5 July 2020

How Do Bitcoin Transactions Work?

How Bitcoin Transactions work

For most people, the experience of buying and selling goods & services will be as turnkey using PayPal for online shopping. In fact, PayPal has announced that 26 million of their global merchants will accept Bitcoin and cryptocurrencies from PayPal in 2021. Furthermore, Visa and Mastercard are making it easier for cryptocurrency exchanges and digital currency firms to issue branded debit cards.

Similar to how most individuals do not know how SWIFT powers credit card transactions, you will almost certainly not need to know how all the technical components are working on the backend to process and validate transactions.

With that said, there are two items that will be important to know in terms of using Bitcoin and keeping it safe:

  1. Crypto Wallets

To send and receive Bitcoins, you first need a crypto wallet. Crypto wallets are available online and can be purchased in the form of hardware wallets. The wallets are vital as they store the public and private keys (keys vital to Bitcoin transactions).

Contrary to what many people may believe, crypto wallets do not store bitcoins or any other cryptocurrencies.  What they hold are the public and private keys, which keep a record of all your transactions.

Bitcoin Hot Wallet vs Bitcoin cold Wallet
Source: How to Choose a Cryptocurrency Wallet (CoinTracker)

There are several types of crypto wallets, hot and cold wallets. The hot wallets include desktop, web, and mobile wallets, while cold wallets include hardware and paper wallets.

2. Keys

The public key, also known as the Bitcoin address, functions similarly to an email address. It is what allows you to receive bitcoins in your account. The private key gives you control over your funds. It is more like the password to your email account.

Private Keys vs. Public Keys vs. Wallet Addresses
Crypto Security: The Difference Between Public Keys, Private Keys, and Wallet Addresses

Both public and private keys are made up of alphanumeric numbers. While the public key is meant to be shared, the private key is meant to be kept private. Anyone with access to your private keys has access to your funds.

To send Bitcoins to a friend or anyone, you only need their public key (which is also the public address).

How is Bitcoin Safe?

Bitcoin works as a decentralized database. Every time a transaction is made, details of the transactions pass through a network of connected devices known as nodes for verification. Once verified, the transaction is stored in a block.

Blockchain How Does It Work
How Does Blockchain Work?

There are two main players in this chain that verifies that the purchase is valid and adds it to the running ledger of transactions (i.e. blockchain).

1. Nodes

Bitcoin transactions run on blockchain networks. Blockchain networks are made up of blocks, which are stored on nodes. Nodes can be computers or even bigger servers.  Nodes are crucial since they store, spread, and preserve the blockchain data.

When it comes to Bitcoin transactions, the nodes check if transactions are valid or not. They can either reject or accept a transaction. Full nodes are run by volunteers who use their computers and bandwidth to perform vital functions.

All nodes in a blockchain have to validate a transaction for the transaction to go to the mempool. The mempool is a place where all transactions validated by nodes are added. Then, the miners choose which transactions they record on the network.

2. Miners

Miners in the crypto world are a group of people who verify Bitcoin transactions. They are known as miners because they mine blocks that make up a blockchain. The blocks constitute transactional data.

Miners usually install and run blockchain software that enables their devices to communicates securely. Their devices are what become known as nodes. The nodes communicate with one another and process transactions to add new blocks to a blockchain.

When miners add new blocks of transactions to a blockchain, part of their job is to ensure the transactions are accurate.

How to Send Bitcoin

  • Step 1: Open your Bitcoin Software wallet
  • Step 2: Obtain the recipient’s wallet address. You can copy and paste the recipient’s wallet address into your own wallet app or scan the QR code.
  • Step 3: Choose the wallet you want to send Bitcoins from. Choose a BTC wallet when looking to send Bitcoin.
  • Step 4: Enter the amount you wish to send and the miners’ fee. The Miners fee is an incentive to the miners. You can work the provided miners as the best fee estimation, if any, is suggested.
  • Step 5: Confirm that all information provided is correct, and you are satisfied. Click Send to finish the process.

Bitcoin Send Money

How to Receive Bitcoin

  • Step One: Open your Bitcoin Software wallet
  • Step Two: Choose the wallet you wish to receive Bitcoins from. If you are receiving Bitcoin, then you need a BTC wallet.
  • Step Three: Once you choose the right wallet, it will generate an address that lets you receive Bitcoins. Copy the address.
  • Step Four: Provide the copied address to the individual who is to send you the Bitcoins
  • Step Five: wait to receive your Bitcoins. Transactions can take seconds, minutes, or worse, hours.

Things to know about Bitcoin transactions

There are several things to know before sending Bitcoins.

Transactions cannot be reversed:

While keying in transactional information, you have to ensure the information is correct. Keying in the wrong address could mean losing your funds.

Only send the required amount:

Unless you are feeling generous, you should only send the intended amount. If, by mistake, you send more than what you intended unless the receiver is understanding and returns the surplus, you will never get it back.

Final word

As you can see, understanding how Bitcoin transactions work is not as complex as it seems. Not that you have a deeper understanding of how this technology works, we are confident that you will get into it soon and complete your first Bitcoin transaction.

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Investing in cryptocurrency shouldn’t require you to be a computer scientist or banker. With our exclusive analysis & investing tools, investing in crypto has never been more simple.​

Edmund McCormack
Tech industry veteran and blockchain technology investor. Simplifying cryptocurrency for almost a decade.

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