How Bitcoin Transactions Work: Signed, Verified & Confirmed?

Unlike fiat currencies, Bitcoin transactions work in a way that should amaze most. At first glance, a transaction may appear to be a simple money transfer between wallets, but that isn't the case by any means. Your Bitcoins aren't held anywhere, and your Bitcoin wallet is just a list of credentials consisting of a public and private key.

As absurd as that sounds, the technology behind Bitcoin – known as blockchain – enables seamless transactions, and everything happens automatically without any person or institution having a say in your financial matters whatsoever.

Bitcoins Aren't Stored Anywhere

How Bitcoin works require a fundamental understanding of blockchain, the technology behind this and many other cryptocurrencies. Just imagine the blockchain as a ledger for each and every transaction that was ever performed within the Bitcoin network, with new transactions being added continuously to the chain upon verification. This record of past transactions allows Bitcoin “miners” – people who verify transactions through the use of dedicated computing equipment – to determine the current balance of a public key used to initiate a transaction, and that in itself negates the requirement to hold Bitcoins digitally anywhere.

The blockchain is continuously updated at specific mining nodes around the world, thereby eliminating any concerns about the safety of the data stored within. Hashes are used to encrypt each block present throughout the blockchain, which further safeguards it from any kind of modifications.

What a Transaction Looks Like

A Bitcoin transaction is very simple to perform and requires the public key to a wallet with authorization performed via a private key. Once you insert the number of Bitcoins that you want to transfer and the Bitcoin address of the payee, your request is sent to a pool of transactions for verification. Bitcoin miners then begin processing your transaction, with your address being double-checked via the blockchain to ensure that sufficient funds are present to complete the transaction.

A block of transactions is supposed to take just ten minutes to verify, though the massive amount of orders flowing through the Bitcoin network mean that transfers may take significantly longer to process. Most vendors require you to wait for verification before you can gain access to your purchases, but certain merchants don't make you sit it out for low-value transactions.

Transaction Fees

Bitcoin miners are automatically compensated for every solved block of transactions in the form of newly created Bitcoins, but that doesn't necessarily mean that you don't pay any transaction fees when sending money. The extreme popularity of the cryptocurrency has led many Bitcoin miners to place a high priority on transactions that include fees – most wallets have settings on how much transaction fees to include within a transfer, and if you want to send some money in a hurry, be prepared to pay a hefty fee to be able to do that.

Safety of Transactions

Due to the strength of the technology and cryptography behind Bitcoin, transactions are very safe to perform. Authorization requires a private key, so unless someone else has knowledge of it, there's practically no reason to worry about unauthorized transactions. The Bitcoin network also allows for anonymity – while your public key is visible on the blockchain to almost everyone, there simply is no way to identify anyone with just a string of random letters and numbers.

However, you must keep in mind that transactions are permanent and cannot be reversed unless refunded by the payee – if you are about to complete a high-value transaction, you may want to confirm the legitimacy of the receiver beforehand.

Weighing the Pros and Cons

Always keep in mind that unlike a normal money transfer, Bitcoin transactions are very different. You have complete anonymity and faster transfers overall, and the encryption protocols behind the cryptocurrency allow for extremely secure transactions.

However, the unregulated nature of the market can cause significant issues when it comes to high-value transactions, especially since you are solely responsible for the safety of your Bitcoins. Combine that with the rapidly fluctuating values of cryptocurrencies, and Bitcoin payments aren't feasible for every situation by any means.