Born in McComb, Mississippi, USA as Ellas Otha Bates, he was adopted and raised by his mother's cousin, Gussie McDaniel, whose surname he assumed, becoming Ellas McDaniel. In 1934, the McDaniel family moved to the largely black South Side area of Chicago, where the boy dropped the name Otha and became known as Ellas McDaniel, until his musical ambitions demanded that he take on a more catchy identity.

In Chicago he was an active member of his local Ebenezer Baptist Church, where he studied the trombone and the violin, becoming proficient enough on the latter for the musical director to invite him to join the orchestra, with which he performed until the age of 18. He was more impressed, however, by the pulsating, rhythmic music he heard at a local Pentecostal Church. Also, he became interested in the guitar.

Further inspired musically after seeing John Lee Hooker, he supplemented his work as a carpenter and mechanic with a developing career playing on street corners with friends, including Jerome Green (c. 1934–1973), as a band called the Hipsters (later the Langley Avenue Jive Cats).

During the summer of 1943–44, he played for tips at the Maxwell Street market in a band with Earl Hooker. In 1951, he landed a regular spot at the 708 Club on Chicago's South Side, with a repertoire influenced by Louis Jordan, John Lee Hooker, and Muddy Waters.

In late 1954, he teamed up with harmonica player Billy Boy Arnold, drummer Clifton James and bass player Roosevelt Jackson, and recorded demos of "I'm A Man" and "Bo Diddley".

They re-recorded the songs at Chess Studios with a backing ensemble comprising Otis Spann (piano), Lester Davenport (harmonica), Frank Kirkland (drums) and Jerome Green (maracas). The record was released in March 1955, and the A-side, "Bo Diddley", became a #1 R&B hit.

McDaniel would adopt the stage name "Bo Diddley". The origin of the name is somewhat unclear, as several differing stories and claims exist. Some sources state that it was his nickname as a teenage Golden Gloves boxer, while others claim that it originates from the a one-stringed instrument called the diddley bow.

Bo Diddley himself has said that the name first belonged to a singer his adoptive mother was familiar with, while harmonicist Billy Boy Arnold once said in an interview that it was originally the name of a local comedian that Leonard Chess borrowed for the song title and artist name for Bo Diddley's first single.