Crypto · Beginner · 4 min

Bitcoin: idea and mechanics

You can explain what Bitcoin was designed for, how new bitcoins are created, and what the supply limit and halvings mean.

Money without an issuer

In 2008, during the global financial crisis, an author using the name Satoshi Nakamoto published a short paper. It described a form of electronic cash that could be sent directly between people, without a bank in the middle, and without any government or central bank issuing it.

A few months later, the system started running. Today bitcoin is the largest crypto asset by market value. This lesson explains the idea behind it and the rules that govern how it is created.

21 million, halving every ~4 years

Bitcoin runs on a public blockchain secured by proof of work, as described in the last lesson. Its key rules are written into its software.

Creation by mining. Mining is the process of adding new blocks. Miners use specialized computers to solve a computing puzzle. The first to solve it adds the block and receives a reward: newly created bitcoins plus the fees paid by the transactions in the block. This is the only way new bitcoins come into existence.

Halving. Every 210,000 blocks, roughly every four years, the reward for a new block is cut in half. This event is called the halving. The reward started at 50 bitcoins in 2009. The most recent halving, in April 2024, cut it from 6.25 to 3.125 bitcoins per block. The next one is expected around 2028.

Supply cap. Because of the halvings, the total number of bitcoins will never exceed 21 million, as bitcoin.org explains. Most of them have already been created.

Divisibility. One bitcoin can be split into 100 million units, so the cap does not limit how small a payment can be.

These rules make bitcoin's supply predictable. They say nothing about demand. Its price is set entirely by what buyers are willing to pay, and the SEC describes bitcoin as highly speculative and volatile.

6.25 → 3.125 → ...

A fictional mining company adds one block today.

It receives 3.125 new bitcoins plus the fees from the block's transactions.
Before April 2024, the same work would have paid 6.25 bitcoins.
After the next halving, it will pay about 1.5625 bitcoins.

To stay profitable, miners need either a higher bitcoin price, more fees or cheaper electricity. Their costs are real money, their reward depends entirely on the market.

Common mistakes

"Fixed supply means the price must rise." Demand can fall, and prices with it.
"Bitcoin is anonymous." Transactions are public and can often be traced.
"Halvings are surprises." They are scheduled years in advance.
Ignoring volatility. Bitcoin has lost more than half its value several times.

The takeaway

Bitcoin is digital money without a central issuer. New coins come from mining, halving every 210,000 blocks, up to a cap of 21 million.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the rule that cuts the creation of new bitcoins in half.

Tap the chart.

Every 210,000 blocks, roughly every four years, the reward for a new block halves.
2When did the latest halving take place, and what is the block reward since then?

The April 2024 halving cut the reward from 6.25 to 3.125 bitcoins per block.
3What does a bitcoin miner do?

Miners compete to solve a puzzle under proof of work. The winner adds the block and receives the reward.
4Does a fixed supply mean the price must rise?

Scarcity alone does not create value. Bitcoin has fallen by more than half several times.

of 4 correct.