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How Bitcoin Transactions Work

Bitcoin might seem complicated at first, but once you understand a few key ideas, the process becomes much clearer. Here's what actually happens when you send Bitcoin.

Inputs and Outputs​

Bitcoin doesn’t work like a bank account where your balance is just a number. Instead, it uses something called UTXOs — Unspent Transaction Outputs.

  • Input: Where the Bitcoin is coming from (previous UTXOs you own).
  • Output: Where the Bitcoin is going (a new address).

When you send Bitcoin, you're telling the network:

“I want to use these inputs (Bitcoins I previously received) and send them to this output (the person I’m paying).”

You Always Spend the Whole Input​

One important detail: Bitcoin doesn’t let you spend just a portion of an input. You always spend the whole thing. If you only need part of it, the rest is sent back to you as change, usually to a new address that your wallet controls automatically.

Example:

  • You have an input worth 0.01 BTC
  • You send 0.008 BTC to a friend
  • The remaining 0.002 BTC goes back to you as change on a new address

Your wallet takes care of this behind the scenes, but it helps to understand what’s happening.

Transaction Fees​

To get your transaction included in a block, you pay a small fee to the miners. This fee isn’t a separate line item — it’s simply the difference between the amount you’re spending and what’s being sent out.

Going back to our example:

  • Inputs: 0.01 BTC
  • Outputs: 0.008 BTC to friend + 0.0019 BTC change
  • Fee: 0.0001 BTC (automatically calculated by your wallet)

That means the remaining 0.0001 BTC was used as the transaction fee.

Your wallet usually calculates the fee for you, based on how busy the network is.

Miners Confirm Your Transaction​

Once your transaction is broadcasted, it enters the Bitcoin network and waits in the mempool — a sort of public waiting room for unconfirmed transactions.

Miners look through the mempool and choose which transactions to include in the next block. Transactions with higher fees get picked first. When your transaction is added to a block, it gets its first confirmation.

Each time a new block is added after that, your transaction gains another confirmation. One confirmation is usually enough for small payments, while larger ones (like several thousand dollars or more) typically wait for six confirmations to be considered fully secure.