What is Bitcoin?
A peer-to-peer electronic cash system
What is bitcoin?
Bitcoin is a new form of money.
It was launched in 2009 as a "peer-to-peer electronic cash system". That means you can send money directly to someone else, electronically, without needing a bank or payment processor in the middle.
What does this mean?
Physical cash is peer-to-peer: You hand someone a $20 bill, they take it, and the transaction is direct and final.
Electronic cash is not peer-to-peer: Electronic cash must be held by a third party (a bank) and must involve one or more banks to transact.
Bitcoin is the first successful system that combines the peer-to-peer nature of physical cash with the speed and scale of electronic cash. Bitcoin is an entirely new form of money, one that you can hold yourself and transact with anyone in the world electronically, without needing any middle-men.
How does Bitcoin accomplish this?
Bitcoin is open-source software that encodes a set of specific, unchangeable rules. These rules govern how the network operates: from how transactions are validated, to the total supply of bitcoin, to how the system defends itself from attacks. The software is freely available for anyone to download and run. When you run it, your computer becomes a node — one of many in a global network of machines that all maintain a full, up-to-date copy of Bitcoin’s transaction history.
This decentralized structure means that no single company, government, or authority controls Bitcoin. Every node checks every transaction against the same rules, and invalid actions — like printing more bitcoin or spending coins you don’t own — are easily detected and automatically rejected. In this way, Bitcoin operates as a leaderless system, where transaction integrity and monetary are enforced by all participants.
Bitcoin is:
Digital: Bitcoin can be sent at speeds, distances, and scales of electronic payments.
Peer-to-peer: Transactions occur directly between users, no banks needed.
Global: Accessible and usable from anywhere in the world.
Limited: Only 21 million bitcoin can ever be created.
Decentralized: No central control, no single point of failure.
It’s a financial system built on math, not trust. It’s peer-to-peer cash for the internet age.
Understanding electronic cash
To see why Bitcoin matters, we need to look at how money works today.
Most of the money in the world isn’t physical — it’s electronic. What we call “electronic cash” is really just digits in databases — entries on a bank's digital ledger. When you check your banking app, you're not looking at paper bills held in a vault with your name on them — you're seeing a number on a screen, a digital IOU promising to fulfill a withdrawal or transfer request.
Banks don’t just store that money — they lend it. When you deposit funds, the bank uses most of it to issue loans to individuals, businesses, or governments, hoping to earn a return. The money gets spent and redeposited, then lent out again, and the cycle repeats. This system creates a loop where the same money is effectively promised to multiple people.
Here’s how the cycle works in a fiat money system:
You deposit $1,000 into a bank
The bank holds 10% ($100) in reserve and lends out the remaining $900
The borrower spends the $900, which is redeposited into another bank
That bank holds 10% ($90) and lends out $810
And so on…
This is known as the money multiplier effect. In this example, a single $1,000 deposit can create up to $10,000 circulating in the economy (assuming a 10% reserve requirement). But this new "money" isn’t backed by real value — it’s just more digits in more accounts. As more money is created, the purchasing power of each unit declines. That’s inflation: more money chasing the same number of goods.
Monetary authorities (i.e. Central Banks) can dictate the supply of money by adjusting reserve requirements, setting interest rates, or outright printing money.
This system is also inherently fragile. If too many people try to withdraw their deposits at once — more than the bank has on hand — the system collapses. This is a bank run. It happens when confidence evaporates, triggering mass withdrawals. If a bank can’t meet those requests, it fails, and depositors risk losing their money.
While government deposit insurance may offer some reassurance, it doesn’t eliminate the risk. Governments don’t hold enough cash to backstop every deposit. If multiple banks fail at once, the government’s only option may be to print more money — which further devalues the currency.
To recap, the current money has significant problems:
Fragility: Banks hold only a fraction of deposits in reserve. If too many people withdraw at once, the system can collapse.
Inflation: Lending expands the money supply, driving prices up as more money chases the same amount of goods.
Centralized control: Central banks manage the money supply and interest rates, eroding the value of savings through inflation and policy decisions.
Bitcoin offers an alternative—a decentralized system with transparent, predictable monetary rules and a fully auditable supply.
How Bitcoin works
How do you run a database with no central authority? With rules—strict, shared, and enforced by all.
Instead of a single entity maintaining a database, Bitcoin works by giving everyone a copy and democratizing its maintenance. Voluntary participants run the Bitcoin software, follows the same rules, and collectively agree on how the database—the ledger—gets updated. This process of updating is called proof-of-work mining, a kind of cryptographic lottery. Anyone can participate by contributing computational power – the more power you deploy, the higher your chances of earning the right to add the next block of transactions and get paid a reward in bitcoin for doing so.
Bitcoin is designed to process transactions by relying on three key participants: nodes, miners, and holders.
1. Nodes: The rule enforcers
Nodes are computers running the Bitcoin software. Anyone can operate a node; it’s free, open-source, and lightweight enough for an old laptop. Nodes keep a full copy of the entire transaction history — the ledger — and enforce the rules encoded in the Bitcoin software and connect to the other nodes to form a network, sharing valid transaction information. If a transaction breaks the rules, it’s easily detected and rejected.
Key rules include:
21 million cap: Only 21 million bitcoin will ever exist, issued according to a fixed schedule.
Private keys control coins: Only the private key holder (kinda like a password) can authorize spending—secured by unbreakable cryptography.
Block size limit: Each block has a maximum size, keeping the system lightweight so all nodes can stay in sync.
10-minute blocks: New blocks are added roughly every 10 minutes, promoting steady network propagation.
Difficulty adjustment: Mining difficulty automatically adjusts every ~2 weeks to keep blocks on schedule.
2. Miners: The transaction confirmers
Miners are computers that compete to add new blocks of transactions to the ledger. They do this by solving lottery-style cryptographic puzzles — a process called proof of work. The first to solve it earns the right to confirm the latest transactions and receives a reward—both newly issued bitcoin and transaction fees. It's super hard to mine a block, but it's super easy for nodes to find any invalid transaction, so miners must follow the nodes rules.
Mining performs four essential functions:
Confirming valid transactions: Only transactions that follow the rules are included in blocks.
Secures the network: Mining is computationally expensive, deterring against attacks costly and easily detected.
Issues new bitcoin: Bitcoin is minted through mining rewards, according to the preset supply schedule.
Builds the blockchain: Each block references the previous one, forming a tamper-evident chain. Any edit breaks the chain and gets rejected by nodes.
The difficulty of mining auto-adjusts every two weeks to maintain a steady flow of blocks, regardless of how much computing power is on the network.
3. Holders: The bitcoin users
Holders are the people who own and use bitcoin. Once you receive bitcoin to your wallet, it’s yours. Only you—by holding the private key—can spend it. That key is what proves ownership and authorizes transactions.
You can store your bitcoin in a wallet, spend it, or save it. Holding your own keys means you truly control your money. It’s not a claim on a bank—it’s direct ownership. No one can freeze it, seize it, or inflate it away.
Incentives keep the system honest
Nodes want a secure, reliable system to protect their funds and validate their own transactions.
Miners want their blocks to be accepted by nodes to be paid their reward, so they follow the rules to avoid having their efforts wasted.
Holders use bitcoin because it’s absolutely scarce, verifiably secure, and easily transferrable.
Everyone’s incentives align to preserve the system.
Anyone can broadcast a transaction. If they include a fee, miners will add it to the next block. That’s how the ledger updates—open access, permissionless.
To recap, Bitcoin is:
Stable & secure: Decentralized design with aligned incentives ensures redundancy and resilience.
Inflation-proof: Fixed supply of 21 million, enforced by self-interested nodes who will easily detect and reject changes.
Decentralized & neutral: No central authority, no political manipulation, no special access—just rules, code, and consensus.
Comparing Bitcoin and Cash
Bitcoin and traditional fiat money (dollars, euros, yen, pesos, etc...) work in fundamentally different ways:
Supply: Traditional money has no limit—it can be created endlessly. Bitcoin has a fixed supply of 21 million.
Control: Traditional money is managed by governments and banks. Bitcoin runs on decentralized rules enforced by software.
Access: Traditional money requires permission—accounts, ID, and gatekeepers. Bitcoin is open to anyone with an internet connection.
Security: Fiat money relies on trust in authorities to not inflate or destabilize. Bitcoin relies on cryptography, software, and global consensus.
Transparency: Traditional systems are opaque. Bitcoin is open—every transaction is publicly verifiable.
Bitcoin isn’t just digital cash. It’s a new kind of financial system—open, borderless, and beyond the control of any single authority.