How Do Bitcoin (BTC) Transactions Work?
Bitcoin transactions are directly between users (like cash) and verified by member-computers of the Bitcoin network.
Introduction to bitcoin transactions
Bitcoin transactions are made by sending records from one digital wallet to another with each transaction being signed electronically for the purposes of security.
After each transaction is made it is broadcast to the world on a public ledger called the Bitcoin blockchain; allowing anybody to assess and scrutinize it. It is entirely possible to trace and follow any and all Bitcoin transactions.
Nowadays there are many people around who wish to only hold onto their Bitcoins for the purposes of gaining a profit, but as it is designed to be spent and transacted, it is best to fully understand how the process happens.
Bitcoins have no physical form
Bitcoins only exist in the form of electronic records, similar to an accounting system.
Unlike conventional money such as US Dollars or British Bounds, Bitcoins are not tangible or physical in any way; they essentially do not exist. They do not even exist in the form of data on a hard-drive or server.
When somebody has Bitcoins in their digital wallet they don’t exactly have those Bitcoins, but rather they have a record which states that they do. It is only those records which exist, and all of those records are documented in the public ledger.
The ledger keeps track of what all the records say; keeping a log of how many Bitcoins each wallet has access to.
Bitcoin addresses do not show how many Bitcoins a person has, to find that out you would need to access the blockchain. Most wallets nowadays do this for you and keep your balance updated regularly.
The best way to understand Bitcoin transactions is to break down the process a little.
If you decide to send Bitcoins to a friend, then the transaction will have three distinct parts to it.
This is the record of which Bitcoin address was used to send the transaction. Bitcoins addresses look something like this:
This is the number of Bitcoins which were sent. Remember that you do not have to send full Bitcoins.
You can send fractions such as 0.08 BTC or even 0.0005 BTC.
This is the address of your friend or the address of the receiver.
How are bitcoins sent?
For a person to send Bitcoins, they need to have two things: a Bitcoin address and a private key for that address.
The address is the cryptographic location of where your Bitcoin records are held. It is sometimes referred to as a public key as anybody can see it.
The private key is used to keep your Bitcoins safe and allow only you to access them.
You need the private key to send Bitcoins. Unlike the public address, the private key should never be shared with anybody, because anybody who has your key can steal your Bitcoins.
Private keys look like this:
Anybody can see your Bitcoin address and even your balance, but only people with the private key can actually access those Bitcoins and use them. It acts as a digital signature which you use to declare that you actively chose to send Bitcoins.
Private keys are automatically generated every time you get a new address.
What if I only want to send part of a Bitcoin?
Bitcoins can be split into 1 million units. In fact, it is rare nowadays to send whole Bitcoins as they are worth so much. Most people send amounts to like 0.2 or 0.008 Bitcoins.
A Satoshi is referred to as a one hundred millionth of a Bitcoin and it is entirely possible to send or receive an amount as small as 5430 Satoshis.
Why do some transactions take so long?
Every time a Bitcoin transaction is made, it must be ‘mined’ and verified. Mining is the act of signing a transaction and placing it on the blockchain by having a computer solve complex cryptographic equations.
This works as a means of checking that every transaction is both real and possible. Sometimes it takes a long time for a transaction to be mined which means that confirmations will be longer.
It is recommended to wait for six confirmations before accepting a Bitcoin payment. On average it takes around 10 minutes for each confirmation, but this process can be sped up by the use of higher transaction fees.
Some vendors who accept Bitcoin will force their customers to wait for six confirmations to occur so that they can be sure that the transaction will happen. This can (but doesn’t always) take a substantial amount of time.
The Lightning Network, a new Bitcoin protocol, should make confirmations significantly faster. Other vendors will not wait for any confirmations and will trust that each transaction is real. They do this as a means of speeding up the process of buying something.
What are the transaction fees?
Transaction fees are paid to miners who place your transaction on the blockchain; they use the transaction fees as an incentive for doing so.
For the most part, transaction fees are low (around $2.00-$5.00) but there will be situations where it is higher. The Bitcoin developers are constantly working on methods of reducing fees significantly.
Bitcoin transaction fees do not change depending on how much you send, or where you are sending them.
What happens if the input and output amounts are not the same?
This is something that happens a lot, but it is not a problem for Bitcoin as the blockchain handles most of the hard work.
Say that somebody sent you 2 Bitcoins in a transaction and then you wanted to send 1 Bitcoin to somebody else, you wouldn’t be able to directly send 1 Bitcoin because the only record that you have in your address is for 2 Bitcoins.
In theory, this would mean that you can only send 2 Bitcoins together because that was how you received them, but Bitcoin has a solution to this.
Instead, what happens is that you would send 2 Bitcoins over, but during the transaction you would get 1 Bitcoin sent back to you, therefore meaning that you only give 1 Bitcoin away.
Is it possible to get a receipt?
Bitcoin does not directly provide receipts in the same way a service like PayPal does, but there will always be a record of your transactions.
Most addresses also keep a track of what has been spent and what has been received, and the blockchain itself will have an up-to-date record too.
There are also services like BitPay and GoCoin that offer the functionality to receive properly formatted and articulate receipts too.