19/07/2026
Nowadays, there is an ongoing debate about whether cryptocurrency is genuinely an investment or simply another form of gambling. However, there is also one more fundamental question that receives far less attention: when someone says they own Bitcoin or a cryptocurrency coin, what exactly do they own? Similarly, when someone says, “I sent X BTC to someone,” what exactly was sent? Let us first discuss the core nature of Bitcoin or cryptocurrencies and then we will come to the aspect of gambling in our next posts.
I am planning to write a series of posts on this topic to help everyone understand it in simple terms. You can follow the series using the hashtag .
In order to understand Bitcoin or cryptocurrencies, we have to dig deeper into the core functioning of it. Firstly, it is important to make it clear that bitcoin or any cryptocurrency is not gold or silver coin, a paper bank note, an independent computer file, or even a certificate issued by a specific central bank or any government [5]. Bitcoin is primarily a distributed transaction ledger that is governed by the cryptographic protocols and rules [1, 2]. From a digital perspective, what exists digitally is ledger data, or ledger records, which comprise of transactions, amounts, spending conditions, rules, signatures, hashes, and the set of spendable outputs. And to be clear, there is no separate digital object called “Bitcoin” that exists independently in these records. So, it will not be wrong to say that bitcoin or any crypto currency can therefore be understood as a set of ledger records protected by digital signatures and governed by rules specifying how and by whom its value may be spent (with some exceptions in some specific cases).
From the basic conceptual level, bitcoin can be compared to a shared spreadsheet that contains the entries that specify who is entitled to spend the particular amounts. However, different from an ordinary spreadsheet, no single person can change its entries, and each proposed change must satisfy the validation rules [2, 3]. Secondly, I used the word digital signature, which is basically a way to provide evidence that a person possessing the relevant key has authorized that transaction (in simple words, that particular change in ledger).
To understand this system from scratch, when bitcoin system began, there were no bitcoins already circulating the network, no one owned any bitcoin. The protocol basically allowed a miner who successfully produced a valid block (mine the block) to include a special transaction known as ‘coinbase transaction’. Beginning with the block after the genesis block, this transaction allowed a miner to create an output containing the protocol-defined subsidy, initially 50 BTC, which became spendable after the required maturity period [1, 5]. Thus, these newly issued bitcoins were not taken from any gold reserve or any other banking account, instead the protocol accepted a new entry and resulted in adding 50 bitcoins to the sheet/ledger (in a simpler manner).
But it is important to note that these bitcoins did not exist as separate digital objects. Instead, spendable bitcoin is represented through unspent transaction outputs (UTXOs) recorded on the ledger [4, 6]. A UTXO is an output of a previous transaction that has not yet been consumed by a later transaction.
So, when someone says that they sent/transferred 10 bitcoins, the specific coins do not move from one wallet to another, because no specific coins exist in the ledger, instead one or more UTXOs are referenced and consumed as a transaction input, while one or more new outputs are created [4, 5, 7]. In simple terms, it can be said similar to marking one or more existing entries as spent and creating new entries with new spending conditions in an updated spreadsheet/set of records. (One should also note that this UTXO mechanism is specific to Bitcoin and various other chains; some other chains like Ethereum use an account-balance model instead, though the core idea stays the same: you get a ledger entry, not an actual coin.)
Let us take a final example to understand it further. Suppose a person says he has 2 bitcoins and want to transfer 0.75 to another person. The transaction may consume the complete 2 BTC UTXO and create a new output of 0.75 BTC for the recipient, another output returning the remaining value to the sender as change, and a small difference representing the transaction fee. The original 2 BTC UTXO does not travel to the recipient. It becomes spent, and new UTXOs are created in its place. The spent output is not deleted from the blockchain’s historical record. It remains recorded as part of the transaction history, but it is removed from the current UTXO set and can no longer be spent again [4].
Disclaimer: I have written this post for general educations and information purposes and are my personal understanding about it. I have simplified certain technical concepts to make them easier to understand, so some details and exceptions may not be fully covered. This post does not constitute financial, investment, legal, or professional advice, nor is it a recommendation to buy, sell, or hold any cryptocurrency.
References:
[1] S. Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System,” 2008.
[2] C. Badertscher, U. Maurer, D. Tschudi, and V. Zikas, “Bitcoin as a Transaction Ledger: A Composable Treatment,” Journal of Cryptology, vol. 37, no. 2, Art. no. 18, 2024.
[3] F. Tramèr, D. Boneh, and K. Paterson, “Remote Side-Channel Attacks on Anonymous Transactions,” in Proceedings of the 29th USENIX Security Symposium (USENIX Security 20), 2020, pp. 2739–2756.
[4] S. Delgado-Segura, C. Pérez-Solà, G. Navarro-Arribas, and J. Herrera-Joancomartí, “Analysis of the Bitcoin UTXO Set,” in Financial Cryptography and Data Security Workshops, Lecture Notes in Computer Science, vol. 10958, 2019, pp. 78–91.
[5] F. Tschorsch and B. Scheuermann, “Bitcoin and Beyond: A Technical Survey on Decentralized Digital Currencies,” IEEE Communications Surveys & Tutorials, vol. 18, no. 3, pp. 2084–2123, 2016.
[6] D. Wu, S. Ren, Y. Bai, L. He, J. Liu, W. Wen, K. Ren, and C. Chen, “On the Atomicity and Efficiency of Blockchain Payment Channels,” in Proceedings of the 34th USENIX Security Symposium (USENIX Security 25), 2025, pp. 4053–4072.
[7] M. Bartoletti, R. Marchesin, and R. Zunino, “Secure Compilation of Rich Smart Contracts on Poor UTXO Blockchains,” in Proceedings of the IEEE 9th European Symposium on Security and Privacy (EuroS&P), Vienna, Austria, 2024, pp. 235–267.
