You have finally obtained your own Bitcoins and have found an online store that will accept your Bitcoins as payment. You realize that it seems relatively easy to work with Bitcoin. You simply signed up for a wallet, then signed up at an exchange, provided them with some details, deposited money into your account and they sent you some Bitcoin to your wallet for the amount you deposited with your credit card. Yes, buying Bitcoins have become very easy – you can now even buy them at Bitcoin ATMs, machines with an increasing presence around the world. Now that you have dug a little into this Bitcoin industry, you may be wondering how Bitcoin transactions actually work. This is exactly what we will be explaining in this post.
Bitcoin Transactions 101
The very first thing that needs to be understood when it comes to taking a look at how Bitcoin transactions work is that, technically, Bitcoins do not exist. There is no physical object that represents a Bitcoin. Even though hosted on the internet, there isn’t even a single digital file that represents a Bitcoin. Instead, a record of Bitcoin transactions is recorded and filed into the Bitcoin blockchain, which is made up of “blocks” – these blocks are mined by miners, which is how Bitcoins are discovered by some people. When sending money to someone, a transaction is recorded and stored in such a block – but the entire process is somewhat more confusing, so let’s explore.
When you take a look at a Bitcoin transaction or want to better understand how this process works, it is important to note that each and every transaction exists out of three values. These values include an input, amount and an output. The input represents the original source of the Bitcoin – in other words, when you are sending Bitcoin to someone else, the input would declare where you got the Bitcoin in the first place. The amount is quite self-explanatory as it represents the total Bitcoin that is being sent in the transaction, and the output is the Bitcoin address of the receiver.
When sending Bitcoin to someone, a private key will be required. The private key is sent with the transaction and the transaction would not be possible without this particular variable. It acts as a security protocol.
Once a transaction has been initiated, the next thing that happens is the transaction is sent to the Bitcoin network. Here, the transaction needs to be verified before it will clear into the receiver’s Bitcoin wallet. This process is done by miners – once a miner has verified the transaction, it is recorded into a block and will then be added to the Bitcoin blockchain.
This also explains why you may sometimes have to wait a little for your transaction to display in the account of the receiver. This is because the block into which your transaction was sent is still being solved and verified by miners. The transaction would thus only clear once miners have successfully verified the transaction; thus causing the Bitcoin to appear in the receiver’s wallet and the transaction to be recorded into the blockchain.
Conclusion
Thousands to millions of Bitcoin transactions are made every single day, and many of the people making these transactions never stop to think for a second what is going on behind that transaction. Bitcoin has made sending and receiving money very easy, but there are a lot of questions that may come to mind, especially while in the middle of a transaction – whether the receiver or the sender. In this post, we aimed to provide a better overview of how these transactions work.
About Kevin Lee
Kevin Lee is a former tech advisor who cut his teeth in Silicon Valley. He now spends his time sharing his passion for investing in diamonds and jewelry. You can reach Kevin for any comments by using the contact form on this site. Don't forget to sign up for his free "Investing 101 Guide" by clicking on the button at the top right of this website.