How Bitcoin Transactions Work?

Bitcoin, although it’s over a decade old now, is still a relatively new technology. Because of that, there are a lot of misconceptions and misunderstandings about bitcoin. In all that shroud of confusion, there is one concept that eludes most people—how do bitcoin transactions work?

Unlike traditional means of exchange, where people literally exchange money for a good or service, bitcoin transactions are purely digital — a concept that was new to people at a time.

The Process Behind the Technology

Each transaction has three main parts: an input, an amount, and an output. The input is your bitcoin wallet or the place where you’re sending bitcoin from. The amount is how much you want to send. The output refers to the wallet of the intended recipient.

Let’s say person A is trying to send some bitcoin to person B. The input of the transaction is person A’s bitcoin wallet. The amount is how much he or she wants to send to person B, and the output is person B’s wallet address. Once the amount is sent, it is validated by the Bitcoin network, or miners (we’ll get into this later).

Think of it as an e-mail. Person A is sending an e-mail to person B. Without an amount, it’s like sending a blank e-mail, and without an output, it’s like sending an e-mail to a person without an e-mail address. All these e-mails go through the Internet, which is like the Bitcoin network—it has algorithms that determine whether or not the e-mail can be sent. If it’s a wrong address, then the e-mail won’t be sent. If it doesn’t pass the spam filter algorithm, it could go to the recipient’s spam folder.

At its purest form, that is what a bitcoin transaction is — and if you’re a casual enthusiast, then that’s all you really need to know.

However, if you’re a diehard crypto geek (like us), you know it can’t be that simple. Well, you’re right. There’s more to it.

Let’s Dive In

Now, let’s get into more technical terms. Sending a bitcoin transaction requires the sender to publish the intention to do so. A person has to prove his or her identity (e.g., 2-factor authentication) to send BTC.

A common misconception about bitcoin is that bitcoin wallets don’t actually hold BTC. Instead, they hold wallet addresses. These “wallet addresses” are records of all your transactions, past and future. They’re a 34-character long string of letters and numbers that you share with other people to receive funds (kind of like your e-mail address).

They’re also widely known as public keys, and each public key has a corresponding private key. If a wallet address is like your e-mail address, then a private key is like your password—it gives you access to your wallet. Private keys are 64-character long strings of letters and numbers, and you use that string to “sign” your transactions.

Still confused? Here’s another example. Let’s say Celine is trying to send BTC to Martina. After inputting all the transaction details (the amount and Martina’s wallet address), Celine “signs” the transaction by inputting her private key into the Bitcoin software. Once that transaction is signed, it then needs to go through the network for validation. First, it validates if Celine has enough BTC to send. Next, it will confirm her BTC hasn’t already been sent to someone else.

At this point, miners are working hard to confirm the transaction. Once it gets three confirmations, the transaction data is added into a block and then added onto the blockchain. After it receives those three confirmations, Martina is free to spend her BTC however she pleases. As a reward for validating the trade, miners receive new BTC per block solved.

The Matter of Transaction Speeds

Generally speaking, bitcoin transactions take around 10 minutes to process. However, some factors could potentially slow the process.

We’ve established that transactions need to be verified by miners on the blockchain. When many people are making BTC transactions, the queue can sometimes fill up. When that happens, your transaction can sometimes not make the cut for the current block. As a result, your transaction is put on hold for the next block.

Because bitcoin blocks are limited to 1MB per block, your transaction being put on hold happens more than you think. Although there is the possibility of the bitcoin block size increasing in the future, 1MB is the current cap for bitcoin blocks.

Transaction Fees

Bitcoin transaction fees will often vary depending on the wallet you’re using. Fees go to miners, and the higher the fees you pay, the more your transaction will be prioritized.

Internal fees will depend on the platform you’re using—different platforms will charge different fees. If you’re just starting, it’s best to look at the fees charged on various platforms before you land on one.

Ready, Set, Trade!

With your newly-equipped knowledge of how bitcoin transactions work, you’re ready to start trading! If you already have begun your journey, then now you understand what goes on backstage. At the end of the day, in this trading sphere, knowledge is power. And the more you know, the more you minimize your risks — but it’s essential to understand that there are always risks. Never put in more money than you’re willing to lose and enjoy the ride. 

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