2.3 Understanding Bitcoin and Blockchain

Understanding Bitcoin and Blockchain

What you will understand after this chapter

The historical significance and origin of Bitcoin and the pseudonymous creator Satoshi Nakamoto.

- How the Bitcoin blockchain works and the role of decentralised nodes in recording transactions.

The critical role of private keys and wallets in controlling access to Bitcoin.

The main reasons people say Bitcoin has value, alongside important risks and limitations.

What is Bitcoin?

Bitcoin is a type of digital asset that allows value to be transferred electronically between users. It was launched in 2009 by a person or group using the name Satoshi Nakamoto.

Instead of existing as notes or coins, Bitcoin is recorded on a shared public ledger called a blockchain, which keeps track of which digital addresses control which amounts of Bitcoin at any point in time.

As of 2026, the majority of the total maximum Bitcoin supply (21 million coins) has already been created under the rules of its software, with a smaller portion due to be issued over time. This capped supply is one factor some people focus on, but it does not guarantee that the price will rise or that Bitcoin will hold its value.

The blockchain: Bitcoin’s public ledger

The Bitcoin blockchain is a record of all confirmed Bitcoin transactions. New transactions are grouped into “blocks”, which are linked together in sequence.

Many independent computers (often called “nodes”) around the world maintain and check this record according to Bitcoin’s rules. Because many copies exist, altering past confirmed data would require an impractical level of control over the network’s computing power, although no system is completely risk‑free or immune to all types of attack or failure.

The ledger is public: anyone can view transaction histories for addresses, but the real‑world identities behind those addresses are not automatically visible.

How Bitcoin transactions work

When someone wants to send Bitcoin, they create a transaction from one address to another and authorise it using their private key.

The transaction is then broadcast to the network, where it is validated and eventually included in a block by “miners”. Miners use computing power to follow the network’s consensus rules and, in return, can receive transaction fees and newly created Bitcoin. This process is known as mining.

Mining helps keep the blockchain updated and consistent, but it also consumes significant energy and relies on the continued participation of miners and node operators.

Owning Bitcoin: private keys and wallets

Controlling Bitcoin in practice means controlling the private keys associated with the relevant addresses. A private key is a long, secret code that allows you to authorise transactions.

If someone else obtains your private key, they can usually move your Bitcoin without your consent. If you lose your private key (and any recovery phrase or backup), you may permanently lose access to your Bitcoin.

A Bitcoin wallet is a tool (for example, an app, software program or hardware device) that helps you manage your addresses and keys. Different wallet types involve different trade‑offs between convenience, control and security.

Why do people think Bitcoin has value?

Different people give different reasons for why they believe Bitcoin has value. Common points they raise include:

A capped supply: The protocol currently limits the maximum number of Bitcoins that can be issued.

Network effects: A large and active user base and ecosystem.

Technical design: The way the network and its security model are structured.

However, these factors do not guarantee that Bitcoin’s price will remain stable or increase. Bitcoin’s price has been highly volatile, has experienced major declines, and there is a real risk of losing all the money you put in. It is not backed by a government, central bank or deposit guarantee scheme.

Bitcoin and the “digital gold” idea

Some people compare Bitcoin to gold and describe it as “digital gold” because it can be held and transferred independently of traditional financial systems and has a capped supply.

Others point out that Bitcoin is much more volatile than many traditional stores of value, that its role in portfolios is still evolving, and that it may not behave like gold or other hedges in times of stress. The “digital gold” label is a viewpoint, not a guarantee or a recommendation.

Is Bitcoin right for everyone?

Bitcoin is high risk and will not be suitable for everyone. Its price can move quickly and unpredictably, and using it involves technology and security responsibilities that many people find unfamiliar.

Before deciding whether to get exposure to Bitcoin, it is important to understand how it works, what protections you do and do not have, and how losing money would affect your wider financial situation. If you are unsure, consider seeking independent financial advice.

Nothing in this chapter is a recommendation to buy, sell or hold Bitcoin or any other cryptoasset. Its purpose is to help you understand how Bitcoin and its blockchain work and what risks are involved.

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