What is bitcoin and how does it work?

Bitcoin is a digital currency that runs without a central bank or company in charge. It is recorded on a public ledger called a blockchain, which is kept by thousands of computers around the world. People can send it to each other directly over the internet, and only 21 million coins will ever exist.

Where did bitcoin come from?

Bitcoin was described in a short paper published on October 31, 2008, under the name Satoshi Nakamoto. The network started running on January 3, 2009. It was the first cryptocurrency, and the thousands of coins that followed borrow from its design.

The aim set out in the paper was a form of electronic cash that two people could exchange without a bank in the middle.

How does a bitcoin transaction work?

Bitcoin does not exist as files or physical coins. It exists as entries on a shared record, the blockchain, which lists every transaction since 2009. A payment moves through four steps:

1. A user holds a private key, a secret number that proves control over the coins at a given address. A wallet app stores it.
2. To pay someone, the wallet signs a message with that key, stating how much to send and to which address.
3. The message is broadcast to the network's computers, called nodes, which check that the coins exist and have not already been spent.
4. Valid transactions are bundled into a block, and the block is added to the chain. A new block arrives about every 10 minutes.

Once a transaction is buried under several later blocks, it is treated as final. There is no customer service desk that can reverse a payment sent to the wrong address.

What do miners do?

Adding blocks is the job of miners. In bitcoin mining, specialized computers compete to solve a mathematical puzzle. The winner adds the next block and collects newly created bitcoin, plus the fees users attached to their transactions.

The puzzle takes large amounts of electricity to solve, and that is deliberate. Rewriting the ledger would mean redoing the work, so cheating is expensive. The same feature is the source of bitcoin's best-known criticism, its energy use.

How many bitcoin are there?

The software sets a limit of 21 million coins. New coins enter circulation only through mining, and the amount is cut in half roughly every four years in an event called the halving. Each bitcoin can be divided into 100 million smaller units called satoshis, so people routinely hold and send fractions of a coin.

Supporters see the fixed supply as protection against inflation. Critics point out that bitcoin's price swings sharply, that it earns no income, and that it is used far more as a speculative asset than as everyday money.