One of Bitcoin’s features is the ability to send a transaction from one address to another without a central authority. This is achieved by the Bitcoin protocol interacting with a series of computers around the planet that run the Bitcoin software and process transactions directly for a fee in Bitcoin.
Bitcoin transactions are arguably the most important part of the entire network. Understanding how they work is essential to successfully managing your bitcoin and using Bitcoin for its intended purpose.
A Bitcoin transaction moves Bitcoin from one address to another. To send Bitcoin, you need the recipient’s address. Enter it into your wallet software (e.g., Trezor Suite), choose a fee, send the transaction, and wait for confirmation.
After your transaction is included in a block, it is considered confirmed. The more confirmations a transaction has, the more secure it is considered to be. Since one block gets added to the blockchain approximately every 10 minutes, a general rule of thumb is that one confirmation will take around 10 minutes, although when the network is busy, this can vary.
When the next block after the one containing your transaction is confirmed, your transaction will have two confirmations. Many parties, such as exchanges, require multiple confirmations to verify a Bitcoin transaction has gone through on their end. Often, exchanges require three confirmations to deposit funds, which takes about 30 minutes.
For instructions on how to send Bitcoin in Trezor Suite, please read our article called Send crypto in Trezor Suite.
Every Bitcoin transaction comprises of one or more UTXOs, which are ‘chunks’ of Bitcoin you can spend. For a full breakdown of UTXOs, please read our article called What is a UTXO?
When you send a Bitcoin transaction to someone, you send one or more UTXOs to another address. The receiving address then combines all of these UTXOs into a single UTXO which the receiving address controls.
Trezor Suite automatically selects the most economical way to send a Bitcoin transaction - however, if you want complete control over which UTXOs you use, you can use the Coin Control feature.
As the owner of your Bitcoin, you have the ability to determine how much of a transaction fee you are willing to pay.
Since mining is competitive, selecting the right fee for your Bitcoin transaction is crucial to ensure it gets processed quickly. Since network use fluctuates, setting a lower fee and waiting is generally acceptable if you don’t need to send your transaction right away.
If you set the fee too low, you may need increase the fee by doing a Replace-by-fee transaction.
When you send a Bitcoin transaction, your private key signs it so it can be broadcast to the blockchain. With Trezor, you sign the transaction directly on your device.
This ensures the transaction is secure and sent to the intended recipient.
Transactions are broadcasted to the network through the following process.
1. Sign the transaction: Your private key signs the transaction to prove you own the funds and authorize the transfer. This is done with your Trezor device.
2. Assemble the transaction: The inputs, outputs, and signature are combined into a final “raw transaction” that the Bitcoin network can recognize.
3. Broadcast the transaction: Your wallet sends the signed transaction to the Bitcoin network, where it’s shared with other nodes.
4. Validate and include in a block: Miners verify the transaction and add it to the next block on the blockchain if it’s valid.
5. Confirm the transaction: Once added to the blockchain, the transaction is confirmed. Additional blocks make it more secure and permanent.
For more information about this, please read our article called Send crypto in Trezor Suite.
When a Bitcoin transaction happens, the sender always pays a transaction fee to send the Bitcoin. This fee is then paid to the miners who validate the transaction.
Bitcoin miners validate transactions by grouping them into a block, and then compete to add the block to the blockchain through a process called proof of work. Other miners and nodes verify the block to maintain the blockchain’s security and immutability. Miners are rewarded with transaction fees and new Bitcoin (block reward) for their efforts, incentivizing their participation in securing the network.
Bitcoin transactions become increasingly secure with each new block added to the blockchain, as this makes reversing a transaction or attempting double spending (spending the same Bitcoin twice) nearly impossible.
Bitcoin transactions are public, but as long as you avoid linking your personal identity to your Bitcoin address, this transparency will not affect your privacy.
Bitcoin transactions are all part of a public ledger. You can trace any Bitcoin transaction and the associated addresses by using a block explorer.