What is Bitcoin and How Does it Work?

As the first widely adopted cryptocurrency, Bitcoin introduced a fundamentally new way to think about money, transactions and financial control, operating outside the traditional framework of banks and central authorities.

At its core, Bitcoin (BTC) is a type of digital currency designed for use on a peer-to-peer electronic system. This means that transactions can potentially occur directly between individuals without needing an intermediary like a bank. It exists solely in the digital realm and can be sent from one user to another across the globe.

Unlike traditional money, which is issued and controlled by a central bank, Bitcoin operates on a decentralized ledger. This decentralization is a key characteristic: no single entity or institution has control over the entire Bitcoin network. Instead, the network is maintained by a distributed group of participants. Each unit of this digital coin is referred to as BTC, or simply Bitcoin. The smallest fraction of a Bitcoin is named a Satoshi, in honor of its creator, representing 0.00000001 BTC.

Bitcoin was conceived as a method for online payments that did not rely on trust in third parties. It represents a significant departure from conventional financial systems, offering a potential alternative for value exchange and storage in the digital age.

The story of Bitcoin begins in late 2008. Amidst a global financial crisis that highlighted vulnerabilities in traditional banking systems, an anonymous individual or group using the pseudonym Satoshi Nakamoto published a whitepaper titled "Bitcoin: A Peer-to-Peer Electronic Cash System." This document outlined the concept of a decentralized digital currency secured by cryptography.

The vision described in the whitepaper came to life on the 3rd January 2009, with the creation of the first block on the Bitcoin blockchain, known as the "genesis block." This marked the official launch of the Bitcoin network.

In its early years, Bitcoin was primarily known within niche technology and cryptography communities. Early Bitcoin transactions were experimental and often involved enthusiasts. A notable event occurred in 2010 when a programmer named Laszlo Hanyecz famously paid BTC 10'000 for two pizzas, marking one of the first documented real-world uses of Bitcoin for a commercial purchase.

As the concept gained traction, the open-source nature of the Bitcoin software allowed developers worldwide to contribute to its development and security. Over the years, interest grew beyond technical circles, attracting attention from investors, businesses and policymakers. This evolution saw Bitcoin transition from an obscure digital experiment to a recognized, albeit volatile, digital asset with a significant market presence.

The foundation of Bitcoin's operation is a technology known as the blockchain. Imagine the blockchain as a digital public ledger that records all Bitcoin transactions in a secure and verifiable manner. This ledger is not stored in one central location but is distributed across thousands of computers around the world that participate in the Bitcoin network.

When a transaction occurs, such as sending BTC from one person to another, the details of this transaction are broadcast to the network. These transactions are then grouped together into "blocks." Before a block can be added to the chain, it must be validated through a process called mining.

Mining is performed by participants (miners) who use powerful computers to solve complex mathematical puzzles based on cryptographic hash functions, specifically SHA-256 for Bitcoin. The first miner to solve the puzzle proposes the block of transactions to the network. Other participants verify the solution and the validity of the transactions within the block. Once verified by the majority of the network, the block is added to the existing chain of blocks – the blockchain – and the transaction is considered confirmed.

This process ensures that the ledger is consistent across all participants and that transactions cannot be easily altered or reversed once confirmed. The decentralized nature of the blockchain, combined with the cryptographic security and the distributed consensus mechanism (Proof-of-Work via mining), makes the Bitcoin network resilient and transparent. Every transaction ever made on the network is recorded and accessible on this public ledger, enhancing accountability while users are identified only by pseudonymous addresses.

Engaging with the Bitcoin network involves initiating and receiving transactions, which requires a Bitcoin wallet. A wallet is essentially software that manages your Bitcoin addresses and the cryptographic keys associated with them.

Each Bitcoin address functions like a unique account number you can share to receive BTC. Crucially, each address is linked to a pair of cryptographic keys: a public key and a private key. The public key is used to generate your address and can be shared freely. The private key, however, is similar to a password; it must be kept secret. Owning the private key associated with a Bitcoin address is what proves ownership of the BTC sent to that address and allows you to authorize spending it. Losing your private key means losing access to your Bitcoin.

When you initiate a Bitcoin transaction using your wallet, you are essentially creating a message that requests to transfer a certain amount of BTC from one address to another. This message is cryptographically signed using your private key, which proves that you authorize the transfer without revealing your private key itself. This signed transaction is then broadcast to the Bitcoin network for verification and inclusion in the blockchain. Hardware wallets are physical devices designed specifically to store private keys offline, offering enhanced security against online threats.

The transaction details, including the sending address, receiving address and amount, are then added to the pool of unconfirmed transactions waiting to be processed by miners.

Mining is an integral part of the Bitcoin system, serving two primary functions: verifying and confirming transactions and creating new Bitcoin. Miners use specialized hardware and significant computational power to compete in solving the complex mathematical problems required to add a new block of transactions to the blockchain.

This process, known as Proof-of-Work, is computationally intensive. The mining difficulty is automatically adjusted every 2016 blocks (roughly every two weeks) to keep block production close to one block every ten minutes. This consistent block time helps maintain the network's stability.

When a miner successfully solves the puzzle, they are rewarded with newly created Bitcoin (3.125 BTC per block as of 2025), along with the transaction fees from the transactions included in that block. This reward structure incentivizes miners to dedicate resources to maintaining and securing the network.

The amount of newly created Bitcoin awarded to miners for each block is subject to a process called halving. Approximately every four years (or specifically, every 210'000 blocks), the mining reward is cut in half. This mechanism is hardcoded into Bitcoin's protocol and reduces the rate at which new BTC is introduced into circulation. The halving event contributes to Bitcoin's programmed scarcity, as the total supply of Bitcoin is capped at 21 million coins. This supply limit is expected to be reached sometime around the year 2140, after which miners will be compensated solely by transaction fees.

Beyond its function as a digital currency, Bitcoin has increasingly been viewed and treated as a digital asset or a potential store-of-value. The concept of a store-of-value refers to an asset that is expected to retain its purchasing power over time, ideally appreciating against inflation. Historically, assets like gold have served this purpose.

Proponents of Bitcoin as a store-of-value point to its capped supply (21 million coins), its decentralized nature (meaning no single government or entity can inflate its supply) and its growing recognition and adoption. They argue that its scarcity and resistance to censorship make it a compelling digital alternative to traditional safe-haven assets.

However, classifying Bitcoin solely as a store-of-value is debated. Its price has historically exhibited high volatility compared to traditional assets. While its price has seen significant periods of appreciation over the years, it has also experienced substantial and rapid declines. This volatility is a factor for individuals considering its role within a diversified approach to digital assets or investments.

Understanding Bitcoin as an asset class involves recognizing its unique characteristics – its technological underpinnings, its defined supply schedule and its market behavior – which differ considerably from traditional financial instruments. Its place in the broader financial landscape continues to evolve as more institutions and individuals gain exposure to cryptocurrencies.

The price of Bitcoin, typically quoted against traditional currencies like the US Dollar (BTC to USD), is determined by the forces of supply and demand on cryptocurrency exchanges around the world. These exchanges function like digital marketplaces where buyers and sellers trade BTC. The constant activity on these platforms contributes to metrics such as trading volume and market cap.

Several factors influence Bitcoin's price fluctuations:

• Market Sentiment: Overall optimism or pessimism among market participants plays a significant role. News headlines, social media trends, and public perception can quickly impact demand.
• Regulatory Developments: News or actions from governments and regulatory bodies around the world can heavily influence the market. Positive regulatory clarity can boost confidence, while restrictive measures can lead to price drops.
• Technological Advancements: Updates or issues within the Bitcoin network itself, or developments in the broader blockchain technology space, can affect its perceived value and price.
• Macroeconomic Factors: Global economic conditions, inflation rates, interest rates set by central banks and the performance of traditional markets can impact investor behavior and capital flows into assets like Bitcoin.
• Adoption Rates: Increased adoption by individuals, businesses, and institutions for payments, investments or other use cases can drive demand and positively influence price.
• Supply Dynamics: Events like the halving, which reduces the rate of new Bitcoin creation, affect the available supply over time, which can have long-term price implications if demand remains constant or grows.

It is important to note that the cryptocurrency market, including Bitcoin, is known for its volatility. Prices can change rapidly and significantly based on a complex interplay of these factors. While historical price charts show periods of considerable growth, they also show substantial downturns.

Regarding the value of smaller amounts of Bitcoin, such as how much $1 or $100 translates to in BTC, this is simply a calculation based on the current market price. Since Bitcoin is divisible into very small units (Satoshi), it is possible to buy fractions of a coin. You can check the current exchange rate on reputable cryptocurrency exchanges or financial data websites to determine how much Bitcoin you would receive for a specific amount of traditional currency at that moment. However, providing a specific, real-time conversion here is not feasible as the price is constantly changing.

Predicting the future price of Bitcoin is inherently challenging and unreliable. Market conditions are dynamic, and numerous unforeseen factors can emerge. Therefore, focusing on understanding the underlying technology and market drivers is generally more informative than relying on price forecasts.

For individuals interested in acquiring Bitcoin, Swissquote offers a secure and regulated way to invest directly through its online trading platform. With a Swissquote account, you can buy and sell BTC using traditional fiat currencies such as USD, EUR or CHF, and you can start with even a fraction of a Bitcoin, making participation accessible with small amounts.

The process is straightforward: open an account with Swissquote, complete the verification steps, fund your account, and place an order to buy Bitcoin at the current market price.

Once acquired, your BTC can be held safely within your Swissquote account under custodial storage, combining convenience with the security standards of a regulated Swiss bank. For those who prefer full control of their assets, it is also possible to withdraw Bitcoin to an external private wallet.

Swissquote provides both flexibility and peace of mind, enabling you to choose the storage method that best suits your needs while ensuring that your investment journey is supported by a trusted financial institution.

It is possible to find the Bitcoin (BTC) price and chart here, together with detailed information about the cryptocurrency and how to invest.

The question of whether Bitcoin represents a good investment is complex and does not have a simple yes or no answer. It is essential to approach this topic with an objective and cautious mindset, focusing on understanding the characteristics and risks involved rather than seeking investment advice.

As a relatively new asset class, Bitcoin possesses characteristics that differ significantly from traditional stocks, bonds or real estate. These include its decentralized nature, limited supply cap, technological innovation, and global accessibility. These factors are seen by some as potentially contributing to its long-term value proposition.

However, Bitcoin's price has historically been subject to substantial volatility. Its value can experience dramatic increases and decreases over short periods, which presents both opportunity and risk. Factors such as regulatory uncertainty, competition from other cryptocurrencies, security vulnerabilities (like exchange hacks or loss of private keys) and technological scaling challenges are all potential risks that individuals must consider. Periods of sharp growth have repeatedly drawn global attention, while downturns have tested conviction and created entry points for new participants.

Engaging with Bitcoin or any digital asset should only occur after thorough research and understanding. It is prudent to consider your own financial situation, risk tolerance and investment goals. Consulting with a qualified financial advisor who understands digital assets can also be beneficial. Approaching Bitcoin with caution, focusing on education and avoiding any suggestion of guaranteed returns or swift profits is a responsible stance.

Several misconceptions persist, often fueled by its technical nature and association with early, less regulated environments.

• Bitcoin is completely anonymous: While Bitcoin transactions do not necessarily link directly to a person's identity, they are not anonymous. The blockchain is a public ledger, and every transaction is recorded permanently. While addresses are pseudonymous, analysis of transaction patterns and links to real-world exchanges where identity verification is required can potentially de-anonymize users. Bitcoin is more accurately described as pseudonymous.
• Bitcoin is only used for illicit activities: While early on Bitcoin was sometimes associated with dark web markets due to its perceived anonymity (which is a misconception, as noted above), data analysis suggests that the vast majority of Bitcoin transactions are for legitimate purposes. The transparency of the public ledger can actually make it easier to track illicit funds compared to cash.
• Bitcoin mining is a waste of energy: Bitcoin mining does consume significant energy, primarily due to the Proof-of-Work mechanism's reliance on computational power. However, the debate around this topic is nuanced. Proponents argue that this energy consumption is the cost of securing a decentralized network, similar to the energy used by traditional banking infrastructure. An increasing share of Bitcoin mining already uses renewable or stranded energy sources, though estimates vary.

Everyday users across the globe are driving a surge, with the Chainalysis 2025 Global Adoption Index showing U.S.A and India account for over 40% of global transaction volume. In places like India, where only 60% of adults have bank accounts, Bitcoin’s low-cost remittances are transforming how families send money home, while major retailers like Shopify and Overstock now accept it for purchases—handling over $1 billion in crypto transactions in early 2025. 

The institutional adoption of Bitcoin in 2025 is equally thrilling, as banks and major players signal its rise from niche to mainstream. A recent EY survey highlights that 34% of global institutional investors now hold spot Bitcoin, with 46% planning to increase stakes, boosted by Fed rate cuts that make it a strong inflation hedge. Giants like JPMorgan and Goldman Sachs have launched crypto custody and trading services, while Coinbase, the top U.S. custodian, secures billions for pension funds and corporations, including BlackRock’s iShares Bitcoin Trust ETF, which hit $50 billion in inflows by mid-2025. This growing trust from financial heavyweights shows Bitcoin is becoming a legitimate part of diversified portfolios, offering beginners a glimpse into its promising future as a global asset.

The content in this article is provided for educational purposes only. It does not constitute investment advice, financial recommendations, or promotional material. Investing in digital assets carries a high degree of risk.