What’s Bitcoin? A 101 guide to the first cryptocurrency

With banking websites and fintech apps now available at a click, you can move money faster than ever before. But these services are still part of the traditional financial infrastructure. It wasn’t until pseudonymous cryptographer Satoshi Nakamoto launched Bitcoin (BTC) that the world realized digital technology could reshape what money is, not just how it’s accessed.

As the first successful peer-to-peer (P2P) digital asset, BTC inaugurated the cryptocurrency market. Today, it's increasingly recognized as both an investment vehicle and a medium of exchange. From institutions to individuals, BTC has become a novel way to store wealth and a powerful form of financial freedom.

In this article, we’ll explore what Bitcoin is and how it works. We’ll also cover the basics you should know if you want to invest in BTC, like the buying process, pros, cons, and tax implications.

What are Bitcoins? A quick history

There’s endless speculation about exactly who created the Bitcoin network, but an individual or group called Satoshi Nakamoto was the driving force behind the project. In 2008, Nakamoto published the historic Bitcoin white paper describing an internet-based P2P "electronic cash system."

Instead of relying on banks or governments to oversee transactions, Bitcoin was presented as a virtual currency anyone could store in private wallets and use to directly transact with others on the network.

Nakamoto turned this theory into reality in 2009 by launching the open-source Bitcoin network. Early contributors – mostly cryptography enthusiasts and curious developers – began contributing to the network’s security and mining BTC into existence using their personal computers.

Bitcoin’s growth was slow at first, but the idea began spreading on online forums and niche tech communities. One early milestone was Laszlo Hanyecz’s purchase of two Papa John’s pizzas for 10,000 BTC in 2010, marking the first real-world use case. Despite BTC’s price volatility and regulatory uncertainty, it continued to gain traction as a novel investment outside the control of centralized institutions.

Today, BTC is widely viewed as a store-of-value investment akin to gold, used by companies as large as Tesla and institutions as influential as the United States government. In 2021, the total market cap for Bitcoin surpassed $1 trillion for the first time, and the price per coin hit a historic $100,000 in 2024.

How does Bitcoin work?

To explain Bitcoin’s architecture, let’s break this crypto network down into a few essential components.

Blockchain technology

Bitcoin’s transparency and security rest on its foundational blockchain technology, which serves as a tamper-resistant, globally distributed virtual payment ledger. Transactions on the Bitcoin network are recorded and organized into blocks of data, which link together in a chronological chain going all the way back to the first transaction.

All the data on this payment ledger is publicly viewable. Anyone can plug into Bitcoin’s blockchain as a node to validate transactions and store a copy of the complete transaction history.

Since every node on the network has the same information, it’s very difficult for inconsistencies or malicious transaction errors to slip through the verification process. And when nodes reach consensus and add blocks to the chain, the transactions in that block are immutable.

BTC mining

The nodes that process BTC transactions have to follow a built-in algorithmic protocol called proof-of-work (PoW) consensus. In this model, nodes compete to solve an algorithmic problem roughly every 10 minutes, and the first computer to solve the problem receives free BTC. Because this process unearths BTC and releases it into circulation, it’s colloquially called Bitcoin mining (and nodes are often called miners).

At Bitcoin’s launch in 2009, the block reward was 50 BTC. However, these rewards are cut in half every four years in pre-programmed halving events. To promote transparency and prevent runaway inflation, there will only ever be 21 million Bitcoins on the public blockchain.

Decentralization

Bitcoin’s PoW algorithm and blockchain design handle all the checks and balances traditionally managed by centralized institutions like banks. In this way, Bitcoin exists as a self-contained ecosystem that doesn’t rely on third-party intervention.

Although core developers maintain and update Bitcoin’s programming, there’s no risk of counterparty interference on the blockchain. The only major threat to Bitcoin’s decentralization is if one entity manages to control 51% of the network’s hashrate power. However, since the Bitcoin network is so large and globally distributed, the energy required to launch a successful network takeover outweighs the potential gains.

Wallets and keys

People who want to buy BTC don’t have to set up mining rigs or verify transactions, but they’re responsible for securing their assets in crypto wallets. To safely send and receive BTC, users can choose either hot or cold wallets.

Hot wallets are more prone to hacks, because they’re always connected to the internet. But active traders tend to favor hot wallets due to their ease of use, affordability, and connectivity with decentralized applications (dApps).

Cold wallets store their passcodes offline, so they’re generally more secure. Although the original cold storage solutions were printouts with QR codes (aka paper wallets), it’s now more common for traders to use hardware devices like Ledger or Trezor to secure their BTC offline.

Both types of BTC wallets contain a pair of cryptographic keys: a public and private key. The public key serves as a home address for receiving payments, while the private key is used like a password for digitally signing and approving transactions. Sharing a public key to receive BTC is safe, but the private key must be kept secret. If someone else learns a private key, they can easily steal the BTC in the associated wallet.

How can I buy Bitcoin? 4 steps

If you’re planning to invest in BTC, here’s how to get started.

1. Choose an exchange

For beginners, buying BTC on a centralized exchange (CEX) like Coinbase is the safest and most intuitive option. If you’re already familiar with buying stocks on a brokerage app, the transition to a digital asset trading platform is fairly seamless. In fact, as more traders demand access to Bitcoin and other cryptocurrencies, it’s becoming common to find both crypto and equities on a single platform.

Just keep in mind that CEXs are centrally controlled, which means the Bitcoins on these platforms are stored in third-party wallets that are vulnerable to attacks. If you don’t feel comfortable sharing personal information with a CEX or entrusting an exchange to hold your private keys, you might consider other ways to buy BTC, such as P2P exchanges and Bitcoin ATMs.

​2. Complete an identification check

To comply with regulatory bodies, CEXs must collect personal data in line with established know-your-customer (KYC) policies. KYCs help CEXs detect suspicious activity and work with regulators to identify and prosecute anyone accused of using cryptocurrency for illicit activities.

Typically, as a new customer you’ll have to enter your full name, phone number, email address, and current home address when setting up a new CEX account. Many exchanges also require a photo of a valid government-issued ID and a selfie to verify the information. As long as all this data clears a CEX’s internal checks, you’ll gain access to a crypto trading account.

3. Fund the trading account

After KYC verification, you’ll have to send money to your CEX account. Many CEXs offer several ways to transfer fiat currency, such as ACH, wire transfers, debit cards, and fintech apps. Just be sure to review any fees associated with different transfer methods before deciding on the most cost-effective solution.

4. Buy BTC

Once you have fiat in your CEX account, you can use it to buy BTC and other available currencies. Just search for a crypto in the CEX’s trading portal and enter how much you want to purchase. Some CEXs only offer market orders that execute at the current exchange rate, while others support limit orders that let you set your preferred price to purchase BTC.

Once a transaction clears on a CEX, the BTC appears in your custodial wallet. If the CEX allows external transfers, you can also send your BTC to a self-custodial wallet.

What are the advantages and disadvantages of Bitcoin?

BTC has achieved some impressive milestones, but just because it’s the largest and oldest cryptocurrency doesn’t mean it’s without downsides. Here are the main pros and cons of investing in BTC.

Bitcoin’s pros

The advantages of BTC include:

• Decentralization: BTC’s core value proposition is its P2P design. There's no need for a bank, payment processor, or government to approve transactions, giving people the power to control their money without fear of counterparty risks.
• Security and transparency: BTC’s PoW mining system continues to operate as designed, with few successful hacks or exploits. Plus, the Bitcoin network posts a transparent record of transactions anyone can verify.
• Global accessibility: BTC doesn't have the same border restrictions as traditional financial systems. As long as you have internet access, you can download a wallet and participate in the BTC economy.
• Lower fees for international transactions: BTC is also quicker and more affordable than sending cross-border payments through traditional methods like wire transfers. The Bitcoin Lightning Network – which offers BTC microtransactions on a separate blockchain layer – is used to send remittances with virtually zero fees.
• Potential for high returns: Due to its fixed supply and high price volatility, careful BTC investors can be quite successful.

Bitcoin’s cons

And here are the main drawbacks of BTC:

• Extreme volatility: Despite BTC’s long-term growth, its price can still drop 10–20% in a day, making it an unpredictable payment method and a higher-risk investment.
• Lack of regulation and insurance: Some countries are introducing clearer crypto regulations, but other nations have bans on BTC, and there aren’t international standards for this digital asset. You also can’t fall back on traditional insurance policies like FDIC or SIPC in the event of a theft or hack.
• Security and user responsibility: The blockchain’s immutability means that mistaken transactions can't be undone. If you send BTC to the wrong crypto address or fall victim to a scam, there's no way to recover your assets.
• Complexity and usability: Managing BTC is getting easier, but it isn’t as intuitive for those accustomed to traditional finance. You’ll need to understand concepts like crypto wallets, private keys, and network fees, and meanwhile mistakes – such as losing a private key – can result in permanent loss of funds.
• Potential future vulnerabilities: Some crypto advocates are concerned that the rise of quantum computing could pose challenges to Bitcoin’s code. Without robust quantum resistance, new technologies might break through Bitcoin’s security and call its legitimacy into question.

What’s the difference between Bitcoin and altcoins?

Between 2009 and 2011, BTC was the only cryptocurrency. But as more developers began exploring blockchain technology, they started launching alternative coins – also known as altcoins – with different designs and use cases.

Thousands of altcoins now exist, each with its own mission statement and risk profile. Because of their lower market caps and more speculative reputations, altcoins tend to be unpredictable, with wilder price swings up or down when compared to the more established BTC.

Bitcoin versus Ethereum

One altcoin that deserves special mention is Ethereum (ETH). Second only to BTC by market cap, Ethereum is the most significant altcoin because it introduced self-executing smart contracts.

This innovation turned Ethereum into more than just a P2P digital currency exchange. Instead, this network became a programmable platform for building dApps, and it laid the groundwork for fields like decentralized finance, GameFi, and non-fungible tokens.

What’s Bitcoin’s legal status?

In the U.S., the Commodity Futures Trading Commission clearly classifies BTC as a commodity and regulates it accordingly in futures and derivatives markets.

Because BTC lacks a central issuer and operates independent of any controlling entity, it doesn't fit the definition of a security. Unlike securities, commodities don’t have to comply with strict disclosure rules or ongoing oversight from organizations like the U.S. Securities and Exchange Commission.

What’s Bitcoin used for today?

The original plan was to use BTC as a P2P digital currency in daily life. It’s possible to use BTC that way, but its long-term price appreciation and short-term volatility have also positioned it as an investment and trading vehicle.

Investing in Bitcoin

For every $1 of BTC in 2009, investors would have roughly $100 million when BTC first hit $100K. Gains that high probably won’t happen again, but many believe in BTC’s long-term potential thanks to its fixed supply and increasing accessibility. That positive outlook resonates with traders who can accept the volatility of crypto and prefer to hold their assets over time rather than trade frequently.

And it’s not just retail investors holding BTC in hopes of price appreciation. The U.S. government has a Bitcoin Strategic Reserve, and companies like MicroStrategy hold BTC in their treasuries.

Trading Bitcoin

BTC’s combination of volatility and high liquidity makes it a popular choice for traders who speculate on short-term price movements. Trading aims to capitalize on volatility, and it requires a disciplined strategy grounded in careful risk management and technical analysis of crypto charts.

Beyond buying and selling BTC directly on spot exchanges, many CEXs offer derivatives such as options and futures. These products track BTC’s price and allow traders to increase their position sizes by borrowing funds on margin.

Transacting with Bitcoin

Exchanges like Coinbase offer crypto credit cards that let users spend BTC and other currencies. Fintech apps like PayPal also support crypto payments. In both cases, users spend their BTC, but a third-party provider instantly sells the crypto and delivers the fiat equivalent to the merchant.

For P2P BTC transactions, users need to send crypto directly between wallets. To do this, the sender copies or scans a QR code representing the recipient’s wallet address and enters the code into their own wallet.

Is Bitcoin taxable in the U.S.?

The IRS doesn’t view BTC as a currency like USD, but as a property. So for tax purposes, BTC follows the same capital gains and losses rules as stocks. There’s no tax for purchasing BTC or transferring it between personal wallets or exchange accounts. But every sale – including using BTC to buy goods or services – is a taxable event.

When you sell your BTC, you’ll subtract the average price you paid (aka the cost basis) from the fair market value at time of disposal. The difference between these numbers represents the taxable gain or deductible loss, and the amount you have to pay depends on your tax bracket and how long you held the BTC.

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One exception is if you receive BTC as wages or as a reward for activities like mining. In these cases, you have to report this BTC as income on your crypto taxes. The fair market value when you received the BTC represents both your taxable income and the cost basis if you decide to sell.

Manage your Bitcoin taxes easily with CoinTracker

Whether you actively trade BTC or hold on to your coins for years, you need to present detailed transaction summaries to the IRS every tax year. The simplest way to stay compliant is to link all your crypto wallets and exchange APIs to CoinTracker’s Portfolio Tracker.

Our system automatically syncs with your accounts to categorize transfers and provide accurate cost basis estimates and yearly gains or losses. CoinTracker also makes sharing this data simple by importing it into IRS-compliant forms ready for a CPA or tax software.​

Worried about reporting your crypto taxes? CoinTracker makes it simple. Join over three million users who trust us for hassle-free tax reporting. Start for free today.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.