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How Do Bitcoin Transactions Work?

Bitcoins have outranked traditional payment methods by being a virtual currency that’s easily transferable, inflatable, and widely accessible. Millions of users worldwide rely on Bitcoins for their day-to-day transactions. But have you ever wondered how Bitcoin transfers work? How is it that Bitcoins sent from one wallet reflect into another in a matter of minutes, irrespective of the recipient’s geographic location or demographics?

In this blog, we will decipher how Bitcoin transactions actually work, what network fees are, and how you can transact efficiently with Bitcoin. If that sounds exciting, let’s get going.

What is a Bitcoin transaction?

At its core, a Bitcoin transaction is a transfer of value from one wallet to another. All the Bitcoin transactions are recorded on a publicly shared ledger called Blockchain, which is immutable and decentralized.

Technically, when a person initiates a Bitcoin transfer, they sign it digitally with a private key or seed, providing mathematical proof that they own the Bitcoin. The signature keeps the transaction from being altered by anyone after it’s issued.

All the transactions are broadcasted to the global Bitcoin network and are confirmed within 10-20 minutes through a process called mining. Let’s understand the fundamentals of a Bitcoin transfer.

How does a Bitcoin transaction work?

Bitcoin transactions may seem simple, but they are not. When you press the send button on your wallet, it triggers a sophisticated chain of events that make Bitcoin transfers possible. The entire process can be broken down into three steps: creating, broadcasting, and confirmation. Let’s understand them individually to learn how Bitcoin transfers actually work.

Initiating a transaction

The very first step in a Bitcoin transfer is creating and authorizing a transaction. This can be done via the user’s unique signature through their wallet application and is the most visible step to the end users.

Every Bitcoin transaction requires the following details:

  • The sender’s Bitcoin wallet address
  • Amount of Bitcoin transferred
  • The recipient’s address

To initiate a Bitcoin transaction, you will need the recipient’s wallet address. It’s usually an alphanumeric string that acts like an email address or a bank account number where the funds will be transferred. Most Bitcoin wallet applications like Speed display it as a scannable QR or a string of characters. It’s completely safe to share your Bitcoin wallet address with your friends and acquaintances.

If you are a business seeking to accept Bitcoin payments, we can simplify this step of the process for you with our readymade payment solutions. Using Speed, you can create and share payment QRs and invoices with your customers. Thus, they won’t have to manually enter your wallet address every time they want to pay. Instead, customers can scan your invoice or payment QR with their preferred Bitcoin wallet to complete the transaction in just a few clicks.

Once you specify the recipient’s address, add the amount, and hit send, your wallet application will broadcast the transaction on the Blockchain network. Let’s understand how it works.

Broadcasting a transaction

When you send or receive Bitcoins, the transaction is transmitted to the entire network for validation. All the nodes (computers running the Bitcoin’s software) will verify the transaction and check for its authenticity. They will check the sender’s wallet balance to ensure they have enough funds to initiate the transaction.

Once the transaction is verified, it will be held in mempool (memory pool), where all the verified but unconfirmed transactions are stored until they are confirmed. Miners take these transactions from mempools and include them in a block by solving proof-of-work puzzles. This brings us to the last step of the process: transaction confirmation.

Confirming a transaction

For any transaction to be added to the Blockchain, it needs to be confirmed by miners through a consensus algorithm called proof-of-work. Miners with high-performing computers compete to be the first to solve an extremely complex mathematical problem. The one who successfully cracks the code is allowed to add a new “block” to the “chain” of previously confirmed transaction blocks.

Once a block is successfully added to the Blockchain, all the transactions in the block are confirmed. This means the recipient will be able to see the funds in their wallet. The entire process usually takes 10-20 minutes. However, if there are a lot of transactions waiting in the mempool, it may take a few hours for a transaction to be confirmed. You can check the status of your transaction via Blockchain Explorer, a software application that allows users to extract, visualize, and review blockchain network metrics.

Transaction fees

Every time a transaction is confirmed and added to the Blockchain, you will pay a fee to miners for validating the transaction. It’s usually a small fraction of the payment. However, the fees may vary depending on the transaction size and network congestion. Let’s look at a few ways you can minimize fees on your transactions:

  • Time your transactions: Miner fees are higher when the transaction volume is higher. This means if you want to minimize the fees, you will have to time your transactions when the network is less congested than usual.
  • Use Lightning Network: Popularly known as “Layer 2”, the Lightning Network is built on top of Blockchain. All the transactions made via the Lightning Network incur lesser fees and have relatively faster settlement times. Speed supports both on-chain and Lightning Network payments. Thus, you can receive Bitcoins however you want.
  • Compare service provider fees: There are service fees applicable on all Bitcoin transactions in addition to the miner’s fee. The service fees are charged by payment gateways for facilitating the transaction. They can go as high as 5% — depending on your service provider. Speed, however, has the lowest transaction fees on the market. For every transaction, Speed only levies a 1% fee once your total volume exceeds 0.5 BTC ($13603).

Start accepting Bitcoins with Speed

Bitcoins are the digital currency of the future. With its blazing-fast transaction speed, decentralized nature, and wide accessibility — Bitcoin can become a better alternative to fiat money.

If you are a retailer or run an online business, now is the time to start accepting Bitcoins. With Speed, you can get started in just a few clicks. At the lowest transaction fees, Speed brings cutting-edge features and bank-grade security to businesses of every size and scale. Sign up today to experience lightning-fast Bitcoin payments anywhere, anytime.


Can Bitcoin transactions be traced?

Yes, all the Bitcoin transactions can be traced back to their origins via a Blockchain Explorer. However, no one can associate your real-world identity with your transactions. This provides users with better privacy while transacting online.

While receiving a payment confirmation notification may be instant, there’s a delay before the network confirms your transaction and includes it in a new block. Once it's added to a new block, it will be included in all the consecutive blocks — making it impossible to reverse by anyone.

That’s completely fine. You can receive Bitcoins even when your computer is turned off. The Bitcoins will reflect in your wallet the next time you turn it on. That’s because Bitcoins are not received by the software on your system. They are added to a publicly shared ledger (Blockchain) which is maintained by all the nodes on the Bitcoin network.

The time taken to transfer a Bitcoin depends on the number of transactions pending in the mempool. If there are a lot of pending transactions, it may take longer to confirm your payment and vice versa. However, the average confirmation time on the Bitcoin network is about 10 minutes.

No. All the Bitcoin transactions made via Blockchain are irreversible. Neither you nor anyone else on the Blockchain can reverse, cancel, or alter a transaction once it's confirmed.

Speed Team