Beginner guides, explanations, and everything about Bitcoin

Bitcoin is for everyone

Unlike traditional forms of money, bitcoin isn’t backed by physical assets or government policies, instead, it’s backed by a novel system that uses decentralization, incentives, energy, and cryptography.

![](https://www.datocms-assets.com/99305/1734386385-learn-what-is-backing-bitcoin-state-hero.png)

To properly answer “What is backing bitcoin?,” we first need to establish what “backing” means.

In the context of money, “backing” historically meant a currency that was directly linked to a specific quantity of a commodity, like gold. This system, known as the “gold standard,” provided tangible assurances of the currency’s value as it could be exchanged for set quantities of a valuable metal.

In 1971, the US dollar’s gold-backing ended, along with that of all other major currencies. This marked the shift to “fiat” money (from the Latin word for “decree”), where the money’s value relies on government policies and public trust, rather than redeemability for gold. 

Neither gold nor fiat money are backed by redeemability for anything or by any ability to generate cash flows. They are “base-layer” monetary assets, meaning their value relies on their *inherent* properties and the assurances that those properties will persist into the future. People own gold or fiat because they’re useful for storing and/or exchanging value, made possible by their reliable [monetary properties](https://strike.me/learn/what-is-money):
* **Gold:** Gold’s value relies upon its resistance to corrosion, ease of verification, physical weight, measurable purity, and natural scarcity, which are established by the unchanging laws of physics. Additionally, gold’s superior scarcity is safeguarded by the economic barriers of production, since there is no other way to produce gold other than through energy-intensive work.
* **Fiat money:** Fiat’s value relies upon government-mandated acceptance for taxes, debts, and legal transactions, combined with public trust in the issuing authority’s ability to maintain its value. If policies change or the authorities print money excessively, the money’s value could drop and popular trust could be lost (see 1920’s Germany, 1990’s Yugoslavia, 2000’s Zimbabwe, or 2010’s Venezuela).

Base-layer monetary assets are backed by nothing other than themselves and the forces that assure their valuable properties will persist into the future. 

Bitcoin is the same. It’s a base-layer monetary asset, backed by the forces that assure its valuable properties will persist. 

## How is bitcoin backed?
[Bitcoin](https://strike.me/learn/what-is-bitcoin) is a peer-to-peer electronic cash system, letting people acquire, hold, and spend bitcoin in a similar way to traditional forms of money.

Bitcoin has valuable [monetary properties](https://strike.me/learn/what-is-money), including: 
* **Scarcity:** Bitcoin has a fixed supply limit of [21 million bitcoin](https://strike.me/learn/how-many-bitcoin-are-there)
* **Divisibility:** Each bitcoin can be effortlessly subdivided into [100 million satoshis](https://strike.me/learn/what-are-satoshis)
* **Portability:** Bitcoin can be moved digitally and securely transferred from one person to another without a 3rd party intermediary by authorizing the transaction using their unique [private key](https://strike.me/learn/what-are-private-keys-and-public-keys)

These valuable monetary properties are established through a novel system that combines decentralization, incentives, energy, and cryptography. 

Let’s examine.

![](https://www.datocms-assets.com/99305/1704930771-learn-better-ai-agents-state-default.png)

## Decentralization of rule-enforcing nodes
Bitcoin’s monetary properties are defined by its [rules](https://strike.me/learn/how-does-bitcoin-work), which are encoded in Bitcoin’s free and open-source software and run by a global network of independent computers, called “nodes.” The rules determine the operations of the Bitcoin network (uppercase “B”) and the characteristics of the bitcoin asset (lowercase “b”):
* **Network operation rules:** Transaction formatting, node connectivity processes, the block time interval, the mining difficulty adjustment, etc…
* **Asset characteristic rules:** The supply limit, the supply schedule, the divisibility of each bitcoin, the authorization requirements for initiating a transaction, etc…

When you operate a node, it connects to every other node in the network to share valid transaction information. Any transaction that violates the rules is easily detected and automatically rejected by each and every node. Although any node can change their *own* copy of the software, thereby altering *their* version of Bitcoin’s rules, no one can force *other* nodes to adopt those changes. The unchanging nature of the rules is what establishes the reliability of Bitcoin’s monetary properties. 

This network of countless independent nodes forms a globally decentralized system that collectively ensures the integrity of Bitcoin’s rules and operations. Each node operates equally and redundantly, meaning no single node holds unique authority or is critical to the network’s operation. This decentralization ensures that no individual or group can unilaterally change Bitcoin’s rules while safeguarding it from censorship or shutdown.

➔ **Assurance:** The rules that establish Bitcoin’s monetary properties can’t be changed, blocked, or banned by any individual or group.

## Incentives
Although nodes are free to adopt new rules, such as increasing the supply limit, any transactions they process under incompatible rules would conflict with all other nodes’ rules and be instantly rejected. This makes the effort pointless, as their time and resources would be wasted. The same principle applies to [Bitcoin mining:](https://strike.me/learn/what-is-bitcoin-mining) producing a valid block is resource-intensive, and if any transaction within that block violates Bitcoin’s rules, the block will be rejected, the miner’s energy wasted, and no rewards issued.

Nodes and miners are not only incentivized to avoid rule changes, they’re incentivized to strictly enforce established rules. The unchanging nature of Bitcoin’s rules assures its monetary properties are reliable and its operations are stable, giving rise to Bitcoin’s value. Node operators want their own valuable transactions accepted, while miners want to earn valuable bitcoin rewards. This incentive alignment creates a system where:
* **Adopting incompatible rules is costly:** Breaking consensus leads to rejected transactions and wasted resources.
* **Enforcing existing rules is profitable:** Stability in Bitcoin’s rules secures its value, protecting nodes’ transactions and miners’ rewards.

➔ **Assurance:** All network participants are financially incentivized to uphold the existing rules and avoid any rule changes, ensuring the reliability of Bitcoin’s monetary properties and continued operations.

## Energy and computational power (aka “hashpower”)
[Bitcoin mining](https://strike.me/learn/what-is-bitcoin-mining) involves computers performing computational work, called “hashing”, to earn a set reward paid in bitcoin for each block of transactions they add. This is how new bitcoin are issued, new transactions are added, all previous transactions are re-asserted, and the entire network is secured against attack.

The only known way to produce a [valid hash](https://strike.me/learn/what-is-a-hash-function) is by using energy in a computationally-intensive process of trial and error. However, once a valid hash has been found, it’s trivially quick and easy for each node to mathematically verify that it’s correct. This asymmetry between the difficulty of mining and the ease of verification means only miners who have mathematically proven to have expended real world resources can add blocks, while verifying validity remains simple, efficient, and widespread.

A key rule in Bitcoin is the **mining difficulty adjustment**, which ensures blocks are mined roughly every 10 minutes, regardless of the total computational power (hashpower) of all miners. Every 2,016 blocks (roughly 2 weeks), mining difficulty automatically adjusts to maintain this pace, making mining harder if hashpower increases and easier if hashpower decreases. This dynamic scaling keeps block times and the supply schedule consistent, while ensuring mining remains efficient and profitable, incentivizing ongoing participation.

The combination of mining with the difficulty adjustment creates a global, decentralized, scalable, and open competition that ties real-world resources (energy and compute hardware) to the supply and operations of Bitcoin. This system ensures:
* **Predictable supply schedule:** Block intervals and the [supply schedule](https://strike.me/learn/what-is-the-bitcoin-supply-schedule) are maintained by the difficulty adjustment, regardless of the total hashpower deployed by miners. 
* **Transaction processing:** Transactions can’t be blocked by mining bans or miners colluding to produce empty blocks, as mining is an open, global competition where miners can join or relocate freely and empty blocks miss out on [transaction fees](https://strike.me/learn/what-are-bitcoin-fees).
* **Miner incentives:** The difficulty adjustment ensures global mining remains profitable for the most efficient miners by dynamically scaling with network hashpower, keeping revenues above expenses and sustaining or increasing miner participation.
* **Transaction permanence:** Reversing a transaction requires re-mining all subsequent blocks and exceeding the network’s total computational power.

➔ **Assurance:** Bitcoin’s monetary properties and operations are secured by energy, as new bitcoin can only be issued through energy-intensive work, while attacks on its supply consistency and transaction security are deterred by a globally distributed network of incentivized energy resources.

## Cryptography and mathematical principles
Bitcoin relies on cryptographic hash functions and the use of immense numerical spaces to create computational barriers against attacks. [Hash functions](https://strike.me/learn/what-is-a-hash-function), like the industry-standard SHA-256 used in Bitcoin, generate unique outputs from input data. Even the slightest change to the input completely alters the output, and there’s no known way to reverse the process. 

Alongside hash functions, Bitcoin’s use of extremely large numbers ensures the security of private keys, transaction authorization, and mining rewards.
* **Private keys:** Bitcoin [private keys](https://strike.me/learn/what-are-private-keys-and-public-keys/) come from a numerical space with approximately 115 quattuorvigintillion possible combinations (a number with 78 digits). This immense scale ensures it’s computationally impossible for anyone to guess your private key, even with all the computing power on earth.
* **Transaction authorization:** To authorize a transaction, your private key generates a unique [digital signature](https://strike.me/learn/what-is-a-digital-signature/). The strong reliability of hash functions means there is no known method to reverse engineer your private key from the signature or the hash output of a transaction.
* **Bitcoin mining:** To add a block and be rewarded, miners must produce a [valid hash](https://strike.me/learn/what-is-a-hash-function/) that meets the network’s required output and difficulty. There is no known way to produce valid hashes other than completing the energy-intensive proof-of-work. 

➔ **Assurance:** The security of bitcoin ownership and mining operations is assured by industry-standard cryptography and mathematical principles.

## Summary
Bitcoin is a base-layer monetary asset, designed to store and exchange value–a fundamental human need.

Its value relies on its robust monetary properties, which are assured through a novel combination of decentralization, financial incentives, energy resources, and cryptography. 

This assurance isn’t abstract, it’s tangible. Real nodes enforce Bitcoin’s rules globally, real miners use computational resources and energy to secure the network, and industry-standard cryptography underpins its security – the same cryptography that secures global financial and communications networks. The entire system is self-sustaining as *all* participants are aligned through transparent financial incentives to promote Bitcoin’s continuation and defend against attacks.

Dismissing Bitcoin as “unbacked” because it lacks physical presence or government oversight is to miss its revolutionary innovation. Bitcoin is the first successful peer-to-peer electronic cash system – something entirely new – and its innovative design to link real-world resources and established cryptography to let people hold and exchange value is worth your attention.

Decentralization, incentives, energy, and cryptography

What is backing bitcoin?

## Protocols are standardized rules
Bitcoin works as a set of standardized rules. 

In computer terms, standardized rules are known as "protocols", and they enable devices and apps worldwide to communicate with each other. These rules govern how Bitcoin functions as a peer-to-peer electronic cash system. The rules are encoded within the Bitcoin software, so when someone downloads and runs the software on their computer (aka node), they become an enforcer of the rules and an active participant in Bitcoin’s operations. 

![](https://www.datocms-assets.com/99305/1704930859-learn-what-is-a-protocol-state-hero.png)

What this means is that Bitcoin operates as a worldwide network of independent nodes, each running the software containing the standardized rules for adding valid transactions to their own copy of the transaction database (called the blockchain). 

To better understand how this works, it’s helpful to define some terms:
* **The Bitcoin protocol:** The set of standardized rules within the Bitcoin software that determines how Bitcoin works
* **The Bitcoin software:** The software program (aka Bitcoin Core), which can be downloaded and run on computers, thereby making them a node in Bitcoin’s network
* **The Bitcoin network:** The global web of connections between nodes that are running the Bitcoin software, through which transaction information can be shared
* **The bitcoin asset** (lowercase “b”): The amounts that are specified within each transaction
* **The Bitcoin blockchain:** The entire history of all bitcoin transactions, structured as a sequential “chain” of blocks of transactions and which is held and maintained by each node independently 

You can think of it like this: bitcoin is an *asset*, that's transacted through a *network*, which is built on a *protocol*. 

Each node can start or stop running the software (join or leave the network), without any problem since they’re each redundant to the system as a whole. Whenever a node joins or rejoins the network, they simply follow the rules to check the validity of the transactions that took place in their absence.

Alongside the nodes are the Bitcoin miners – the computers that confirm bitcoin transactions by grouping them into blocks and adding them to the blockchain. Miners perform computational work in a lottery-style competition to win the right to add the next block and earn a reward for doing so – a system known as “proof-of-work.” Miners also follow the rules of the Bitcoin protocol, because if they don’t, any block they *attempt* to add risks being rejected as invalid by the nodes, which means their time and efforts will be wasted.

Bitcoin works because nodes and miners follow the same set of rules.

## What are the rules of Bitcoin?
The standardized rules of Bitcoin’s that are encoded within the Bitcoin software define the different aspects of Bitcoin’s operations:

### Supply rules:
* The total possible [supply of bitcoin](https://strike.me/learn/how-many-bitcoin-are-there/) is capped at 21 million. 
* New bitcoin are to be issued with each block, according to a strict [supply schedule](https://strike.me/learn/what-is-the-bitcoin-supply-schedule/) that decreases the issuance amount by half (aka a "[halving](https://strike.me/learn/what-is-the-bitcoin-halving/)") every 210,000 blocks (roughly 4 years) until the 21 million limit is reached.
### Mining rules:
* New blocks are to be created on average every 10 minutes.
* Miners must perform computational work to win the cryptographic “lottery” to add a new block of transactions to the blockchain, thereby confirming that block’s transactions and re-confirming all preceding blocks upon which it is built.
* The difficulty of winning the lottery automatically adjusts every 2,016 blocks (roughly 2 weeks), to maintain the 10 minute block time regardless of the total mining power (aka hashpower) being deployed.
### Transaction rules:
* Transactions require the digital signature that corresponds to the sender’s address, ensuring that only the owner of the bitcoin can send it.
* All transactions must have inputs and outputs to specify the sender, recipient, and amount of bitcoin being sent, except for “coinbase” transactions (the newly issued bitcoin in each block), which lack input details.
* The amount of bitcoin in the inputs must equal the amount in the outputs, less the fee amount to be paid to the miner for the service of confirming the transaction.
* Invalid transactions (e.g., invalid signature, invalid bitcoin amount, or double-spending of the same bitcoin) are to be automatically rejected.
### Consensus rules:
* Nodes accept the longest valid chain with the most cumulative proof-of-work as the correct version of the blockchain (aka the “heaviest chain”) and discard any other version of the blockchain
* To undo a transaction that has been added to the blockchain requires performing a greater amount of proof-of-work than the total accumulated work since the transaction was made, an effort which exponentially increases with time and makes bitcoin transactions effectively unchangeable after a few blocks.
### Scripting language rules:
* Any scripts included in a transaction, which can define bitcoin transaction conditions, must  follow certain rules regarding their size and complexity.
### Connectivity rules:
* Nodes must follow specific rules for how to communicate with each other, such as how data is to be formatted and transmitted.
### Blocksize rules:
* Blocks of transactions have a maximum size of 1 megabyte (with some additional space allowed for other data), which indirectly limits the number of transactions that can be included in a block.

Collectively, these rules define how to form the network, make transactions, and establish the attributes of the bitcoin asset, namely its scarcity and peer-to-peer transactability. When nodes run the software, a network is formed through which bitcoin transactions can be sent.

![](https://www.datocms-assets.com/99305/1702580888-is-bitcoin-money-02.png)

## Incentive-alignment of Bitcoin
As more nodes run the software, the rules become more difficult to change. Changing the rules entails creating a new version of the Bitcoin software and getting nodes to download and run that new version. Unlike mandatory smartphone software updates, the Bitcoin software can’t be forced on nodes, as they’re free to download and run whatever version of software they want. Nodes will only download and run software if it’s in their best interest, and will avoid any software that doesn’t.

Additionally, since any block or transaction that violates the rules is automatically rejected by all other nodes, both miners and nodes are incentivized to avoid adopting incompatible rule changes, lest their time and efforts be wasted. Furthermore, bitcoin’s value as an asset is intrinsically linked to the unchanging nature of the rules, as they establish its scarcity, transactability, and reliability. Since miners are rewarded in bitcoin and nodes process bitcoin transactions that they want added to the blockchain, everybody has a vested interest in maintaining the rules that support the value of bitcoin and the network’s consistent operations.

In this way, Bitcoin benefits from network effects – people run nodes, mine bitcoin, or buy bitcoin because it offers them a way to acquire, transact, and secure an immutable digital asset with desirable and robust attributes. Through their activities, the bitcoin asset is made more robust, immutable, and scarce, further incentivizing others to do the same. It’s a self-reinforcing cycle of network strengthening, rule solidifying, and price appreciation. 

The openness of the Bitcoin protocol stands in contrast to legacy financial systems, which are closed and opaque. There aren’t clear and transparent rules governing the supply of dollars, or who is to receive newly issued dollars and in what quantities and for what reasons. Also, entrepreneurs can’t simply build their own dollar app, capable of holding or transacting dollars independently – that’s a privileged service performed by financial institutions within predetermined limits and jurisdictions. 

What this means is that Bitcoin is structurally different from legacy finance. It’s an open, transparent, and rules-based system, with specific built-in incentives that people can opt-into, rather than being forced into. It’s fair, radically transparent, and therefore opens new possibilities for building products and services, unconstrained by arbitrary rules, privileges, and limits. Those possibilities are set to transform how money can work.

Ultimately, Bitcoin works because well-aligned incentives lead all participants to follow Bitcoin’s rules.

Understanding how standardized rules lead to a global network for transactions

How does Bitcoin work?

## Getting started
The [Strike app](http://strike.me/download) is a fast and easy way to get into Bitcoin. 

Strike is one of the world’s most licensed Bitcoin-focused companies and the Strike app is available in [tons of countries](https://strike.me/faq/where-is-strike-available-wr/) globally. It supports a variety of different payment methods, so you can use your cash to buy bitcoin, starting as little as $0.01.

![](https://www.datocms-assets.com/99305/1704930819-learn-how-to-buy-bitcoin-on-strike-state-hero.png)

Buying bitcoin with Strike is as easy as three steps:
1. Create your free account
2. Connect your cash payment method
3. Buy bitcoin

Let’s get started!

## Create your account
To get started, visit the [App store](https://apps.apple.com/app/apple-store/id1488724463) or [Google Play store](https://play.google.com/store/apps/details?id=zapsolutions.strike) to download the Strike app and complete the signup process. 

Signup is free and can take less than a minute to verify your identity and create your account. Depending on your country, some features such as higher account limits and additional payment methods may only be available after completing the additional verification steps.

Once your signup is complete, you can explore the app and make transactions.

## Connect your cash payment method
Cash payment methods enable you to buy bitcoin, by letting you deposit cash to your Strike account or charge the payment method for your bitcoin purchase. Depending on your country, there are different methods available, such as bank accounts, debit cards, wire transfers, direct deposits, or mobile money accounts. 

To link a payment method, follow these steps:
1. Go to your <UserIcon> Account screen
2. Tap "Payment methods"
3. Tap "Add method"
4. Follow the instructions, which may include retrieving a verification code from your bank account

Wire transfers and direct deposits are available in select countries and can be accessed by going to your Account screen, then tapping on <TransferIcon> Wire transfer or <BankIcon> Direct deposit. Your transfer details will be generated, which can be used to initiate the deposit from either your or your employer’s bank.

![](https://www.datocms-assets.com/99305/1705011631-learn-how-to-buy-bitcoin-support.png)

## Buy bitcoin
With a payment method connected or cash deposited into your account, you can now buy bitcoin.

To buy bitcoin, visit your Bitcoin screen and follow these steps:
1. Tap “Buy”
2. Enter the cash amount to purchase
3. Tap “Next”
4. Confirm the purchase

When the purchase is complete, the bitcoin will be added to your bitcoin balance and you’re done!

You can buy as much bitcoin as you want from your cash balance or up to your payment method’s deposit limit. You can view your limits for adding cash and sending bitcoin by going to your <UserIcon> Account screen and tapping <LimitsIcon> Limits. The cash for your bitcoin purchase needs to settle before you can send your bitcoin, which can take a few business days depending on your bank or method.
	
Strike also lets you buy bitcoin via recurring purchase or target orders:
* **Recurring purchases:** Set up [automatic purchases](https://strike.me/learn/how-to-dollar-cost-average-into-bitcoin/) on an hourly, daily, weekly, or monthly basis to help smooth out price fluctuation. At Strike, recurring purchases incur no trading fees after the first week.
* **Target orders:** Set specific [target prices](https://strike.me/learn/what-is-a-bitcoin-target-order/) to buy or sell bitcoin, and your trade will only execute if your desired price is reached.
	
With bitcoin in your account, you can:
* Make borderless peer-to-peer transactions
* Pay for goods and services with bitcoin
* Send your bitcoin to your own custody
* Sell your bitcoin for cash
* Hold your bitcoin

Let’s go!

It has never been easier to buy bitcoin through Strike

How to buy bitcoin

## Lightning as a payments network
The Lightning Network was proposed in 2015 as a payments network for transacting bitcoin *outside* the Bitcoin blockchain.

Essentially, the Lightning Network is a way to transact bitcoin faster, cheaper, and more privately than on the Bitcoin blockchain. 

![](https://www.datocms-assets.com/99305/1702580934-what-is-the-lightning-network-01.png)

Unlike legacy networks for inter-bank cash transfers or credit and debit card payments, the Lightning Network offers instant settlement, no chargebacks, and uses bitcoin as the underlying asset. 

It helps solve a key obstacle for Bitcoin, mainly the ability to scale to lots of users making lots of payments. Whereas the Bitcoin blockchain is designed first and foremost for security and decentralization, the Lightning Network is designed for speed, cost, and volume of payments. 

Lightning is a new kind of payments network, one that’s borderless, open, low-cost, and instant.

## How does the Lightning Network work?
The Lightning Network is kinda like the Bitcoin Network, in that it’s made up of computers (nodes) all running the Lightning Network software. Unlike Bitcoin, Lightning transactions aren’t publicly broadcast on the blockchain; instead they’re made privately and directly between nodes. 

Also like Bitcoin, the Lightning software is a standardized set of rules (aka protocol) that’s open and free to use for anyone or any company who wants to join.

So how does it work?

It all starts with bitcoin. Every bitcoin on Lightning begins with a transaction on the Bitcoin blockchain. That on-chain transaction is shared between two parties and serves as the reference point to start transacting *outside* the blockchain. 

With that on-chain bitcoin secured, the two nodes can then open a payment “channel” – a peer-to-peer connection through which bitcoin can be transacted. It’s like a direct link between two computers that update their own mini, private bitcoin ledger, with the start of their ledger being that first on-chain transaction. 

In their channel, they can transact as fast and often as they want by simply updating their private record, and when they’re done, they can close the channel by settling the original on-chain transaction. 

It’s like opening a tab at a bar, so that you don’t have to pay the bartender each time you buy a drink. Once you open the tab, you can order lots of drinks and just have the tab updated each time. At the end of the night, you make one single payment to settle up. 

It’s the same with Lightning. One on-chain transaction to start, countless off-chain transactions, and one on-chain transaction to close. 

What’s more, each node can open as many channels with as many nodes as they want, forming a global web of connections. Through this web, nodes can “route” payments to other nodes, even if they’re not directly connected. This means person A can send to person C, via their shared connections with person B. These *indirect* payments open a global network of payment possibilities, since each node can be indirectly connected with every other node in the network.

Lightning is a peer-to-peer payments network that helps scale the Bitcoin blockchain, without making tons of on-chain transactions.

![](https://www.datocms-assets.com/99305/1702580946-what-is-the-lightning-network-03.png)

## Lightning and global money transfers
Lightning helps deliver instant, low-cost, and interoperable payments for the world.

Payments routed via Lightning move at lightspeed. When they arrive, they’re final. Instant plus final is what legacy networks can’t do. Legacy cash payments sit in “pending” status for days, with the risk of failing or reversing, adding to merchants’ costs and headaches. 

On top of that is Lightning’s extreme low cost. Lightning payments are just information sent between computers, which costs little to nothing. When indirect payments are routed, a routing fee is paid to any in-between nodes, and those fees are typically a couple satoshis (a fraction of a penny). Payments themselves can be that small, unlocking new possibilities for micro-payments. Compare that to card payment processors, who take a couple percent per transaction in fees and can’t practically process penny transactions (let alone sub-penny amounts).

What’s more is Lightning’s interoperability. Like Bitcoin, Lightning is an open protocol, which means any person, any company, or any app can join and start making Lightning payments themselves. It’s the opposite of how bank or card networks operate, which are closed and don’t allow people to hold electronic money themselves.

With Lightning, you can make payments across apps, for less than a penny, and the payment will be instantly spendable. 

To really get it, you have to see a Lightning app in action. 

People send payments from Miami to Mumbai, via Manila, Mexico City, and Munich. Each person uses a different app, each transaction is sent for fractions of a penny, each payment is finalized and immediately spendable. No 1-5 business days, no bank holidays, no manual approvals, no opaque fees. Secure global payments that just work. 

And since bitcoin is traded 24/7/365 across all major currencies, you can use cash to buy bitcoin, send via Lightning, and sell back into cash. That’s exactly what the Strike app and Strike API do. 

The Lightning Network is a new standard for payments. 
It’s fair — nobody has privileged access.
It’s global — across the street as across the world.
It’s interoperable — across apps, across companies, across borders.
It’s secure — it all begins and ends with Bitcoin, verifiably secure and scarce.

The global bitcoin payments network that’s instant, private, and low-to-no cost 

What is the Lightning Network?

## Bitcoin ETFs
First of all, what’s an ETF?

ETF stands for Exchange Traded Fund, which is a type of investment product that can be traded on stock exchanges. ETFs hold assets, such as stocks, bonds, or commodities, and then issue shares, which investors can buy to get investment exposure to those underlying assets. 

![](https://www.datocms-assets.com/99305/1705929799-learn-what-is-a-bitcoin-etf-state-hero.png)

The idea is that the shares of the ETF *track* the price of the underlying assets, which means that as the assets go up or down in price, the shares in the ETF go up or down in a similar way. For example, if you buy shares in a Gold ETF, your investment would go up or down alongside the price of gold. It's a way of getting investment exposure to gold, without having to buy physical gold coins yourself. 

For the service of operating the ETF, the company that manages it (aka ETF Provider) charges a fee, typically a percentage of the total value of the fund’s assets.

So what’s a Bitcoin ETF?

A Bitcoin ETF is simply an ETF that holds bitcoin. It holds no other underlying asset – no other crypto, coin, or token… just [bitcoin](https://strike.me/learn/what-is-bitcoin). 

When the price of bitcoin goes up or down, the share price of the Bitcoin ETF goes up or down too. It’s a way to get investment exposure to bitcoin, without actually buying and owning the bitcoin *directly*.

Bitcoin ETFs differ from direct ownership of bitcoin, most notably in that ETFs incur ongoing management fees and don’t let you send, withdraw, and control your bitcoin yourself. The [Strike app](https://strike.me/download) is a way to buy, sell, hold, send, and receive bitcoin, as well as withdraw it to your own custody, without incurring any management fees.

![](https://www.datocms-assets.com/99305/1705598787-engineering_06-blended-bitcoin-fee-estimations-default.png)

## How does a Bitcoin ETF work?
From a high-level perspective, all you really need to know is that you can buy shares of a Bitcoin ETF in a brokerage account, and then as bitcoin’s price goes up or down, so too does your investment. 

Under the hood, the operations of a Bitcoin ETF are a bit more technical and involve creating and redeeming shares. Before digging in, there are a few terms you might need to know:

* **Net Asset Value (NAV):** The value of the ETF’s holdings
* **Authorized Participants (AP’s):** Special designated partners (usually large financial institutions) that can participate in creating or redeeming shares of the ETF
* **Custodian:** The company that actually holds the bitcoin, which could be the ETF Provider itself or a 3rd party company

So how does a Bitcoin ETF work?

1. Bitcoin ETF shares each represent a certain portion of the fund’s underlying bitcoin holdings (for example, 1 bitcoin per 1,000 shares), and are traded on a stock exchange.
2. The share price rises and falls according to supply and demand.
3. When there’s increased demand, the ETF share price rises, leading to a *premium to NAV*, meaning the ETF shares are higher in price than the underlying bitcoin they represent.
4. This premium to NAV acts as a signal to the APs to create new ETF shares, which they do by delivering cash to the ETF Provider who buys bitcoin and deposits it to the fund’s custodian.
5. The NAV of the Bitcoin ETF is updated to reflect the fund’s newly acquired bitcoin and the APs receive newly created ETF shares.
6. The APs can then trade the shares in the open market, thereby collecting and closing any premium to NAV.

The reverse can also occur when there’s a *discount to NAV*, meaning the ETF shares are lower in price than the underlying bitcoin they represent. This leads APs to gather shares and return them to the ETF Provider, *redeeming* them in exchange for the cash value of the bitcoin they represent. The ETF Provider delivers the cash to the APs by selling the underlying bitcoin.

This whole system is designed so that the ETF tracks the market price of bitcoin. Whenever there’s a premium or discount to NAV, either due to trading of ETF shares or price fluctuations of the underlying bitcoin, the APs are able to bring the share price back in line with the value of the bitcoin they represent. This system also provides liquidity, as the APs are able to participate in trading of shares, even when regular investors may be reluctant or illiquid.

The above scenario describes cash-create type ETFs, where the APs create or redeem shares by exchanging cash with the ETF Provider, rather than bitcoin. Different Bitcoin ETFs around the world may operate with different creation/redemption processes, bitcoin-per-share ratios, management fee amounts or schedules, or settlement times for when the bitcoin or cash need to be exchanged. You can read about each ETF’s details on their website.

Overall, APs and ETF Providers work to keep deviations from NAV to a minimum, so that the share price tracks the price movements of bitcoin. A 5% move in bitcoin’s market price should result in a corresponding 5% price move in the Bitcoin ETF share price. 

![](https://www.datocms-assets.com/99305/1705011631-learn-how-to-buy-bitcoin-support.png)

## Should you buy into a Bitcoin ETF?
If you’re getting into bitcoin, the question arises: should you buy shares of a Bitcoin ETF or buy bitcoin directly?

Ultimately, it’s up to you. 

For some, the convenience and familiarity of buying within their brokerage account is a big plus. For others, they might be swayed by “unit bias” – feeling better about owning *whole* shares of an ETF rather than owning *fractions* of a bitcoin, despite the fact that shares themselves represent a fraction of a bitcoin. 

Before deciding what’s best for you, there are some factors to consider:

### Management fees:
Bitcoin ETFs incur management fees, typically as a percentage of the total value of the fund’s holdings, while direct ownership has no ongoing management fees. From a long-term perspective, fees add up and are compounding, which steadily erodes the value of your holdings.

### Control of funds:
Owning bitcoin directly gives you the freedom to move your assets where, when, and how you want, while ETF shares can only be held via a brokerage service and have limited or no ability to be transferred to an alternate brokerage or custodian.

### Trading access:
Bitcoin ETFs can only be traded during market hours on business days, whereas owning bitcoin directly affords you the ability to buy and sell, any time, any day. During periods of high volatility, ETF-holders have to wait until markets open to be able to trade, while direct bitcoin-holders are free to trade and transfer when they please.

### Counterparty risk:
Bitcoin ETFs require trust in certain 3rd parties: the ETF Provider and custodian must securely manage the bitcoin, the Authorized Participants must ensure liquidity and limit deviations from NAV, and your brokerage service must provide reliable trading and access to your holdings. With direct ownership, you can decide where your bitcoin is held and by who, including self-custodying where you are the holder and sole authority over your assets.

### Future opportunities:
As the Bitcoin ecosystem grows, new use cases may arise for bitcoin holders, including using bitcoin to collect routing fees within the [Lightning Network](https://strike.me/learn/what-is-the-lightning-network) or posting bitcoin as collateral into escrow accounts to borrow against. Although these use cases are nascent and come with their own set of risks and complexities, they’re simply unavailable if your holdings are locked inside an ETF.

When considering whether to buy shares of an ETF, it’s important to consider the tradeoffs compared to buying bitcoin directly. 

The [Strike app](https://strike.me/download) offers a way to get into Bitcoin that’s simple and secure. You can sign up and buy bitcoin in minutes using regular cash payment methods, with little as $0.01 or as much as you want. Strike Private (private@strike.me) also provides OTC-desk bitcoin buying and selling for large orders from individuals, businesses, or institutions. 

With Strike, you control how you trade, hold, transact, or withdraw your bitcoin – and never pay any ongoing “management fee”. 

*Please note: this content is for educational purposes only. Strike does not provide financial advice.*

Bitcoin Exchange Traded Funds – what they are and how they work

What is a Bitcoin ETF?

Taking self-custody of your bitcoin is a process involving setting up a self-custodial wallet then sending your bitcoin to one of your addresses.

![](https://www.datocms-assets.com/99305/1704930777-learn-better-ai-agents-state-hero.png)

[Private keys](https://strike.me/learn/what-are-private-keys-and-public-keys) are central to bitcoin ownership.

Every bitcoin transaction must be authorized using the correct private key, meaning if you exclusively hold the private key, then you alone can spend the bitcoin associated with that key. The control of private keys– their creation, security, and management – is how you own bitcoin without relying on any 3rd party.

Custodial wallets, like [Strike](https://strike.me/download), handle private keys on behalf of their users. The process of taking [self-custody](https://strike.me/learn/what-is-self-custody) of your bitcoin involves setting up a new self-custodial wallet, then sending your bitcoin to an address created from that wallet. 

There are two basic types of self-custodial wallets:
* **Hardware wallet:** A physical device, usually with a screen, that runs its own wallet app to generate a [seed phrase](https://strike.me/learn/what-is-a-seed-phrase) and manage private keys directly on the device.
* **Software wallet:** A mobile or desktop app that you download, which generates a seed phrase and manages private keys within the app.

One of the major threats to your private keys is malicious or faulty software. If bad software infiltrates your wallet app, it could compromise your bitcoin. For this reason, it’s crucial to be cautious about your wallet’s connection to the Internet. 

Wallets can be further categorized based on their Internet connection:
* **Hot wallet:** A wallet that’s connected to the Internet
* **Cold wallet:** A wallet that’s disconnected from the Internet
* **Air-gapped wallet:** A wallet that is never connected to the Internet, and which passes transaction information via physical SD card or some other means.

## When should I take self-custody
Many people start their Bitcoin journey using a custodial app, like Strike, since it offers convenience, simplicity, and security. However, as you gain a deeper understanding of Bitcoin or allocate an increasingly significant portion of your wealth into it, self-custody should become an essential part of your financial plan.

Before proceeding with self-custody of your bitcoin, it’s best to understand key concepts:
* **Private and public keys:** Learn how bitcoin transactions are created and authorized via [private and public keys](https://strike.me/learn/what-are-private-keys-and-public-keys).
* **Seed phrases:** Understand how your private keys are generated from a [seed phrase](https://strike.me/learn/what-is-a-seed-phrase) and how to recover them in case your wallet is lost, damaged, or destroyed.
* **Private key security best practices:** Know the best practices to [properly safeguard](https://strike.me/learn/how-do-i-protect-my-private-keys) your private keys and seed phrase to prevent loss or theft.
* **Mult-signature setups:** Especially for large amounts of bitcoin, consider multi-signature (multi-sig) wallets that require multiple, geographically distributed private keys to authorize transactions.
* **Cold vs. hot vs. air gapped wallets:** Understand the differences between cold wallets (offline storage), hot wallets (online storage) and air-gapped wallets (never-connected storage), and how to use each safely.
* **The UTXO system:** Learn how [UTXOs](https://strike.me/learn/what-is-a-utxo) (Unspent Transaction Outputs) work to avoid issues that could make your bitcoin uneconomical or unspendable and protect your privacy.

Once you have a strong grasp of these concepts, research and choose the right self-custodial wallet that suits your needs. Many people opt for a hardware wallet, which can cost around $100 or more. Whether you choose a hardware or software wallet, be prepared to stay updated on the latest software or firmware to protect against security vulnerabilities.

Online tutorials, videos, and step-by-step walkthroughs are great resources for researching wallets and how to use them.

## How to take self custody
Here’s how to take self-custody of your bitcoin using a hardware wallet:

1. **Buy a hardware wallet:** Research and choose a reputable hardware wallet and follow the setup instructions provided in the package. For security reasons, it’s best to purchase the wallet from the manufacturer, rather than from a reseller.
2. **Set up your wallet:** Turn on the device, follow the on-screen instructions to begin creating your new wallet.
3. **Record your seed phrase:** As part of the setup process you’ll be prompted to write down a 12, 18, or 24-word [seed phrase](https://strike.me/learn/what-is-a-seed-phrase), which can be used to recover your wallet if it’s lost or damaged. It’s vital to record the words accurately and in the correct order, and to follow [best practices](https://strike.me/learn/how-do-i-protect-my-private-keys) when storing them for safekeeping.
4. **Generate a Bitcoin address:** Initiate a “receive” transaction in your wallet to generate a new Bitcoin address.
5. **Copy and paste the address:** Copy the address and paste it into the service you’re using to send bitcoin (like [Strike](https://strike.me/faq/how-do-i-send-bitcoin/)). This can be done either by having your wallet generate a QR-code, or by sharing the address to yourself, preferably using a secure and encrypted message app. Double check that the address’s characters are correct.
6. **Set your fee and amount:** Choose a transaction fee and enter the amount of bitcoin you want to send, making sure it aligns with [UTXO best practices](https://strike.me/learn/what-is-a-utxo).
7. **Send a test transaction:** As an optional step, you can send a small “test” transaction to your Bitcoin address to be absolutely sure that the address is correct. 
8. **Initiate the transaction:** After reviewing all details, initiate the transaction to your address.
9. **View the transaction on the blockchain:** Once your transaction has been initiated, it will typically appear as a pending transaction. As a final step, you can monitor your transaction’s progress on a [blockchain explorer](https://mempool.space) by searching for your Bitcoin address.

Once your transaction has six confirmations (~60 minutes), it is generally considered complete. 

At this point, you exclusively own the bitcoin because you control the wallet with your private keys, and you have securely stored your seed phrase.

Sending your bitcoin to an address where you control the private keys

How do I take self-custody of my bitcoin?

## Cash –> Bitcoin –> Cash
Send Globally is a feature in the Strike app that lets you send cash through the [Bitcoin Lightning Network](https://strike.me/learn/what-is-the-lightning-network) and have it delivered as local currency to bank or mobile money accounts. It’s a way of sending money globally or locally that can cut out unnecessary middlemen, achieve lower costs, and deliver at faster speeds.

It’s cash, sent through Bitcoin, delivered as local currency.

![](https://www.datocms-assets.com/99305/1702407736-learn-what-is-send-globally-state-title.png)

To understand how it works, let’s take a look at Bitcoin.

[Bitcoin](https://strike.me/learn/what-is-bitcoin) is a digital asset that trades 24/7/365, uninterrupted. People worldwide buy and sell bitcoin across all major currencies. This means you can buy bitcoin with your local currency, send the bitcoin to someone else, who can then sell that bitcoin for a different currency. Cash to bitcoin to cash.

On top of Bitcoin is the Lightning Network, a second-layer scaling solution that lets people securely send real bitcoin faster and cheaper. With Lightning, people can now send and receive bitcoin, anywhere in the world at lightspeed, for low-to-no cost. 

With Bitcoin and Lightning, all you need are cash on/off ramps to make global cash transfers… which is where Strike comes in.

The [Strike app](https://strike.me/download) has full functionality for Bitcoin, Lightning, and cash. Strike has also built a global network of partnerships with bitcoin-powered companies. These global partners can receive bitcoin, convert it to their local currency, and deposit it directly to bank or mobile money accounts. 

So, how does it work?

With cash in your Strike account, you add your recipient’s bank or mobile account details, enter an amount to send, and hit “Confirm”. Immediately, your cash is converted to bitcoin, bitcoin is sent via Lightning to the global partner, the global partner sells the bitcoin for local currency, and the local currency is deposited into your recipient’s account.

The entire operation is automated, and can be done in seconds. Neither you, nor your recipient, ever owns bitcoin. It’s a cash to foreign currency transaction, made possible through Bitcoin.

![](https://www.datocms-assets.com/99305/1702580906-using-bitcoin-to-send-money-abroad-02.png)

## Bitcoin as public payments infrastructure
This is a new approach to using Bitcoin. 

It’s using Bitcoin, not as an asset, but as a network to transfer value. It’s Bitcoin as public payments infrastructure for the world – an alternative to traditional money transfers.

In traditional finance, sending money internationally to friends and family (aka remittances) is slow and expensive. The average cost to remit money globally is roughly [6.20%](https://remittanceprices.worldbank.org/sites/default/files/rpw_main_report_and_annex_q223.pdf) — as in you send $100 and $6.20 is lost to fees, exchange rates, and/or middlemen. 

There’s also delays. The money can take hours, days, or even weeks to arrive and be spendable. You’re also limited if you’re trying to send really small or really large amounts. It all depends on the country, currency, or companies involved.

But why is that?

Put simply, international banking processes.

To transfer local cash in a local bank to foreign cash in a foreign bank involves payment batching, net clearance schedules, chargeback risks, business hours, bank holidays, and of course fees for all middlemen involved. If the countries or currency-pairs are small or uncommon, then the rates, delivery times, and limitations are going to be worse. 

It’s an inefficient system, not designed for speed and savings.

![](https://www.datocms-assets.com/99305/1702580912-using-bitcoin-to-send-money-abroad-03.png)


## Lightning delivers real savings and real value
Send Globally is for saving time and money.

By using Bitcoin as the network to send value, Strike can deliver even better cross-currency exchange rates. That’s because the transfer is able to bypass a lot of the processes and middlemen that drive up costs. And since the money is sent through Lightning, it can arrive much faster than traditional money transfers.

Strike has already launched in a [number of countries](https://strike.me/faq/which-countries-are-available-for-send-globally/) (with more to come), each with super low minimums. All you need is your recipient’s bank or mobile account details, and then you can send to them in their local currency, typically in seconds. 

It’s as easy as texting.

You can also use it for travel. Airport money changers charge crazy high fees and bad rates, so why not use the cash in your Strike app while traveling abroad? On your next trip to the Philippines, just use your cash to pay people in pesos, by Sending Globally right to their mobile money account.

If your recipient doesn’t live in one of the supported countries, that’s okay. The Strike app is available in [countries worldwide](https://strike.me/faq/where-is-strike-available-wr), so you can send them cash or bitcoin instantly to their Strike account. Or they can use any other Lightning-enabled wallet app to receive payments. Bitcoin is interoperable, and is traded across all major currencies. It just works.

You can use Send Globally the Strike app today, or check out this [step-by-step walkthrough](https://strike.me/learn/how-to-use-send-globally) to learn more.

Happy sending.


Bitcoin's Lightning Network makes global money transfers faster and cheaper

Using Bitcoin to send money abroad

UTXO stands for Unspent Transaction Output, and is the technical term for a discrete portion of bitcoin. Put simply, your UTXOs are your bitcoin that you’ve received, but not yet spent.

![](https://www.datocms-assets.com/99305/1721348184-learn-what-is-a-utxo-state-hero.png)

Amounts of bitcoin exist as records of transactions on the Bitcoin [blockchain](/learn/what-is-a-blockchain). Owning bitcoin means that there’s a transaction on the blockchain to an address for which you control the private keys. That record of an amount of bitcoin is called a UTXO.

The way Bitcoin works is that transactions have inputs and outputs. When a transaction is made, the sender specifies one or more inputs and one or more outputs, which can be of any amount, ranging from fractions of a bitcoin to multiple whole bitcoin:
* **Input(s):** An input in a bitcoin transaction references a previous unspent transaction output (UTXO) and is used to fund the new transaction. It includes the previous transaction’s ID, the specific output being spent, and a signature to prove ownership.
* **Output(s):** An output in a bitcoin transaction specifies the recipient of the bitcoin and the amount to be transferred, which can be an address controlled by the sender.

When a UTXO is spent as an input, it’s destroyed, and one or more UTXOs are created as the output. The one exception to this input-output system is the first transaction in each block, called the “coinbase.” The coinbase transaction has no input since it is newly issued bitcoin entering circulation as a reward to the miner, according to the strict [supply schedule](/learn/what-is-the-bitcoin-supply-schedule).

You can look at any given block on the [blockchain](https://mempool.space) for yourself and find the assorted transactions, each with one or more inputs and outputs, alongside the inputless coinbase. The network of nodes running Bitcoin’s software maintains a record of all UTXOs, known as the “UTXO set,” which represents all valid coins in the system. 

## Comparison with the account model
This UTXO model is different from the “Account model” used by banks. In the Account model, balances are tracked as single figures that are adjusted with each transaction, while the UTXO model treats each transaction output as a discrete, spendable unit.
* **Account model:** Balances are updated by debiting and crediting accounts, similar to how banks manage cash balances. When you deposit or withdraw any amount, your balance will adjust accordingly.
* **UTXO model:** Each transaction output is like a separate piece of physical cash (paper notes and metal coins). When you make a payment, you must select specific notes or coins to use. As part of the transaction, you might receive change in return, which are new notes or coins in your wallet.

A key difference to this physical cash analogy is that the recipient of a bitcoin payment receives it as a unified UTXO, not as an assortment that matches the inputs. Overall, what this means is that your bitcoin holdings are simply a collection of outputs from previous transactions that you haven’t yet spent, hence “Unspent Transaction Outputs” or UTXOs.

## Understanding UTXOs and fees
When you make a transaction on the Bitcoin blockchain, you need to pay a [transaction fee](/learn/what-are-bitcoin-fees) (aka on-chain fee) to get it added to a block and be “confirmed.” Transaction fees are paid to the [miner](/learn/what-is-bitcoin-mining) who adds the block and offers an incentive to get transactions confirmed sooner.

In any given transaction, the fee amount is simply the difference in amounts between the inputs and outputs. If the total amount of the inputs is 1 bitcoin, and the total amount of the outputs is 0.99 bitcoin, then the fee payable to the miner is 0.01 bitcoin.

Bitcoin blocks have a limited amount of space and are only added on average every 10 minutes. This ensures the entire blockchain remains small enough to be downloaded and verified on an average laptop computer, helping Bitcoin stay decentralized by keeping participation open to all. Fees are therefore based on the *amount of data* a transaction requires, rather than its *financial value*. Transactions that occupy more bytes of data, such as those with many inputs and outputs, pay more in fees, since they’re using more of the scarce resource of block space. 

![](https://www.datocms-assets.com/99305/1702407727-learn-how-to-buy-bitcoin-state-title.png)

## Fees and UTXO sizes
Fees are measured in [satoshis](/learn/what-are-satoshis/) per virtual byte (aka “sats/vbyte”). Since the market for fees is free and open, anyone can include any amount of fee for their transaction, and miners can select which transactions to include in a block. Fees can be competitively bid up, especially during periods of high network traffic. Higher fees means it’s more expensive to have your transaction added to the blockchain, even for transactions with a single input and output, since each input and output incur a cost based on the bytes of data they require.

This becomes a problem for low-value UTXOs. 

When fees are high, using a low-value UTXO as an input can become uneconomical, since the fee cost to include that UTXO could be a significant percentage of its value – as in you might end up spending half of the UTXO’s value just on fees. What’s more, if the cost of including a specific UTXO as an input surpasses its value, it effectively becomes unspendable. Such low-value UTXOs, which cost more in fees to spend than they’re worth, are often referred to as “dust” – they’re lost.

For example, a [single input](https://bitcoinops.org/en/tools/calc-size/) could require between 57.5 vbytes for a Taproot transaction to 148 vbytes for standard P2PKH transaction (or more for complex transactions like multi-sig), so if fee rates were to reach [200 sats/vbyte](https://mempool.space/graphs/mining/block-fee-rates#1y), the following UTXO sizes or smaller would become unspendable, depending on the transaction type:
* 57.5 vbytes * 200 sats/vbyte = 11,500 satoshis UTXO 
* 148 vbytes * 200 sats/vbyte = 29,600 satoshis UTXO

What this means is that as fees rise, smaller UTXOs can become uneconomical or even unspendable. UTXOs worth thouands, tens of thouands, or even low hundreds of thouands of sats might cost a third, half, or even their entire value in fees to add to the blockchain. In the long term, fees are expected to rise with increased Bitcoin adoption, as more individuals, businesses, apps, and even governments begin to transact on-chain. When self-custodying your bitcoin, you need to plan accordingly to manage your UTXOs effectively.

## How to manage your UTXOs
Using an app like [Strike](https://strike.me/download) to custody your bitcoin is a way to delegate UTXO management, including the selection of inputs and the setting of fee rates to process your transactions economically. With Strike, you can buy as little as $0.01 of bitcoin either as a one-time purchase or through dollar cost averaging (DCA) via recurring purchase, without affecting UTXOs, since the purchases aren't recorded on the blockchain. However, when you make an on-chain transaction, like sending bitcoin to your own custody, you'll need to manage your UTXOs, as your bitcoin purchases on Strike will be combined into a single UTXO sent to your chosen Bitcoin address.

When you’re ready to take self-custody of your bitcoin, managing your UTXOs becomes crucial and requires that you consider a number of factors, suchas fee rates, privacy, and the economic viability of your future transactions. 

Below are some UTXO management best practices to follow: 
* **Not too small:** Keep your UTXO’s at least around 1 million satoshis (0.01 bitcoin), to ensure they remain economically viable, even as fees rise. UTXOs as low as 10,000’s or even 100,000’s satoshis may become uneconomical or unspendable in high-fee environments.
* **Not too big:** Avoid having all your bitcoin in a single large UTXO. Using a large UTXO as an input in a future transaction can reveal your holdings to your recipient, as they can see which UTXO was used as an input and where the change was sent, potentially affecting your privacy.
* **Diversify your UTXO sizes:** If possible, maintain a mix of UTXO sizes, to give yourself options when selecting appropriately sized inputs for future transactions. 
* **Segregate UTXOs:** Keep UTXOs from different sources separate, including any non-kyc sources, to maintain privacy and prevent traceability by transaction recipients.
* **Time your sends:** Monitor [fee rates](https://mempool.space/graphs/mining/block-fee-rates#1y) and aim to send transactions when fees are relatively low, but avoid waiting too long as your desired fee rate may not materialize.
* **Avoid reusing addresses:** To promote privacy and avoid traceability by your recipients, use a new Bitcoin address each time you transact on-chain.
* **Consolidate when fees are low:** Use periods of low fees to combine smaller UTXOs as inputs into larger outputs to ensure future economic viability.
* **Be wary of fee spikes:** Sudden increases in fees may be temporary and could subside within hours or days. For non-urgent transactions, waiting might be wise, though long-term fees are expected to rise with increased Bitcoin adoption.
* **Use Lightning:** For small transactions, use the [Lightning Network](/learn/what-is-the-lightning-network). Lightning enables real bitcoin transactions, without recording each one on the blockchain, avoiding on-chain fees and wait times. Transactions on Lightning are instant and low-to-no cost, allowing you to send even single satoshis to friends or your own Lightning wallet.

For a more in-depth explanation of UTXO management and best practices, read [this article](https://strike.me/learn/how-to-manage-utxos/).

By carefully managing your UTXOs, you can optimize your transaction costs, maintain privacy, and ensure you’re able to spend your bitcoin in the future the way you want, regardless of future fee market conditions. 

Unspent transaction outputs are discrete portions of bitcoin

What is a UTXO?

Make your move into bitcoin.

Learn

Self-custody means sending your bitcoin to an address where you directly control the private keys needed to spend that bitcoin.

![](https://www.datocms-assets.com/99305/1724875219-learn-what-is-self-custody-state-hero.png)

The term “Bitcoin wallet” can be a bit misleading.

Bitcoin wallets don’t actually *hold* bitcoin in the same way that cash wallets hold paper cash. This is because bitcoin is digital money that exists as records of transactions on a distributed financial ledger, called a [blockchain](https://strike.me/learn/what-is-a-blockchain). Owning bitcoin simply means there’s a transaction on the blockchain to an address in which you control the ability to spend – something that can only be done using [private keys](https://strike.me/learn/what-are-private-keys-and-public-keys).

Private keys are like the master keys that unlock your bitcoin whenever you need to authorize a transaction. If you control the private keys, you own the bitcoin – hence the saying “Not your keys, not your coins.”

A Bitcoin “wallet” might be better understood as a “key chain,” since it’s how you manage your keys to spend your bitcoin. There are two basic setups for managing private keys: 
* **Custodial wallet:** A custodial wallet is a wallet where a trusted 3rd party manages the private keys on your behalf (like [Strike](https://strike.me/download)).
* **Self-custodial wallet:** A self-custodial wallet is a wallet where you have full control over your private keys.

When using a self-custodial wallet, you rarely if ever view or interact with your private keys directly. The way you control your private keys is by controlling access to your wallet app that holds the keys and through backing-up your wallet using a [seed phrase](https://strike.me/learn/what-is-a-seed-phrase). A seed phrase is a sequence of 12 to 24 random words generated by your self-custodial wallet app, and is used to create your private keys and to recover them in case your wallet’s lost or destroyed. 

If you control your private keys, either by exclusively holding your seed phrase or the wallet app that has your private keys, then you have the sole ability to spend your bitcoin. Self-custody is about exclusively controlling the ability to spend your bitcoin.

## Why should you take self custody?
When people first get into bitcoin, they often start with a custodial wallet, like [Strike](https://strike.me/download). Custodial wallets offer convenience, simplicity, and security, often with the added perk of letting you buy bitcoin in-app. With a custodial wallet, you don’t need to worry about seed phrases, private keys, or [UTXO](https://strike.me/learn/what-is-a-utxo) management – you simply set up your wallet, then buy, hold, and transact bitcoin as you wish.

Taking self-custody of your bitcoin is an important step in your Bitcoin journey, providing unique benefits while letting you eliminate reliance on 3rd parties:
* **Elimination of custodian risk:** When holding your bitcoin in a custodial wallet, you must trust that the custodian won’t fail due to bankruptcy, hacking, or legal issues, or obstruct your access to your bitcoin in any way. 
* **Full control over your bitcoin:** Self-custody ensures that you alone decide when and how to send or receive your bitcoin, without any external interference.
* **Verifiability:** Self-custody allows you to verify your own bitcoin holdings on the blockchain itself, ensuring that your funds are held in their entirety and securely under your control.
* **Enhanced privacy:** By eliminating 3rd party-involvement from your transactions, you can maintain greater financial privacy.

Self-custody is ultimately about financial self-sovereignty–taking full control of your money without relying on others. It provides financial freedom and a level of control that’s unmatched in the legacy financial world. However, this freedom comes with added responsibilities. When you have exclusive control of your money, you are solely responsible for its protection against loss and theft, as well as managing the complexities of UTXOs, fees, and privacy.

Self-custody offers you financial independence, while calling you to take full responsibility for your money.

## Why is self-custody important?
Self-custody goes beyond your personal risk mitigations and financial self-sovereignty. It’s about a new approach to money itself.

Bitcoin is peer-to-peer electronic cash, allowing you to hold and transact digital money without needing a bank or any 3rd party. All other forms of legacy digital money–dollars, euros, yen, pesos–require that you trust a bank to hold and manage your funds. They're money mandatory 3rd party involvement.

Banks take in deposits and then lend them out to earn revenue. Your cash balance isn’t an asset held in full by your bank, it’s being lent-out and is better understood as a bank liability – an amount of money the bank owes you. This is called fractional reserve banking, and it means when you deposit cash, you must trust the bank not to lose your funds through risky lending, while also trusting that your fellow depositors won’t all withdraw at the same time, causing a bank run and collapse. 

On top of such bank risks is central bank risk. Central banks, like the Federal Reserve (aka “the Fed”) in the U.S., control the money supply and can print money, which leads to inflation. If commercial banks go bust, the central bank may step in and print money to solve the crisis. This means all cash, whether digital or physical, has the ongoing risk of being devalued by the central bank for their desired purposes.

Bitcoin self-custody offers a new approach to money:
* **No bank lending risk:** No bank can lend out, invest, or otherwise put your self-custodied bitcoin at risk for their own gain, or restrict the movement of your bitcoin in any way.
* **No arbitrary inflation risk:** Nobody can print more bitcoin, since Bitcoin’s monetary policy is set in code, which is run by countless self-interested node operators who are financially incentivized to never change the supply limit of [21 million bitcoin](https://strike.me/learn/how-many-bitcoin-are-there).
* **Holding funds outside legacy systems:** Self-custodied bitcoin is immune from bank runs, bank failures, and mandatory participation in taxpayer-funded bail-outs. It provides a way to hold money that is independent from the fragility of legacy financial systems.

Self-custodied bitcoin is a monetary shift that moves the power of money from banks to people. If you hold your private keys, you have sovereignty over your money.

Taking self-custody is asserting your financial sovereignty. 

If you’re ready to take self-custody, you can read more about [how to take self-custody](https://strike.me/learn/how-do-i-take-self-custody-of-my-bitcoin), [how to protect your private keys](https://strike.me/learn/how-do-i-protect-my-private-keys), as well as useful information on [seed phrases](https://strike.me/learn/what-is-a-seed-phrase) and [UTXOs](https://strike.me/learn/what-is-a-utxo).

Taking direct control of your bitcoin

What is self-custody?

Bitcoin uses public and private keys to secure bitcoin transactions and ensure your bitcoin are only accessible to you.

![](https://www.datocms-assets.com/99305/1715906688-learn-what-are-bitcoin-private-keys-state-hero.png)

Bitcoin isn’t a physical asset, rather it exists as digital records of transactions on the [blockchain](https://strike.me/learn/what-is-a-blockchain). Owning an amount of bitcoin simply means there’s a transaction on the blockchain to an address in which you control the ability to spend. 

If you can spend it, you own it.

Spending bitcoin can only be done using the private key that corresponds to the correct public key for the bitcoin in question. You can think of private and public keys like a locked mailbox. The private key is like the master key that opens the mailbox, giving exclusive access and control over its contents. The public key is like the locked mailbox itself, which anyone can see and deposit mail into, but which nobody except for the master key-holder can open.
* **Private key:** The secret key to “unlock” your bitcoin and authorize spending
* **Public key:** The public code that can be shared with others so they can send you bitcoin

When you use a custodial Bitcoin wallet, like [Strike](https://strike.me/download), the private keys are held for you on your behalf, giving you indirect control over spending your bitcoin. Taking [self-custody](https://strike.me/learn/what-is-self-custody) of your bitcoin means you are sending your bitcoin to an address to which you control private keys directly, a process that comes with added benefits and responsibilities. Self-custody is all about self-sovereignty–taking exclusive control over your money.

## What is a private key?
A private key is simply a very large, secret number used to authorize transactions.

Specifically, a private key is a unique 256-bit number, meaning it’s a number between 0 and 2²⁵⁶  or 1.1579 X 10⁷⁷ ( aka ~115 quattuorvigintillion). In Bitcoin, this number is typically represented in hexadecimal format: 64 characters with numbers from 0-9 and capital letters A-F, resulting in private key that might look something like this:

`E8C5F60C6CCCD437D71597401C6A808F96C5EE74AEA6C4BCD8F24883A0DFC858`

*(This example private key is for illustrative purposes only. Remember, you should never share or expose your private key because it's used to to spend your bitcoin.)*

Many modern self-custodial Bitcoin wallets will generate and manage your private keys within the wallet. The process for generating private keys starts by using randomness (aka “entropy”) to create a [seed phrase](https://strike.me/learn/what-is-a-seed-phrase) – a sequence of 12 to 24 words selected from a standardized list. The unique seed phrase is then used to create a seed, then master key, then subsequent private keys to be used for making transactions. To summarize:
* **Seed phrase**: The unique sequence of 12 to 24 random words that are the source from which keys can be generated or recovered should your wallet be lost or destroyed.
* **Seed:** The unique sequence of characters derived from the seed phrase, which is used to generate the master key.
* **Master key:** A unique key derived from the seed, which is used to generate one or more private keys.
* **Private keys:** Unique 256-bit numbers stored in your wallet’s software, derived from the master key, and which are used to create public keys and authorize transactions.

This entire process is known as hierarchical deterministic or “HD” wallets. It allows multiple hierarchies of private keys to be created from a single source, including private keys generated from private keys, and ensures that the same keys can always be recreated given the same starting point (aka “deterministic"). This simplifies wallet backup and recovery, while offering greater flexibility in key management.

When you set up a self-custodial Bitcoin wallet, the wallet’s software will typically generate your seed phrase and prompt you to write it down. Your wallet will then generate and manage your private keys from your unique seed phrase, letting you easily authorize transactions in the wallet app without needing to view or manage your private keys directly. 

Controlling access to your wallet app and your seed phrase is how you assert control over your private keys when taking self-custody. The most important thing to remember concerning your private keys and seed phrase, is that they must be kept [secret and secure](https://strike.me/learn/how-do-i-protect-my-private-keys), since they are used to spend your bitcoin.

## What is a public key?
A public key is a unique code generated from a private key, which can be shared publicly without compromising the secrecy of the private key. Public keys are generated using industry-standard cryptographic “one-way functions”, (aka elliptic curve cryptography), which means that while it’s easy to generate a public key from a private key, there is no known way to do the reverse.

Public keys are used for receiving bitcoin and are foundational in the creation of Bitcoin addresses. A Bitcoin address is just a shorter, more efficient, and human-readable version of a public key. When you want to receive bitcoin, your wallet’s software can easily generate a Bitcoin address from one of your public keys, which you can give to your friend to send you bitcoin. 

When it comes time to spend your bitcoin, your wallet software uses the private key that corresponds to the public key that was used to receive the funds and generates a [digital signature](https://strike.me/learn/what-is-a-digital-signature) to authorize the transaction. This digital signature combines the uniqueness of the private key and a cryptographic summary of the transaction itself. Most importantly, signatures can be verified using only the public key without exposing the private key itself.

What this all means is that if you control your private keys, then you can generate Bitcoin addresses to receive bitcoin, and only you can spend those bitcoin by authorizing transactions with a digital signature created using your private key. 

![](https://www.datocms-assets.com/99305/1721871514-batching-on-chain-sends-hero.png)

## How are public and private keys used in bitcoin transactions?
Bitcoin transactions follow the [UTXO model](https://strike.me/learn/what-is-a-utxo) (Unspent Transaction Outputs), which means that each peer-to-peer transaction has inputs (the source) and outputs (the destination). 

Each amount of bitcoin you own is the output of a previous transaction, which was sent to a Bitcoin address generated from one of your public keys. In order to spend that bitcoin you must sign the transaction using the private key associated with the public key used to receive it. This is why keeping your private keys secret and secure when self-custodying bitcoin is critical.

Here’s a step-by-step example of Alice sending 1 bitcoin to Bob:
1. **Requesting an address:** Alice requests Bob’s Bitcoin address. The address is generated from one of Bob’s public keys, which is derived from one of his private keys.
2. **Creating the transaction:** Using her Bitcoin wallet, Alice creates a transaction by entering Bob’s Bitcoin address, the amount to send, and her desired [fee rate](https://strike.me/learn/what-are-bitcoin-fees). 
3. **Managing UTXOs:** Alice’s wallet software selects the inputs and outputs.
	- *Inputs:* A UTXO of 0.5 bitcoin and a UTXO of 0.75 bitcoin
	- *Outputs:* A UTXO of 1.0 bitcoin to Bob’s Bitcoin address and a UTXO of 0.249 bitcoin to one of Alice’s own Bitcoin addresses (aka a “change” address)
	- *Difference:* The difference of 0.001 bitcoin goes to the miner as the fee
4. **Signing the transaction:** Alice’s wallet software creates a [digital signature](https://strike.me/learn/what-is-a-digital-signature) and signs the transaction using the transaction’s data and the private keys that match the public keys of the UTXO she is spending.
5. **Broadcasting to the network:** The signed transaction is broadcast to the Bitcoin network.
6. **Verifying the transaction:** [Miners](https://strike.me/learn/what-is-bitcoin-mining/) on the network verify the transaction by checking the digital signature against Alice’s public key (derived from the address), thereby ensuring that the legitimate owner of the bitcoin has authorized the spend.
7. **Mining:** When a miner finds a winning hash, the miner groups the transaction with other valid transactions into a block, which is broadcast to the Bitcoin network.
8. **Adding the transaction:** Nodes receive the new block of transactions and confirm its validity before adding that block to their copy of the [blockchain](https://strike.me/learn/what-is-a-blockchain).

The keys to secure and manage your bitcoin

What are private keys and public keys?

A seed phrase is a sequence of 12 to 24 simple words that serves to generate and backup your Bitcoin wallet’s private keys.

![](https://www.datocms-assets.com/99305/1724875232-learn-what-is-a-seed-phrase-state-hero.png)

[Private keys](https://strike.me/learn/what-are-private-keys-and-public-keys) are required to prove ownership when authorizing a bitcoin transaction. 

You can think of private keys as like the master keys that unlock your bitcoin whenever you need to spend. As a result, creating, managing, and securing private keys is of utmost importance.

So where do private keys come from?
… From a seed phrase.

Most modern Bitcoin wallets (aka Hierarchical Deterministic or “HD” wallets) create private keys  from a standard process involving a seed phrase. The process begins by generating randomness (aka “entropy”) to create a 128-bit to 256-bit number (128 to 256 ones and zeros). For human-readability and ease-of-use, that random number is converted into a corresponding sequence of 12 or 24 words called a “seed phrase,” which is used to create private keys. You can think of a seed phrase as a human-friendly way to represent a very big random number. 

The process of going from seed phrase to private keys is deterministic, which means the same set of private keys can always be reproduced from a given seed phrase. Seed phrases, therefore, serve two main roles:
* **Private key source:** When setting up a self-custodial wallet, a seed phrase is created and used as the unique source for generating your private keys.
* **Private key recovery:** If your Bitcoin wallet is ever lost, damaged, or destroyed, your seed phrase can be used to re-create all your private keys, giving you back control of your bitcoin.

If you use a custodial Bitcoin wallet, like [Strike](https://strike.me/download), then the custodian will be in charge of managing the seed phrase and private keys on your behalf. Taking [self-custody](https://strike.me/learn/what-is-self-custody) of your bitcoin is the process whereby you send your bitcoin to an address where you control the private keys yourself, including the seed phrase from which they’re created. 

Even though bitcoin is a digital asset that exists as records on a distributed ledger called a [blockchain](https://strike.me/learn/what-is-a-blockchain), you can hold your seed phrase in your possession or even memorize it in your head. Since the only way to spend bitcoin is with the correct private key, having exclusive control of your seed phrase (and by extension your private keys) is how you can own bitcoin without relying on any trusted 3rd party. 

It goes without saying that the most important thing to know about seed phrases is that they must be kept [secret and secure](https://strike.me/learn/how-do-i-protect-my-private-keys). If someone takes your seed phrase, they can recreate your private keys and take your bitcoin.

## Where do the seed phrase words come from?
Seed phrase words come from a standardized word list defined by [Bitcoin Improvement Proposal #39](https://github.com/bitcoin/bips/tree/master/bip-0039) (aka BIP39). This proposal was introduced in 2013 to simplify and improve the process of backing up and recovering Bitcoin wallets. 

The [word list](https://github.com/bitcoin/bips/blob/master/bip-0039/english.txt) contains 2,048 simple words, however, only the first 4 letters of each word are actually relevant since no two words in the list share the same first 4 letters. The list is ordered alphabetically, so that each word corresponds to a specific number in the list, with “Abandon” being the first word and “Zoo” being the last.

To make a 24-word seed phrase, your wallet will follow these steps:
* **Start with randomness:** Your wallet will use a random number-generating algorithm to produce a 256-bit number – a unique sequence of 256 ones and zeros. 
* **Add a checksum:** An 8-bit checksum is added at the end of this number by [hashing](https://strike.me/learn/what-is-a-hash-function) the number, then taking the first 8-bits of the deterministic hash and appending it to the end to create a 264-bit number. This checksum serves as an internal security check within the number itself to prevent error or manipulation.
* **Split into 11-bit segments:** The 264-bit number is then split into 24 separate 11-bit segments. In binary, 11-bits can represent numbers from 0 to 2,047 (2,048 total combinations).
* **Match to word list:** Each 11-bit segment corresponds to a specific word in the BIP39 word list. For example, the number `00000000000` matches to the 1st word (“Abandon”), `00000000001` matches to the second word (“Ability”), and so on until `11111111111` matches to the 2,047th word (“Zoo”).
* **Finalize the phrase:** The 264-bit number (256-bit randomness + 8-bit checksum) now has a corresponding seed phrase and can be used as a unique source to generate private keys. 

Depending on the wallet or configuration, seed phrases can also be 12 or 18-words long, providing differing balances between simplicity and security. 12 and 18-word phrases follow the same procedure, except that they have 128-bit or 192-bit randomness with 4-bit or 6-bit checksums, respectively. 

When setting up a self-custodial wallet, you’ll be prompted to write down your seed phrase. It’s crucial to record the words accurately and in the correct order. To protect from water or fire damage, consider storing your seed phrase on a steel plate. Also, keep in mind that your seed phrase is the backup for your bitcoin, so taking utmost care is warranted.

![](https://www.datocms-assets.com/99305/1727279580-bip-0039-wordlist.png)

## How does a seed phrase work?
Once your wallet has gone from randomness to seed phrase, it can then be used to produce subsequent private keys, public keys, and Bitcoin addresses. Here’s the basics of how it works:
* **Generate seed phrase:** Your wallet generates your seed phrase using the aforementioned process, which you promptly write down and store securely.
* **Create a seed:** The seed phrase is [hashed](https://strike.me/learn/what-is-a-hash-function) to produce a seed – a unique sequence of numbers and letters.
* **Create the master key:** From your seed, your wallet creates a master key (aka “master private key”), which serves as the main input to create private keys.
* **Derive private keys:** From the master key, countless unique private keys can be created, which can be used to authorized transactions.
* **Create public keys:** For each private key, a matching public key can be generated, which can be shared publicly without exposing the corresponding private key.
* **Create Bitcoin addresses:** Each public key can then be used to create a Bitcoin address, which can be easily shared to others to receive bitcoin transactions.
* **Signing transactions:** After receiving bitcoin to one of your addresses, you can spend that bitcoin by authorizing a transaction using a [digital signature](https://strike.me/learn/what-is-a-digital-signature), which can only be created using the matching private key.

The process of going from a seed phrase to a set of Bitcoin addresses is deterministic, meaning  the same seed will always generate the exact same set of private keys, public keys, and addresses. 

What this means is that 12 to 24 words held in your possession can secure your entire bitcoin wealth. It’s a way to hold money independent of any bank or custodian and be entirely financially autonomous. Seed phrases offer several advantages: 
* **Simplicity:** A single phrase can backup and recover countless private keys.
* **Human-readability:** It’s easier to remember 12 to 24 words than a long sequence of random letters or numbers, which are how seeds and private keys are represented.
* **Cross-compatibility:** The BIP39 standard is widely adopted, so you can use your seed phrase to recover all your private keys in a new self-custodial wallet app.
* **Mobility:** When you write down (or even memorize) your seed phrase you can actually carry your entire bitcoin wealth with you, offering unprecedented mobility and autonomy.

## How secure are seed phrases?
Randomly generated seed phrases are extremely secure due to the vast number of possible combinations.

In binary, each bit can be either `1` or `0`. For a 24-word seed phrase, which comes from 256-bits of randomness, there are 2²⁵⁶ possible combinations. This means seed phrases represent unique numbers within an unimaginably vast range of possibilities:
* **12-word seed phrase:** A 128-bit number with 2¹²⁸ possible combinations, or a number between 0 and 3.400 X 1038 (aka ~340 *undecillion*) 
* **18-word seed phrase:** A 192-bit number with 2¹⁹² possible combinations, or a number between 0 and 6.277 X 1057 (aka 6.277 *quattuordecillion*)
* **24-word seed phrase:** A 256-bit number with 2²⁵⁶ possible combinations, or a number between 0 and 1.157 X 1079 (aka 1.157 *quattuorvigintillion*)

To put this into perspective, a random 256-bit number is a number between 0 and 115,792,089,237,316,195,423,570,985,008,687,907,853,269,984,665,640,564,039,457,584,007,913,129,639,936. For context, there are more possible combinations than there are atoms in 100 billion galaxies (atoms mind you, not stars). Even with all the computation power in the world, successfully finding someone’s random seed phrase through “brute force” guessing is for all intents and purposes impossible. 

It’s not a needle in a haystack, it’s an atom in a universe. This asymmetry between the ease of generating a seed phrase and the sheer impossibility of guessing it is a security feature of Bitcoin.

Seed phrase security is less about any human or computer guessing your phrase, and more about someone stealing it. When you take self-custody of your bitcoin, you must take utmost care to safeguard your seed phrase from theft, loss, or damage. You can read more about best practices for how to secure your private keys and seed phrase [here](https://strike.me/learn/how-do-i-protect-my-private-keys).


The secret words used to generate and backup your private keys

What is a seed phrase?

Digital signatures are used to authorize bitcoin transactions and are created from private keys and transaction data. 

![](https://www.datocms-assets.com/99305/1724875226-learn-what-is-a-digital-signature-state-hero.png)

Bitcoin exists as transaction records on a public financial ledger, called a [blockchain](https://strike.me/learn/what-is-a-blockchain). To have your transaction added to that ledger you must mathematically prove that you are the rightful owner of the bitcoin – something which can only be done using [private keys](https://strike.me/learn/what-are-private-keys-and-public-keys).

Control of private keys is effectively how you own bitcoin, and therefore keeping them safe, secret, and secure is paramount. The way you authorize a transaction on a public blockchain, while keeping your private keys private is with a digital signature.

A digital signature is a cryptographic code that can only be created using the sender’s private keys, but which can be validated by anyone on the Bitcoin network using the public key. Digital signatures are kinda like signing a paper check (or “cheque” for the non-Americans): 
1. **Add the transaction information:** When you write a check, you must add the recipient’s name, the date, and the amount for the payment.
2. **Sign the check:** Once the transaction information is added, you write your personal signature, which is unique to you.
3. **Payment can be made:** Once the check is signed with valid information, its validity can be verified and the transaction can be made.

The key difference is that with digital signatures the private key itself is never revealed to anyone else. 

Digital signatures can’t be faked because they’re generated using a cryptographic process that requires the unique private key of the signer that matches the public key. Without access to the private key, it’s computationally impossible for anyone to create a matching digital signature, meaning no one can spend bitcoin unless they control the private keys.

When taking [self-custody](https://strike.me/learn/what-is-self-custody) of your bitcoin, you control the private keys, and your wallet software uses them to create digital signatures for your transactions. If you use a custodial wallet app, like Strike, the app will manage the private keys and create signatures on your behalf.

## How does a digital signature work?
Digital signatures are handled by your wallet’s software. When you want to make a transaction, your wallet will construct the transaction by selecting the correct private key to generate the signature. Here’s the basics of how it works:

1. **Transaction creation:** A user initiates a transaction by specifying an amount of Bitcoin to send, the recipient's Bitcoin address, and a desired [fee rate](https://strike.me/learn/what-are-bitcoin-fees). The Bitcoin wallet software then creates a transaction with the necessary inputs and outputs.
2. **Transaction hashing:** The transaction data is converted into a unique digital fingerprint called a [hash](https://strike.me/learn/what-is-a-hash-function). This hash is a unique, fixed-length sequence of numbers and letters that acts as a summary representation of the entire transaction.
3. **Signature generation:** The sender's private key is used to encrypt the transaction hash, creating a digital signature. This signature is mathematically linked to the private key, proving ownership.
4. **Signature attachment:** The digital signature is added to the transaction, which can then be broadcast to the Bitcoin network.
5. **Signature verification:** [Miners](https://strike.me/learn/what-is-bitcoin-mining) and nodes on the Bitcoin network can verify the signature’s validity using the sender's public key. 

Digital signatures ensure the authenticity and integrity of a transaction by leveraging the unique relationship between a private and public key. This cryptographic process guarantees that only the holder of the private key could have created the signature, making it a secure and reliable way of authenticating ownership without revealing any sensitive information.

Authorizing bitcoin transactions to prove ownership

What is a digital signature?

A Bitcoin address is a sequence of letters and numbers that serves as a digital “destination” for receiving bitcoin. 

![](https://www.datocms-assets.com/99305/1731351768-learn-what-is-a-bitcoin-address-state-hero.png)

To send bitcoin to someone, you need their Bitcoin address. It’s  kinda like how you need a person’s phone number to send them a text or their email address to send them a message.

Understanding Bitcoin addresses is an essential part of making transactions, especially when you’re ready to take [self-custody](https://strike.me/learn/what-is-self-custody/) of your bitcoin. While Bitcoin exchange businesses make it easy to buy and hold bitcoin without *directly* interacting with Bitcoin addresses, when you’re sending to an external wallet (either your own or someone else’s), you’ll need to understand how addresses work.

So what is a Bitcoin address?

A Bitcoin address is a long sequence of seemingly random numbers and letters that serves as a destination for a bitcoin transaction. They start with one of three common prefixes, depending on the format: “1”, “3”, or “bc1”. Here’s some examples of how they look.
* `1BgXRx8YMGKU7fc8RfTPQ2uL2ivC9cMmGj`
* `3G3CxtfN4rg4ShVzVAUsM3AtGbnbs6v26S`
* `bc1qsfc2g86agexaht5eh8yfp3xs9q65nhnz85dq8u`

Despite the differences in length or format, all Bitcoin addresses function in the same way: receiving bitcoin transactions. By viewing any [given block](http://mempool.space) on Bitcoin’s public blockchain, you can see for yourself the amounts of bitcoin being sent and the respective addresses they’re being sent to.

Bitcoin addresses are also commonly shared as QR codes, which is just a computer-readable format that can be easily scanned with a phone or computer. Scanning QR codes is useful for avoiding mistakes when typing or copying these long addresses.

## Where do Bitcoin addresses come from?
Bitcoin addresses are generated from a [public key](https://strike.me/learn/what-are-private-keys-and-public-keys/), which itself comes from a [private key](https://strike.me/learn/what-are-private-keys-and-public-keys/)–a long sequence of numbers and letters that serves as the basis for authorizing transactions. Private keys are like the secret codes that unlock your bitcoin when you want to spend, and therefore only you should have access to them.

When you use a custodial bitcoin service like [Strike](https://strike.me/download), address creation and management are handled for you. When you’re ready to take [self-custody](https://strike.me/learn/how-do-i-take-self-custody-of-my-bitcoin/) of your bitcoin, understanding how Bitcoin addresses work becomes paramount.

Here’s the basics of how a Bitcoin address works:
* **Private key:** A private key is the secret, random sequence of letters and numbers, which is typically generated by your Bitcoin wallet’s software. Private keys are used for generating public keys and for authorizing transactions through the creation of [digital signatures](https://strike.me/learn/what-is-a-digital-signature/). The most important thing to know about private keys is that they must remain secret and secure.
* **Public key:** A public key is derived from a private key, but it can be shared publicly without compromising the secrecy of the private key. Historically, people used to send bitcoin payments directly to public keys (Pay-to-Public-Key or “P2PK”), but today Bitcoin addresses are used for their improved privacy, security, and compatibility.
* **Bitcoin address:** A Bitcoin address is created by taking a public key and running it through two [hashing](https://strike.me/learn/what-is-a-hash-function/) processes (SHA-256 and RIPEMD-160) to make it shorter and more secure against privacy intrusions. A few extra characters, called a checksum, are added at the end to help catch any mistakes when copying or typing the address. Finally, the address is encoded into a format like Base58Check or Bech32, depending on the address type, which uses letters and numbers that avoid confusing characters (like “0” and “O”) to make it easier to read and share.

The final product is a Bitcoin address that can be shared publicly for receiving payments, without compromising the secrecy of the private key. When you want to spend the bitcoin that was sent to your address, you can authorize a transaction using the private key that was used to create your Bitcoin address.

## Types of Bitcoin addresses
There are four basic types of Bitcoin addresses. They all work similarly, but differ in their formatting and compatibility with different wallets and platforms.
* **P2PKH (Pay-to-Public-Key-Hash):** P2PKH Bitcoin addresses are a legacy format and start with a “1”. These addresses are supported everywhere, but are less efficient in terms of the data they require, and therefore typically incur higher fees when making transactions.
* **P2SH (Pay-to-Script-Hash):** P2SH addresses were introduced in January 2015 and start with a “3”. This address format allows for more complex transaction scripts and can be used for various purposes, including multi-signature and time-locked transactions, as well as improved fee efficiency. With these addresses, bitcoin is sent to a hash of the script, and the recipient must meet the script’s conditions to spend it, offering flexibility for advanced transactions.
* **Bech32 (SegWit address):** Bech32 addresses were introduced in July 2017 and start with “bc1”. They support Segregated Witness (SegWit), an upgrade that separates the signature (witness) data from the main part of the transaction, thereby reducing overall transaction size and allowing more transactions per block, lower fees and faster confirmations. SegWit also makes the [Lightning Network](https://strike.me/learn/what-is-the-lightning-network/) possible, allowing off-chain transactions to be settled more securely and efficiently on the blockchain.
* **Taproot address:** Taproot addresses start with “bc1p,” and were introduced in November 2021 to enable enhanced privacy, scalability, and flexibility. Taproot addresses allow complex transactions to appear as simple ones on the blockchain, which means multi-signature setups, smart contracts, or spending conditions can be masked, enhancing privacy and reducing costs while maintaining compatibility with the broader Bitcoin network.

Depending on your wallet app, you can [manage your bitcoin addresses](https://strike.me/learn/how-to-manage-bitcoin-addresses), including the selection of which address type to use.

## How to use a Bitcoin address 
Whether you’re sending or receiving on the Bitcoin [blockchain](https://strike.me/learn/what-is-a-blockchain), you’ll need to use a Bitcoin address. Within the [Strike](https://strike.me/download) app you can send to or receive from a Bitcoin address, using either your bitcoin or cash balance, and Strike will convert the funds before completing your transaction.

While each Bitcoin wallet app is different, they typically follow the same procedure:

### How to receive to your Bitcoin address:
1. **Generate an address:** Within your Bitcoin wallet app, select the “Receive” button, which will show one of your Bitcoin addresses (sometimes called an “on-chain” address).
2. **Share your address:** Copy the address or display it as a QR code to share it with the person who wants to send you bitcoin.
3. **Receive funds:** The person who is sending bitcoin will paste or scan your address into their wallet app, enter an amount to send, set a [fee to pay](https://strike.me/learn/what-are-bitcoin-fees/), and then tap “Send” to broadcast the transaction.

### How to send to a Bitcoin address:
1. **Prepare to send:** Within your Bitcoin wallet app, ensure you have sufficient funds to be able to send, then select the “Send” button.
2. **Scan or paste the address:** Within your wallet app, scan or paste your recipient’s Bitcoin address, being sure to double-check that it’s the correct address.
3. **Enter an amount:** Select an amount to send and set a [fee to pay](https://strike.me/learn/what-are-bitcoin-fees/), before tapping “Send” to broadcast the transaction.

For both sending and receiving, once a transaction is broadcast by the sender’s wallet, the transaction will be added to a block on the [blockchain](https://mempool.space), typically within minutes depending on the sender’s fee paid. The recipient’s wallet will monitor Bitcoin’s blockchain and detect the new transaction that is destined for one of its Bitcoin addresses. Once the transaction has been “confirmed” by being added to a block on the blockchain, the recipient’s wallet balance will be updated to reflect the received bitcoin.

After this process, the recipient now owns the bitcoin, since the only way to spend that bitcoin is by authorizing a new transaction using the private keys that were used to create the Bitcoin address. Depending on the wallet, you might have to wait for 1-6 blocks to pass (~10-60 minutes) before the transaction is considered finalized.

Once a bitcoin transaction is added to the blockchain, it’s permanent and cannot be reversed. This makes it crucial to double-check where you’re sending your bitcoin and to ensure you trust the recipient. Unlike bank transfers, there’s no way to recover funds after sending bitcoin, which is especially important to remember while being vigilant and wary of [potential scams](https://strike.me/learn/how-to-avoid-bitcoin-or-crypto-scams).

To learn about managing your bitcoin addresses learn about address management [best practices](https://strike.me/learn/how-to-manage-bitcoin-addresses).