What Is Bitcoin (BTC)? How It Operates, How to Purchase and Mine It

Key Takeaways

• Bitcoin is the culmination of contributions from many individuals, but it is widely recognized that Satoshi Nakamoto created and introduced it in 2008.

• Bitcoin is the public blockchain protocol used to create and manage the cryptocurrency of the same name.

• Bitcoin mining involves miners competing to hash block data, solve a cryptographic puzzle, and add a new block to the blockchain. The miner who successfully solves the puzzle receives a bitcoin reward.

• Bitcoin can be utilized by speculators, investors, and consumers for transactions or as a store of value.

• Investing in and using bitcoins carries several risks, including price volatility, fraud, and theft.

What Is Bitcoin (BTC) and How Does It Work?

Figure 1: Bitcoin mining and the decentralized architecture of the Bitcoin network

What Is a Bitcoin (BTC)?

The domain Bitcoin.org was registered in August 2008. It was created by Satoshi Nakamoto and Martti Malmi, who collaborated with the anonymous Nakamoto to develop Bitcoin.

How and When Did Bitcoin (BTC) Begin?

In October 2008, Nakamoto announced on the cryptography mailing list at metzdowd.com: "I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party." The seminal white paper published on Bitcoin.org, titled "Bitcoin: A Peer-to-Peer Electronic Cash System," laid the foundational protocol for Bitcoin’s operation today.

Bitcoin Genesis Block

The first Bitcoin  block was mined on January 3, 2009. Block 0, known as the genesis block, includes the text "The Times 03/Jan/2009 Chancellor on the brink of second bailout for banks," serving as evidence that the block was mined on or after this date.

Bitcoin Mining Rewards Over Time

Bitcoin block rewards halve every 210,000 blocks. Initially, the reward was 50 bitcoins in 2009. The third halving occurred on May 11, 2020, reducing the reward to 6.25 bitcoins per block. The fourth halving took place in April 2024, lowering the reward to 3.125 bitcoins. The next halving is expected around mid-2028, reducing the reward to 1.5625 BTC.

Bitcoin Units and Denominations

One Bitcoin (BTC)  is divisible to eight decimal places (100 millionths of one bitcoin), with the smallest unit called a satoshi.

The cryptography mailing list announced the first release of Bitcoin software on January 8, 2009. Block 1 was mined on January 9, 2009, marking the start of Bitcoin mining.

Bitcoin (BTC) and Blockchain Technology Explained

Figure 2: Blockchain functionality

Bitcoin as a digital currency is straightforward to understand. For instance, owning Bitcoin allows you to use a cryptocurrency wallet to send fractional amounts as payment for goods or services. However, the underlying mechanics of Bitcoin are complex.

Bitcoin (BTC) Blockchain Explained

A blockchain  is a distributed ledger—a shared database linked through cryptographic methods. "Distributed" means data is stored across multiple computers rather than centralized servers, as is typical in traditional data storage.

A network of automated nodes running on these computers maintains the blockchain and executes necessary operations.

A blockchain block is a data file containing a block header, transaction count, and recorded transactions. The transaction count enumerates transactions within the block, while the block header comprises:

• Software version: The blockchain protocol version in use (sometimes called the magic number)

• Previous block hash: The cryptographic hash of the preceding block

• Merkle root: A single hash aggregating all transaction hashes in the block

• Timestamp: The date and time the block was created

• Difficulty target: The current mining difficulty level miners must solve

• Nonce: Short for "number used once," utilized to solve the mining puzzle and validate the block.

Each block contains the hash of the previous block, forming a chain of encrypted blocks that link all prior transactions back to the genesis block.

Bitcoin (BTC) Encryption and Security

Bitcoin employs the SHA-256 hashing algorithm to encrypt data stored within blockchain blocks. Transaction data is transformed into a 256-bit (64-character) hexadecimal hash that encapsulates all transaction details and references preceding blocks.

Although block data is encrypted and referenced in subsequent blocks, blocks remain accessible and readable. This chaining ensures immutability, as altering one block would require recalculating all subsequent blocks, enabling transparent auditing of the blockchain.

How To Buy Bitcoin (BTC)

If you prefer not to mine Bitcoin, you can acquire it through cryptocurrency exchanges. Due to Bitcoin’s price, most buyers purchase fractional amounts using fiat currencies like USD.

For example, you can buy Bitcoin on platforms such as Coinbase or Binance by creating and funding an account via bank transfer, credit card, or debit card.

Next, navigate to the spot crypto or spot Bitcoin wallet on the exchange to execute your purchase. Reputable exchanges like Coinbase and Binance provide secure storage and high liquidity, allowing quick sales when needed.

Step-by-Step Guide to Bitcoin (BTC) Mining

Figure 3: Bitcoin Mining Process

Various hardware and software solutions exist for Bitcoin mining. Initially, Bitcoin mining was feasible on personal computers, but as network participation increased, the probability of mining a block individually diminished.

While personal computers with modern hardware can still mine, the likelihood of successfully solving a hash solo is extremely low.

This is due to competition with a global network of miners generating approximately 745 quintillion hashes per second (as of December 5, 2024). Specialized machines known as Application Specific Integrated Circuits (ASICs) can produce over 400 trillion hashes per second, whereas high-end personal computers achieve around 100 megahashes per second (100 million).

Bitcoin Mining Methods and Strategies

Bitcoin mining hardware options include using existing computers with compatible mining software or investing in dedicated ASIC miners.

1. Joining a mining pool, where miners combine computational resources to compete against large ASIC farms, is common. Popular mining software includes CGMiner and BFGMiner, while leading pools include Foundry Digital, Antpool, F2Pool, ViaBTC, and Binance.com.

2. ASIC miners typically cost around $10,000 new, with used units available as miners upgrade. Consider significant operational costs such as electricity and cooling. Even with ASICs, competition against large-scale mining farms—some deploying hundreds of thousands of units, like CleanSpark’s 195,059 miners—makes rewards uncertain.

Mining pools improve reward frequency but reduce individual payouts due to sharing. When selecting a pool, review its reward distribution, fees, and user feedback.

How to Use Bitcoin for Payments

Figure 4: Using Bitcoin for Payments

Bitcoin was originally designed as a peer-to-peer payment system. Its use cases have expanded due to rising value, competition from other blockchains and cryptocurrencies, and developments in blockchain interoperability.

How to Pay With Bitcoin

Bitcoin is accepted by numerous merchants, retailers, and service providers as a payment method.

Physical stores accepting cryptocurrencies typically display a "Bitcoin Accepted Here" sign. Transactions are processed via compatible hardware terminals or wallet addresses using QR codes and touchscreen applications. Online merchants can integrate Bitcoin payments alongside traditional options like credit cards and PayPal.

To transact with Bitcoin, a cryptocurrency wallet is required. Wallets serve as your interface to the blockchain and securely store private keys necessary to authorize transactions.

How to Invest in Bitcoin or Trade Bitcoin

Investment in Bitcoin can be direct—purchasing and holding the asset via cryptocurrency exchanges and digital wallets—or indirect through trading Contracts for Difference (CFDs). Direct ownership exposes investors to full market volatility, wallet security risks, and custody fees.

Alternatively, trading Bitcoin CFDs enables speculation on price movements without owning the underlying asset. Crypto CFD trading  is well-suited for short-term traders aiming to profit from both bullish and bearish Bitcoin price trends. TMGM’s trading platform offers Bitcoin CFDs with competitive spreads, rapid execution, and customizable leverage aligned with your risk tolerance.

Additionally, Crypto CFD trading eliminates the need for crypto wallets and provides access to advanced charting tools and real-time price data. Whether responding to macroeconomic developments, central bank policies, or crypto market news, Crypto CFD trading offers enhanced control and strategic flexibility compared to traditional investing.

Summary: Should I Invest in Bitcoin?

Bitcoin’s price was $7,167.52 on December 31, 2019, rising over 300% to $28,984.98 a year later. It reached an all-time high near $69,000 in November 2021, then declined to around $40,000 before surging past $100,000 in 2024.

Due to such volatility, many acquire Bitcoin primarily for investment rather than as a transactional currency. However, its lack of intrinsic value and digital nature entail inherent risks.

Regulatory bodies including the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), and Consumer Financial Protection Bureau (CFPB) have issued multiple investor warnings regarding Bitcoin. Beyond reviewing the Bitcoin Outlook for 2025, investors should be aware of several risks.

Key risks when trading or investing in Bitcoin include:

• Regulatory risk: Ongoing regulatory scrutiny creates uncertainty around Bitcoin’s longevity and liquidity. As of December 2024, Bitcoin is not classified as a security, though this status may change.

• Security risk: Most Bitcoin holders acquire tokens via exchanges rather than mining. These digital platforms are vulnerable to cyberattacks, malware, and technical failures.

• Insurance risk: Cryptocurrencies are not insured by the Securities Investor Protection Corporation (SIPC) or Federal Deposit Insurance Corporation (FDIC). Some exchanges, like Gemini and Coinbase, offer third-party insurance covering system failures or cybersecurity breaches. Cash deposits on these platforms may qualify for pass-through FDIC coverage.

• Fraud risk: Despite blockchain security, fraudulent activities remain possible.

• Market risk: Bitcoin prices are highly volatile, influenced by trading volumes and market news, resulting in significant price swings.

Bitcoin Regulation and Legal Considerations

Figure 5: Bitcoin Legal Status Worldwide

Regulating Bitcoin has posed challenges for authorities. The U.S. government aims to regulate cryptocurrencies while balancing innovation and economic benefits.

U.S. enforcement agencies currently apply existing securities, commodities, and tax laws, but as of December 2024, no significant legislative changes have been enacted.

The European Commission’s Markets in Crypto Assets (MiCA) regulation came into effect in 2023, establishing a regulatory framework for cryptocurrencies within the European Union.

India banned several cryptocurrency exchanges in December 2023 and continues to postpone legislative decisions regarding Bitcoin and other digital assets.

Summary: Should I Invest in Bitcoin?

Bitcoin was the first cryptocurrency introduced for public use as an alternative payment method outside traditional fiat currencies. Since 2009, its popularity and blockchain applications have grown substantially.

While Bitcoin generation is complex, investing is more accessible via crypto exchanges. As with any volatile and emerging asset, investors should carefully evaluate Bitcoin’s suitability for their portfolios.

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