Bitcoin Transaction

In a Bitcoin transaction, Bitcoin values are transferred from one wallet to another. The transfer is secured by digital signatures and is stored in the Bitcoin network (blockchain), where it is transparently visible to all users (and remains visible for all time).

Bitcoins are digital signatures that are stored on a decentralized register (ledger), the so-called Bitcoin blockchain. They exist exclusively in the form of records, so-called Bitcoin transactions between two different Bitcoin addresses, which in turn are stored in wallets.

The wallet merely stores the wallet address(es), not the digital asset itself. Each wallet address can be allocated to a collection of incoming and outgoing transactions that are stored on the blockchain. Conversely, this also means that Bitcoins are not simply deposited as value in a wallet, as is the case with e-money on prepaid cards, for example. Hence, to find out the current balance of a Bitcoin address, one must first calculate all incoming and outgoing transactions via the blockchain. The reason why wallets still often show a balance is that most crypto wallet providers perform these calculations automatically in the background.

How does a Bitcoin transaction work?

For a Bitcoin transaction to proceed, three essential things are needed: A Bitcoin address, a Private Key, and sufficient funds (Bitcoin).

• The Bitcoin address (also known as the wallet address) is needed to assign a transaction to a destination and ensure that it arrives at the correct party. In this respect, it can be compared to an IBAN. Bitcoin addresses are derived from the public key, which is hashed for this purpose. Bitcoin addresses consist of a sequence of randomly generated letters and numbers (for example, the first ever Bitcoin address was: 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa).

• The Private Key is needed to perform a transaction. It is comparable to a PIN / PUK and should be kept secret at all times. Unlike the Bitcoin address, the private key is never stored in the blockchain.

If party A wants to transfer Bitcoin to party B, it uses its private key to sign a transaction statement. This contains the following information:

1. the input (a record of all previous incoming and outgoing transactions of bitcoin address A; this also serves as proof that it has the corresponding credit),

2. the (partial) amount of bitcoins to be sent, and

3. the output (the recipient address, i.e. bitcoin address B). The signed transaction message is then sent to the Bitcoin network, where it is verified by Bitcoin miners before being subsequently included in the transaction block. Once the block has been "mined“ it is added to the blockchain and the transaction is considered irrevocably completed.

In this context, so-called double spending is a major challenge for traders and platforms: Since transactions basically have to be confirmed by miners, it can happen that a transaction takes a few minutes. In order to advertise speed and user-friendliness, some service providers and platforms therefore confirm transactions in advance, especially if they involve very small transactions (so-called micropayments). By doing so, they run the risk that one party will not use this time window to send the same Bitcoins to several recipient addresses at the same time.

How much does a Bitcoin transaction cost?

The transaction fees for Bitcoin (or for almost all cryptocurrencies and tokens) go as a "bonus" to the miner who first managed to mine the respective block, i.e. to finish the calculation. Oftentimes, the fees can be set directly by the sender/user. The selection of the ideal amount depends on various factors. Basically, the higher the transaction fee, the faster the transaction is processed. While a so-called GAS price is set as the fee for Ethereum-based transactions, the portion that is not transmitted to the recipient or taken in as change is understood as the fee for Bitcoin transactions.

Is it possible to transfer only a partial portion of Bitcoin?

Yes! Bitcoin transactions are also possible in fractional parts. In this case, the smallest part is called a Satoshi = one hundred millionth of a Bitcoin. However, although it is theoretically possible to send as little as 5,500 Satoshi, it is rarely economical as the transaction fees are not based on the amount of Bitcoin and would therefore no longer be in an appropriate proportion to the value transferred.