Opinion

How Do Bitcoin Transactions Work?

Caroline Bowler

To understand how Bitcoin functions with such agility, you must have an understanding of how the Bitcoin transaction process works. Considering it is one of the great tech developments of our lifetime there are plenty of layers of complexity when breaking down the how and why of the Bitcoin system. In order for a successful transaction of electronic funds from one party to another, there are a number of steps and levels of verification that must be completed.

So how do Bitcoin transactions work?

So what is a Bitcoin transaction and how does it work? Before learning how to do a Bitcoin transaction, it’s important to recognise that Bitcoins don’t exist in the traditional way that we understand currencies to be possessive. You can’t hold a Bitcoin, you can’t print a Bitcoin and you won’t see a Bitcoin denoted as a dollar sign in your bank account.

So if Bitcoins don’t “exist”, how can you legitimately and safely use them to engage in a peer-to-peer cashless transaction? The way to maintain transparency and regulation is through a public ledger called Blockchain, which is effectively an all-encompassing data file where you can view Bitcoin transactions. This records the history of all Bitcoin Blockchain transactions that have taken place from one Bitcoin address to another Bitcoin address.

Once you’ve wrapped your head around Bitcoins not existing as a typical form of money, we can begin to understand the steps involved with Bitcoin transactions. Firstly, you’ll need to set up a wallet to store your Bitcoins at BTC Markets, you can easily create an account to begin the process. You’ll then need to purchase Bitcoin so you have currency to purchase, trade, transfer or invest — you’ll be able to manage everything within your wallet. Your Bitcoins — or Bitcoin addresses — are actually made up of special keys and you’ll need to enter these to signify a transfer. When a bitcoin is transferred to you it will have a public key and when you are transferring it uses a private key. In order for successful Bitcoin transactions to be completed, there must be an input, an amount and an output of the Bitcoin addresses.

Let’s take a look at a Bitcoin transaction explained through an example of how a transfer might play out between two parties:

Amy is a 29-year-old receptionist from Melbourne and has travelled to Bologna, Italy to take part in a summer cooking school. While there she makes friends with a couple from San Francisco — David and Greg. They decide to take a trip to San Marino for a couple of days, so Greg arranges train tickets and accommodation. Amy wants to repay Greg without having to incur international transfer fees from her Australian bank account to his American bank account, so they agree to use Bitcoin transactions to simplify the exchange of funds.

  • Amy will input the private key that encrypts the source of the Bitcoins that had been sent to her
  • Amy will then add the amount of Bitcoin she’d like to transfer to Greg
  • The funds will then be unlocked using Greg’s public address
  • They will both then be able to check the BTC transaction via Blockchain


How do I check a BTC transaction?

If you’re wondering how to confirm a Bitcoin transaction you can check the status via the Blockchain. Once you have hit send on your transaction it will go into the “mempool” or memory pool in order to be confirmed by Bitcoin miners. A few factors will determine how quickly your Bitcoin transactions are completed, like the type of wallets being used and how congested the Bitcoin network is at that time. If you are transferring Bitcoins from wallets on the same platform it will be instantaneous; other times you can wait for up to 20 minutes while miners sort through a backlog. You can head to the Blockchain and check the status by typing in the transaction ID into the search field. It’s always important to check for any typos when entering details into your transaction, as this may cause it to be denied by miners.

How does Bitcoin use Blockchain?

Bitcoin uses Blockchain to help regulate the transaction process by letting miners across a number of computers verify the addresses and keys. This is essential in making sure the process remains without a central authority while still continuing to be a safe and secure practice for all parties engaging in Bitcoin transactions. Blockchain becomes a decentralised ledger, containing all of the data from Bitcoin operations around the world.

How does the Bitcoin transaction verification process work?

In order for you to receive a Bitcoin verification on your transaction, miners will need to confirm details to ensure there isn’t anything amiss going on. Miners are a group of computers spread across the Bitcoin network that receives encrypted data broadcast to them from users. Using high-level algorithms, the miners will go about testing the validity of your BTC before confirming the transaction.

Can Bitcoin transactions be reversed?

Once you have entered in the necessary information and hit send on your Bitcoin transaction, it is an irreversible action on your end. However, the receiver may choose to reverse the payment. It’s for this reason you should take care with the users and organisations you choose to transfer money to.

Will I incur fees for the Blockchain transaction of my Bitcoin?

The way fees are calculated will vary depending on your wallet, but generally speaking, you will need to include this fee during the input step — otherwise, the transaction may be denied when it hits the miners in Blockchain. As you cannot ‘half’ a portion of your Bitcoin, anything left over will go to the miners and is considered ‘gifting’ your change as an act of goodwill. If there is a lofty amount of change leftover this can often be seen as an incentive for the miners to prioritise your transaction. If you do not include a fee in your transaction, you may find it will be denied by miners. Users must remember that despite Bitcoin being a revolutionary form of technology it is still emerging and developing which can often lend itself to errors — be prepared for there to be a couple of kinks along the way.

Learn more about Bitcoin transactions with BTC Markets

It’s an exciting time to be dipping your toe into the world of Bitcoin. At BTC Markets we understand the complex nature of cryptocurrencies, so if you’re interested in learning more about Bitcoin transactions and how you can become a pro with your wallet, we have plenty of features to help you get up to speed. We are constantly updating our website with news from the world of crypto so make sure you check in to be the first in the know.

If you’re new to Bitcoin, don’t worry — we have plenty of resources that will give you all of the facts you need to know before. Head to our FAQs page to learn more.

At BTC Markets we are on hand to assist wherever you are in your journey — whether that is getting an introduction to cryptocurrency; wanting to start investing and create an account; trying to troubleshoot an issue with Blockchain or perhaps you need advice on utilising Bitcoin as a part of your self-managed super fund. No query is too big or too small. Get in touch with someone from our team today to let us know how we can help further.

You can also learn more by downloading the Bitcoin Whitepaper from bitcoin.org.


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