Bitcoin, launched in 2009, was the first of a new kind of asset called cryptocurrency, a decentralized form of digital cash that eliminates the need for traditional intermediaries like banks and governments. Bitcoin can be used as a currency or an investment.
Bitcoin (BTC) definition
Bitcoin is a form of digital currency that aims to eliminate the need for central authorities such as banks or governments. Instead, Bitcoin uses blockchain technology to support peer-to-peer transactions between users on a decentralized network.
Transactions are authenticated through Bitcoin’s proof-of-work consensus mechanism, which rewards cryptocurrency miners for validating transactions.
Launched in 2009 by a mysterious developer known as Satoshi Nakamoto, Bitcoin (BTC) was the first, and remains the most valuable, entrant in the emerging class of assets known as cryptocurrencies.
How does Bitcoin work?
Each Bitcoin is a digital asset that can be stored at a cryptocurrency exchange or in a digital wallet. Each individual coin represents the value of Bitcoin’s current price, but you can also own partial shares of each coin. The smallest denomination of each Bitcoin is called a Satoshi, sharing its name with Bitcoin’s creator. Each Satoshi is equivalent to a hundred millionth of one Bitcoin, so owning fractional shares of Bitcoin is quite common.
- 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.
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.” The resulting blockchain is a complete, public and permanent record of every Bitcoin transaction.
Miners are then 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.
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
- Cost-efficient transactions and fast speeds. Once you own Bitcoin, you can make transfers anytime, anywhere, reducing the time and potential expense of any transaction.
- Privacy. Transactions don’t contain personal information, such as a name or credit card number. While it’s still possible to link a certain person to a certain wallet, transactions are generally more private than credit card transactions, for example.
- 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.
- Growth potential. 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.
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. More recently, Bitcoin’s price began 2023 slightly under $17,000 per coin, and hit new record highs in March 2024.
- 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 the cryptocurrency exchange Binance. (The company covered the losses.)
- 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[3].
Like many other assets, Bitcoin can be bought and sold using 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 and most convenient option is using a cryptocurrency exchange.
Some of these exchanges 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.
NerdWallet writers are subject matter authorities who use primary, trustworthy sources to inform their work, including peer-reviewed studies, government websites, academic research and interviews with industry experts. All content is fact-checked for accuracy, timeliness and relevance. You can learn more about NerdWallet’s high standards for journalism by reading our editorial guidelines.
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.” The resulting blockchain is a complete, public and permanent record of every Bitcoin transaction.
Miners are then 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.
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.” The resulting blockchain is a complete, public and permanent record of every Bitcoin transaction.
Miners are then 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.