After returning to New Mexico, Bonney worked for English businessman and rancher John Henry Tunstall (1853–1878), as a Cowboy near the Rio Felix—a tributary of the Rio Grande—in Lincoln County. Tunstall and his Business partner and Lawyer Alexander McSween were opponents of an alliance formed by Irish-American businessmen Lawrence Murphy, James Dolan, and John Riley. The three men had wielded an economic and political hold over Lincoln County since the early 1870s, due in part to their ownership of a beef contract with nearby Fort Stanton and a well-patronized dry goods store in Lincoln.

Henry McCarty was born to Catherine (née Devine) McCarty in New York City. While his birth year has been confirmed to be 1859, the exact date of his birth has been disputed as either September 17 or November 23 of that year. A letter from an official of Saint Peters's Church in Manhattan states it is in possession of records showing McCarty was baptized in that church on September 28, 1859. Census records indicate his younger brother, Joseph McCarty, was born in 1863.

Following the death of her husband Patrick, Catherine McCarty and her sons moved to Indianapolis, Indiana, where she met william Henry Harrison Antrim. The McCarty family moved with Antrim to Wichita, Kansas, in 1870. After moving again a few years later, Catherine married Antrim on March 1, 1873, at the First Presbyterian Church in Santa Fe, New Mexico Territory; McCarty and his brother Joseph were witnesses to the ceremony. Shortly afterward, the family moved from Santa Fe to Silver City, New Mexico and Joseph McCarty began using the name Joseph Antrim. Catherine McCarty died of tuberculosis on September 16, 1874.

McCarty was 14 years old when his mother died. Sarah Brown, the owner of a boarding house, gave him room and board in exchange for work. On September 16, 1875, McCarty was caught stealing food. Ten days later, McCarty and George Schaefer robbed a Chinese laundry, stealing clothing and two pistols. McCarty was charged with theft and was jailed. He escaped two days later and became a fugitive, as reported in the Silver City Herald the next day, the first story published about him. McCarty located his stepfather and stayed with him until Antrim threw him out; McCarty stole clothing and guns from him. It was the last time the two saw each other.

After leaving Antrim, McCarty traveled to southeastern Arizona Territory, where he worked as a ranch hand and gambled his wages in nearby Gaming houses. In 1876, he was hired as a ranch hand by well-known rancher Henry Hooker. During this time, McCarty became acquainted with John R. Mackie, a Scottish-born Criminal and former U.S. Cavalry private who, following his discharge, remained near the U.S. Army post at Camp Grant. The two men soon began stealing horses from local Soldiers. McCarty became known as "Kid Antrim" because of his youth, slight build, clean-shaven appearance, and personality.

At some point in 1877, McCarty began to refer to himself as "William H. Bonney".

On October 5, 1878, U.S. Marshal John Sherman informed newly appointed Territorial Governor and former Army general Lew Wallace that he held warrants for several men, including "William H. Antrim, alias Kid, alias Bonny [sic]" but was unable to execute them "owing to the disturbed condition of affairs in that county, resulting from the acts of a desperate class of men". Wallace issued an amnesty proclamation on November 13, 1878, which pardoned anyone involved in the Lincoln County War since Tunstall's murder. It specifically excluded persons who had been convicted of or indicted for a crime, and therefore excluded Bonney.

One of the few remaining artifacts of Bonney's life is an iconic 2-by-3-inch (5.1-by-7.6-centimeter) ferrotype photograph of Bonney by an unknown portrait Photographer in late 1879 or early 1880. The image shows Bonney wearing a vest over a sweater, a slouch Cowboy hat, and a bandanna, while holding an 1873 Winchester rifle with its butt resting on the floor. For years, this was the only photograph scholars and historians agreed showed Bonney. The ferrotype survived because Bonney's friend Dan Dedrick kept it after the outlaw's death. It was passed down through Dedrick's family, and was copied several times, appearing in numerous publications during the 20th century. In June 2011, the original plate was bought at auction for $2.3 million by businessman william Koch.

On December 13, 1880, Governor Wallace posted a $500 bounty for Bonney's capture. Pat Garrett continued his search for Bonney; on December 23, following the siege in which Bowdre was killed, Garrett and his posse captured Bonney along with Pickett, Rudabaugh and Wilson at Stinking Springs. The prisoners, including Bonney, were shackled and taken to Fort Sumner, then later to Las Vegas, New Mexico. When they arrived on December 26, they were met by crowds of curious onlookers. The following day, an armed mob gathered at the train depot before the prisoners, who were already on board the train with Garrett, departed for Santa Fe. Deputy Sheriff Romero, backed by the angry group of men, demanded custody of Dave Rudabaugh, who had killed a local jailer. Garrett refused to surrender the prisoner, and a tense confrontation ensued until he agreed to let the sheriff and two other men accompany the party to Santa Fe, where they would petition the governor to release Rudabaugh to them. In a later interview with a reporter, Bonney said he was unafraid during the incident, saying, "if I only had my Winchester I'd lick the whole crowd". The Las Vegas (New Mexico) Gazette ran a story from a jailhouse interview following Bonney's capture; when the reporter said Bonney appeared relaxed, he replied, "What's the use of looking on the gloomy side of everything? The laugh's on me this time." During his short career as an outlaw, Bonney was the subject of numerous U.S. newspaper articles, some as far away as New York.

While Bonney was on the run, Governor Wallace placed a new $500 bounty on the fugitive's head. Almost three months after his escape, Garrett, responding to rumors Bonney was in the vicinity of Fort Sumner, left Lincoln with two deputies on July 14, 1881, to question resident Pete Maxwell, a friend of Bonney's. Maxwell, son of land baron Lucien Maxwell, spoke with Garrett the same day for several hours. Around midnight, the pair sat in Maxwell's darkened bedroom when Bonney unexpectedly entered.

Because people had begun to claim Garrett unfairly ambushed Bonney, Garrett felt the need to tell his side of the story and called upon his friend, Journalist Marshall Upson, to ghostwrite a book for him. The book, The Authentic Life of Billy, the Kid, was first published in April 1882. Although only a few copies sold following its release, it eventually became a reference for later historians who wrote about Bonney's life.

In 1931, Charles W. Foor, an unofficial tour guide at Fort Sumner Cemetery, campaigned to raise funds for a permanent marker for the graves of Bonney, O'Folliard, and Bowdre. As a result of his efforts, a stone memorial marked with the names of the three men and their death dates beneath the word "Pals" was erected in the center of the burial area.

John Miller, an Arizona man, also claimed he was Bonney. This was unsupported by his family until 1938, some time after his death. Miller's body was buried in the state-owned Arizona Pioneers' Home Cemetery in Prescott, Arizona; in May 2005, Miller's teeth and bones were exhumed and examined, without permission from the state. DNA samples from the remains were sent to a laboratory in Dallas and tested to compare Miller's DNA with blood samples obtained from floorboards in the old Lincoln County courthouse and a bench where Bonney's body allegedly was placed after he was shot. According to a July 2015 article in the Washington Post, the lab results were "useless".

In 1948, a central Texas man Ollie P. Roberts—nicknamed Brushy Bill—began claiming he was Billy the Kid and went before New Mexico Governor Thomas Mabry seeking a pardon. Mabry dismissed Roberts' claims, and Roberts died shortly afterwards. Nevertheless, Hico, Texas, Roberts' town of residence, capitalized on his claim by opening a Billy the Kid museum.

The image, which has been copied and published in various ways, shows Bonney wearing his holstered Colt revolver on his left side. This led historians to believe he was left-handed, but they did not take into account that the ferrotype process produces reversed images. In 1954, western historians James D. Horan and Paul Sann wrote that Bonney was "right-handed and carried his pistol on his right hip". The opinion was confirmed by Clyde Jeavons, a former curator of the National Film and Television Archive. Several historians have written that Bonney was ambidextrous.

In 1940, stone cutter James N. Warner of Salida, Colorado, made and donated to the cemetery a new marker for Bonney's grave. It was stolen on February 8, 1981, but recovered days later in Huntington Beach, California. New Mexico Governor Bruce King arranged for the county sheriff to fly to California to return it to Fort Sumner, where it was reinstalled in May 1981. Although both markers are behind iron fencing, a group of vandals entered the enclosure at night in June 2012 and tipped the stone over.

In 2004, researchers sought to exhume the remains of Catherine Antrim, Bonney's mother, whose DNA would be tested and compared with that of the body buried in william Bonney's grave. As of 2012, her body had not been exhumed.

In 2007, author and amateur Historian Gale Cooper filed a lawsuit against the Lincoln County Sheriff's Office under the state Inspection of Public Records Act to produce records of the results of the 2006 DNA tests and other forensic evidence collected in the Billy the Kid investigations. In April 2012, 133 pages of documents were provided; they offered no conclusive evidence confirming or disproving the generally accepted story of Garret's killing of Bonney, but confirmed the records' existence, and that they could have been produced earlier. In 2014, Cooper was awarded $100,000 in punitive damages but the decision was later overturned by the New Mexico Court of Appeals. The lawsuit ultimately cost Lincoln County nearly $300,000.

In 2010, New Mexico Governor Bill Richardson turned down a request for a posthumous pardon of Bonney for the murder of Sheriff william Brady. The pardon considered was to fulfill Governor Lew Wallace's 1879 promise to Bonney. Richardson's decision, citing "historical ambiguity", was announced on December 31, 2010; his last day in office.

On the night of Sunday, July 14, McSween and the Regulators—now a group of fifty or sixty men—went to Lincoln and stationed themselves in the town among several buildings. At the McSween residence were Bonney, Florencio Chavez, Jose Chavez y Chavez, Jim French, Harvey Morris, Tom O'Folliard, and Yginio Salazar, among others. Another group led by Marin Chavez and Doc Scurlock positioned themselves on the roof of a saloon. Henry Newton Brown, Dick Smith and George Coe defended a nearby adobe bunkhouse.

In early October 2015, Kagin's, Inc., a numismatic authentication firm, said the image was authentic after a number of experts, including those associated with the National Geographic special, examined it. Kagin's has insured the tintype for $5 million.

As of 2018, only one photograph confirmed to show Bonney is known to exist; others thought to depict him are disputed.

Five days after Bonney’s killing, Garrett traveled to Santa Fe, New Mexico, to collect the $500 reward offered by Governor Lew Wallace for his capture, dead or alive. william G. Ritch, the acting New Mexico governor, refused to pay the reward. Over the next few weeks, the residents of Las Vegas, Mesilla, Santa Fe, White Oaks, and other New Mexico cities raised over $7,000 bounty reward money for Garrett. A year and four days after Bonney's death, the New Mexico territorial legislature passed a special act to grant Garrett the $500 bounty reward promised by Governor Wallace.