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Bitcoin seemingly works as a digital currency: there is a unit of account, it can be sent and received, you can track a balance of BTC, and pay a fee to use the network. However, if you are ready to dive deep into the way Bitcoin transactions work, you will need to learn even more unconventional truths about this fascinating invention.
If you want something more than a basic introduction to Bitcoin or a general overview, dive into this article! How do Bitcoin transactions really work? How long does it take and why? What tricks can make it faster? Learn in our comprehensive guide.
Key Takeaways
- As a cryptocurrency, Bitcoin protocol uses encryption to make records in its database called blockchain. It employs double-key cryptography in which every user has one or more pair(s) of the public key and private key. The latter is especially important to keep secure because losing access to it means losing access to the public key, BTC address, forever.
- There are no physical or digital Bitcoins but there are records that track the paths of BTC units and the states of addresses. Bitcoin uses a system called UTXO to combine and divide units and follow the history of each piece efficiently.
- To send a Bitcoin transaction, you will have to pay a fee that will go to miners’ rewards. A sufficient miner fee is a prerequisite for the transaction to be confirmed in ten minutes or less, otherwise, it can take hours or days for it to go through.
How Do Bitcoin Addresses Work?
To start using Bitcoin and to send or receive Bitcoin transactions, you will need an address. They are also called wallets but only due to the surface-level similarities (Bitcoin is more similar to a database than bank records but more on that later). Bitcoin wallet can also refer to an application that helps you generate keys and addresses and view their state.
The Bitcoin network uses double-key cryptography to keep track of Bitcoin ownership. Your Bitcoin address is the public key, and the digital signature that lets you and only you approve transactions with an associated address is the private key.
Public Key
As the name implies, your Bitcoin address is public and it is safe to share it with others. In fact, it is the only way to ensure that a Bitcoin transaction you request from another will end up in your hands.
The records in the Bitcoin blockchain are pseudonymous, meaning that by default you do not know who owns which public key. Your address is basically your pseudonym when using the Bitcoin network.
Getting a Bitcoin address wrong can and will result in loss of funds, so be careful! Remember that Bitcoin transactions are irreversible: we will explain why later.
Private Key
Each public key is generated from a private key and only the person with access to this private key can make transactions from this address. You cannot decipher the private key from the public one, though (once again: the public one’s safe to share).
In double-key cryptography, the sender encrypts a message with their private key and the recipient’s public key. The recipient of the message can decrypt the message with their private key because it was encrypted using a derivative of it, the recipient’s public key. They can also confirm that they got the message from the sender by their public key.
As a cryptocurrency — it’s in the name — Bitcoin network uses cryptographic messages to track BTC. Without a digital signature, a Bitcoin transaction cannot be decrypted and will not be sent at all. However, if you have the complete pair of keys, you can exercise full control over the corresponding address. This is why it is vital to keep your private keys secure and never share them with untrustworthy parties. You should also keep in mind that if you lose the private keys, you will never be able to recover access to BTC at the corresponding address.
What Really Are Bitcoins?
One of the facts that is hard to wrap your head around at first is that there is no physical Bitcoin. All BTC are numbers in messages recorded on the Bitcoin blockchain. There are also no accounts or balances in the regular sense of the word! Only the records of each unit’s path and addresses where they are currently residing. Bitcoin itself cannot be confiscated because there is nothing to confiscate (but one can lose or give up their key pair and access to an address, as we have learned).
UTXO System: Inputs and Outputs Explained
Rather than keep track of user accounts, the Bitcoin protocol instead tracks the transaction history of each BTC unit, down to the smallest 10^-8 unit called satoshi after the inventor.
The transaction history, which all network participants agree on, can be viewed with a block explorer. You can see the state of any Bitcoin transaction, address, the whole blockchain, or each block there, among other things. If you have used one, you may have noticed that a transaction consists of inputs and outputs rather than a straightforward record of the state change. This is because of this system called unspent transaction output (UTXO): instead of tracking each and every single satoshi, they are bundled or divided into inputs when received and outputs when sent.
For example: Alice has 0.1 BTC which she has previously bought in 0.02 BTC increments. She wants to send 0.05 BTC to Bob. A transaction would include three 0.02 BTC inputs and two outputs: 0.05 BTC to Bob and a change output of 0.01 BTC to Alice. If Bob will then send Charlie 0.0075 BTC, there will be one input and two outputs (the amount sent and the 0.0025 change).
Normally, you would not need to bother with mixing and matching inputs and outputs because it is done automatically by Bitcoin wallets. However, knowing this helps you understand how to use a block explorer, which is an irreplaceable tool for Bitcoin transactions.
Bitcoin Transaction Fees: Why Do We Pay Them?
Another component of any Bitcoin transaction that you learn about almost from the get-go is the transaction fee. In real-world transactions, it is more or less clear who takes the fee: a bank, payment service provider, acquirer, etc. But if you buy Bitcoin with a local currency, you may notice that on top of an on-ramp service fee, they also inform you of a transaction fee, also known as a miner fee.
Sending Bitcoin is not free of charge, and these days you can pay from $2 to $20 for a single Bitcoin transaction. These transaction fees go to miners: network participants who contribute computing power to the security of the Bitcoin network. In exchange for their expenses, they get the chance to receive Bitcoin and collect transaction fees.
The Bitcoin network was designed to process only so many transactions at a time (about 7 per second), so transaction fees determine who gets to be the first in the queue. This is because every Bitcoin node has to store a copy of the entire blockchain, and the blocks have a size limit to prevent it from bloating up. This gave rise to a fee market in which miners prioritize transactions with a higher fee and leave other transactions with lower transaction fees pending.
The days when you had to check the current Bitcoin transaction fee and manually input it are long gone. Most wallets and services these days set up the fee automatically or allow users to customize it.
How Long Does a Bitcoin Transaction Take?
Now that you have sent a BTC transaction with a sufficient fee, how long should you wait for it to arrive? Briefly speaking, the average time for a transaction to show up is ten minutes, and the average confirmation time is one hour. Let’s unpack why it takes this amount of time.
Block Time
When you send a Bitcoin transaction, the node you use broadcasts a message to other nodes. These nodes check their own copy of the ledger to ensure you are not spending more than you have. In other words, the consensus of nodes prevents double-spending.
If everything is fine, the transaction goes to the mempool (short for ‘memory pool’). You can think of it as a queue for pending transactions. Miners choose transactions to fill a block by common criteria: the miner fee being the best-known and often deciding one. The one miner that solves a cryptographic problem before the rest gets to produce a block and pocket the reward: newly minted bitcoins plus the fees from the BTC transactions they picked.
The difficulty of the Bitcoin problems is calibrated so that it is solved roughly every ten minutes. If the hash rate, or the computing power contributed by miners, grows, the problem will become more difficult so that it is not solved too fast, and vice versa. However, the calibration usually lags behind the changes in hash rate, so individual blocks may be produced sooner or later than ten minutes.
Confirmation Time
Why is it a common practice to consider six confirmations, or about one hour, for a BTC transaction to be completed? The number six was chosen purely by convention but the purpose of the wait is to secure the transaction against a reorganization.
If two or more miners broadcast a block with the same number, the blockchain temporarily forks. Usually, this does not lead to a significant change in the ledger because as blocks are added, the longer chain is always considered valid. Other blocks that are invalidated are called orphaned blocks. If your transaction ends up in one, which is rare, it will just roll back as if it didn’t happen.
A reorganization can happen when two chains are competing for validation and a valid sequence of blocks gets invalidated because the other chain got longer. The changes introduced in this dropped chain will also roll back, including the miner rewards. This penalty encourages them to behave fairly and always keep the copy of the blockchain up to date.
Malicious intentional reorganizations are also known as 51% attacks because to mine the longer chain, the attacker has to secure somehow more than half of the network’s hash rate. With Bitcoin’s current mining power, it is incredibly expensive, so the possibility of it is extremely low.
As you can see, technically, there is a way to reverse Bitcoin transactions but it is unfeasibly costly and endangers the integrity of the whole blockchain, so it is best to treat Bitcoin transactions as irreversible.
Bitcoin Transaction Taking Longer Than Usual? Here are Possible Reasons Why
As we mentioned, ten minutes for one confirmation is the usual scenario. However, sometimes, BTC transactions take longer than expected for reasons not always within our control. Let’s review the most common ones and see what you can do.
Sometimes, Bitcoin experiences network congestion. It can happen due to high demand and network activity or even be a result of a spam attack. In these circumstances, Bitcoin fees easily skyrocket: at the market peaks, it averages over $60. You can try setting up a higher fee but it will only move you closer to the start of the queue: if the miners produce blocks slowly, the whole queue will lag.
If you try to cut some corners with lower transaction fees, your transaction can get stuck in a mempool because miners will ignore it. This situation is remedied by adjusting the fee more reliably, so the solution is straightforward.
The ten-minute block time is a blessing in disguise for this type of situation: you will have enough time to take action to speed things up. Methods include replace by fee (RBF), child pays for parent (CPFP), and Bitcoin accelerator service.
RBF is the go-to way to speed up sending Bitcoin, and CPFP increases the fee for a Bitcoin transaction you want to receive. These are parts of the protocol but in order to use them, your wallet or service you use has to support this function.
Bitcoin accelerators repeatedly broadcast your transaction to a pool of miners, increasing the chances of inclusion in the next block. They are usually web-based and can be paid or free.
Conclusion
Sending and receiving BTC transactions may seem counterintuitive if you think of it as an ordinary currency. The payoff to undertaking to learn how BTC works is that its quirks and perks will all make sense.
More guides and articles on Bitcoin, altcoins, and trading are waiting for you on our blog. Follow our social media to stay tuned for updates: Twitter, Facebook, Reddit, and Telegram.
Frequently Asked Questions
Why is Bitcoin transaction taking so long?
It is normal for Bitcoin transactions to take up to ten minutes to receive one confirmation and be securely confirmed in an hour. If your BTC transaction is taking too long, you might have set a low fee or the network can be congested. You can wait more or use special methods to increase the network fee.
Can a Bitcoin transaction take 24 hours?
Although it is not the norm, a Bitcoin transaction can take so long. For example, it has a very low network fee and miners nominate other transactions with higher fees.
How long does it take to send a Bitcoin transaction?
Sending a Bitcoin transaction is as easy as clicking a button but receiving it takes some time. For a transaction to appear on the Bitcoin blockchain, the network fee has to be on par with the current average or higher and ten minutes or more should pass.
How fast is Bitcoin payment?
A regular Bitcoin transaction takes up an hour or more even if everything goes smoothly. There are faster ways to transfer Bitcoin, such as Lightning Network.
