Beginners introduction to Bitcoin and cryptocoin

Key takeaways #

• A cryptocoin is digital money secured by cryptography rather than issued by a government or bank.
• Bitcoin, the original cryptocoin, has a fixed supply and a public ledger (the blockchain) that anyone can verify.
• New coins are introduced through mining or staking, which also secures the network.
• Value comes from scarcity and usefulness — the same forces that give gold or the Australian dollar value.

What is a cryptocoin? #

A cryptocoin is digital money that lives on a shared public ledger instead of a bank’s database. Bitcoin, the original and largest cryptocoin, lets anyone send value directly to anyone else over the internet — no bank, no intermediary — and every transaction is recorded publicly so it can be independently verified. If that sounds abstract, it helps to look at how money evolved in the first place. Centuries ago, bartering was the common method of trade. Imagine you ran a rice farm but wanted wine. You could trade rice directly with the winemaker, but what if they didn’t want rice? You would need to find a chain of trades — rice for wheat, wheat for wine — and it quickly became convoluted.

The solution was an intermediate currency: something scarce, hard to fake, and durable. Gold and other precious metals filled this role. Our rice farmer would trade rice for gold, then use the gold to buy wine. The object was the value.

Later, coins and notes replaced raw metals. These objects represented the value. You no longer needed to carry gold around or cut it into pieces to make a purchase.

Today, most currency isn’t tied to any physical object at all. Modern currencies are managed by governments and central banks, which steer them to manage inflation and international trade, and monitor usage for taxation and law enforcement. Governments generally do this with the best intentions, but history shows they don’t always get it right — capital controls, hyperinflation and banking failures have repeatedly eroded people’s savings.

Bitcoin, the original cryptocoin, took a different approach. It created a fixed number of digital objects that must be “discovered” before they can be spent (similar to gold), every transaction is recorded publicly so it can be verified by anyone, and no government has explicit control over it. Instead, the majority of network participants decide what is or isn’t a valid transaction.

Where does a cryptocoin come from? #

Bitcoin and every cryptocurrency since rely on cryptography for digital security. In Bitcoin’s case, a distributed network of computers verifies every transaction that occurs on the network. To encourage people to provide this service, the protocol rewards them with newly created bitcoin. This ensures enough people are incentivised to protect the network and that new coins enter circulation on a predictable schedule. This system is known as mining. Newer networks use staking instead, where participants lock up coins they already own to help verify transactions — you can read more in our guide to staking on a proof-of-stake blockchain.

How does a cryptocoin have value? #

Things become valuable through scarcity and desirability. Most cryptocoins start with a limited supply and try to fulfil a useful function. Bitcoin’s function is deliberately simple: to be a reliable, trustworthy way to transfer value between people online.

… a new electronic cash system that uses a peer-to-peer network to prevent double-spending. It’s completely decentralised with no server or central authority. — Satoshi Nakamoto, on the original release of Bitcoin

When Bitcoin launched in January 2009 it caught the attention of only a few people. There was no proper marketplace — early users traded coins directly with each other, famously including the purchase of two pizzas. As more people found it useful to transfer value online, demand grew and so did the price. By 2017 Bitcoin was regularly reported in mainstream media, and it has since matured into an asset class with exchange-traded products, listed companies holding it in their treasuries, and regulated Australian exchanges where anyone can buy it with AUD.

The Bitcoin protocol ensures a consistent but limited number of new coins are added, so supply grows predictably while demand has historically grown much faster. That combination — fixed supply, growing usefulness — is what creates value.

What next? #

If you are considering purchasing cryptocoin, see our step-by-step guide on how to buy Bitcoin and other cryptocoins in Australia, and make sure you understand how cryptocurrency is taxed in Australia before you start. Once you own some, it’s worth learning how to keep your crypto funds secure — and why many holders eventually move their savings onto a hardware wallet.

Frequently asked questions #

Is cryptocurrency real money? It’s real in the sense that people freely exchange it for goods, services and government currency every day, and Bitcoin is even legal tender in one country (El Salvador). But in Australia the law treats it as property, not currency — which mostly matters at tax time.

How many Bitcoins are there? The Bitcoin protocol caps supply at 21 million coins, with new coins released on a predictable schedule as rewards to miners. The last fraction will be mined around the year 2140. Scarcity is built into the rules, and no one can vote to print more.

Who controls Bitcoin? No single company, government or person. Changes to the software require agreement from the network’s participants — miners, wallet providers, exchanges and users — which is why its core rules have stayed remarkably stable since 2009.

Do I need to buy a whole Bitcoin? No. A Bitcoin divides into 100 million units (the smallest is called a satoshi), so you can start with $20, $50 or $100. See how to buy Bitcoin in Australia for the full walkthrough.