How Bitcoin works

Bitcoin is a network of computers that keep the same record of who can spend which coins. No bank or company runs it. Anyone can run the software, check every rule and broadcast transactions. Launched in 2009, it introduced the design most later blockchains build on: a shared ledger, digital signatures for ownership and proof of work for agreeing on history.

Key takeaways

• The ledger records unspent transaction outputs. A wallet’s balance is the total of the outputs its keys can spend.
• Private keys authorize spending through digital signatures. Whoever controls the keys controls the coins.
• Miners bundle transactions into blocks about every ten minutes, and each new block makes earlier ones harder to rewrite.
• New bitcoin is issued through the block subsidy, which halves every 210,000 blocks. Total supply will never exceed 21 million.

The ledger

Bitcoin does not track account balances the way a bank does. It tracks unspent transaction outputs, or UTXOs: discrete amounts locked to a spending condition, usually a signature from a particular key. Your wallet finds the outputs it can unlock and shows their total as your balance. The coins never sit inside the wallet app; they exist only as entries in the shared ledger.

Bitcoin is divisible to eight decimal places. The smallest unit, one hundred-millionth of a bitcoin, is called a satoshi.

Keys and signatures

A private key is a very large secret number. From it, the wallet derives a public key and, from that, the addresses you share to receive funds. To spend, the wallet signs the transaction with the private key. Every node can check the signature against the public key without ever seeing the private key. If someone else learns your key or recovery phrase, they can sign as you, and the network cannot tell the difference.

Worked example: spending an output

Say your wallet controls a single output worth 0.05 BTC and you want to pay someone 0.02 BTC. The transaction spends the whole 0.05 BTC output and creates two new ones: 0.02 BTC to the recipient and 0.0299 BTC back to an address you control, called change. The remaining 0.0001 BTC is the fee, collected by the miner who includes the transaction. These are illustrative amounts.

From transaction to block

A signed transaction is broadcast to nodes, which check it against the rules and hold it in their mempool, a waiting area for unconfirmed transactions. Miners choose transactions, usually favoring those that pay the most per unit of block space, and compete to find a block whose hash falls below a difficulty target. That search is the proof of work. The network adjusts the difficulty every 2,016 blocks, about two weeks, to keep the average time between blocks near ten minutes.

Once a block includes your transaction, it has one confirmation, and each later block adds another. Reversing a deeper transaction would take more computing work, which is why many services wait for several confirmations before crediting a large deposit. The number they wait for is their own policy, not a protocol rule.

Where new bitcoin comes from

The miner of each block may claim a block subsidy of newly created bitcoin plus the fees in that block. The subsidy halves every 210,000 blocks, roughly every four years, in an event known as the halving. Because of that schedule, total supply approaches but never exceeds 21 million BTC. As the subsidy shrinks, the design relies on fees making up a larger share of what miners earn.

Before you send

• Check the address carefully, or verify it on a hardware wallet screen. Bitcoin transactions cannot be reversed.
• Confirm you are sending on the Bitcoin network. Wrapped or bridged bitcoin on other chains is a different asset with its own risks.
• Choose a fee rate that matches how quickly you need confirmation.
• Keep your recovery phrase offline and private, and send a small test amount to a new address first.