How does Bitcoin Work: Bitcoin Transactions Explained with Video

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Despite being a virtual currency, bitcoin transactions do take place. But how? Do you also wonder how does Bitcoins work? How does bitcoin transactions happen?Are there any fees attached during bitcoins transactions? Where does this transactions actually take place? Well, we have an answer to all your questions.

Read this post till the end, we will guide you in details about every step of bitcoin transactions. We can also guarantee that you will have all your doubts cleared after you finish reading this post. Moreover, If you want to know What is Bitcoin do have a look.

How Does Bitcoin Work?

First of all get this thing sorted in your mind that bitcoin transactions are some high funda rocket science and exists only for technology stalwarts. It’s a myth! Everybody, anywhere in the world can transact bitcoins without having any domain specific know-how in it. You just need to get clear upon few basics and you can easily understand the concept of bitcoin transactions. Just install a Bitcoin wallet in your computer or mobile device and your first Bitcoin address gets generated. Now that you have an address, you can make transactions, give it to your friends for sending and receiving bitcoins.

How Does Bitcoin Work

However, it is advisable to use different bitcoin address every time you make a transaction – reason being privacy issues. Let’s say you are using the similar address for making another transaction, this allows others to easily determine that the address being reused is yours. Every time your re-used address’s private key signs a fresh transaction, whosoever receiving it can actually use the histories of that address to discover information about you. Anyone who is interested in discovering the identity of the address’s owner can have a chance to do what they want.

With bitcoin prices touching the sky everyday it has become a great source of investment as well. So for that you need to understand how to make btc transactions and how does bitcoin transactions work!

How does Bitcoin Transactions occur?

Basically, a bitcoin transaction is a transfer of value between bitcoin wallets – that gets added to the blockchain. Bitcoin wallets have a secret data called a private key, which is used to sign transactions by providing a mathematical proof that they have come from the owner of the wallet. Once issues, the signature prevents the transaction from being altered by anybody.

All the transactions get broadcasted between the users and confirmed by the network through a process called bitcoin mining. 

How does Bitcoin mining happen?

Mining is a process that is used to confirm the waiting transactions by including them in the blockchain. Protecting the overall neutrality of the network, it often enforces a chronological order in the blockchain. To get confirmed, transactions have to be packed in a block that fits strict cryptographic rules, verified by the network.

These rules also prevent previous blocks from being modified. Although, miners make the transaction happen by solving the mathematical puzzles and the blocks get accumulated one after the other. However, no individual can just control/add/replace parts of the block chain to add up to their own spends. 

Does it takes time for a transaction to clear?

Yes, It takes some time to clear a bitcoin transaction work. Since your transaction gets verified by miners, sometimes you have to wait until they finish mining. Although, with bitcoin’s protocols set – each block takes around 10 minutes to mine. Few merchants may make you wait until this block has been confirmed.

So basically paying directly to the merchants is although possible but as it sometimes takes time so we would advise that you get bitcoins exchanged for your traditional currency first in case you are in a hurry and can’t wait for this process of your transaction being confirmed at the merchant.

Ever wondered Who Created bitcoin? Just check it out!

However, there are some merchants that won’t even make you wait until the transaction has been confirmed. But that is rare, possibly because in this case they have to assume that you won’t try to spend the same bitcoins somewhere else before the transaction confirms. So this is trust based, if you have good terms with the merchants yes this is possible otherwise you have to wait at least for 10 minutes for the transaction to get confirmed.

What does bitcoin transaction consists of?

Let’s understand this with an example. Suppose there are three friends Rahul, Raj and Aman. Now, there is some bitcoin transactions happening between them. Basically, a transaction will have three pieces of information as mentioned below:

  • An input: This is a proof of the bitcoin address that is used to send bitcoins to Raj in the first place (Raj has received them from his friend, Rahul)
  • An Amount: This is the amount of Bitcoins that Raj is sending to Aman.
  • An Output: This is Aman’s bitcoin address

I hope this solves the basic question about bitcoin workings.

How to send and receive bitcoins?

For sending and receiving bitcoins you need two things – a bitcoin address (which is generated randomly and is a sequence of numbers and letters) and a private key (which is also a sequence of numbers and letters, however unlike bitcoin address, this one is kept secret). Now, although your bitcoin address box is a like a safe deposit box, a private key is what used to unlock it and take bitcoins out or put bitcoins in.

Now, when Raj wants to send bitcoins to Aman, he would require his private key to sign a message with the input (source transaction of the coins), the amount and the output (Aman’s address).

Raj sends bitcoins from his bitcoin wallet out to the bitcoin network. From there, bitcoin miners will verify the transaction, will put it into btc transaction block. Eventually they solve it so that it can be finally bitcoins received by Aman.

What if input and output amounts during a bitcoin transaction don’t match?

Adhering to the fact that bitcoins exists only as records of transactions – there could be many different transactions tied to a particular bitcoin address. Perhaps, Rishi sent Raj two bitcoins, Akshay sent him three bitcoins and Rahul sent him a single bitcoin. All as separate transactions at separate times. Now, they will not automatically combine in Raj’s wallet to make one file containing six bitcoins, rather they simply remain different transaction records.

Now since Raj wants to send bitcoins to Aman, his wallet will try to use transaction records with different amounts that add up to the number of bitcoins that he wants to send to Aman. The chances are when Raj wants to send bitcoins to Aman, he won’t have exactly the right number of bitcoins from other transactions. Perhaps he only wants to send 1.5 Bitcoins to Aman.

None of the transactions that he has in his bitcoin address are for that similar amount and none of them even add up to that amount if combined. Raj can’t just split a transaction into smaller amounts – reason being that he can only spend the whole output of a transaction rather than breaking it up into smaller amounts.

Now, the only solution is Raj will have to send one of the incoming transactions and then the rest of the bitcoins will be returned to him as change. Raj sends two bitcoins that he got from Rishi, to Aman. Rishi is the input here and Aman is the output. But the amount is only 1.5 Bitcoins because that is all he wants to send. So, his wallet automatically creates two outputs for his transaction. Therefore, 1.5 Bitcoins to Aman and 0.5 Bitcoins to a new address created for Raj to hold his change from Aman.

Is there any transaction fees for Bitcoin transactions?

Mostly no! But yes sometimes it does that too very miniscule. Transaction fees might have several parameters attached to it. Some wallets often allow to set transaction fees manually. Any portion of the transaction that is not picked up by the recipient or returned as change is generally considered a fee.

Now, this goes to the lucky miner for solving the transaction block as an extra reward. As of now, mostly miners process transactions without any fees. Even if they charge that is extremely less as stated earlier.

Is there any receipt that you get for bitcoin transactions?

As of now – No! However, changes with version 0.9 the way payment works might get altered making it more user-friendly.

Can Bitcoins be purchased or sold?

Offcourse yes! Whenever you want traditional currency in exchange of bitcoins you can, you can do it many ways. Either directly transfer it to your friend over the internet and ask him to pay money in your bank account (as per the current price of bitcoin in Indian rupee) or you can get this exchanged at several bitcoin exchanges in India.

The best part is that there are no extra charges of sending, receiving or exchanging bitcoins which often makes it a potentially attractive currency.

Moreover, You must go through this article If you want to buy bitcoins with Paypal.

I hope you must have understood how does bitcoin work and how bitcoin transaction occurs. If you still have any doubt, just leave a comment below and we will be happy to reply.

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