Well, first thing’s first, I want to let you in on a little secret about bitcoins… they literally do not exist anywhere.
Not even on a hard drive safely tucked away in some dude’s shoebox.
You hear tons of chatter about people “owning” bitcoins, but when you really look at a particular bitcoin address, you will find that there are no digital bitcoins held in it. No one on this planet can point to a physical object, or even a digital asset/file, and honestly say “this right here is a bitcoin”.
You may all be sitting there while reading this and now you’re scratching your head..
So what the hell is bitcoin then?
Let me help you understand some more. All a bitcoin is, is a record of transactions that take place between different addresses, with balances that simply either increase or decrease. Every single transaction that has ever taken place with bitcoins is stored in a massive public ledger called the blockchain. So if you are ever extremely bored, and for some reason want to work out the balance of a specific bitcoin address, the information isn’t actually held at that address; you have to reconstruct the information by looking at the blockchain.
How does a bitcoin transaction work?
So the first thing you have is an electronic bitcoin wallet. Bitcoin transactions are sent to and from electronic bitcoin wallets, and each transaction is digitally signed for security purposes.
Every single person on the network knows about any specific transaction at any given time, and because of this, the history of any transaction can be traced back to the point of where the bitcoins were originally produced.
What does a bitcoin transaction look like?
It’s not as complicated as it might sound. Let’s break it all down for you.
Let’s say Mike sends some bitcoins to Matt, that transaction will have three main pieced of information tied to it:
- An input. This is a record of which bitcoin address was used in the past to send the bitcoins to Mike in the first place (he received them from his friend Sam).
- An amount. This is raw amount of bitcoins that Mike is sending over to Matt.
- An output. This is Matt’s bitcoin address.
How are the bitcoins sent then if they don’t really exist?
In order for someone to send bitcoins, you need two things:
- A bitcoin address
- A private key
So a bitcoin address is generated completely at random, and all it basically is, is a sequence of letters and numbers. That’s it.
A private key is another sequence of letters and numbers, but unlike the bitcoin address, this is kept completely secret.
Here is a good way to visualize this.
Think of your bitcoin address as a safe deposit box that has a glass front to it. Every single person on the network knows what is in the safe deposit box, but only the private key can open it to take the things out or put the things in. It’s basically that simple.
Back to our real world example above. When Mike wants to send bitcoins to Matt, he uses his private key to sign a memo with the input (the source transaction(s) of the bitcoins), the amount he wants to send to Matt, and the output (Matt’s address).
Mike then sends them from his bitcoin wallet out to the wider bitcoin network. This is where bitcoin miners get to do their job by verifying the transaction, placing it into a transaction block and then eventually solving it.
Why is there a lag period before my transactions clear?
So the last thing I said about the transaction is that it is placed in the hand of miners. Your transaction must be verified by miners. And because of this step, you are sometimes forced to wait until they have finished doing their mining. The bitcoin protocol is currently set so that each block takes about 10 minutes to mine.
Depending on the merchant, some make you wait until the transaction has been fully confirmed, and others do not. The ones who do not, are essentially taking a risk on you, assuming that you will not try to spend the exact same amount of bitcoins elsewhere before the original transaction is confirmed. This often happens for lower value transactions, where the risk for the merchant is not nearly as great.
Are there transaction fees then?
Not all the time, but for the most part you will have to succumb to the small fees that come with bitcoin transactions.
Transaction fees are how the miners mainly make their money. Let me explain.
Transaction fees can be calculated using various factors.
Some digital wallets let you set the transaction fees manually. Any portion of a specific transaction that is not snagged by the recipient or returned as change to the sender is considered a fee. This amount is then presented to the miner lucky enough to solve the transaction block as a reward.
Can I get a receipt?
Bitcoin wasn’t really set up like real world currency where receipts are so prominent.
There are however some payment processors out there, like BitPay, that provide the advanced features that you wouldn’t normally find with a native bitcoin transaction, such as a receipt.