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

A blockchain is a database – a way to store and organize information. Blockchains are used for secure, transparent, and tamper-proof record keeping, such as for financial transactions like Bitcoin.

![](https://www.datocms-assets.com/99305/1704930836-learn-what-is-a-blockhain-state-hero.png)

Blockchains are a new kind of database.

They work by organizing information as a sequence of grouped updates, called “blocks”. In Bitcoin, the updates are transactions being sent peer-to-peer. Each block contains a reference to the preceding block, forming an unbroken “chain of blocks” that go all the way back to the blockchain’s beginning.

It’s kinda like an accountant’s ledger book, where each page in the book contains a list of transactions and includes a special note, referencing the previous page’s transactions. 

Traditional databases, like the ones used by banks for financial transactions, are centralized, which means the access and control of information is managed by a central authority (the bank). It’s kinda like a master copy of the ledger book, where only the owner of the book can control it and make changes.

Blockchains, on the other hand, use a decentralized model. They work within a network of independent peers, each participating in the operation of the database by following standardized rules for how and when to update the information. It’s like everyone having their own copy of the ledger book and all agreeing on the same rules for how and when to make changes to their own copy.

This lack of a central authority means blockchains offer a way to manage information, while preventing corruption, obstruction, or manipulation of the database by any individual or group.

Bitcoin is by far the largest, most secure, and robust blockchain.

## How does a blockchain work?
Blockchains are based on rules.

A blockchain’s software contains the rules that govern its operations. For Bitcoin’s blockchain, the rules define things like the supply of bitcoin, the formatting of transactions, and the timing and size of blocks. You can read more about Bitcoin’s rules [here](https://strike.me/learn/how-does-bitcoin-work).

Computers can download and run the software, thereby becoming a “node” in the blockchain's network and enforcing its rules. By running the software, nodes can check for themselves whether the information within the blockchain follows the rules, while also participating in the process for adding new blocks.

So how are new blocks added if nobody is in charge?

The solution is a process called [mining](https://strike.me/learn/what-is-bitcoin-mining). Here’s the basics of how mining works with Bitcoin:

1. **Broadcasting:** A new proposed transaction is broadcast to the network of nodes, containing an amount to send, a destination, and the required signature to authorize the transaction. 
2. **Checking:** Each node checks the validity of the transaction to ensure it follows the rules, such as valid amounts, signatures, and formatting.
3. **Mining:** Computers (called “miners”) perform computational work called “[hashing](https://strike.me/learn/what-is-a-hash-function),” in a competitive “lottery-style” competition to win the right to add the next block to the blockchain.
4. **Grouping:** The miner who finds a winning hash gets to assemble a group of proposed transactions into a block and broadcast it to the network, which includes a reward of newly issued bitcoin payable to themselves. The winning hash acts as mathematical “proof of work” that the miner expended computational power (aka hashpower), to “mine the block”.
5. **Appending:** All nodes check that the new block’s data is valid and that the hash was legitimately won, before adding that block to their own copy of the blockchain.
6. **Repeating:** The new block serves as an input for the next round of the lottery and the process repeats.

If there’s ever conflicting versions of the blockchain, the version with the most computational work applied is correct. 

Every 2 weeks the lottery’s difficulty automatically adjusts (aka the “difficulty adjustment”), to ensure that the lottery is won every 10 minutes, thereby ensuring consistent block intervals and predictable supply issuance of bitcoin. 

![](https://www.datocms-assets.com/99305/1704930872-learn-what-is-a-satoshi-state-hero.png)

## Why are blockchains useful?
With a blockchain, any miner or node can disconnect and reconnect to the network, and easily verify what has taken place in their absence. This means that the blockchain doesn’t exist in any single location or computer, but rather equally across all copies of the blockchain.

It’s a database that exists everywhere, yet nowhere in particular.

Blockchains offer significant advantages over traditional databases, making them ideal for certain applications, such as peer-to-peer electronic cash.
* **No central authority:** There is no individual or group capable of manipulation or unilateral changes to the rules, or blocking or reversing transactions.
* **Transparency:** Each node can verify the validity of every transaction to ensure that everyone is following the rules, which are publicly available for all to see.
* **Immutability:** Once a transaction is added on the blockchain (aka “confirmed”), reversing it requires an amount of computational work that surpasses all other competing versions of the blockchain that contain the transaction, making it virtually impossible to alter transactions after multiple blocks have passed.
* **Democratization:** Anyone can participate as a node or a miner, verifying transactions and enforcing the rules that they support.
* **Internal incentives:** Blockchains can sustain themselves based solely on their own incentives. Miners get rewarded for their work, nodes get their desired transactions confirmed, and everyone follows the rules because the value of rewards and transactions is based on rule-following.

## Decentralization is paramount
In centralized systems, such as financial databases, trust is required to ensure the central authority doesn’t manipulate transactions or unilaterally change the rules to arbitrarily create money or block access to funds.

A blockchain with only a few nodes or miners requires trust that they won’t collude, be coerced, or act on mis-aligned incentives. Given the financial value of blockchain transactions, there is always the risk that if someone can manipulate the blockchain for financial gain, they will. 

Centralization of a blockchain can take many forms:
* A small total number of nodes or miners
* A concentration of network hashpower in a few miners or groups of miners
* Miners or nodes operating in a single country, subject to that country’s laws
* A leadership team that can influence or dictate rule changes

Bitcoin’s software and entire transaction history are small enough to be downloaded and verified on a typical laptop, making it accessible for countless people to run a node. Mining is a globally competitive industry, with many independent operators worldwide and who aim to avoid excessive consolidation to protect the blockchain’s integrity. Ensuring Bitcoin’s continued decentralization is a shared interest for everyone in the community.

Other blockchains often lack sufficient decentralization. If they rely on leadership teams or a small number of nodes or miners to verify transactions, they are vulnerable to failures, corrupt incentives, or attacks. Centralized blockchains are simply databases that require trust in a central authority or group, risking  manipulation, obstruction, or changes made for their own benefit.

A decentralized database for security, transparency, and integrity

What is a blockchain?

Proof of Work (PoW) is the foundational mechanism that secures Bitcoin and enables it to function as a peer-to-peer electronic cash system. 

![](https://www.datocms-assets.com/99305/1752018650-learn-what-is-proof-of-work-state-hero.png)

At its core, proof of work is a process whereby certain participants in the Bitcoin network, called “miners”, compete to solve a computational puzzle in a lottery-style competition. The first miner to solve the puzzle earns the right to add a new block of transactions to Bitcoin’s [blockchain](https://strike.me/learn/what-is-a-blockchain) and gets paid a reward in bitcoin.

While the terms “proof of work” and “[mining](https://strike.me/learn/what-is-bitcoin-mining)” are often used interchangeably, they refer to different aspects of the system. Proof of work is the protocol rule—it defines the criteria a new block must meet to be considered valid. Mining, on the other hand, is the competitive process by which participants attempt to satisfy that rule, expending electricity and hardware resources to find a solution to the puzzle. In essence, proof of work is the mechanism; mining is how it’s carried out.

## Why does proof of work exist?
The problem that proof of work solves is how to operate a peer-to-peer electronic cash system, without any central authority in charge. For such a system to work, it needs to:
* Process and prioritize transactions
* Issue new bitcoin into circulation
* Protect historic transactions against manipulation
* Resolve disputes regarding valid vs. invalid transactions
* Defend the system from malicious attacks

Proof of work solves this challenge by using industry-leading cryptography and aligning the incentives of three main parties: bitcoin holders, nodes, and miners. 
* **Holders:** People who are holding and transacting bitcoin
* **Nodes:** Computers running Bitcoin’s software, thereby enforcing its rules
* **Miners:** Computers working to solve the computational puzzle

Bitcoin holders broadcast their transactions to the network, where nodes quickly verify that each transaction follows [Bitcoin’s rules](https://strike.me/learn/how-does-bitcoin-work). These transactions remain “unconfirmed” until a miner solves the current proof of work puzzle – expending resources like electricity and hardware – to propose a new block that includes those transactions, along with a reward of newly issued bitcoin. Nodes then independently verify that the puzzle’s solution is valid and that all included transactions follow the rules before adding the block to their own copy of the blockchain, thereby *confirming* the transactions.

This system creates an intentional *asymmetry*: 
* Solving the puzzle is difficult and costly for miners
* Verifying the puzzle’s solution is fast and easy for nodes

The asymmetry creates an incentive structure for Bitcoin. Miners are incentivized to include only valid transactions, since any invalid block will be easily rejected by the nodes, wasting the miner’s effort. Meanwhile, nodes are incentivized to enforce the rules they support and ensure their own transactions are properly validated and secured.

By requiring miners to include proof of their computational work in each block, Bitcoin imposes a real-world cost on transaction processing and issuance of new bitcoin. This cost acts as a deterrent to manipulating, reversing, or blocking transactions. It also establishes a mechanism for resolving transaction disputes: if two competing versions of the blockchain emerge, the one with the most accumulated proof of work is deemed valid.

Because every node maintains its own independently verified copy of the blockchain – and because anyone can run a node or mine – Bitcoin operates as a decentralized financial system, free from centralized control or enforcement.

## How does proof of work… work?
So what is this cryptographic puzzle that miners solve?

At the heart of proof of work is “[hashing](https://strike.me/learn/what-is-a-hash-function)”, a cryptographic process that takes an input of any size to produce a fixed-size *output* (aka "hash"), which looks like a jumbled sequence of numbers and letters. The miners’ “work” is simply re-running a hash function with slightly different inputs to try and produce a hash that meets certain criteria set by the Bitcoin network. 

This process is akin to a decentralized lottery, where the more computational resources a miner deploys, the more likely they are to find a valid or “winning” hash. Hash functions have [unique properties](https://strike.me/learn/what-is-a-hash-function) that make them suitable for proof of work:
1. **Variable input, fixed output:** Any length of data always produces a hash of the same length.
2. **Deterministic:** The same input will always produce the same hash.
3. **One-way:** It is computationally infeasible to derive the input from the output.
4. **Unpredictable:** Even the slightest variation of the input will produce a completely different and seemingly random output.
5. **Collision-resistant:** Two different inputs will not produce the same hash.
6. **Creation vs. verification asymmetry:** Generating a valid hash is very hard, but checking its validity is easy.

What this means is that there’s no known way to produce a valid hash (aka “solve the puzzle”), except through the trial-and-error process of re-running the hash function using different inputs.

So what are the inputs?

Miners combine *fixed* data and *variable* data into a single input to run their hash function:
#### Fixed data:
* **Previous block's hash:** A hash of the previous block’s content, which links the current block to its predecessors in an unalterable chain of blocks.
* **Summary of transactions:** A hash that summarizes all the current block’s transactions in a structure called a “Merkle root” for ease of validation.
* **Current timestamp:** A mark of time for when the miner began working on the block.
* **Difficulty target:** A value defined by the Bitcoin network that determines the criteria for what is deemed as a valid hash.

#### Variable data:
* **Nonce:** A random number miners change to produce a new hash with each attempt.

Miners repeatedly modify the *nonce* and re-run the hash function until they produce a hash that falls within the network's current [difficulty target](https://strike.me/learn/what-is-bitcoins-difficulty-adjustment). When a valid hash is found, the miner broadcasts the new block to the network, which includes a batch of unconfirmed transactions and a transaction paying themselves the [block reward](https://strike.me/learn/how-many-bitcoin-are-there/).

Nodes then independently verify that the hash is correct and that all included transactions follow Bitcoin’s rules. If valid, each node adds the block to its own copy of the blockchain. This new block’s data becomes part of the fixed input for the next proof-of-work round, and the cycle continues. 

## How proof of work adjusts the difficulty of mining
As miners deploy more hashpower, they can attempt more hashes per second, thereby boosting their chances of solving the proof-of-work puzzle first. This can lead to blocks being found faster than Bitcoin’s target average of 10 minutes.

To maintain a stable [issuance schedule](https://strike.me/learn/what-is-the-bitcoin-supply-schedule) and pace of transactions, the Bitcoin software automatically re-adjusts the mining difficulty every 2,016 blocks (about every two weeks). This ensures consistent timing, regardless of how many miners are active.
* If blocks are found too quickly, the difficulty increases.
* If blocks are found too slowly, the difficulty decreases.

This adjustment changes the [difficulty target](https://strike.me/learn/what-is-bitcoins-difficulty-adjustment) – the threshold below which a hash must fall to be valid. Since hashes are random, a lower target means fewer possible valid hashes exist, requiring more trial and error and making winning more difficult.

Think of it like a lottery: reducing the number of “winning numbers” means it takes more total guesses (and more time) to win.

What does this mean?

Miners are incentivized to operate, so long as the expected bitcoin reward exceeds their expenses. If difficulty rises too high, some miners will shut down, reducing network hashpower, slowing block production, and triggering a difficulty decrease in the next adjustment. This feedback loop keeps mining competitive yet efficient, and ensures Bitcoin’s transaction flow and issuance rate remain steady and decentralized.

## What proof of work means for Bitcoin
Proof of work is the foundation that enables Bitcoin to operate as a peer-to-peer electronic cash system, without any central authority:
* **Transaction consistency:** A new block of transactions is confirmed approximately every 10 minutes, maintaining a predictable pace of transactions.
* **Transaction permanence:** Because each block’s [hash](https://strike.me/learn/what-is-a-hash-function) is linked to its predecessor, altering or reversing transactions would require redoing all proof of work from that point forward – an economically infeasible task.
* **Scalability:** There’s no limit on node operators or miners, and with layer 2 solutions like the [Lightning Network](https://strike.me/learn/what-is-the-lightning-network), Bitcoin can scale as a truly decentralized financial network.
* **Network security:** Blocking, reversing, or manipulating transactions, or otherwise attacking the network is both verifiably impractical and economically infeasible.
* **Incentive alignment:** Miners must expend electricity and hardware resources, ensuring only economically rational participants continue mining.
* **Global energy optimization:** Miners naturally seek the cheapest energy sources—often stranded, wasted, or renewable—leading to a more geographically distributed and energy-efficient mining ecosystem.
* **Protocol integrity:** All participants follow the same rules enforced by the software. Any miner submitting invalid blocks will have their work rejected by the network’s nodes.

Beyond its technical function, proof of work imbues bitcoin with a form of intrinsic value. Just as a gold coin can only come into existence as a result of physical labor and expended energy spent to extract and refine metal from the earth, a bitcoin can only come into existence as the result of real-world energy expended to mine a block.

Each bitcoin, in essence, is a manifestation of real-world expended resources (electricity and hardware). This stands in sharp contrast to fiat systems, where cash can be printed at the discretion of central banks, often without transparency or limitation.

In this way, proof of work transforms bitcoin from abstract digital data into a provably scarce, costly-to-produce, and manipulation-resistant form of money. It is the mechanism that enables decentralized trust and anchors bitcoin’s role as a durable, global store of value.


Enabling Bitcoin operations, without a central authority

What is proof of work?

Bitcoin mining is the process of adding new blocks of transactions to Bitcoin’s blockchain and is the innovation that lets Bitcoin to function as peer-to-peer electronic cash. 

![](https://www.datocms-assets.com/99305/1710202355-learn-what-is-bitcoin-mining-state-hero.png)

Legacy forms of electronic cash (dollars, euros, yen) are digits in databases of financial institutions, like banks. Trust is required that those institutions won’t block, limit, manipulate, or arbitrarily print money and cause inflation – a trust that has been repeatedly betrayed.

Bitcoin offers a way to manage a financial database without needing any such central authorities. Bitcoin’s solution is a [blockchain](https://strike.me/learn/what-is-a-blockchain), a system that democratizes the management of the database by awarding the rights to update the database in a fair, public, and transparent way, in a process known as “mining”.

Mining works kinda like a public lottery system, where any computer (called a “miner”) can participate by doing specific computational work, called “[hashing](https://strike.me/learn/what-is-a-hash-function)”. The more computational power a miner deploys to produce hashes (aka hashpower), the more likely they’ll be to win the lottery and earn the right to add the next block of transactions to the blockchain and get paid a reward for doing so.

Bitcoin mining serves four main functions:
1. **Confirming new transactions:** New bitcoin transactions are assembled into groups, called “blocks,” and when a block is added to the blockchain, these transactions are confirmed.
2. **Re-asserting all previous transactions:** Each new block serves to re-confirm the validity and permanence of all preceding blocks’ transactions upon which it’s been added.
3. **Issuing new bitcoin:** Miners receive a reward for their work, which includes an amount of newly issued bitcoin, following Bitcoin’s strict [supply schedule](https://strike.me/learn/what-is-the-bitcoin-supply-schedule).
4. **Securing the network:** The global network of miners deploying their computational power makes it prohibitively expensive to prevent or reverse transactions that have been added to the blockchain.

Mining is the open and competitive process of adding blocks of transactions to Bitcoin’s decentralized blockchain, without any need for a central authority. 

## How does Bitcoin mining work?
Bitcoin mining works in conjunction with Bitcoin node-operating.

Nodes are computers that run Bitcoin’s software, forming the Bitcoin Network and enforcing its [rules](https://strike.me/learn/how-does-bitcoin-work), such as its supply limit and the timing and sizing of blocks. Nodes maintain their own copies of the Bitcoin blockchain (the history of transactions), and are continuously checking to make sure that proposed transactions and new blocks follow Bitcoin’s rules. 

Miners work to add new blocks, which must be accepted by the nodes as valid for them to add it to their copies of the blockchain. 

Here’s the basics of how Bitcoin mining works:
1. **Transaction collection:** Miners gather proposed transactions that have been broadcast by users and check that they follow bitcoin’s rules, then assemble them into a group, called a “block”. Transactions that pay [higher fees](https://strike.me/learn/what-are-bitcoin-fees) are more likely to be added sooner.
2. **Hashing:** Miners perform [hashing](https://strike.me/learn/what-is-a-hash-function), which takes both fixed and variable input data to try to produce an output that meets specific criteria set by the Bitcoin protocol. Since hashes are unpredictable, the only way to produce a desired output hash is through trial and error, by continuously re-running the hash function with a new variable input data.
3. **Proof of work:** The first miner to find a hash that meets the criteria broadcasts their new block of transactions to the network. The block includes their winning hash to prove that they performed the necessary work.
4. **Block validation:** Nodes receive the new block with its proof of work and verify that all its transactions follow Bitcoin’s rules and that the hash meets the necessary criteria. If valid, the nodes append the new block to their copy of the blockchain.
5. **Reward:** The successful miner includes a set amount of newly issued bitcoin in the new block, payable to themselves (known as the “block subsidy”), as well as the fees from the transactions included in the block. This reward acts as the incentive for miners to continue operating and as the mechanism for new bitcoin to be issued.
6. **Repeat:** Once a new block has been added, that block serves as part of the fixed input data for the next round of hashing, and the process repeats.
7. **Difficulty adjustment:** Approximately every two weeks, Bitcoin’s software automatically adjusts the difficulty of output hash’s criteria to ensure blocks are mined roughly every 10 minutes, regardless of the total hashpower on the network. This ensures a steady and predictable issuance of bitcoin and pace of transactions, regardless of total hashpower.

If there are ever conflicting versions of the blockchain, the version that has the most proof of work applied to it is the correct one. Any miner can freely disconnect and reconnect, and easily verify what occurred in their absence, then continue hashing the latest block.

## Why is Bitcoin mining important?
Mining is a way to manage a financial database, without anyone in charge. 

Rather than a single master copy of a database held by a bank, Bitcoin’s blockchain is maintained equally across a decentralized network of nodes. The current state of the blockchain and the rules that govern it are established by consensus, not any individual’s authority. 

A leaderless financial database opens new possibilities for a monetary system:
* **Fixed money supply:** Bitcoin’s supply is immune from money printing and arbitrary inflation, since the [supply limit rule](https://strike.me/learn/how-does-bitcoin-work) is universally enforced and everyone is incentivized to keep it unchanged.
* **Immutable transactions:** Once a transaction is confirmed to the blockchain, it’s exceedingly difficult or impossible to alter. Changing a previous block’s transaction requires performing enough computational work to surpass all the work since that block was added. 
* **Financial freedom:** No individual or group can block, reverse, or manipulate transactions. Everyone is free to broadcast their transactions, and if it’s valid and pays the necessary market [fees](https://strike.me/learn/what-are-bitcoin-fees) it will be included in the blockchain.
* **Transparent monetary system:** Bitcoin’s blockchain is open and free to download, so that anyone can audit the transaction history, ruleset, and current supply for themselves.
* **Peer-to-peer electronic cash:** Bitcoin allows for direct transaction between parties, reducing costs, eliminating middle-men, offering scalability, and increasing transaction speeds (especially across borders). With the advent of the [Lightning Network](https://strike.me/learn/what-is-the-lightning-network) as a second layer to Bitcoin, transactions can be sent at lightspeed with low-to-no cost.

Bitcoin is a rules-based peer-to-peer electronic cash system that operates 24/7, and mining is the incentive-based innovation that makes it happen.

Running a global monetary system without a central authority

What is Bitcoin mining?

Bitcoin’s difficulty adjustment is what ensures new blocks are added to the blockchain at a consistent, predictable rate – regardless of how much computational power is deployed by miners.

![](https://www.datocms-assets.com/99305/1752018650-learn-what-is-bitcoin-s-difficulty-adjustment-state-hero.png)

The difficulty adjustment plays an essential role in Bitcoin’s [proof of work](https://strike.me/learn/what-is-proof-of-work) system. Proof of work is the mechanism whereby specialized computers compete in a decentralized lottery to solve a cryptographic puzzle. The first to solve the puzzle earns the right to add a new block of transactions and collect a reward in bitcoin.

But proof of work is more than a lottery – it’s the solution to a foundational problem: how to operate a *peer-to-peer electronic cash system without any central authority*. To do this, a system must:
* Confirm and sequence transactions in a tamper-resistant way
* Prevent fraudulent or conflicting transactions
* Issue new currency without relying on trust or discretion
* Defend against manipulation by malicious actors
* Maintain global consensus across a decentralized network

Proof of work achieves this by requiring miners to prove their expenditure of real-world resources – most notably electricity and hardware – before their proposed blocks are considered valid. The cost to create a block makes dishonesty expensive, while verification by nodes remains cheap and automatic. This creates a system of asymmetric validation that aligns the incentives of all participants: miners, nodes, and users.

A core strength of proof of work is its *scalability*. 

Since there is no maximum number of miners and no authority deciding who may participate, the system must accommodate an *unknown and constantly changing* amount of computational power (aka “[hashpower](https://strike.me/learn/what-is-a-hash-function/)”). The question is: how?

That’s where the difficulty adjustment comes in.

Rather than fixing the amount of computational work required in absolute terms (a measure of power), Bitcoin defines it in terms of *time*. The rules encoded in the [Bitcoin software](https://strike.me/learn/how-does-bitcoin-work) targets a new block approximately every 10 minutes. No matter how much hashpower is applied, the system continually and automatically re-adjusts how hard the proof of work puzzle is, ensuring that, on average, it still takes about 10 minutes of collective effort to produce the next block.

This approach allows Bitcoin to remain both decentralized and scalable. It doesn’t matter whether there are a thousand miners or a million – what matters is how much *time* worth of computation is needed. The difficulty adjustment translates variable hashpower into a stable tempo, anchoring Bitcoin’s issuance schedule and transaction flow.

## Why Bitcoin adjusts the difficulty of mining
It all comes down to decentralization.

To avoid any central authority from controlling Bitcoin’s ledger (the blockchain), management of the ledger is designed to be open, transparent, and leaderless.. In this system, anyone around the world can compete in the process of adding new blocks of transactions and earn newly issued bitcoin as a reward.

This approach introduces a unique scaling challenge. Bitcoin must adapt to changing network conditions, including:
* **Rising hashpower:** More miners joining the network and contributing computational power.
* **Falling hashpower:** Miners shutting down due to economic or operational factors.

Without a flexible system, Bitcoin blocks would be produced at unpredictable intervals, which would have negative consequences for the system as a whole.
* **Unpredictable issuance:** Bitcoin’s fixed supply schedule could be accelerated or decelerated, undermining its predictability and auditability.
* **Reduced security:** Rapid block production would limit time for global propagation, increasing the risk of forks and chain reorganizations.
* **Unstable confirmations:** Transaction finality would become inconsistent or ambiguous.
* **Centralization pressures:** High-speed mining would advantage well-resourced operators, discouraging broad participation.

The difficulty adjustment solves the problem by making the difficulty of the mining puzzle itself dynamic. Every 2,016 blocks, Bitcoin software adjusts the difficulty target to maintain a 10-minute average block time – regardless of the level of hashpower. This mechanism ensures Bitcoin remains stable, secure, and decentralized, even as global mining activity fluctuates.

## How the difficulty adjustment works
The cryptographic puzzle miners solve is based on a [hash function](https://strike.me/learn/what-is-a-hash-function). Miners repeatedly run this function, modifying a piece of variable data called a "nonce," in an attempt to produce a hash that meets the Bitcoin network’s difficulty target. Because hash functions are unpredictable, the only viable method is trial and error—similar to buying lottery tickets.

So, what is the difficulty target?

Hash outputs are 256-bit numbers – large, fixed-length binary values that are typically expressed in hexadecimal format. These numbers are deterministic for a given input but appear random and are computationally unpredictable. The difficulty target sets a threshold: only hashes below this threshold are valid. Adjusting this target expands or contracts the range of acceptable hashes:
* **Higher difficulty target:** More possible valid hashes → blocks are found faster.
* **Lower difficulty target:** Fewer valid hashes → blocks take longer to find.

Think of it like a lottery where you randomly guess a number between 0 and 1 billion. If the target is 10 million, any number below that is a winner. If the target is decreased to 1 million, the odds of winning decrease tenfold, requiring far more guesses to win.

Every 2,016 blocks (roughly every two weeks), the Bitcoin software, run by the network of nodes, recalculates the average block time:
* If the average block time is less than 10 minutes, the difficulty increases.
* If the average block time is more than 10 minutes, the difficulty decreases.

Although any individual block may take more or less than 10 minutes, the difficulty adjustment ensures that, over the long run, the average time between blocks remains close to 10 minutes – regardless of how much total hashpower is in the network.
Upon readjustment, the updated difficulty target is embedded in the next block and enforced by all nodes going forward. This ensures all miners work under the same global condition, maintaining consensus.

## What the difficulty adjustment means for miners
[Bitcoin mining](https://strike.me/learn/what-is-bitcoin-mining/) is a globally open and permissionless activity. Anyone, anywhere, can join and contribute hashpower by submitting guesses (hashes). Specialized hardware is far more efficient, producing many more hashes per second with less electricity than standard computers.

The difficulty adjusts every 2,016 blocks based on the total network hashpower:
* When hashpower increases, blocks are found faster, and the difficulty rises.
* When hashpower decreases, blocks slow down, and the difficulty falls.

This creates a self-regulating feedback loop that stabilizes block production and regulates miners’ operations. Miners earn revenue in bitcoin, but incur expenses in fiat (dollars, euros, pesos, etc.).
* If expected revenue exceeds expenses, miners are incentivized to expand.
* If expenses exceed revenue, miners are incentivized to shut down.

Miners are therefore exposed to both bitcoin’s price and network difficulty. A new mining operation coming online anywhere in the world will increase total hashpower, accelerating block times and raising difficulty at the next adjustment. Only efficient, profitable miners can stay competitive, while inefficient ones are naturally pushed out. 

Only miners with low operating costs—especially electricity—are likely to remain competitive. Over time, market forces compel miners to seek out the most affordable and efficient energy sources. High marginal-cost electricity, such as fossil fuels, becomes less viable, while low or zero marginal-cost sources prove more sustainable for mining.

These energy sources often include:
* **Wasted energy:** Surplus electricity that would otherwise go unused (e.g., hydro spillover)
* **Stranded energy:** Remote power sources without economic transmission options (e.g., flared gas that would otherwise be released as methane)
* **Renewable energy:** Abundant but variable supply (e.g., wind, solar, hydro)

Since electricity is the dominant ongoing expense in mining, competitive pressures naturally drive miners to optimize for energy efficiency. This dynamic ensures that mining remains geographically distributed, economically sensible, and increasingly aligned with efficient energy use.

Scaling Bitcoin’s operations to unknowable sizes

What is Bitcoin’s difficulty adjustment?

Bitcoin fees (aka transaction fees or on-chain fees) are an amount of bitcoin paid to miners as an incentive to include a transaction on the blockchain.

![](https://www.datocms-assets.com/99305/1710202331-learn-what-are-bitcoin-mining-fees-state-hero.png)

Bitcoin transactions are recorded on a decentralized database called a [blockchain](https://strike.me/learn/what-is-a-blockchain), which is maintained by a global network of nodes and miners. 

Miners are computers that compete to add the next block of transactions to the blockchain in a process known as [mining](https://strike.me/learn/what-is-bitcoin-mining). To incentivize miners to include their transactions in the blocks they add, users can pay fees. Fees are a way of prioritizing transactions in a fair and open system.

Prioritization of transactions is necessary due to the limited block space in Bitcoin. Each block has a fixed capacity, preventing unlimited transactions per block. Without this limit, the entire blockchain would become impractically large for regular people to download and verify, compromising decentralization and security.

## The market for fees
Bitcoin fees operate on a free-market principle, where users can set any fee for their transactions and miners can select any transactions to include in the blocks they add. Paying higher fees increases the likelihood that a transaction will be confirmed sooner, while lower fees may result in delayed confirmations, or simply never being confirmed at all. By having a fee market, frivolous or “spam” transaction can be prevented.

Fees are one of the two components of the block reward, along with the block subsidy, which is how miners earn their revenue. With the subsidy steadily diminishing over time according to Bitcoin’s supply schedule, fees become an increasingly important source of revenue. This revenue incentivizes miners to continue securing the network, making it impractical for anyone to block, manipulate or reverse transactions. 

Overall, fees serve as a mechanism to prioritize transactions, prevent spam, and ensure network security as a source of miner revenue.

## How do fees work?
Bitcoin transactions have inputs and outputs. The input is where the bitcoin is coming from, (referencing a previous transaction’s output) and the output is the destination of the transaction.

This is known as the [UTXO](https://strike.me/learn/what-is-a-utxo) (“Unspent Transaction Output”) model, where each input is simply an output of a previous transaction. What this means is that amounts of bitcoin exists as discrete portions, rather than an account balance, and have transaction history. 

The difference between the input amount and the output amount is the fee, payable to the miner.

Since block space is limited, fees are based on the data size of a transaction rather than its financial value. This means a transaction involving 9 bitcoin could occupy the same bytes of data and pay the same fee as a transaction involving 1 bitcoin. Since transactions can have one or more inputs and one or more outputs, the more complex a transaction is, the more data it will require and more fees.

Fees are measured in satoshis per virtual byte, or “sats/vbyte”. You can check out the current market rate for fees at [mempool.space](https://mempool.space).

![](https://www.datocms-assets.com/99305/1705615422-learn-how-do-i-dca-into-bitcoin-state-hero.png)

## Inputs, outputs and fees
Transactions can have one or more inputs and one or more outputs, which requires more data as they become more complex. The difference between the total input amount and the total output amount are the fees, which are paid to the miner.

For example, if you want to send 0.2 bitcoin to a friend and you have a UTXO of 1 bitcoin, your transaction will look like this:
* **Input:** 1 bitcoin UTXO
* **Output 1:** 0.2 bitcoin to your friend’s address
* **Output 2:** 0.799 bitcoin back to one of your addresses (aka a “change address”)
* **Fee:** The difference of 0.001 bitcoin goes to the miner

Valid transactions that have been broadcast by users, but not yet been added to the blockchain are called “unconfirmed” transactions. These transactions are verified by the network of nodes, then sit and wait in their memory pool (aka “mempool”). The miner that finds a winning hash earns the right to add the next block to the blockchain and gets to select which transactions from the mempool to include in the block.The higher the fee, the more likely a transaction will be added by the miner in their block. 

## What makes fees go up or down?
In Bitcoin’s early days, fees were very low, but as Bitcoin adoption has grown, so has network traffic and the competition to get transactions confirmed quickly. Since fees operate in a free market, more transactions can bid up the fee price.

Several factors influence fee prices: 
* **Network traffic:** When there are lots of people trying to get their transactions confirmed on the blockchain, the competition for the limited block space drives up fees.
* **Data size:** Transactions with more inputs and outputs, or those using complex scripts, occupy more data and thus incur higher fees.
* **Transaction type:** Some transactions, such as those with multi-signature or older formats, use more data than newer, more efficient formats, like SegWit.

If you must make an on-chain transaction immediately, you are at the mercy of the fee market. Paying the current rate for the next block doesn’t necessarily guarantee confirmation in that block. Overpaying fees can be costly and can mean the transaction isn’t very economical. However, underpaying or setting a fee too low could delay your transaction by several blocks, potentially hours.

## Fee management strategies
To manage fee costs, try these strategies:
1. **Monitor fee rates:** Check sites like [mempool.space](https://mempool.space/graphs/mining/block-fee-rates#1y) to monitor current fee rates and identify periods of higher or lower fees.
2. **Target a few blocks away:** If you are able to wait, consider delaying your on-chain transaction or setting your fees to target multiple blocks away instead of the next block.
3. **Manage your UTXOs:** If you self-custody your bitcoin, it’s essential to manage your UTXOs, especially their sizes. This can ensure that even in high-fee environments your bitcoin won’t become uneconomical or unspendable. Read more about UTXO management [here](https://strike.me/learn/what-is-a-utxo).
4. **Use the Lightning Network:** Lightning enables real bitcoin transactions off-chain, avoiding block times and on-chain fees by using direct payment channels. The [Lightning Network’s](https://strike.me/learn/what-is-the-lightning-network) routing fees are cheaper than on-chain fees, making Lightning ideal for smaller payments or when on-chain fees are high.
5. **Use the Strike app:** [Strike](https://strike.me/download) offers free on-chain withdrawals, so you can skip the fees altogether. Strike is able to offer free on-chain withdrawals by combining and batching multiple transactions together and delaying the broadcast of the transactions by 12-48 hours to target optimum fee rates.

The Strike app supports payments via on-chain, Lightning, or directly between users with either cash or bitcoin, as a seamless experience. When making an on-chain payment, you can select between Priority, Standard, or Flexible delivery times, which will adjust the fees for your transaction. Flexible delivery times (aka free on-chain withdrawals) pay no fees. 

The fees paid to miners to get transactions confirmed

What are Bitcoin fees?

Hash functions are mathematical functions, which are used in cryptography, information security, and finance. Due to their unique properties and reliability, they’re used in Bitcoin for security, privacy, and in Bitcoin mining operations.

![](https://www.datocms-assets.com/99305/1704930845-learn-what-is-a-hash-function-state-hero.png)

A hash function takes an input and produces an output (called a “hash”). The input is information of any size, while the output will always be of a fixed-length, typically as a sequence of numbers and letters. 

It’s kinda like a machine, where raw materials are the inputs and a standard-sized finished product is the output.

The specific ways that hash functions take inputs to produce hashes, as well as the unique relationships between inputs and hashes, have led to their widespread use across different industries. Here’s a breakdown of the important features of hash functions: 

1. **Variable input, fixed output:** Regardless of the length of the input – whether it's a single character or an entire book – the hash that’s produced will always be the same length. This uniformity of outputs is crucial for predictability in storage and processing.
2. **Deterministic:** Given a particular input, a hash function will always produce the exact same hash, no matter how many times you repeat it. This repeatability is useful for verification purposes, as any change to the input, such as changing a single letter in a book, will result in a different hash.
3. **One-way:** Hash functions are designed to be one-way, meaning you can use an input to produce a hash, but you can’t take a hash and figure out what was its input. While the process of generating a hash from an input is fast and easy, the reverse process of generating the input from a hash is for all intents and purposes impossible.
4. **Unpredictability of the hash:** It's impossible to predict the hash of a given input without actually processing it through the hash function. This unpredictability is a security feature, as it prevents potential attackers from deducing the input just by looking at the hash.
5. **Collision-resistant:** Two different inputs should not produce the same hash, which is known as a “collision.”  
6. **Creation vs. verification asymmetry:** Since the hash is unpredictable, creating a hash with specific characteristics (like a hash that begins with 5 zeros: “00000”) is computationally intensive and time-consuming. The only known way to do this is with trial and error, by simply running the hash function over and over again with new inputs. However, once an input has been found that produces a desired hash, it’s quick and easy to verify that the input corresponds to the output. This asymmetry between producing a specific hash and verifying its validity is particularly important in systems that rely on proof-of-work (Bitcoin mining).

You can think of it like a city library that prints a unique stamp on each of its books, which completely captures all the information of that book. Even though some books are short-stories (small input data) and others are long novels (large input data), the stamp (aka the hash) is always the exact same size. Identical copies of a book will always have identical stamps, but changing even a single letter in a book will completely change its stamp. What’s more, it’s super easy to check if a book and a stamp match, but if you only have a stamp there’s no way to determine what book it belongs to.

![](https://www.datocms-assets.com/99305/1707356681-learn-what-is-the-strike-api-state-hero.png)

## How does Bitcoin use hash functions?
Bitcoin uses hash functions in its operations, including for Bitcoin mining, information integrity, and generating Bitcoin addresses.

The most commonly used hash function in Bitcoin is called “SHA-256” (aka Secure Hash Algorithm 256-bit). This hash function is an industry-standard function used widely in banking, information security, and communication networks. In all likelihood, if you click your web browser’s 🔒 icon next to the website’s URL and view the security certificate of the website, you’ll find it’s using SHA-256 to secure your connection.

Below are the different ways hash functions are used in Bitcoin.

### Bitcoin mining 
Bitcoin mining is a process that serves the dual-purpose of processing transactions and issuing new bitcoin into circulation. It involves computers (aka miners) using their computational power to produce hashes (aka hashpower), to compete to add the next block of transactions to Bitcoin’s blockchain and get paid a reward of new bitcoin for doing so. It’s a system that democratizes the updating of Bitcoin’s record of transactions, without relying on any central authority.

How does it work?

Miners take inputs to try and produce a hash with specific properties (a certain number of zeros at the start), which is set by the Bitcoin software. The input includes both fixed and variable information:
1. **Fixed information:** The Bitcoin software version, the previous block’s hash, the hash of the latest block’s transactions (aka a “Merkle root”), a timestamp, and the required difficulty setting set by the Bitcoin software.
2. **Variable information:** A number, called a “nonce.”

Since hashes are unpredictable, the only way to produce a desired hash is through trial and error, by re-running the hash function with a new variable nonce. The first miner to produce a valid hash broadcasts their finding and wins the right to add the next block to the blockchain. Although it’s hard to produce the desired hash, it’s trivially easy to check if the hash is valid, thus making verification an easy process. 

The Bitcoin software automatically adjusts the difficulty of this hashing process by changing the number of required leading zeros for the target hash to ensure new blocks are added on average every 10 minutes.

### Ensuring blockchain integrity
Hash functions are used to ensure the integrity of the data within each block. Every block in the blockchain contains the hash of the preceding block, which itself contains the hash of its preceding block, and so on, forming an unbroken “chain” of blocks (aka blockchain) going all the way back to Bitcoin’s beginning. 

Altering information in any previous block would dramatically change its hash, and consequently, the hash of every subsequent block since they are all connected through sequential hashes.

This makes tampering with block data essentially impossible, as any changes would be easily detectable and immediately rejected by all participants in the network.

### Ensuring transaction integrity
Hash functions are used to maintain transaction data integrity within each block. This is done using a data structure called a “Merkle tree,” which is a way to structure and organize hashes.

Here’s the basics of how transactions are hashed into Merkle trees:
1. **Hash transaction:** Each transaction within a Bitcoin block is hashed.
2. **Pair hashes:** The individual transaction hashes are then paired, hashed together.
3. **Repeat pairing:** The process of pairing and hashing is repeated over and over, using the resulting hashes from the previous step.
4. **Create a Merkle root:** The iterative process continues until one final hash remains, called the “Merkle root,” which is stored in the block’s header.

The “Merkle root” represents a complete summary of all the block’s transaction data. It’s a quick and space-efficient way to summarize data and it can be used to verify whether a specific transaction is included in a block, without needing all of the block’s data. It can also prevent tampering, as any tiny change to transaction data will completely change that transaction’s hash and all subsequent hashes, including the Merkle root. 

### Handling private and public keys
A private key is a secret, randomly generated numerical code used to sign transactions, providing proof of ownership and control over the bitcoin associated with a specific Bitcoin address. 
This private key is put through a series of cryptographic transformations, including hashing, to produce a public key. This process ensures that while the public key can be freely shared, the private key, crucial for accessing and transferring bitcoin, remains secret and infeasible to derive from the public information. 

### Generating Bitcoin addresses
Bitcoin uses a combination of SHA-256 and another hash function called RIPEMD-160 to generate Bitcoin addresses. A user’s public key, which is derived from their private key, is first hashed using SHA-256, then hashed again using RIPEMD-160. This two-step process, often coupled with a checksum for error checking, generates the Bitcoin address which is what is used for sending bitcoin.