Bitcoin (BTC) is the world’s first decentralized cryptocurrency, the largest cryptocurrency by market cap and the most traded cryptocurrency by volume, as of the writing of this article. As the precursor to all other cryptocurrencies, BTC also happens to be the first to have been sent from one address to another, paving the way to a global, decentralized and highly secure payment system.
The result of a BTC transaction looks similar to that of an ordinary USD bank transfer. The transferred asset has moved from one wallet address or bank account to another. However, while the USD bank transfer requires a bank or some other payment service provider to act as the middleman, no such intermediary is needed in a BTC transfer. This article explains how BTC transactions work. If you do not know how to move your crypto asset from one address to another – say from an external wallet to an exchange or vice-versa – then you have come to the right place.
Sending and receiving BTC essentials
- To send or receive BTC, you will first need a private key, which is generated free of charge for all new wallet owners.
- It functions like a secret password for signing outbound transactions.
- A public key is derived from the private key.
- The hashed version of a public key is called the wallet address, which functions like a bank account number – this is the piece of information people need if they want to send BTC to you.
- Each BTC transaction requires that a mining fee be paid, which is an incentive for miners to include the transaction in a block.
Public and private keys
Much in the way that you need a bank account in order to receive and store your salary, scholarship or allowance in USD, you need a BTC address to receive and store your BTC. Each address is derived from a public key by means of hashing. Once an address has been hashed, it functions similarly to an international bank account number. It takes the form of an alphanumeric code that other users need if they want to send BTC to your address. An address looks something like this:
1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2
The easiest way to manage an address is with a wallet – most often a software program (though it could also be a hardware device or service) that stores asymmetric key pairs and interacts with the blockchain, enabling the owner to send or receive cryptocurrencies, in this case BTC. To facilitate payments by allowing the sender to scan the recipient’s address instead of having to type it in, most software wallets support QR-code input, making an address look like this:
QR-code
Unlike a public key, which is used to derive the address, a private key serves a different purpose. It functions as a secret “password” used to generate a signature, allowing a trader or investor to spend the BTC at their address. A wallet may be associated with more than one private key, and may require more than one signature to initiate a BTC transaction – such wallets are referred to as MultiSig wallets. Private keys should always be stored securely, for a compromised key may result in stolen funds. Here is an example of a private key:
F8763E79D6D87DC0FB6A5778611189F3343212213EB61B20BD67FC233AA44151
A private key is generated free of charge for any new BTC user. There are a couple of ways you can go about obtaining a private key. The first option – which should be considered highly insecure, as it exposes your assets to risk – is to let one of the many purpose-built web services generate a key for you. The second option is to let a wallet client generate the private key on your behalf. The third option is to come up with a private key yourself, but there are limitations and rules in terms of the minimum and maximum character count, valid characters and character sequences.
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Transaction fees
Since the implementation of SegWit in 2017, Bitcoin’s block size caps at 4 MB. Thus, in theory, each Bitcoin block can only hold as much as 4 MB of transaction data and block data, such as headers (but usually much less, about 1.5 MB on average). Due to the limited block size, not all transactions from the mempool can make it into the next block if the traffic is significant. In order to incentivize miners to include your transaction in the blockchain, the fee you decide upon should at least come close to matching those set by the majority of transactors.
Transaction fees are expressed in satoshis (Bitcoin's smallest subunit) per byte of block data. If you check websites with BTC transaction fee charts, you will find that fees range from a few satoshis per byte to more than a 100 satoshis per byte. If you set a fee too low, your transaction might never make it into a block and could be dropped from the mempool altogether. But if you set it too high, you will be wasting your BTC, as your transaction would probably have made it into the next block, even if you had set the fee lower.
So, how is a trader supposed to know how high to set the mining fee for their transaction? It helps to use websites such as Bitcoin Fees, which keep track of how high the fee should be set to have a transaction finalized within a given number of blocks.
Send BTC from a wallet to an exchange and vice-versa
To send BTC from your wallet to a crypto exchange, like Bitstamp, you will need a BTC address associated with your Bitstamp account, which you can access upon logging into your Bitstamp account and navigating to Deposit→Cryptocurrency and select Bitcoin (or another crypto if depositing something else). Use this address when transferring BTC from your external wallet to your Bitstamp account. As is the case with any BTC transaction, a mining fee must be paid. This fee is deducted off the total amount you are sending. Also keep in mind that crypto transactions are irreversible, so you should always double-check the receiving address before initiating a transaction.
To send BTC from your Bitstamp account to your external wallet, log in to your Bitstamp account and go to Withdrawal→Cryptocurrency. Enter the address of your external wallet and click “Authenticate and withdraw.” Once again, make sure to double-check the receiving address before you initiate any transaction.
Bitstamp is the longest-running cryptocurrency exchange with a proven track record in reliability and security. If you wish to enter the realm of crypto trading for the very first time, there is no better place to start than Bitstamp. Register your free account and start trading BTC today!