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Bitcoin is the world’s first and most widely used digital currency. It introduced a new way to send and store value digitally without relying on banks or other centralized financial institutions.
This guide explains what bitcoin is, how it works, and how both individuals and businesses use it today, from everyday payments to long-term investments.
Key takeaways
- Bitcoin is a digital currency that allows people to send and receive money over the internet without a bank.
- It runs on a decentralized network, meaning no single company or government controls it.
- Bitcoin has a fixed supply, which is why many people view it as scarce.
- Individuals use bitcoin to make payments, send money globally, or invest.
- Businesses can accept bitcoin as a payment method, often alongside traditional payment options.
What is bitcoin (BTC)?
Bitcoin is a digital currency that allows people to send money directly to one another without using a bank or payment processor.
Unlike cash, bitcoin has no physical form. It exists entirely online and is tracked on a public digital ledger. Unlike traditional currencies, bitcoin is not issued or controlled by a central authority such as a government or central bank.
One of bitcoin’s defining features is scarcity. There will only ever be 21 million bitcoins in existence. This fixed supply is written into bitcoin’s underlying software and cannot be changed without agreement from the network. Because of this, bitcoin is often compared to scarce resources like gold.
Bitcoin was created in 2009 by an anonymous person or group using the name Satoshi Nakamoto. It was introduced in response to the global financial crisis, with the goal of creating a more transparent and resilient way to move money online.
Since its launch, bitcoin has evolved from an experimental technology into a globally recognized digital asset. Today, it’s used by individuals, investors, and businesses around the world for payments, savings, and financial innovation.
How does bitcoin work?
Bitcoin works as a shared digital system for recording and verifying transactions. Instead of relying on a bank to track balances and payments, bitcoin uses a global network of computers to keep everyone in sync.
Here are the key pieces and how they fit together:
Decentralized network
Bitcoin runs on a decentralized network, meaning it’s not owned or operated by any single company, government, or financial institution. Thousands of independent computers around the world help maintain the network by following the same set of rules. Because there’s no central authority, no single party can unilaterally change transaction records, freeze funds, or issue new bitcoins beyond the fixed supply.
The blockchain
All bitcoin transactions are recorded on a public digital ledger called the blockchain. Transactions are grouped into blocks and added to the chain in chronological order. Once recorded, they are extremely difficult to alter, helping keep the system secure and transparent.
Mining and transaction verification
Bitcoin transactions are verified through a process called mining, which works like a competition among computers on the network. In this process, computers race to solve a cryptographic puzzle. The first to solve it earns the right to add the next block of transactions and receives newly created bitcoin along with transaction fees. This competitive process secures the network and controls how new bitcoin enters circulation, with rewards decreasing on a fixed schedule.
Wallets, addresses, and private keys
To use bitcoin, individuals and businesses store it in a digital wallet. A wallet doesn’t hold physical money, but instead manages the cryptographic keys that allow access to bitcoin on the network. A bitcoin address works like an account number for receiving payments, while a private key acts like a password that allows you to send bitcoin. Anyone with access to the private key controls the funds, which is why keeping it secure is critical.
Sending and receiving bitcoin
When someone sends bitcoin, the transaction is broadcast to the network, verified through mining, and permanently recorded on the blockchain. Transactions can be sent globally without needing approval from a bank or intermediary. Once confirmed, transactions cannot be reversed.
Price changes and investment value
Bitcoin’s value fluctuates based on supply and demand. Factors such as market sentiment, adoption, regulation, and economic trends can influence its price. Because of this volatility, some people use bitcoin as a long-term investment, while others use it primarily for payments or transfers.
How businesses can use bitcoin and accept bitcoin
For businesses, bitcoin can function as another way to accept payments, similar to credit cards or digital wallets. While it’s not a replacement for traditional payment methods, some businesses choose to offer bitcoin to meet customer preferences, support global payments, or experiment with new financial tools.
Businesses may use bitcoin in practical ways:
- Accept payments from customers who prefer to pay with digital currency, especially online or across borders
- Reduce reliance on traditional banking systems, particularly for international transactions
- Offer more payment flexibility alongside cash, cards, and other digital options
- Hold bitcoin as an asset, depending on their financial strategy and risk tolerance
Accepting bitcoin typically involves using a payment processor that handles the technical details behind the scenes. These services can either convert bitcoin into local currency at the time of sale or allow the business to retain bitcoin directly. To learn more about setup options and considerations, see our guide on how to accept bitcoin as a business.
Square makes it easier for businesses to accept bitcoin without needing to manage wallets, private keys, or blockchain infrastructure themselves. By integrating bitcoin into a broader payments ecosystem, Square allows businesses to offer more payment options while keeping day-to-day operations simple. This helps businesses explore digital currency payments without disrupting existing workflows.
In addition to accepting bitcoin from customers, some businesses choose to convert a portion of their existing sales into bitcoin as a long-term savings strategy. With Square Bitcoin Conversions, you can convert part of your Square balance into bitcoin instantly or set an automatic rule to convert up to 50% of your daily sales. You decide how much to convert and when to sell, and you can update your settings at any time. For more information, see our guide on getting started with Square Bitcoin.
How individuals can buy and use bitcoin
Individuals can buy bitcoin through online platforms known as exchanges. These platforms allow people to purchase bitcoin using traditional payment methods such as bank transfers, debit cards, or credit cards. Once purchased, it can be stored in a digital wallet. Some people prefer to keep bitcoin on an exchange for convenience, while others move it to a personal wallet to retain direct control over their private keys.
Once owned, bitcoin can be used in several ways:
- Make purchases online or in-store where bitcoin is accepted
- Send money globally, often faster than traditional international transfers
- Store value or invest, with the expectation that bitcoin’s value may change over time
Bitcoin transactions don’t require a bank account, which is why some people use it as an alternative way to move money digitally.
Benefits of bitcoin
Bitcoin offers different advantages depending on how it’s used. Below are the most commonly cited benefits for individuals and businesses.
For individuals
- Global access: Bitcoin can be sent or received anywhere in the world without needing a bank account.
- Direct control over funds: Users control their bitcoin through private keys, rather than relying on a financial institution.
- Fast international transfers: Cross-border payments can be quicker and more straightforward than traditional wire transfers.
- Potential investment upside: Some individuals view bitcoin as a long-term investment or store of value due to its fixed supply.
For businesses
- Additional payment option: Accepting bitcoin can appeal to customers who prefer digital currencies.
- Simplified international payments: Bitcoin can reduce friction when receiving payments from customers in other countries.
- No chargebacks: Bitcoin transactions are irreversible, which can help reduce fraud-related disputes.
- Integration with existing tools: Platforms like Square allow businesses to offer bitcoin payments alongside traditional payment methods without managing complex infrastructure.
Disadvantages of bitcoin
While bitcoin has benefits, it also comes with important trade-offs that individuals and businesses should consider.
For individuals
- Price volatility: Bitcoin’s value can fluctuate significantly over short periods of time.
- Responsibility for security: Losing access to private keys can mean losing access to funds permanently.
- Limited acceptance: Not all merchants accept bitcoin, which can limit where it can be used.
- Learning curve: Understanding wallets, addresses, and transactions can take time for new users.
For businesses
- Market volatility: The value of bitcoin received as payment may change quickly.
- Accounting and tax complexity: Bitcoin transactions may require additional reporting or compliance considerations.
- Varying demand: Not all customer or supplier bases actively use or request bitcoin payments.
Bitcoin FAQs
Can you turn bitcoin into cash?
Yes, bitcoin can be converted into cash by selling it through a cryptocurrency exchange or payment platform that supports withdrawals to a bank account. Square allows sellers to buy, sell, hold, and withdraw bitcoin directly from their Square account. Once sold, the funds are transferred in local currency, similar to withdrawing money from an investment account.
Where does bitcoin come from?
Bitcoin is created through a process called mining, where new bitcoin is issued as a reward to miners who help verify transactions on the network. This process follows a fixed schedule and will continue until the maximum supply of 21 million bitcoin is reached.
Why does bitcoin have value?
Bitcoin has value because people are willing to buy, sell, and use it, and because its supply is limited. Demand, utility, trust in the network, and its ability to function as a digital store of value all contribute to its market price.
Are there any costs associated with accepting bitcoin?
Yes, accepting bitcoin can involve transaction fees, payment processor fees, or conversion fees if bitcoin is exchanged for local currency. Businesses may also have tax reporting obligations. The exact costs and reporting requirements depend on how the business accepts and manages bitcoin payments and which provider it uses. For example, Square currently offers 0% processing fees on bitcoin payments through 2027, along with no chargebacks and instant access to funds. For more information on tax considerations, see our bitcoin tax guide.
How long do bitcoin transactions take?
Bitcoin transactions typically take between a few minutes and an hour to confirm, depending on network activity and fees paid. Some services provide faster settlement by handling confirmations in the background.
