Bitcoin basics · Overview

How Bitcoin works.
The protocol in plain English.

READ5 min·UPDATED·APPLIES TOAny country·LEVELBeginner
For someone who has never understood how Bitcoin functions. Sources are listed at the bottom of the page; check their dates before acting.

A six-minute explanation of how Bitcoin transactions, mining, the blockchainBlockchainA public transaction ledger, grouped into blocks that each link to the one before. Every Bitcoin full node checks each block itself and follows the valid chain with the most accumulated proof of work. Recent blocks can occasionally be replaced (a reorganization); the number of computers does not decide validity.Full definition, and the 21 million cap fit together. No jargon. No "magic internet money" hand-waves. The protocol is simple at the level you need to understand it as a user.

This page explains the whole protocol in one read. For separate deep dives on the blockchain, mining, the halving and Lightning, see Bitcoin Mechanics.

Short answer

Bitcoin is a shared spreadsheet of who owns what. About every 10 minutes, computers around the world race to solve a costly puzzle for the right to add the next page of transactions to the spreadsheet. The winner gets paid in newly created Bitcoin. The puzzle is so expensive to solve that rewriting old pages is economically infeasible. New Bitcoin is created on a fixed schedule that ends at 21 million coins. That's the whole protocol at the level a normal user needs.

On this page
  1. How transactions work
  2. Proof of work, in plain English
  3. The blockchain
  4. Mining and network security
  5. The 21 million cap and halvings
  6. What this changes for tomorrow
  7. Continue the sequence

How transactions work

A Bitcoin "wallet" is not a place where coins are kept. It is software that holds two things: private keys (cryptographic secrets that prove you own coins assigned to specific addresses) and a list of those addresses. To send Bitcoin, your wallet creates a transaction message that says "the coins at address A are now assigned to address B" and signs it with your private keyPrivate keyA secret number that proves the right to spend bitcoin by signing transactions. Most wallets derive their private keys from a seed phrase backup. The phrase is not itself a private key, but it can regenerate them, so unless the wallet also needs a passphrase or other keys, anyone who has it can spend the coins.Full definition. The signature is mathematically verifiable by anyone but cannot be forged without the key.

An open, empty leather wallet holding a single old-fashioned key.
A Bitcoin wallet is not a place where coins are kept. It is software that holds private keys, the secrets that prove ownership of coins assigned to specific addresses.

Your wallet broadcasts the transaction to the network. Mining nodes pick it up, verify the signature, and include it in the next block they mine. Once your transaction is in a block, and a few more blocks have been added on top, it is irreversible.

A Bitcoin Transaction, Step by Step

Alice's wallet holds her private keys Signs transaction with private key Transaction broadcast propagates to nodes around the world Mempool pending pool, sorted by fee rate Miner picks transaction Block mined included in the next valid block (~10 min) 6 confirmations six more blocks added on top, ~60 minutes Final irreversible without majority hashrate attack No intermediary at any step. The protocol settles itself.

Methodology: standard Bitcoin transaction lifecycle. Confirmation depth depends on transaction value; six is the conventional threshold for high-value irreversibility.

Proof of work, in plain English

Miners compete to add the next block to the chain. To win, a miner has to find a number (a "nonce") that, when combined with the block contents and run through a one-way hash function, produces an output below a target value. There is no shortcut. Miners just guess, trillions of guesses per second, until one of them finds a winning number. The winner broadcasts the new block, claims the block rewardblock rewardThe brand-new Bitcoin a miner earns for adding the next batch of confirmed transactions to the public ledger. The reward is how new Bitcoin enters circulation, and it gets cut in half every four years. in newly created Bitcoin, and the race for the next block begins.

Why this matters: rewriting an old block requires re-doing all the proof of workproof of workBitcoin's security trick. Computers around the world race to roll the right random number, burning real electricity in the process. The winner adds the next batch of transactions and earns new Bitcoin. Because cheating means burning more electricity than everyone else combined, attacking the network costs real money.Full definition for that block plus every block after it, faster than the rest of the network is producing new blocks on top. The deeper a transaction sits in the chain, the more compute would be required to reverse it. Six confirmations (about an hour) is the standard threshold for "settled" because the cost of reversal at that depth is prohibitive even for state-level adversaries. Detail at Proof of Work.

The blockchain

"Blockchain" is the data structure: a chain of blocks where each block references the cryptographic hash of the previous block. Change anything in any block and every block after it has to be re-mined. The Bitcoin blockchain is currently around 600 GB on disk and grows by roughly 1 MB every 10 minutes. Anyone can download the entire history and verify it independently. Around 16,000 to 20,000 nodes worldwide do exactly that ×DON'T TRUST, VERIFYClaim: The Bitcoin reachable-node count fluctuates between roughly 16,000 and 20,000 worldwide.Verify at: Bitnodes live count ↗ Source 1 in the list belowBitnodes counts only reachable nodes. The total node count including non-listening nodes is higher..

Mining and network security

Miners are paid in two ways: a "block subsidyblock subsidyThe new BTC created with each block, paid to the miner who finds it. Started at 50 BTC in 2009, halves every 210,000 blocks. Currently 3.125 BTC after the April 2024 halving." of newly created Bitcoin (3.125 BTCBitcoin (BTC)The ticker symbol for Bitcoin, used on exchanges and in price quotes.Full definition per block as of the 2024 halvingHalvingThe scheduled event, built into Bitcoin's code, that cuts the new bitcoin paid to miners per block in half. It happens every 210,000 blocks, about every four years; the April 2024 halving at block 840,000 cut it from 6.25 to 3.125 BTC, slowing the rate of new supply.Full definition) plus the transaction fees from the transactions in the block. The block subsidy halves every 210,000 blocks (roughly every 4 years). It started at 50 BTC per block in 2009; it will halve to 1.5625 BTC in 2028 and continue halving until it rounds to zero around 2140.

As the subsidy shrinks, transaction fees become the dominant compensation for miners. Whether the fee market alone can sustain network security is an open empirical question that the protocol's long arc will answer. So far, fee revenue has scaled with usage and price; whether that scaling continues is part of the bull case and part of the bear case.

The 21 million cap and halvings

The supply schedule is fixed in code ×DON'T TRUST, VERIFYClaim: The Bitcoin protocol caps total supply at 21 million coins via a halving schedule.Verify at: Nakamoto (2008) Bitcoin whitepaper ↗ Source 2 in the list belowThe cap is enforced by consensus rules in the reference implementation; changing it would require a hard fork rejected by economic majority.:

  • 2009 to 2012: 50 BTC per block (~12 seconds worth of issuance per coin in a sense; 7,200 BTC per day).
  • 2012 to 2016: 25 BTC per block.
  • 2016 to 2020: 12.5 BTC per block.
  • 2020 to 2024: 6.25 BTC per block.
  • 2024 to 2028: 3.125 BTC per block.
  • 2028 to 2032: 1.5625 BTC per block. And so on.

The total approaches 21 million asymptotically and rounds to that figure around 2140. Approximately 20.1 million coins are already in circulation. About 96% of all Bitcoin that will ever exist has already been mined.

No central party can change the cap. Changing it would require a hard fork that the economic majority of the network rejects. Bitcoin holders, exchanges, miners, and node operators have repeatedly demonstrated they will reject changes to monetary policymonetary policyThe central bank's control of money supply and interest rates to influence the economy.. The cap is as immutable as anything in software can be.

What this changes for tomorrow

  • If you understand transactions and proof of work, the rest of the Bitcoin learning curve is incremental. Most "advanced" topics build on these primitives.
  • Self-custody starts with understanding that owning Bitcoin = owning the private keys. Without the keys, you have a claim on a custodian, not the asset. Detail at Bitcoin Security.
  • The fact that no central party can change supply is the structural property the entire investment case rests on. Detail at Why Bitcoin.

Continue the sequence

→ Bitcoin Security, self-custody and seed phrases · 7 min → Proof of Work, the deep dive on mining and energy → Why Bitcoin, the case for the design → Bitcoin for Beginners, the full long-form intro

Where to go from here

Do next

Bitcoin Mechanics

Four deep dives into blockchain, mining, halving and Lightning.

Read next

Proof of Work

What secures Bitcoin, in more depth.

Explore further

Sources

Verify badges in the text link to these sources. Figures, rates and rules change: check each source’s date before acting on it.

  1. Bitnodes live count · bitnodes.io ↩
  2. Nakamoto (2008) Bitcoin whitepaper · bitcoin.org ↩

Last updated . Not financial advice. Disclosures · How pages are reviewed

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