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 acknowledged that Satoshi Nakamoto created and introduced it in 2008.

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

• Bitcoin mining is a competitive process where miners race to hash block data, solve a cryptographic puzzle, and add a new block to the blockchain. The miner who succeeds is rewarded with bitcoins.

• Bitcoin can be utilized by speculators, investors, and consumers for purchases or as a medium of value exchange.

• Investing in and using bitcoins involves several risks, including high 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 developed by Satoshi Nakamoto and Martti Malmi, who collaborated with the anonymous Nakamoto to build Bitcoin.

How and When Did Bitcoin (BTC) Start?

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, contains 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 that date.

Bitcoin Mining Rewards Over Time

Bitcoin block rewards are halved every 210,000 blocks. Initially, the reward was 50 bitcoins in 2009. On May 11, 2020, the third halving reduced the reward to 6.25 bitcoins per block. The fourth halving occurred 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 known as a satoshi.

The Cryptography Mailing List announced the initial release of Bitcoin software on January 8, 2009. On January 9, 2009, Block 1 was mined, marking the start of Bitcoin mining.

Bitcoin (BTC) and Blockchain Technology Explained

Figure 2: How blockchain technology functions

Bitcoin as a form of digital currency is straightforward to understand. For instance, owning Bitcoin allows you to use your 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 secured by cryptographic methods. "Distributed" means the ledger is stored across numerous computers rather than a centralized server, unlike traditional data storage.

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

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

• Software version: Indicates the blockchain protocol version (sometimes called the magic number)

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

• Merkle root: A single hash representing all hashed transactions in the block

• Timestamp: The exact date and time the block was created

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

• Nonce: Short for "number used once," a value miners adjust to solve the cryptographic puzzle and validate the block.

Each block contains the hash of the previous block, creating a secure chain of encrypted blocks that trace back to the genesis block.

Bitcoin (BTC) Encryption and Security

Bitcoin employs the SHA-256 hashing algorithm to encrypt the data stored within blockchain blocks. In essence, transaction data is converted into a 256-bit (64-character) hexadecimal hash that encapsulates all transaction details and links to prior blocks.

Although the data is encrypted and referenced in subsequent blocks, the blockchain remains transparent and readable. This design ensures immutability, as altering any block would require changing all subsequent blocks, and it enables public auditing of the blockchain.

How To Buy Bitcoin (BTC)

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

For example, platforms like Coinbase or Binance allow you to create and fund an account using bank transfers, credit cards, or debit cards to buy Bitcoin.

You can then access your spot crypto wallet on these exchanges to purchase and securely hold Bitcoin. Reputable exchanges offer liquidity and security, enabling quick sales when needed.

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

Figure 3: Overview of Bitcoin Mining Process

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

While it is still possible to mine with a modern personal computer, the likelihood of 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 called 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

Two primary hardware options exist for Bitcoin mining, accompanied by various compatible software solutions.

1. You can use your existing computer with mining software compatible with Bitcoin’s protocol and join a mining pool. Mining pools aggregate computational power from multiple miners to compete against large ASIC mining farms. Popular mining software includes CGMiner and BFGMiner, while leading pools include Foundry Digital, Antpool, F2Pool, ViaBTC, and Binance.com.

2. If financially viable, you may invest in ASIC miners, typically priced around $10,000 new, with used units available as miners upgrade. Consider substantial operational costs such as electricity and cooling. Note that owning a few ASICs does not guarantee mining rewards due to competition with large-scale mining operations; for example, CleanSpark operates over 195,000 miners.

Joining a mining pool can improve your chances of earning bitcoin rewards, but these rewards are shared among participants. When selecting a pool, evaluate its payout structure, fees, and user reviews.

How to Use Bitcoin for Payments

Figure 4: Using Bitcoin for Transactions

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 many merchants, retailers, and service providers as a payment method.

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

To transact with Bitcoin, you need a cryptocurrency wallet, which serves as your blockchain interface and securely stores your private keys required to authorize transactions.

How to Invest in Bitcoin or Trade Bitcoin

Investing in Bitcoin can be done by purchasing the asset directly or trading it via Contracts for Difference (CFDs). Direct purchase involves acquiring and storing Bitcoin in a digital wallet for long-term holding, exposing investors to full market volatility, wallet security risks, and custodial fees.

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

Moreover, Crypto CFD trading eliminates the need for crypto wallets and provides 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.

Given such volatility, many investors buy Bitcoin for its investment potential rather than as a medium of exchange. However, its lack of guaranteed intrinsic value and digital nature introduce several risks.

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

Key risks when trading or investing in Bitcoin include:

• Regulatory risk: Ongoing regulatory scrutiny of cryptocurrency projects creates uncertainty regarding Bitcoin’s long-term viability and liquidity. As of December 2024, Bitcoin is not classified as a security, but this status could change.

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

• Insurance risk: Bitcoin and other cryptocurrencies lack coverage by the Securities Investor Protection Corporation (SIPC) or Federal Deposit Insurance Corporation (FDIC). Some exchanges, such as Gemini and Coinbase, offer third-party insurance for system failures or cybersecurity breaches. Cash deposits on these platforms may qualify for FDIC pass-through coverage.

• Fraud risk: Despite blockchain security features, opportunities for fraudulent activity persist.

• Market risk: Bitcoin’s value is highly volatile, influenced by trading volumes and market news, resulting in significant price fluctuations.

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 the need to support a growing, economically beneficial sector.

U.S. enforcement agencies currently apply existing securities, commodities, and tax laws, but as of December 2024, no significant new legislation has been enacted.

The European Commission’s Markets in Crypto Assets (MiCA) regulation took 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 review of Bitcoin and other digital assets.

Summary: Should I Invest in Bitcoin?

Bitcoin was the first cryptocurrency introduced as an alternative payment method outside traditional fiat currencies. Since its 2009 launch, Bitcoin’s popularity and blockchain applications have expanded significantly.

While Bitcoin mining is complex, investing is more accessible. Investors and traders can buy and sell Bitcoin on cryptocurrency exchanges. As with any investment—especially one as novel and volatile as Bitcoin—careful consideration is essential.

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