Spontaneous, collective ordering of electronic degrees of freedom leads to second-order phase transitions that are characterized by an order parameter driving the transition. The notion of a ‘hidden order’ has recently been used for a variety of materials where a clear phase transition occurs without a known order parameter. The prototype example is the heavy-fermion compound URu₂Si₂, where a mysterious hidden-order transition occurs at 17.5 K. For more than twenty years this system has been studied theoretically and experimentally without a firm grasp of the underlying physics. Here, we provide a microscopic explanation of the hidden order using density-functional theory calculations. We identify the Fermi surface ‘hot spots’ where degeneracy induces a Fermi surface instability and quantify how symmetry breaking lifts the degeneracy, causing a surprisingly large Fermi surface gapping. As the mechanism for the hidden order, we deduce spontaneous symmetry breaking through a dynamic mode of antiferromagnetic moment excitations.