How does a Bitcoin transaction work

A Bitcoin transaction occurs between electronic Bitcoin wallets. They are secured by a digital signature and are open due to the transparency of the Bitcoin network.

This means that all participants in the network can see this transaction, but the sender and receiver remain anonymous. However, the history of transactions can be traced back to when the corresponding bitcoins were produced.

Why Bitcoin transactions are important?

Of course, there are speculators who just want to hold bitcoin due to the huge price increases. But the real purpose of any currency is its circulation. It is to be spent on products and services, which in the case of a virtual currency means it must be transferred from a sender to a receiver. This happens through the Bitcoin transactions, which are purely electronic. Bitcoins are not physical coins after all (even though they are presented that way), so they only change hands electronically. Accordingly, there are only digital records for Bitcoin transactions.

Important to know: The virtual coins exist only as this record. This begins at the moment of mining and then continues steadily with each transaction. A single bitcoin does not exist anywhere, not even on a hard drive.

So it is not recorded as a single unit like, say, traditional money in a bank account. The balance is noted as the transaction directory, not the individual Bitcoin as a file. This makes it impossible to point to a file, let alone a physical object, and claim, "This is my Bitcoin".

Rather, the transaction records between the different addresses show whose balance has increased or decreased as a result of spending bitcoins. These transactions are stored for all eternity in a ledger. This is a huge public registry called the "blockchain". If you want to calculate the balance of a bitcoin address, you can only do it through the blockchain. In contrast, no information is stored in the address.

How to imagine such a bitcoin transaction?

When user A sends some Bitcoins to user B, that is a Bitcoin transaction with three pieces of information:

  1. Input: this is the record to the sender address from which previously user A received these bitcoins (from user C).
  2. Quantity: the amount of bitcoins sent from user A to user B.
  3. Output: This is the recipient address – i.e. Bitcoin address – of the user B.

The actual bitcoin sending process

For sending the Bitcoins (to the Bitcoin Casino) two things are required: an own Bitcoin address and in addition a private key. One's Bitcoin address is a string of letters and numbers that is randomly generated and publicly viewable in the blockchain. A private key also consists of numbers and letters, but unlike the Bitcoin address, it is secret.

blockchain

The bitcoin address, in turn, is similar to a lockbox, which is glassy on one side. This is the transparency of the blockchain. Anyone can look inside and know what is in the "locker," but only with a private key can this address be "unlocked" to put things in or take them out.

So when user A wants to send bitcoins to user B, he uses his private key to sign the message with his input, which is the previous transaction of bitcoins, with their amount and the user B address, which is the output. User A sends his bitcoin from his own wallet to the bitcoin network with this signature. On this network, bitcoin miners verify this transaction. They put them in a transaction block, eventually they resolve them.

Duration of a BTC transaction

Users sometimes have to wait a bit longer (even ten minutes or more) for their Bitcoin transaction to be confirmed. While this is still much faster than a conventional bank transfer, this wait can still cause anxiety and requires an explanation.

But the Bitcoin transaction has to be confirmed by miners first. They have to finish their mining (mining), so long users have to wait for the confirmation of the transaction. The Bitcoin protocol is specifically set to wait longer when mining blocks, it is currently around ten minutes. There are now merchants who make their customer paying with bitcoin wait until the latest block is confirmed. If it takes ten minutes, the customer can make himself a coffee in the meantime. After a certain amount of time, they can then verify that their transaction has been confirmed in order to accept their digital services or goods paid for with Bitcoins.

Of course, there are also traders who do not wait for the transaction confirmation. In doing so, they take a certain risk. But they just assume that a user will not necessarily reverse the transaction and then suddenly spend his Bitcoins on other things before the previous transaction was confirmed. Especially in micropayments, merchants show this kind of goodwill, i.e. for transactions with very low amounts.

The risk of fraud in this case is small, the damage would also be small. In principle, each recipient can decide for themselves for which payments they require confirmation. There can also be multiple confirmations. The more the trader demands, the more secure the transactions are for him, but the longer they inevitably take as well.

Can there be differences between the amounts of input and output?

It is possible. The bitcoins, after all, exist only as records of transactions, as described. Therefore, multiple transactions may be associated with a particular bitcoin address. Possibly user A has sent two bitcoins to user B, user C has also sent one bitcoin to user B, as has user D.

All of these were separate transactions that occurred at separate times of day. User B now does not receive the total amount of bitcoins received as one file, but only different transaction records. Now, when he himself wants to send bitcoins to someone again, his wallet will try to use those transaction records with different amounts that result in the amount of bitcoins he wants to send. This does not necessarily work out.

The user's wallet may not find the exact amount of Bitcoins needed for the following transaction. It is also not possible to easily split a transaction into several smaller transactions. The user can only spend the entire output of the transaction.

Therefore, he sends one of the previous transactions received, and the rest of the bitcoins he receives back as change. So a user could use a larger amount from a previous transaction and resend a subset of it. His wallet then automatically creates two outputs. One is related to the amount to be sent, the other is for change.

What are the transaction fees for a Bitcoin transfer?

There may or may not be transaction fees. When they are incurred, they are calculated using various factors. Users can set transaction fees manually on some wallets. By doing so, you are rewarding the miner, who will process the transaction faster the higher the fee received. In addition, shares of a transaction that were not taken up by the recipient or as change, respectively, are credited as a fee to the miner as a bonus.

However, many miners rely on block rewards and transfer bitcoin remittances without fees. However, block rewards are decreasing, so fees are more likely to be charged in the future. Previously, these were calculated in a very complex and therefore opaque manner, but several updates to the core software have simplified this.

Is there a receipt for the bitcoin transaction?

It is not in the nature of cryptocurrencies to work with receipts. However, the desire for it is understandable, which is why from version 0.9 slightly changed the way payments work, making them more user-friendly. Some payment processors like BitPay have been working for a while with advanced features like receipts and purchase confirmations that don't actually exist in normal Bitcoin transactions.

Can also send a part of a Bitcoin?

Of course, Bitcoin transactions are divisible, which is necessary simply because of the high Bitcoin exchange rate. The smallest unit is the satoshi = one hundred millionth of a bitcoin. A transaction can only be 5.430 Satoshi to be small.

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