Bitcoin is a type of digital currency, also known as cryptocurrency, serving as a medium of exchange that operates solely online. It gained significant attention in 2017 when its price skyrocketed by thousands of dollars throughout the year, and it currently boasts a market capitalization exceeding $2.1 trillion, making it the most valuable and widely recognized cryptocurrency by a considerable margin. Bitcoin was designed to function as a digital payment method that removes the need for financial intermediaries, such as banks.
In more recent times, after experiencing a dramatic decline in 2022, the cryptocurrency rebounded impressively in late 2023 and 2024, fueled by the approval of Bitcoin ETFs and the reelection of former President Donald Trump, who is known for his pro-crypto stance. Prices surged once more in late 2024, ultimately reaching unprecedented heights in May 2025.
Bitcoin has sparked considerable debate, with supporters claiming it represents the future of currency, while critics label it a speculative bubble. Here’s what you should understand about Bitcoin, its functionality, and some of its potential downsides.
Bitcoin basics: what it is and how it works
Bitcoin was introduced in 2009 with the launch of the software that supports it. Its beginnings are somewhat enigmatic, as an individual or possibly a group known as Satoshi Nakamoto is credited with the creation of this cryptocurrency.
Since its inception, Bitcoin’s price has experienced significant fluctuations, climbing and dropping throughout the 2010s, and then skyrocketing during the COVID-19 pandemic. In 2022, Bitcoin saw a steep decline as the Federal Reserve raised interest rates, but it has bounced back and achieved new peaks in 2025.
Bitcoin functions on a decentralized network of computers or a distributed ledger that utilizes blockchain technology to manage and monitor the currency. Imagine the distributed ledger as a vast public record of all transactions made with the currency. The networked computers authenticate these transactions, maintaining the accuracy of the data and the ownership of bitcoins, and they receive bitcoins as a reward for their efforts, although these rewards diminish over time.
This decentralized network significantly contributes to the allure of Bitcoin and other cryptocurrencies. Users can send money directly to one another, and the absence of a central bank overseeing the currency grants it a level of autonomy. This independence implies that, at least in theory, the currency can sidestep the influence of governments and central banks.
Bitcoin allows for a high degree of anonymity. Although transactions can be traced back to specific users, the individual’s name is not directly linked to the transaction, even if it is conducted in a public manner. Nevertheless, authorities have improved their ability to monitor bitcoin transactions, as the transaction ledger is accessible to the public.
How bitcoins are generated
Bitcoins are generated, or “mined,” when computers within the network validate and process transactions involving the currency. Certain computers, known as miners, are equipped with powerful processors designed to handle transactions efficiently and earn a fraction of a bitcoin in the process. Consequently, Bitcoin demands substantial processing power to sustain the network and a significant amount of electricity to operate these machines.
However, bitcoins are not produced endlessly; the total supply is capped at 21 million units. Experts predict that the last bitcoins will be mined around the year 2140. Once this happens, miners will receive only transaction processing fees as their reward.
Although the total supply of bitcoins is finite, each complete bitcoin can be divided into significantly smaller units. In practice, bitcoins are broken down into fractions to enable transactions involving very small amounts of actual currency. A single bitcoin can be divided into as many as one hundred million segments, known as satoshi, named after the enigmatic creator.
Bitcoin represents just one form of cryptocurrency, with literally thousands of others having been developed. Among the most well-known are Ethereum, Solana, and XRP.
How to use Bitcoin
The primary intention behind Bitcoin was to serve as a decentralized digital currency. While there is debate over whether this goal has been fully realized, some individuals continue to use it for transactions. Conversely, there are investors who perceive Bitcoin more as an investment vehicle, occasionally making speculative predictions about its price trajectory.
Let’s take a closer look at some of the most prevalent methods of using Bitcoin:
| Purpose | Description | Example Activities |
|---|---|---|
| Investing | Enhancing portfolio value by holding Bitcoin directly, investing in Bitcoin ETFs, or buying shares of companies involved in Bitcoin-related businesses. | Buying and holding Bitcoin, Bitcoin ETFs, Bitcoin mining company stocks |
| Payments | Using Bitcoin for transactions via cryptocurrency wallets, which securely store your Bitcoin and generate cryptographic addresses for sending and receiving funds. | Paying at stores using Bitcoin wallets, sending Bitcoin to others via wallet address or QR code |
| Speculating | Focusing on short-term Bitcoin price movements to profit from volatility using high-risk trading strategies. | Trading Bitcoin futures, options on Bitcoin ETFs, short-term Bitcoin trades |
Benefits of Bitcoin
Bitcoin offers several advantages as a form of currency and has gained popularity for various reasons, from idealistic to profit-driven.
1. Decentralized currency management
With its decentralized network and finite supply of coins, Bitcoin presents a vision of currency that some consider utopian. Advocates argue that removing central banks and governments from the currency equation allows it to retain its value more effectively over time. By liberating the currency from these institutions, many believe Bitcoin empowers individuals.
2. Anonymous or semi-anonymous transactions
The relative anonymity that Bitcoin provides is a significant draw for many users. Certain supporters, including some libertarians, appreciate that government or other authorities cannot easily trace the currency’s users. However, this anonymity also raises concerns, as it can facilitate illegal activities.
It’s important to highlight that every transaction is recorded and can be analyzed to reconstruct the spending habits of a specific wallet. The information is public, enabling any interested party to monitor transactions, which raises additional privacy issues, even if the actual owner of a wallet remains uncertain.
3. Hard or impossible to counterfeit
Another reason for Bitcoin’s appeal is its practical aspect: it is extremely difficult to counterfeit, thanks to the blockchain ledger system that repeatedly verifies transactions.
4. Surging popularity
Bitcoin’s popularity is further fueled by the excitement surrounding the cryptocurrency, making it a fashionable trading option. Due to the significant fluctuations in its value, traders can easily enter and exit positions, potentially making or losing money, especially with the advent of exchange-traded funds. This excitement, combined with the limited supply of coins, has driven Bitcoin prices significantly higher over the past decade, although they continue to experience considerable volatility.
Drawbacks of Bitcoin
Bitcoin has several notable disadvantages that stem from its inherent design, particularly its cap on the total number of coins available and its overall price instability.
1. Bitcoin consumes a lot of energy
Large-scale mining operations demand significant energy to function. The generation of this electricity is costly and contributes to environmental pollution, leading some critics to argue that this currency initiative lacks practicality.
How much electricity does Bitcoin actually consume, and what is its greenhouse gas output? As per the Cambridge Bitcoin Electricity Consumption Index, if Bitcoin were classified as a nation, it would be the 24th largest electricity consumer as of June 2025, and it would hold the 61st position regarding greenhouse gas emissions. These figures are substantial for a digital currency that is infrequently utilized.
2. The supply of coins is finite
Inherently, the total number of coins is capped, which creates a significant challenge for Bitcoin’s use as a currency. Essentially, this limitation prevents the expansion of the money supply, a crucial factor during economic downturns. If Bitcoin were to be widely adopted, it could lead to harmful deflationary cycles, reminiscent of the issues faced when economies operated under the gold standard. This concern is a primary reason for the abandonment of the gold standard.
A problematic scenario occurs when individuals and businesses hoard currency in difficult economic periods. When money circulation halts, it hampers economic activity. In the absence of a central authority, like a bank, to stimulate the economy or provide loans, the economy risks entering a deflationary spiral. Consequently, consumers may refrain from spending, anticipating lower prices in the future, which exacerbates the situation.
With a predetermined quantity of coins, Bitcoin lacks the adaptability necessary to effectively manage a comprehensive currency system.
3. A volatile currency is of little use
Picture dining at a restaurant where prices fluctuate daily, sometimes by 10% or more. If this scenario seems unappealing, it perfectly illustrates why Bitcoin is nearly ineffective as a currency. While its volatility attracts traders, it significantly undermines its value as a means of exchange.
Consumers must understand what a currency can purchase when making spending choices. If they anticipate the currency will increase — or even soar — there’s minimal motivation for them to utilize it as a currency.
4. Government regulations and policies
Cryptocurrency regulations differ from one country to another, and even among states in the U.S. States like Wyoming are at the forefront with policies that favor crypto. Federal regulations also vary across different agencies. For instance, the IRS classifies crypto as property, while the SEC views it as a security.
During the current Trump administration, the crypto sector has seen a surge of optimism, partly driven by the announcement of a national strategic Bitcoin reserve. At the same time, discussions are ongoing about integrating crypto into broader financial systems, such as tokenized Treasury bonds, which could indicate a move towards wider acceptance of digital assets.
Nonetheless, the necessity for regulation remains crucial, especially following notable failures in recent years, such as TerraUSD, a stablecoin intended to maintain a stable value. The 2022 downfall of the crypto exchange FTX also reverberated throughout the crypto landscape.
5. Any transaction must be reported to the IRS
The regulations regarding cryptocurrency are burdensome for users, complicating its utilization.
The IRS now mandates that you report any cryptocurrency transactions on your annual tax return for the current tax year. Additionally, if you sell crypto assets or make purchases using them, you may incur a tax liability. Therefore, it’s essential to maintain accurate records of your purchase and sale prices when dealing with digital currency, to avoid legal issues and unexpected tax bills.
In summary
Although Bitcoin has garnered significant public interest, it presents considerable challenges that hinder its intended purpose as a medium of exchange or a reliable store of value. Notably, renowned investor Warren Buffett referred to it as “probably rat poison squared” back in 2018. He has expressed that he does not view it as a viable investment. Furthermore, the possibility of governments shutting down the currency adds to its riskiness as an investment option.
