Bitcoin Basics: How It Works and What You Own

What is Bitcoin?

Bitcoin is two things with one name. Bitcoin with a capital B is a network for sending money over the internet. The coin that moves on that network is bitcoin with a small b. Its short code is BTC.

No bank keeps the accounts. Instead, many computers around the world keep copies of one shared record, called the blockchain. It lists every payment that the network has confirmed. That is how everyone knows who can spend which coins.

The record is public and permanent. It shows addresses, not names, but an address can be linked to you. For example, a company that sells you coins knows who you are. So Bitcoin is not anonymous.

The price chart answers what buyers paid on one market. To understand a payment, ask a different question: who can authorise it? That takes you from the price to the keys.

How does a Bitcoin transfer work?

Say Ana wants to send some bitcoin to Ben. Three things happen.

1. Prepare. Ana's wallet app fills in Ben's address, the amount and a small network fee. She checks all three.
2. Sign. The app uses Ana's private key to sign the payment. This key is a long secret number. The signature proves that the owner said yes, without showing the key.
3. Confirm. The payment goes out to the network, and computers check that it follows the rules. A miner then adds it to a new block, a bundle of checked payments.

Each new block carries a code made from the block before it, called a hash. That links the blocks into a chain: the blockchain. The first confirmation usually comes within about 10 to 60 minutes.

What does a Bitcoin wallet actually hold?

A wallet does not hold coins. The coins are entries in the shared record. The wallet holds the keys that let you spend them.

So what happens if you delete your wallet app? If you still have your seed phrase, you can usually get access back in a wallet app that supports it. A seed phrase is a list of words, often 12 or 24, that can rebuild your keys. If you lose the keys and the phrase, no company can reset them. The coins stay on the record, but nobody can move them.

Three screens can show the same bitcoin balance and mean very different things:

• Your own wallet: you hold the keys, so only you can sign.
• An account on a trading app: the company holds the keys. You have a login and a claim on that company.
• A fund or other investment product: you may own units or a contract, not bitcoin itself. Read the product's documents.

Before you trust a balance, ask who can sign a transfer.

Can I buy less than one bitcoin?

Yes. The price you see is for one whole coin, but you can buy a small part of it.

A price move changes what your coins are worth. It does not change how many you own. Only a payment, a purchase or a sale changes the amount.

A coin with a low price per unit is not cheaper in any useful sense. A coin at 50 cents and a coin at $50,000 can both fall 20% in a day. To compare, multiply the amount you own by the price. Then list what you still don't know: how many coins exist, what rights you have and what trading costs.

What are the risks, and which rules apply to me?

Bitcoin's price can rise or fall a lot in a short time. The Bitcoin Project's website, bitcoin.org, says to treat it as a high-risk asset. Some risks have nothing to do with the price:

• Company risk: a business that holds your coins can be hacked or fail.
• Key risk: lose your keys and seed phrase, and the coins are stuck for good.
• Scam risk: payments can't be reversed, so scammers often ask for crypto.

The rules depend on where you live. In Canada, the Canadian Securities Administrators explain price, platform and technology risks. In the UK, read the FCA's guide to investing in crypto. In Australia, see ASIC Moneysmart. In the US, check which company you would deal with and the rules in your state.

A product that is easy to buy is not automatically right for you. Next, learn who really controls your coins in wallets and custody.