you manage access to your Bitcoin yourself. That gives you more control, but also more responsibility. If you lose the details, there’s nobody who can help you with that.

An important term here is the private key. That’s a secret digital key that lets you send Bitcoin. Whoever has access to that key can, in principle, also access your Bitcoin.

Many wallets also use something called a “seed phrase,” a set of words you can use to recover your wallet if you lose your phone or hardware wallet, for example. Whoever has those words can usually also access your Bitcoin. You can think of it as a kind of login info for your personal digital wallet.

That’s why you should never share a private key or seed phrase with anyone and store it safely.

What Are the Main Risks of Bitcoin?

Bitcoin can be interesting, but it also comes with risks. For beginners, these are the most important ones:

• The price can rise and fall sharply. Bitcoin’s price can move a lot in a short time. This feature is called volatility. Because of that, you could lose part of your investment or even all of it.
• Bitcoin transactions can’t be reversed. If you send Bitcoin to the wrong address, there’s no bank that can cancel the payment for you.
• Self-custody comes with a lot of responsibility. If you store Bitcoin in your own wallet, you’re responsible for access yourself. If you lose your private key or seed phrase without a backup, you may no longer be able to access your Bitcoin.
• Keeping it on a crypto platform also has risks. If you leave your Bitcoin on a platform, you depend on that company’s security and operations.

So the most important thing is not just understanding how Bitcoin works, but also who controls access to your Bitcoin and what risks come with that.

Conclusion

We hope this explanation helped you better understand what bitcoin actually is, how it works, and why it was created.

Bitcoin sounds complicated because there are a lot of technical terms around it. Luckily, the basics are a lot simpler: Bitcoin is digital money that is tracked through a worldwide network. There is no bank or company that manages all the transactions. Instead, computers in the network work together to check whether payments follow the rules.

You can buy, receive, or earn Bitcoin through mining. After that, you can have it stored by a crypto platform or manage it yourself with a wallet.

Why people find Bitcoin interesting differs. Some see it as an investment, others as a digitally scarce asset or as a way to send value worldwide.

You don’t need to immediately understand how mining, cryptography, and the blockchain work in technical detail. If you understand what Bitcoin does, how you get it, and what risks come with it, you already have the most important basics down.

Want to learn more about Bitcoin or other crypto topics after that? In the Finst Academy you’ll find articles about blockchain, wallets, mining, staking, and many other topics. That way, you can keep learning step by step about whatever interests you most.