Bitcoin explained: how blockchain transactions work

Key takeaways

• Bitcoin is a digital currency recorded on a public ledger called a blockchain.
• Transactions are signed with private keys and confirmed by a decentralized network of miners.
• Bitcoin’s supply is capped at 21 million coins, but its price can swing sharply.

What a blockchain is

A blockchain is a shared record of transactions grouped into blocks, each linked to the one before it. Thousands of computers around the world keep copies, which makes the history extremely hard to alter.

Keys and wallets

Your bitcoin is controlled by a private key — a long secret number. A wallet stores your keys and creates addresses for receiving funds. Anyone with your private key or recovery phrase can move your coins, so protecting it is essential.

What happens when you send bitcoin

Each step builds on the one before, which is why confirmed transactions are so hard to reverse.

• Your wallet creates a transaction and signs it with your private key.
• The transaction is broadcast to the network and waits in a pool of unconfirmed transactions.
• Miners bundle transactions into a block and compete to solve a computational puzzle, a process called proof of work.
• The winning miner adds the block to the chain — roughly every 10 minutes on average — and earns newly created bitcoin plus fees.
• Each additional block added on top counts as another confirmation and makes the transaction more secure.

Fees, supply and volatility

Transaction fees rise when the network is busy. New bitcoin is created at a declining rate, with the reward to miners cut in half roughly every four years until the 21 million cap is reached. Because demand can change quickly, bitcoin’s price has historically been far more volatile than stocks or bonds.

Should you invest?

Treat bitcoin as a high-risk asset. If you buy, keep it to a small share of your portfolio, use reputable platforms, secure your keys and never invest money you may need in the near future.

The bottom line

Bitcoin combines cryptography, a public ledger and economic incentives to move value without a bank in the middle. Understanding how it works makes it easier to judge the risks — and to keep your coins safe.

Frequently asked questions