What is Bitcoin and how does it work: a complete guide

You have probably heard of Bitcoin as an investment, as “digital gold” or as a scam. All three ideas come up so often that it is hard to separate what the system is from what people say about it.

This guide starts with the basics: the problem Bitcoin tries to solve, the pieces that make it work and what changes for the people who use it. At the end there is a section on risks, which is not optional for anyone planning to get involved with the technology.

The problem Bitcoin tries to solve

A digital file can be copied endlessly. If money were just a file, nothing would stop someone from spending the same coin twice. This is known as double spending.

In the traditional financial system, an intermediary prevents double spending: the bank or payment institution records who has how much and refuses a second use of the same balance.

The paper that introduced Bitcoin, signed by Satoshi Nakamoto, proposes another way out. Instead of trusting an intermediary, a network of computers publicly records the order of transactions and reaches agreement on it. The abstract describes an electronic payment system “based on cryptographic proof instead of trust” (Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System).

The network went live on January 3, 2009, the date recorded in the first block, the so-called genesis block. The code of Bitcoin Core, the reference software, stores in that block a headline from that day’s edition of The Times about bank bailouts (Bitcoin Core, chainparams.cpp).

Bitcoin, bitcoin and satoshi

The word has two uses. Bitcoin, capitalized, usually refers to the network and the protocol, that is, the set of rules. bitcoin, lowercase, is the unit of value that circulates on it, abbreviated as BTC.

Each bitcoin can be divided down to eight decimal places. The smallest unit is called a satoshi: one bitcoin equals 100 million satoshis, according to the project website’s FAQ (Bitcoin.org, FAQ). In practice, this means nobody needs to buy or receive a whole bitcoin.

The pieces that make Bitcoin work

The system combines some old computing ideas in a new way. Each one has a clear role.

Transactions

A transaction is a message that transfers value from one address to another and is digitally signed by the payer. The signature proves that the payer controls the funds without revealing the secret that allows them to be spent.

Bitcoin does not work with an “account balance” the way a bank does. Each transaction consumes outputs of earlier transactions and creates new outputs. The outputs not yet spent are the coins available. The detailed workings, with inputs, outputs and change, are in the article How the Bitcoin blockchain works.

Blocks and the blockchain

Transactions are grouped into blocks. Each block carries a mathematical fingerprint of the previous block, called a hash. This creates a chain: changing an old block changes its fingerprint and breaks the link with every block that follows. This chain of blocks is the blockchain.

The Bitcoin Core code sets a target of one block every ten minutes on average (Bitcoin Core, chainparams.cpp). The actual interval varies, because finding a block depends on luck.

Mining and proof of work

Blocks are created by miners. For a block to be accepted, the miner must find a number that, combined with the block’s data, produces a hash below a certain target. There is no shortcut: billions of combinations have to be tried. This computational effort is called proof of work.

The original paper explains the logic: once the work has been spent, the block cannot be changed without redoing that work, and the work of all blocks that came after it (Nakamoto). That is what makes rewriting history expensive.

In return, the miner who finds a block receives newly created coins plus the fees paid by the transactions included in it. This is how new bitcoins enter circulation, without a central issuer. Mining has its own article in this section.

Network nodes

A node is a computer that runs the Bitcoin software, stores the blockchain and checks whether each transaction and each block follow the rules. A block containing an invalid transaction is rejected by the nodes, even if it carries proof of work.

That is why miners’ power is limited. Miners order transactions, but they cannot create coins beyond what is allowed or spend other people’s funds, because the nodes would reject the block.

The limited supply

The rules set how many bitcoins can exist. Issuance stops when the total reaches 21 million units (Bitcoin.org, FAQ).

The pace is also defined in the code. The block reward started at 50 bitcoins and is cut in half every 210,000 blocks (Bitcoin Core, chainparams.cpp). At an average of ten minutes per block, that works out to about four years between cuts, an event known as the halving.

A limited supply does not mean a guaranteed price. The price depends on how much people are willing to pay, and that changes all the time. Why the cap exists and what the halving changes are covered in dedicated articles in this section.

Keys and wallets

Here is the most important idea for anyone who will use Bitcoin.

The project’s developer guide describes wallets, in essence, as “a collection of private keys” (Developer Guide: Wallets). The private key is a secret number that lets you sign transactions. The public key is derived from it, and the address, which you can share to receive payments, is derived from the public key.

Bitcoins are not “inside” the wallet. They are recorded on the blockchain. The wallet stores what lets you move them. Whoever has the private key has control; whoever loses it loses access.

Many wallets generate all their keys from a single seed, which can be written down as a sequence of 12 to 24 words under the BIP 39 standard (BIP 39). This recovery phrase restores the wallet on another device. For the same reason, anyone who gets hold of it can take all the funds.

There are two ways to hold bitcoin:

• Third-party custody. An exchange or another company keeps the keys for you. It is simpler, but you depend on that company’s security and solvency.
• Self-custody. You keep the keys yourself. Nobody can freeze your funds, but nobody can recover them if you make a mistake either.

Brazilian regulation uses the same distinction. A September 2026 vote by the Banco Central do Brasil (Brazil’s central bank) cites the definition of a self-custodied wallet as one whose owner “holds control of the respective private key” (BCB, Voto 107/2026). Wallet types and how to protect your recovery phrase have their own articles in this section.

What people use Bitcoin for

The three most cited uses are sending value over the internet without an intermediary, holding an asset whose supply cannot be changed by an authority, and speculating on the price.

The Token & Tech channel video attached to this article (in Portuguese) addresses the first point of view. According to its description, it argues that for many people the most important feature of Bitcoin is not profit but “true ownership of one’s assets.” This is an opinion. It connects to what was explained about keys: direct ownership exists in self-custody, and it comes with direct responsibility.

It is also worth saying what Bitcoin is not. The project website states that it is “not anonymous” and does not offer the same level of privacy as cash (Bitcoin.org, FAQ). All transactions are public. What does not appear is the name of each address’s owner, until some link is made, for example through registration at an exchange.

How long a transaction takes

A transaction that has been sent stays pending until it is included in a block. From then on it has one confirmation. Each new block added afterwards adds another.

The more confirmations, the harder it is to undo the transaction. The developer guide recommends that high-value payments or payments with fraud risk wait for at least six confirmations (Developer Guide: Payment Processing). At an average of ten minutes per block, that is about an hour. Transactions with low fees may take longer to get into a block.

The risks you need to know

The project website keeps a page of warnings. It says Bitcoin “should be seen like a high risk asset” and recommends not storing money in it that you cannot afford to lose (Bitcoin.org, Some things you need to know). These are the main risks:

• Volatility. The price can rise or fall sharply in a short time. Large losses, including losses close to the entire amount invested, are possible.
• Irreversibility. A confirmed transaction cannot be reversed. Only the recipient can send the money back (Bitcoin.org, FAQ). Sending to the wrong address usually means a permanent loss.
• Lost keys. If you lose the private key or the recovery phrase, the bitcoins remain on the blockchain but become inaccessible forever. There is no “forgot my password.”
• Fraud. Crypto-asset scams typically promise guaranteed returns, ask for your recovery phrase or impersonate exchanges and well-known people. In Brazil, Law 14,478/2022 added the crime of fraud using virtual assets to the Penal Code (art. 171-A) (Lei nº 14.478/2022). The law punishes the scammer but does not give the money back.
• Intermediary risk. With third-party custody, a failure, an attack or the company’s bankruptcy can hit your funds.
• Evolving technology. The project website notes that Bitcoin is still under active development and that fees and confirmation times can vary.

Bitcoin in Brazil: what the regulation says

In Brazil, Law 14,478 of December 2022 defines a virtual asset as a digital representation of value that can be traded or transferred electronically and used for payments or for investment purposes (Lei nº 14.478/2022). The law assigned the supervision of companies providing services with these assets to a federal government body to be designated by the Executive branch.

The Banco Central do Brasil published the rules for these providers in November 2025. According to the official presentation, the rules took effect on February 2, 2026, with a transition period. Companies that broker or hold crypto-assets on behalf of others need authorization from the Central Bank, are subject to supervision and must disclose risks and fees clearly (Banco Central do Brasil, November 2025).

This regulation applies to companies, not to the protocol. The Bitcoin network keeps working the same way. What changes is the environment in which exchanges and custodians operate in the country. Income tax obligations for people who hold crypto-assets are the subject of a dedicated article in this section.

Key takeaways

• Bitcoin is a network that solves double spending without an intermediary, using a public record of chained blocks, proof of work and verification by independent nodes.
• Issuance is fixed in code: at most 21 million units, with a block reward that is cut in half every 210,000 blocks.
• Owning bitcoin means, in practice, controlling a private key. That gives you direct ownership and shifts all responsibility for security to whoever holds the key.
• The risks are concrete: volatile prices, irreversible transactions, permanent loss from a misplaced key, and scams. Understanding how it works comes before any decision.

To see from the inside how blocks, transactions and confirmations fit together, read How the Bitcoin blockchain works.