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How Do Bitcoin Transactions Work? 2022

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As we all know, bitcoin was created by Satoshi Nakamoto as a “peer-to-peer electronic cash system.” With the technology being over a decade old now, many platforms and exchanges have simplified the process for us—handling the more technical aspects so we can just enjoy buying and spending our BTC. But do you really understand what happens in a bitcoin transaction?

Let’s get into it.

The process of each transaction

Each transaction consists of three main parts: an input, an amount, and an output.

Let’s say that Michael is trying to send BTC to Jim. The input refers to the BTC address of the sender as well as a record of where these coins have been. In this case, it’s Michael’s wallet address and the record of the coins inside. The amount is how much BTC Michael is trying to send. Lastly, the output is the address of the wallet receiving the BTC—Jim’s wallet address.

Simply put, if Michael wants to send Jim some BTC, he has to publish his intention to do so, and then the network will validate that transaction. The network first validates that Michael has enough BTC to send and then checks if he hasn’t already sent it to someone else. Once validated by the network, the transaction gets clumped into a block with other transactions and attached to the blockchain. Transactions that are added onto the blockchain then become tamperproof and irreversible because it means having to re-do transactions on the succeeding blocks. 

Delving deeper

The thing about bitcoin transactions is that although BTC is sent to and from bitcoin wallets, these “wallets” don’t actually store BTC. Instead, they hold bitcoin addresses—records of all your transactions. Bitcoin addresses look like 34-character long strings of letters and numbers, and are also known as your public key. This is the address that you share with people when you want to receive BTC. Each public key has its own corresponding private key—a string of 64 letters and numbers that you use to “sign” transactions.

Think of your public key as an email address and your private key as your password. Your email address is okay to share because that’s how people send emails to you, but you can’t share your password because then they’ll be able to read all your emails. Public and private keys are essentially the same, but instead of emails, it’s access to your BTC.

Let’s go back to our example of Michael and Jim. Michael, after inputting all the transaction details (the amount and Jim’s wallet address), he inputs his private key into the Bitcoin software to “sign” the transaction, which gives the green light to send the money. At this point, the transaction is up for validation by the network. The network will then check if the signature (private key) matches its corresponding public key. If it matches, the miners will validate the transaction. Once Michael and Jim get three confirmations on their transaction, the data is added onto the blockchain, and Jim will be able to use his newly-acquired BTC however he pleases. As a reward for validating the trade, miners are rewarded in BTC per block solved.

With the technology behind Bitcoin, you can think of your bitcoin address as a transparent safe—everyone can see what’s behind the safe, but only you can access it.

How long does a bitcoin transaction take?

The speed of bitcoin transactions vary, and it depends on several factors. It’s important to remember that all transactions need to be verified by the Bitcoin miners on the blockchain. When the queue is overloaded, your transaction doesn’t always make the cut for the current block. Instead, your transaction is put on hold until the next block is assembled.

Another factor of long confirmation times is the size of Bitcoin blocks. Although there’s always the chance of block size being increased in the future, the current Bitcoin protocol limits blocks to a size of 1MB. This limits each block to a certain number of transactions. That, in turn, can slow down confirmation times and as a result, the entire Bitcoin network is slowed.

In some cases, the speed of your transaction boils down to the blockchain processor you’re using. Paxful makes use of BitGo, the most secure and successful blockchain processing service in the world. If you’re making an external transaction from your Paxful wallet to a wallet that doesn’t use BitGo, it can take longer (as compared to transferring to one that uses BitGo). 

Internal vs. external transactions

Transaction speeds may vary depending on the kind of transactions you’re making.

For example, if you send BTC from one Paxful wallet to another Paxful wallet (internal transactions), the transaction is instant. However, if you’re sending BTC from a Paxful wallet to an external wallet (or vice-versa), you need to have the transaction confirmed by the Bitcoin network. If you’re having trouble with external transfers, you can always check the bitcoin transaction status and see what to do from there.

Platforms like Paxful can help you buy small amounts of bitcoin, making internal transactions effortless and inexpensive.

Bitcoin transaction fees

For their service in verifying your transactions, miners are rewarded with bitcoin transaction fees. These fees are calculated in different ways, depending on the platform you’re using.

On Paxful, there are fixed fees for external transactions:

$0-$9.99 = 0.0001 BTC

$10-$19.99 = 0.0002 BTC

$20+ = 0.0005 BTC

These fees cover the miner fees that come alongside bitcoin transactions as well as the maintenance of our wallet’s infrastructure.

For internal transactions, sending BTC is free of charge for the first five times of the month. Any transactions that succeed those five times carry a fee of $1.00 or 1% (whichever is greater). If you don’t have enough funds in your wallet to cover that fee, you won’t be able to send out BTC.

Trade away!

Now that you have a deeper understanding of how bitcoin transactions work, you’re ready to begin trading at full capacity. What’re you waiting for? There are thousands of offers from trusted sellers on Paxful! 

Steven Madden

Steven Madden

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