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Think you’re ready to make your first Bitcoin transaction? Here’s everything you are going to need to know.
Bitcoin transactions are able to be sent from and to electronic bitcoin wallets. Further, they are digitally signed for security. Everyone on the bitcoin network is made aware when a transaction is being made, and the history of any transaction can be traced back to the point where the bitcoins were created.
Holding onto bitcoins can be beneficial – especially if you’re waiting for the price to go up – but the whole point of this digital currency is to spend it, right? So without further ado, let’s get into how bitcoin transactions work!
There Are No Bitcoins, Only Records of the Transactions
Bitcoins are funny little things because they don’t actually exist anywhere. That includes on a hard drive. Someone can say that they have bitcoins, but if you were to look at their bitcoin address, you will see that there are no digital bitcoins held in it. Essentially, one cannot point to a physical object, and that includes a digital file, and say “this is a bitcoin”.
Instead, the bitcoin network stores records of transactions between different addresses, with balances that rise and fall. Nothing goes undetected in the network; every transaction that takes place will be stored in a ledger called the blockchain. If an individual is looking to work out the balance of any bitcoin address, they will have to reconstruct it by looking at the blockchain.
What Does a Bitcoin Transaction Look Like?
If for example, Jane wanted to send some bitcoins to Tim, that transaction would include three pieces of information:
- An input. The input is a record of which bitcoin address was used to deliver the bitcoins to Jane in the first place.
- An amount. The transaction would also include the number of bitcoins Jane is sending to Tim.
- An output. This will be Tim’s bitcoin address
How Do You Send a Bitcoin?
In order to send bitcoins, you will need two things: 1) a bitcoin address, and 2) a private key.
An individual’s bitcoin address is generated randomly and is a sequence of letters and numbers. On the other side of the equation, the private key is another sequence of numbers and letters, but unlike the bitcoin address, the key is kept secret.
It’s helpful to think of your bitcoin address as a safety deposit box with a glass front. Even though everyone knows what’s in the box, only the private key can unlock it to take things out or put things in.
When Jane is ready to send bitcoins to Tim, all she has to do is use her private key to sign a message with the input, amount, and output.
Jane then sends the coins from her bitcoin wallet out to the wider bitcoin network. After that, bitcoin miners will verify the transaction, by putting it into a transaction block and solving it.
Why Do You Have to Wait for the Transaction to Clear?
Sometimes you are forced to wait until miners finish mining. What does this mean? It means it can take a bit of time for your transaction to be verified by the miners. According to the bitcoin protocol, each block takes about 10 minutes to mine.
Generally speaking, there are two outcomes that you might experience. Some merchants ask for you to wait until this block has been confirmed, which means that you may have to make a cup of tea and come back again before you can download the goods or take advantage of the paid service.
However, other merchants won’t make you wait until the transaction has been confirmed. These are the types of merchants who assume that you won’t try and spend the same bitcoins elsewhere before the transaction is finalized. This tends to happen for low-value transactions.
What Happens if the Input and Output Amounts Don’t Match?
Due to the fact that bitcoins exist only as records of transactions, it’s possible that you can end up with different transactions tied to a particular bitcoin address. For instance, Rebecca sent Jane two bitcoins, Alec sent her three bitcoins, and Lucy sent her one bitcoin, all as separate transactions at separate times.
If this were to happen, these would not automatically combine in Jane’s wallet to make one file containing six bitcoins. They would just sit there as different transaction records.
If Jane wants to send bitcoins to Tim, her bitcoin wallet will try to use transaction records with different amounts that add to the number of coins that Jane wants to send to Tim.
It is rare that when Jane wants to send bitcoins to Tim that she won’t have the right number of bitcoins from other transactions.
Are There Transaction Fees?
Sometimes, but not always.
Transaction fees are calculated using a number of factors. For instance, some bitcoin wallets allow you to set transaction fees manually. Any section of a transaction that is not picked up by the recipient or returned is thought to be a fee. This will then go to the miner who solves the transaction block as a reward.
As of right now, the majority of miners process transactions for no fees. However, as the block reward for bitcoins decreases, this will be less likely.
Many find the most frustrating part about transaction fees in the past to be that the calculation of those fees was mysterious and complex. It has been the result of a number of updates to the bitcoin protocol, and it has developed organically.
Are You Able to Get a Receipt?
Sadly, Bitcoin wasn’t really meant for receipts. However, payment processors like BitPay offer the advanced features that you wouldn’t normally get with a native bitcoin transaction, such as receipts and order confirmations.
What Happens If I Just Want to Send Part of a Bitcoin?
It’s important to remember that bitcoin transactions are divisible. The lowest you can divide your bitcoins into is a ‘satoshi’, which is one hundred millionth of a bitcoin. Additionally, it is possible to send a transaction as small as 5430 satoshis on the network.
Featured Image: twitter
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