The basic idea
Bitcoin does not move like a physical coin
When bitcoin is sent, no digital object physically travels from one wallet to another.
Instead, the sender creates a transaction that changes which spending conditions apply to specific amounts of bitcoin.
The transaction is broadcast to the network, independently checked by nodes and later included in a block by a miner.
Once confirmed, the recipient can use the newly created output as an input in a future transaction.
Simple definition
A Bitcoin transaction is a digitally signed instruction that transfers the ability to spend bitcoin.
Receiving bitcoin
What is a Bitcoin address?
A Bitcoin address is information a recipient can share to receive bitcoin.
The address represents a destination and is normally generated by a Bitcoin wallet.
An address is not the same as a private key. It can be shared publicly without giving someone the ability to spend your bitcoin.
Wallets can generate many addresses, and using a new address for each payment can improve privacy.
Transaction process
From wallet to confirmation
A transaction passes through several stages before it becomes part of Bitcoin's confirmed history.
The wallet builds the transaction
The sender chooses an amount, enters a destination address and selects a transaction fee.
The transaction is signed
The wallet uses the sender's private key to create a digital signature proving the spend is authorised.
The transaction is broadcast
The signed transaction is sent to Bitcoin nodes and begins spreading across the network.
Nodes verify it
Nodes check that the transaction follows Bitcoin's rules and does not attempt to spend invalid bitcoin.
It enters the mempool
Valid unconfirmed transactions are held temporarily while waiting to be selected by a miner.
A miner includes it in a block
A miner selects transactions, usually considering their fee rate, and places them into a proposed block.
The transaction receives confirmations
Once the block is accepted, the transaction has one confirmation. Each later block adds another.
Authorisation
How does Bitcoin prove a transaction is authorised?
A wallet creates a digital signature using the sender's private key.
This signature proves that the transaction was authorised by someone with the required key.
Nodes can verify the signature without learning the private key itself.
The private key should never be shared. The signature provides proof without exposing the secret used to create it.
Transaction structure
Bitcoin uses transaction outputs
Bitcoin does not maintain account balances in the same way as a bank.
Instead, wallets identify unspent transaction outputs, commonly called UTXOs, that the user is able to spend.
A new transaction consumes one or more existing outputs as inputs and creates new outputs.
Your wallet calculates your available balance by adding together the spendable outputs it controls.
Existing output
100,000 sats
Recipient
60,000 sats
Change and fee
40,000 sats
This is a simplified example. Part of the remaining amount may be returned to the sender as change, while the difference becomes the transaction fee.
Change outputs
Why does a Bitcoin transaction create change?
A UTXO must normally be spent in full rather than partially edited.
This is similar to paying for a small item with a larger banknote. The entire note is handed over, and change is returned.
A wallet usually creates one output for the recipient and another output returning the remaining bitcoin to a new address controlled by the sender.
Modern wallets handle this automatically.
Transaction fees
What determines a Bitcoin transaction fee?
A Bitcoin fee is based mainly on the amount of data the transaction uses, not simply the amount of bitcoin being transferred.
Transactions with several inputs can be larger and therefore more expensive than simpler transactions.
Users choose a fee rate, commonly measured in satoshis per virtual byte.
During busy periods, miners generally prioritise transactions offering higher fee rates.
Waiting for confirmation
What is the mempool?
The mempool is the collection of valid, unconfirmed transactions held by a Bitcoin node.
Each node maintains its own mempool, so there is not one single universal mempool.
Transactions normally remain there until they are confirmed, replaced or eventually removed.
When network demand is high, lower-fee transactions may wait longer before being included in a block.
Finality
What are confirmations?
Confirmations measure how deeply a transaction is recorded in the blockchain.
0 confirmations
The transaction has been broadcast but has not yet been included in a block.
1 confirmation
The transaction is included in a block accepted by the network.
Several confirmations
Additional blocks have been added, making reversal increasingly difficult.
The number of confirmations required depends on the value of the transaction and the receiver's risk tolerance. Small payments may be accepted quickly, while large transfers may require several confirmations.
Transaction finality
Can a Bitcoin transaction be reversed?
Bitcoin transactions do not include a central chargeback system.
Once a transaction has several confirmations, reversing it becomes increasingly difficult.
A recipient can voluntarily send funds back, but the original sender cannot normally cancel a confirmed payment.
This makes checking the address, amount and network before sending extremely important.
Key terminology
Transaction terms to remember
Transaction ID
A unique identifier, often called a TXID, used to locate and inspect a Bitcoin transaction.
Input
Bitcoin being spent from a previous transaction output.
Output
A new spendable amount created by the transaction and assigned to a locking condition.
Fee
The difference between the total value of the transaction inputs and outputs.
Confirmation
Evidence that a transaction has been included in a block accepted by the network.
Mempool
A node's temporary collection of valid transactions waiting to be confirmed.
Privacy
Bitcoin transactions are public, not anonymous
Confirmed Bitcoin transactions are recorded on a public blockchain.
The blockchain shows addresses, amounts and transaction relationships, but it does not automatically display a person's legal identity.
Transactions may still be connected to individuals through exchanges, address reuse and other identifying information.
Bitcoin is therefore better described as pseudonymous rather than fully anonymous.
Safety
Common transaction mistakes
Sending bitcoin to the wrong address.
Using the wrong network or incompatible address format.
Selecting a fee that is too low during heavy network demand.
Assuming an unconfirmed transaction is final.
Sharing a private key or recovery phrase while trying to receive bitcoin.
Confusing the amount sent with the total amount deducted after fees.
Knowledge check
Before continuing
What does a Bitcoin transaction actually transfer?
Why can nodes verify a signature without seeing the private key?
What is an unspent transaction output?
Why does a wallet sometimes create a change output?
What mainly determines the size of a Bitcoin transaction fee?
What happens while a transaction is in the mempool?
Why do additional confirmations increase security?
Why is Bitcoin considered pseudonymous rather than anonymous?
Transaction lifecycle
From wallet intent to confirmed transaction
Follow a transaction as it is constructed, authorised, relayed, validated and finally included in a block.
Build
The wallet chooses spendable UTXOs, creates outputs and normally adds a change output plus a fee.
Visual recap
The transaction lifecycle
Wallets spend earlier outputs, create new outputs, add a fee and sign before the network can verify the transaction.
Select UTXOs
Create outputs
Add fee
Sign
Relay and confirm
References
Further reading
From the 21Relay Library
Recommended reading for this lesson
Optional books selected to reinforce this topic or provide a useful second perspective.
Recommended nextGrokking BitcoinKalle RosenbaumIntermediate · Long · EssentialVisual learners moving beyond the basics
Another perspectiveInventing BitcoinYan PritzkerBeginner · Short · EssentialA first technical book about BitcoinLesson summary
Key takeaways
A Bitcoin transaction transfers the ability to spend bitcoin.
Wallets create and digitally sign transactions using private keys.
Nodes verify transactions before accepting and relaying them.
Valid unconfirmed transactions wait in node mempools.
Miners select transactions and include them in blocks.
Bitcoin uses inputs and outputs rather than traditional account balances.
Transaction fees are based mainly on transaction data size and network demand.
Each new block adds another confirmation to a transaction.
Confirmed transactions are difficult to reverse.
Bitcoin transactions are publicly visible and pseudonymous rather than fully anonymous.