Are you considering buying Bitcoin or accept them as payment? Then it’s a good idea to understand a bit about how Bitcoin transactions work. Before we enter the technicalities of Bitcoin transactions, it’s worth knowing what precisely a Bitcoin is. According to the Bitcoin white paper, a Bitcoin is nothing more than a record of a transaction. Bitcoins are IOUs, and that’s alright. The money in your wallet is no different. A coin or note is nothing more than a record of financial obligation, which you can redeem for goods or services. With that clarified, let’s take a look at what takes place during a Bitcoin transaction.
How Bitcoin transactions work
A Bitcoin transaction has three components. The first is a transaction output, which is the sender’s Bitcoin wallet address. The receiver’s Bitcoin wallet address is the transaction input. Finally, there’s the amount. Your Bitcoin wallet address creates a transaction output when you send out Bitcoin to another wallet address. The transaction output includes the receiver’s Bitcoin wallet address as a reference to where to Bitcoin went.
The receiving wallet address will, in turn, produce an input when your Bitcoin has been received. The input includes your Bitcoin wallet address as a referral to where the Bitcoin came from. If the individual you sent Bitcoin to decide to send it on to another person, an output with the new owner’s wallet address is developed. The wallet address you sent the money to initially will, in turn, become the transaction input.
Irreversible and immutable transactions
Simply put, a Bitcoin transaction is a record of where the Bitcoin originated from, where it went, and the transaction quantity. All these transaction records are kept in blocks of information. The blocks of data are what makes up the blockchain.
The blockchain is an irreversible and immutable record of every single Bitcoin ever made. Most significantly, you can trace the journey of a Bitcoin to see the number of times it had changed hands from when it was first created.
The difference between public and private keys
You may have heard these terms being bandied around in the cryptocurrency space and question what they mean. To make everything a bit more complicated, your Bitcoin wallet is not a wallet at all. It doesn’t keep your Bitcoin, nor does it save any records. These are all collected on the Bitcoin blockchain.
A wallet is a collection of keys to the blockchain. A public key is a string of characters, much like a bank account number. It allows people to send you Bitcoins. A private key is also a string of characters, but more like a PIN-number for your card. It will enable you to access your Bitcoins.