How Does a Bitcoin Transaction Work?

What happens in a transaction

The Bitcoin whitepaper describes Bitcoin as a chain of digital signatures. Each owner hands an amount to the next by signing a reference to the previous transaction together with the recipient’s public key. Anyone who checks the signatures can follow the unbroken chain of ownership.

Your wallet does this in the background. It chooses which earlier amounts to spend, builds the outputs to the recipient and back to yourself, signs the lot and sends it to the network. There each node takes the order into its own waiting area, the mempool. There is no single central mempool; every node keeps its own. Miners pull transactions from it into the next block.

Inputs, outputs and change

Bitcoin has no balances, only unspent earlier outputs. When you pay, your wallet takes one or more of them as inputs and spends them in full. According to the Bitcoin whitepaper, a normal transaction has either a single input from a larger earlier transaction or several small inputs, and at most two outputs: one for the payment and one sending the change back to you.

An example. You want to send 0.02 bitcoin and your wallet holds an earlier receipt of 0.05 bitcoin. It spends the whole 0.05, sends 0.02 to the recipient and roughly 0.03 back to an address of your own as change. The small remainder that reaches neither the recipient nor the change output is the fee.

Where the fee comes from

The fee is not a fixed charge, just the leftover. The Bitcoin whitepaper puts it plainly: if the outputs add up to less than the inputs, the difference is the transaction fee, and it goes to the miner who finds the block.

• You set the amount in practice, through your wallet. A higher fee makes it more likely your order lands in a block sooner.
• The cost tracks the size of the transaction, measured in virtual bytes (vB), not the amount you send. Many small inputs make a transaction larger and so more expensive.
• When the mempools fill up, fees rise because more orders compete for the limited space in the next block. In quiet spells it gets cheaper.

Fee rates are usually quoted as satoshis per virtual byte, sat/vB for short. For very small everyday amounts the detour over the Lightning Network is often worth it, since no individual blockchain transaction is needed there.

Confirmations and how long to wait

Once your transaction is in a block, it has one confirmation. Every further block built on top adds another. The Bitcoin whitepaper shows with numbers that the chance of reversing an already confirmed transaction falls quickly with each further confirmation.

A block takes about ten minutes on average, sometimes less, sometimes more. How many confirmations are enough for your case is not a fixed Bitcoin rule. It depends on the amount, on the counterparty, on how costly an attack would be for someone, and on the context. The overview below shows what each level means.

Exchanges usually set their own number of confirmations for deposits. Until it is reached, the amount is not yet available there.

Why a new address every time

You may notice that your wallet uses a fresh address for change and for every new receipt. The Bitcoin whitepaper recommends exactly that: a new key pair for each transaction so that payments cannot easily be tied to a person.

Every transaction is publicly visible. What is visible is that an amount moves from one address to another, not who owns the addresses. A fresh address per transaction keeps that separation intact. Reusing an old address is technically fine but links more payments together than it needs to. How wallets handle this is covered in the overview of wallet types.

Peer-to-peer, MiCA, and why you should label transactions

A common question: does a payment between two people fall under MiCA? Under Article 2(1), the Regulation (EU) 2023/1114 (MiCA) applies to persons engaged in the issuance, offer to the public and admission to trading of crypto-assets in the Union, or providing crypto-asset services. In other words, it addresses issuers, offerors and crypto-asset service providers.

If you hold your own bitcoin and send it directly to another person, no such service provider takes part in that. Recital 22 of the regulation states explicitly that crypto-asset services provided in an exclusively decentralised manner without an intermediary should fall outside its scope.

This is where an unremarkable habit becomes valuable: label your transactions in your wallet as they happen. Many wallets allow a note per incoming and outgoing payment. The burden of showing where an amount came from later sits with you, not with the network.

A label is a note to yourself and is reported to no one. It stays local in your wallet. Its value shows up the moment you want to evidence an origin, whether to a regulated provider or in your tax return.