What is Bitcoin and How Does it Work?

What is Bitcoin?

Bitcoin can refer to three related things: the network and its rules, the unit of account called BTC, and the market price of one BTC. Each BTC can be divided into 100,000,000 smaller units called satoshis, so owning a whole coin is not required to participate; buyers commonly hold a fraction instead. The RBA's digital currencies explainer describes this subdivision. The market price of BTC changes with trading and is distinct from the network itself, which processes transfers between participants according to its rules.

Decentralised versus central bank money

No central bank or government issues Bitcoin. Instead, node operators around the world each run software that validates transactions and blocks against fixed rules, and no single company controls the whole network. Australian dollars, by contrast, are fiat currency: the Reserve Bank of Australia explains that fiat money is not backed by a physical commodity such as gold. Banks and central banks still play roles in the payments system that Bitcoin does not replicate. Not every crypto asset is decentralised to the same degree, and using Bitcoin still involves trusting software, counterparties or your own key management.

Price and value

Bitcoin's supply limit is an issuance rule in the software, not a promise of demand, liquidity or any price floor. Bitcoin's FAQ states that supply and demand affect the price and that no profit is guaranteed. The price can fall substantially, and a fixed supply does not make Bitcoin an automatic hedge against inflation.

How Bitcoin works

A Bitcoin transaction moves through a defined sequence:

1. Your wallet software constructs a transaction that spends previous outputs you control, and signs it with your private key.
2. The signed transaction is broadcast to the network's peers.
3. Peers independently validate it against the network's rules, checking signatures and that the outputs being spent have not already been spent.
4. A miner may include the valid transaction in a new block that satisfies the network's requirements.
5. Additional blocks built on top add confirmations, making reversal less likely.

As the Bitcoin developer transaction guide describes, transactions spend outputs and wallet balances reflect unspent transaction outputs. Inclusion in a block is not guaranteed at any particular moment; it depends on network conditions and the fee attached.

The blockchain and confirmations

The blockchain is the shared ledger of all valid transactions. Each block contains a hash of the previous block's header, so blocks are cryptographically linked, and full nodes validate every block independently against the rules. The Bitcoin whitepaper shows that under its assumptions, including that honest computing power is in the majority, the probability of an attacker reversing a transaction falls as more proof-of-work confirmations accumulate. Reversal becomes less likely, not mathematically impossible. A consensus attack is also distinct from guessing a private key: an attacker who reorganises blocks still cannot authorise spending coins they do not control, and nodes reject invalid blocks.

Transactions, keys and wallets

Three separate ideas are often confused. Your private key is the secret used to sign a transaction authorising a spend. Your public key supports verification of that signature. An address is receiving information you share so others can pay you; address formats differ and do not all work the same way. A wallet is software or an interface that manages keys and builds transactions; it is not a container holding digital coins. The ledger records spendable outputs, not a coin file transferred between devices. For general background on these terms, see our guide to cryptocurrency concepts. Control can be custodial, where a platform holds keys on your behalf, or self-held, where you are responsible for key security and backups.

Mining

Mining is not solving algebraic puzzles and not every node is a miner. Miners repeatedly hash candidate block headers looking for a result below the network's current target. When one succeeds, it proposes the block, and other nodes reject it if it is invalid. Miner compensation consists of newly issued coins, the block subsidy, plus transaction fees collected from included transactions.

The halving schedule

The block subsidy halves every 210,000 blocks, which takes roughly four years because block times vary; it is not a calendar timer. Bitcoin's halving page documents the schedule and the capped total issuance. Transaction fees are separate from the subsidy and are not halved. A halving changes the issuance rate only; on its own it does not predict the price.

The next halving at block 1,050,000 is estimated around 2028, but that estimate depends on actual block production and is not a promise.

Ways to trade Bitcoin

Buying spot BTC does not always require operating your own wallet. A centralised platform may hold BTC on your behalf, with custody, withdrawal availability and your rights set by the product terms rather than by the Bitcoin network itself. Before committing, check whether withdrawals to your own wallet are supported. See our account-opening guide for what to prepare.

Spot buying, CFDs and prop programmes

These routes differ in what you actually hold. Some traders use one, some combine them; the table below sets out the structural differences so you can compare products on their terms.

These are model distinctions. Individual programmes differ in instrument, structure and whether stages are live or simulated, so read each agreement rather than assuming a shared format.

Bitcoin and other crypto assets

Bitcoin's rules do not transfer to every crypto asset. Ethereum is a separate network with its own native asset, ETH, and different capabilities. Stablecoins aim to maintain a stable value relative to another asset, but Moneysmart notes this is an aim, not a safety guarantee, and a peg to US dollars still leaves AUD/USD exposure. See our concepts guide for distinctions between asset types.

Risk and regulation in Australia

Moneysmart, the Australian Government's financial guidance service, states that crypto assets, including AUD stablecoins, are not legal tender in Australia, that most are high risk with volatile prices, and that many providers operate without a licence. Before using any provider, verify the legal entity behind it, what the product terms say you own, custody arrangements, withdrawal availability, costs and security practices; our account guide covers what to check. There is no recovery guarantee: signing errors, transfers to wrong addresses or networks, scams and lost keys can each cause permanent loss, and an AUSTRAC listing does not certify that a provider is safe to invest with.

Where to compare next

To compare recorded spot fees and read provider reviews, continue to our crypto exchange comparison, and check each provider's eligibility and terms independently before opening an account.

Frequently asked questions