Bitcoin went from an internet experiment to an asset held by major investment funds. Here’s what it actually is, and how it works without a bank in charge.
Bitcoin is a digital currency that exists only online.
It was launched in 2009 by a person or group using the name Satoshi Nakamoto, whose real identity has never been confirmed. The idea was a form of money that could be sent directly from one person to another over the internet, without a bank, payment company or government in the middle.
Instead of a bank keeping the records, every Bitcoin transaction is recorded on a public ledger called the blockchain. Thousands of computers around the world each keep a copy, and they follow the same rules to agree on which transactions are valid. Because the record is shared and very hard to change after the fact, no single organisation controls it.
New transactions are bundled into blocks and added to the chain by “miners”, who use powerful computers to solve a mathematical puzzle. The first to solve it gets to add the next block and is rewarded with newly created Bitcoin. This process, called proof of work, is what secures the network, but it also uses large amounts of electricity.
Why supply is limited, and what drives the price
Bitcoin’s rules mean only 21 million coins will ever be created. The reward paid to miners is cut in half roughly every four years, in an event known as “the halving”, so new supply keeps shrinking until the limit is reached.
That fixed supply is a big part of why some investors call Bitcoin “digital gold” and see it as a hedge against inflation and against governments printing money.
Its price is set entirely by what buyers will pay, and it has been extremely volatile, with rises and falls of more than half its value within months. Prices are moved by investor sentiment, regulation, interest rates and the flow of money from large investors.
Bitcoin has become more mainstream in recent years. In Australia, people can buy it through registered digital currency exchanges, and exchange-traded funds that hold Bitcoin are listed on the ASX, which lets investors gain exposure through an ordinary share trading account.
The risks remain significant. Lost passwords or keys can mean coins are gone for good, exchanges and digital wallets can be hacked, and scams are common. Regulators, including ASIC, warn that people should only invest money they can afford to lose. Gains on crypto are also generally subject to capital gains tax.
