Understand Bitcoin Transactions in Less than 10 Minutes

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Bitcoin may be a household name, but fully knowing how it works is still a mystery to some. The whole idea surrounding bitcoin mining and how much of a complexity struggle to earn it discourages many people. 

While it’s true bitcoin is a bit complicated in certain aspects, using it properly isn’t impossible. Unless you’re a developer who’s aspired to create the next generation of cryptocurrency, you’ll never need to know all the technical details behind it.

Buying and selling coins is easy enough, but you’re not savvy until you’ve made an official transaction. This could mean purchasing an item using bitcoin or receiving it for something you’ve sold. In either case, you’d need to know how bitcoin transactions work and to have a wallet.

Spend the next few minutes reading this article to learn how to transact with your bitcoin, how fast it processes, and the fees it might include.

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How Do Bitcoin Transactions Work?

One of the most common misconceptions about bitcoin is that it’s a property. It’s actually a compilation of codes that leaves a digital trail of signatures as it moves through cyberspace. But since it represents value, people start treating it like property.

That said, when you make a transaction, you become a part of its digital trail. This means your wallet address will be permanently recorded on the blockchain along with whatever was transacted.

To send or receive bitcoin, you need to have a wallet, and to have control of that wallet, you need access to its public and private keys. These are randomly generated codes by the platform and will be given only once so save them in a safe place. 

When making a transaction, there are inputs and outputs. An input is the bitcoin leaving your wallet. An output is where the coin is going and there can be multiple inputs going to multiple outputs at the same time. 

Think of your wallet as a cabinet with many drawers. Each drawer represents an input. When you send bitcoin, you’re taking the coin from your drawers and putting it in the other person’s cabinet drawer. However, you have to confirm this transaction with your private key so the network knows it’s legitimate and record it on the blockchain.

Here’s a real-life example: you want to send 2 BTC to your friend Bill. You open your wallet, which has 3 BTC, and enter Bill’s wallet address (output.) This is the part where it gets tricky. Since the bitcoin you have has to have come from somewhere, it would have its own inputs from the previous addresses. If you had received 1.5 BTC from Bob and another 1.5 BTC from Mary, you’d have to verify access to those inputs when sending it to someone else. The wallet won’t just take out 2 BTC and give it to Bill. Instead, it will send 3 BTC and then return the rest to you. This “change” of 1 BTC will come back to a different input address.

How Long Do Bitcoin Transactions Take?

The short answer is they can take pretty long. In today’s standard, a transaction usually takes less than a second to process. Bitcoin, however, has a small capacity of processing power. Most of the problem comes from the old proof of work protocol. This is a lengthy method that involves guessing 64-character hashes that absolutely nobody likes to do.

After you confirm a transaction, the bitcoin network will attempt to verify if you truly own the keys to the input address. This is where miners come in with their supercomputer hardware and RTX 3090s. 

Each miner would take transactions from a waiting list also known as the mempool to verify them. Once verified, they will be recorded into blocks, which then would become an immutable part of the blockchain. Since each block is only 1MB in size, it can only hold roughly 3,000 transactions. Because of that, miners can get choosy about which transaction to prioritize and this depends largely on the fees.

Those that come with higher fees often get processed first, typically within seconds or a few minutes. Smaller transactions pay less fees so they have to wait longer. Some can take anywhere from ten minutes to over an hour.

Another factor to consider is how big your transaction is. As miners grab whatever they can to mine, you sometimes end up with two or more working on the same transaction. When this happens, the network will record two different histories, which results in something called a chain split. In this case, the chain with more blocks will be considered the valid one. If your transaction is on the chain with fewer blocks, it would be removed.

When a transaction is confirmed and added to a block, it will be considered to have one confirmation. Every block added to the chain after that gives you one additional confirmation. The higher this number, the less likely your transaction would be removed due to chain splits. 

When people send only a small number of bitcoin, they often accept one confirmation to finalize the transaction. If there’s a large amount of coin involved, it’s usually a good idea to wait for more confirmations. This means it could take up to several days if you want to be sure.

Bitcoin Transaction Fee

There are many ways to determine the fee for a bitcoin transaction, but it’s typically the difference between the amount of coin sent and the amount received. This is to say you’re waiving other utility features, such as additional confirmations.

The fees can also vary depending on the size of the transaction and how fast you want it to get confirmed. Large transactions will naturally cost more and take longer to process. 

Final Thoughts

Now that you know how bitcoin transactions work, you’re ready to make your first one. The most important detail to pay attention to is your private keys and the platform you’re using. Some exchanges do provide payment structures that incentivize you to make more transactions for lighter fees. Keep an eye out for them if you plan to get the most out of your budget.

Happy spending!

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All guest authors’ opinions are their own. Liquid does not endorse or adopt any such opinions, and we cannot guarantee any claims made in content written by guest authors.

This content is not financial advice and it is not a recommendation to buy or sell any cryptocurrency or engage in any trading or other activities. You must not rely on this content for any financial decisions. Acquiring, trading, and otherwise transacting with cryptocurrency involves significant risks. We strongly advise our readers to conduct their own independent research before engaging in any such activities.

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