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Key Takeaways

Bitcoin is the first cryptocurrency to be ever created. It was created in 2008 and launched in 2009 by pseudonymous Satoshi Nakamoto.

Bitcoin runs on blockchain technology, which works like a public ledger. All Bitcoin transactions are verified by a network of nodes spread around the world.

Bitcoin is decentralized, transparent, and open source, making it a popular alternative to traditional financial systems.

What Is Bitcoin?

Bitcoin is essentially digital money. It is the first cryptocurrency ever created, announced in 2008 (and launched in 2009). Bitcoin allows users to send and receive digital money called bitcoins (with a lowercase b, or BTC for short).

Unlike traditional fiat currencies issued by governments (like dollars or euros), Bitcoin is decentralized, meaning no single institution, government, or entity controls it. Transactions are conducted peer-to-peer, removing the need for banks or financial institutions to act as intermediaries.

What makes Bitcoin highly appealing is its inherent resistance to censorship, the impossibility of double-spending funds, and the ability to conduct transactions anytime and anywhere.

How Does Bitcoin Work?

Bitcoin operates on blockchain technology, a public ledger that records all transactions. This means every Bitcoin transaction is transparent, verifiable, and secure.

Imagine blockchain as a chain of blocks, where each block holds information about transactions. Every time someone uses Bitcoin, their transaction is added to the blockchain, and this record is stored across a global network of computers (called nodes).

This distributed network ensures that no single party can manipulate the data. Anyone can participate in the ecosystem by downloading Bitcoin's open-source software.

Decentralization: Bitcoin's blockchain is maintained by a distributed network of computers, ensuring no central authority controls the ledger.

Immutability: Once a transaction is added to the blockchain, it cannot be altered or deleted.

Security: Transactions are encrypted using cryptography, and verifying each block requires solving complex mathematical puzzles, a process known as mining.

BTC transaction example

When Alice sends a BTC transaction to Bob, the blockchain database updates their balances (e.g., removing 1 BTC from Alice and adding 1 BTC to Bob’s balance). It's like Alice is writing on a piece of paper (that everyone can see) that she's giving Bob 1 BTC.

When Bob goes to send the same funds to Carol, the network can easily check if he has enough BTC balance. The blockchain acts like a digital ledger that tracks all Bitcoin transactions and keeps the users’ balances up-to-date.

Since the network is decentralized, all participants (nodes) have an identical copy of the database (blockchain ledger) stored on their devices. So, they have to communicate constantly to synchronize new information.

Bitcoin mining

Bitcoin mining is the process that secures the Bitcoin network and confirms transactions. When a user makes a BTC transaction, they broadcast it to the network, where it is verified by other nodes known as "miners".

In other words, mining refers to the process of verifying transactions and recording them into the blockchain database (ledger). To do so, miners compete to solve a complex math problem, which requires a lot of computing power.

The first miner to solve the puzzle gets to add a new block of transactions to the blockchain. In return, they are rewarded with new bitcoins. The high cost of mining is one of the things that keep the network secure, and the block rewards given to miners are the only source of “fresh” bitcoins. Each block mined adds a certain amount of coins to the total supply.

Proof of Work (PoW)

To maintain the security and integrity of the blockchain, Bitcoin uses a consensus mechanism known as Proof of Work (PoW). It’s an essential part of the mining process described above.

PoW is a mechanism created along with Bitcoin to prevent double-spending in digital payment systems. Besides Bitcoin, many cryptocurrencies use PoW as a method for securing their blockchain network.

When we talk about a “complex math problem” that miners have to solve, we are basically talking about PoW. It was designed to make it expensive to create a block, but cheap to verify that it's valid. Suppose someone tries to cheat with an invalid block. In that case, the network immediately rejects it and the miner is unable to recoup the cost of mining.

What Is Bitcoin Used For?

Bitcoin is primarily used as a digital currency and store of value. It can be used to make purchases online or in person, similar to traditional currencies. More and more businesses are accepting Bitcoin as a payment method. From online retailers to brick-and-mortar stores. 

You can also use Bitcoin to send money to anyone across the globe quickly and with relatively low transaction fees compared to traditional banks and remittance services.

As an investment, many people buy Bitcoin, hoping its value will continue to rise. While the price of BTC can be volatile, some investors see it as a way to diversify their portfolios and hedge against inflation in the long term.

Who Created Bitcoin?

Bitcoin was first introduced in 2008 when Satoshi Nakamoto published a whitepaper entitled "Bitcoin: A Peer-to-Peer Electronic Cash System". This paper introduced a new digital currency that would operate on a decentralized system without relying on governments or the banking system.

In January 2009, the Bitcoin protocol was released, and the first bitcoin transaction took place between Satoshi Nakamoto and a programmer named Hal Finney. The transaction involved sending ten bitcoins from Nakamoto to Finney.

After the first transaction, more people began to discover Bitcoin and join the network. The digital currency gained popularity among a small community of tech enthusiasts by demonstrating that Bitcoin could function without a central authority or intermediary.

Bitcoin Pizza is another important milestone in the history of Bitcoin, as it marked the first time bitcoins were used as a medium of exchange for a real-world transaction. On May 22, 2010, a programmer named Laszlo Hanyecz made history by using 10,000 bitcoins to buy two pizzas. The transaction became known as "Bitcoin Pizza Day" and is now commemorated every year on May 22.

Who Is Satoshi Nakamoto?

Satoshi Nakamoto's identity remains a mystery. Satoshi could be a person or a group of developers anywhere in the world. The name is of Japanese origin, but Satoshi's mastery of English has led many to believe that he or she is from an English-speaking country.

Did Satoshi invent blockchain technology?

Bitcoin combines a number of existing technologies that have been around for a long time, and this includes blockchain technology. The use of such immutable data structures can be traced back to the early 1990s when Stuart Haber and W. Scott Stornetta proposed a system for time-stamping documents. Much like today's blockchains, it relied on cryptographic techniques to secure data and prevent it from being tampered with. But Bitcoin was revolutionary in solving the double-spending issue that plagued other digital payment systems at the time.

How Many Bitcoins Are There?

The protocol sets the maximum supply of bitcoins at 21 million coins. As of September 2024, just over 94% of these have been mined, but it will take over a hundred years to produce the rest. This is due to periodic events known as Bitcoin halving, which reduce the mining rewards roughly every four years.

What Is Bitcoin Halving?

Bitcoin halving refers to the periodic halving events that reduce the block rewards offered to miners. The next Bitcoin halving is expected to happen in 2028, roughly four years after the last halving, which took place on April 19, 2024.

Bitcoin halving is at the core of its economic model as it ensures that coins are issued at a steady pace, getting increasingly difficult at a predictable rate. Such a controlled rate of monetary inflation is one of the key differences between Bitcoin and traditional fiat currencies, which have an essentially infinite supply.

Is Bitcoin Safe?

One of the main risks associated with Bitcoin is the potential for hacking and theft. For example, in phishing scams, hackers use social engineering techniques to trick users into revealing their login credentials or private keys. Once the hacker has access to the user's account or crypto wallet, they can transfer the victim's bitcoins to their own wallet.

Another way hackers can steal bitcoins is through malware or ransomware attacks. Hackers can infect a user's computer or mobile device with malware that allows them to access the user's Bitcoin wallet. In some cases, hackers can also use ransomware to encrypt a user's files and demand payment in bitcoins to unlock them.

Because bitcoin transactions are irreversible and not insured by any government agency, users must take precautions to protect their bitcoin holdings. This includes using strong passwords, two-factor authentication, and storing bitcoins in a secure crypto wallet that is inaccessible to hackers. It's also important to only download Bitcoin-related software from trusted sources.

Another risk associated with bitcoin is price volatility. The value of bitcoin can fluctuate highly over short periods of time, making it a risky investment for those who are not prepared for the price fluctuations and potential losses.

Closing Thoughts

Bitcoin has come a long way from its humble beginnings, growing into a globally recognized cryptocurrency with numerous use cases. Whether you’re considering using Bitcoin for everyday transactions, investing for the future, or simply interested in the technology behind it, understanding how Bitcoin works is essential.

The future of Bitcoin is still being written, but it’s clear that it’s here to stay. With more companies accepting it and more people using it for investment, Bitcoin continues to revolutionize the way people think about money.

Further Reading

What Is Blockchain and How Does It Work?

What Is Proof of Work (PoW)?

What Is Cryptocurrency Mining and How Does It Work?

Who Is Satoshi Nakamoto?


Disclaimer and Risk Warning: This content is presented to you for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial, legal or other professional advice, nor is it intended to recommend the purchase of any specific product or service. You should seek your own advice from appropriate professional advisors. Where the article is contributed by a third party contributor, please note that those views expressed belong to the third party contributor, and do not necessarily reflect those of Binance Academy. Please read our full disclaimer here for further details. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance Academy is not liable for any losses you may incur. This material should not be construed as financial, legal or other professional advice. For more information, see our Terms of Use and Risk Warning.

Key Takeaways

A rug pull is a type of crypto scam where developers abandon a project and run off with investors' funds, leaving the project inactive or worthless.

These incidents often involve draining liquidity pools, exploiting vulnerabilities in smart contracts, or abandoning the project entirely.

Some common warning signs include unaudited code, anonymous teams, overly ambitious claims, and liquidity that can be easily removed.

Rug pulls are a strong reminder to always do your own research and stay alert before putting your money into any crypto project.

Introduction

If you’ve been in crypto for a while, you’ve probably seen this play out: a new token launches, the hype builds, the price climbs rapidly, and then everything crashes. The website is taken down, social media goes silent, and investors are left wondering what happened. 

This type of exit scam is known as a rug pull and has led to millions in losses in the crypto space. Let’s take a closer look at how rug pulls work and what you can do to avoid falling for one.

What Is a Rug Pull?

A rug pull in crypto is a type of scam where the creators of a cryptocurrency project suddenly withdraw liquidity or abandon the project, leaving investors with worthless tokens. It’s like being invited to a group dinner, asked to split the bill upfront, and then watching the host disappear before anything arrives.

Rug pulls are similar to traditional pump-and-dump schemes, but they often use more complex tools like manipulating smart contracts or draining liquidity pools. These scams started becoming more common during the decentralized finance (DeFi) boom in 2020, when launching a token on a decentralized exchange (DEX) became fast, easy, and was largely unregulated. With minimal checks in place, it was easy for bad actors to exploit the system and take advantage of unsuspecting investors.

How Do Rug Pulls Work?

Rug pulls can happen in a few different ways. They can be technical (via malicious smart contract code) or non-technical (via social manipulation or centralized control). In some cases, it might be a combination of both.

1. Liquidity pool withdrawal

On decentralized exchanges (like Uniswap or PancakeSwap), tokens need liquidity pools so people can trade them. These pools let users swap tokens directly without relying on intermediaries.

Here’s how a typical rug pull unfolds:

A team launches a new token and adds it to a liquidity pool, usually paired with another token like ETH or USDT.

Early buyers jump in, causing the token’s price to rise and the pool to grow.

As more people buy in, the pool ends up holding a significant amount of valuable crypto.

Then, without warning, the developers pull out all (or most of) the liquidity they originally added.

With almost nothing left in the pool, the market collapses, and the token’s price drops close to zero.

This kind of rug pull is the most common and can happen within hours or days of a token launch.

2. Smart contract manipulation 

In some cases, the rug pull is planned from the very beginning. Instead of exiting suddenly, the scam is embedded in the project’s code. Developers might add functions to the smart contract that allow them to:

Mint unlimited tokens, which floods the supply and causes the price to crash.

Stop users from selling their tokens using honeypot contracts. These smart contracts let people buy the token but prevent them from selling, making the tokens worthless.

Transfer tokens directly from users’ wallets without their consent.

These scams are especially hard to spot without a proper code audit. Even worse, some honeypot tokens are marked as “verified” to appear safe. But, in many cases, the malicious code is buried under complex logic, or only activates after enough people have invested.

3. The social rug

Not every rug pull involves complicated code. Some are built on trust, which is exactly what makes them so effective. These scams often start with a crypto project building excitement through social media, attracting a community, and getting shoutouts from influencers. It all seems legitimate, with a token or non-fungible token (NFT) launch that draws in investors. 

But once enough people have invested, the team disappears without a trace. The project’s social media channels and website vanish along with the funds. If the project creators have full control over the token supply, these types of rug pulls may also happen on vulnerable launchpads or centralized platforms. In the end, it comes down to social manipulation and empty promises. 

How to Spot a Potential Rug Pull

While not every project with these traits is a scam, spotting a few of these signs should raise a red flag. Here’s what to look out for:

Anonymous teams

While anonymity is part of crypto culture, projects with no transparency around their developers or founders are harder to hold accountable. That makes it easier for bad actors to disappear with investor funds.

No smart contract audit

Auditing or formally verifying a smart contract helps catch bugs, vulnerabilities, and unintended behavior before the code goes live. Without a review from a reputable security firm, hidden risks may remain, such as functions that allow unlimited token minting or give developers full control over the contract. Be careful with audits from shady or unknown security firms.

Unlocked liquidity

If a project doesn’t lock its liquidity or has no clear vesting schedule for the team’s tokens, there’s a higher risk that funds could be withdrawn or dumped on the market at any time. 

Reputable projects often lock liquidity and implement vesting periods for team members, usually lasting between one and four years. While not a guarantee, this helps build trust and suggests that the team is committed to the project’s long-term success.

Unrealistic promises

Be cautious of projects that advertise exceptionally high returns or guaranteed profits. If a project claims support from well-known investors, companies, or influencers, those claims should be backed by credible proof, such as public announcements or confirmed partnerships.

How to Protect Yourself

While there is no guaranteed way to avoid every rug pull, there are some steps you can take to lower the risk:

Do your own research (DYOR)

Look beyond headlines, hype, or influencer promotions, and examine the project for yourself. A good way to start is by reading the project’s whitepaper to understand its goals, technology, and tokenomics. You can also use block explorers, like Etherscan or SolScan, to review token distribution, see if smart contract ownership has been renounced, and check transaction history for suspicious activity.

Check liquidity locks

Look into whether the project has locked its liquidity and for how long. Many legitimate projects use third-party services to manage liquidity locks, making the process more transparent and verifiable for investors.

Look for audits

Check whether the audit report is publicly available and ensure it is up to date, as older reports may not cover recent changes to the code. While an audit cannot guarantee complete safety, it can help identify common bugs, vulnerabilities, and potentially malicious code.

Stick to reputable platforms

When exploring new tokens or NFTs, choose platforms with a strong track record and rigorous vetting processes. Reliable platforms like Binance Launchpool apply strict evaluation criteria and conduct due diligence on project teams before listing. This significantly reduces the chances of encountering fraudulent or poorly managed projects.

Closing Thoughts

Rug pulls are an unfortunate part of the crypto space, especially in fast-moving areas like DeFi, where new projects launch every day. While many teams are building with good intentions, the lack of regulation and oversight still creates opportunities for bad actors to take advantage of unsuspecting users.

With the growing availability of tools, audits, and educational resources, identifying potential scams is becoming easier. However, it’s still important to conduct thorough research and approach every new project with caution and a critical mindset.

Further Reading

How Binance Fights Financial Crime

What Are Airdrop Scams and How to Avoid Them?

5 Ways to Improve Your Binance Account Security

Disclaimer: This content is presented to you on an “as is” basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial, legal or other professional advice, nor is it intended to recommend the purchase of any specific product or service. You should seek your own advice from appropriate professional advisors. Products mentioned in this article may not be available in your region. Where the article is contributed by a third party contributor, please note that those views expressed belong to the third party contributor, and do not necessarily reflect those of Binance Academy. Please read our full disclaimer for further details. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance Academy is not liable for any losses you may incur. This material should not be construed as financial, legal or other professional advice. For more information, see our Terms of Use and Risk Warning.