Transacting in Bitcoin

• Bitcoin (BTC): A cryptocurrency created in 2009 by an anonymous person or group under the pseudonym Satoshi Nakamoto.
• Decentralization: Bitcoin isn’t controlled by any central authority. Instead, it’s maintained by a network of computers (nodes) running Bitcoin software.
• Units: The smallest unit is a Satoshi (1 BTC = 100,000,000 Satoshis).
• Private and Public Keys: Every Bitcoin transaction involves a pair of cryptographic keys:
  • Public Key: Derived from your private key, it’s part of your Bitcoin address (like an account number) where others send funds.
  • Private Key: A secret code you keep safe, used to sign transactions and prove ownership of your Bitcoin.

• A Wallet: Software or a service to store your private and public keys. Types include:
  • Software Wallets: Apps like Electrum or Exodus on your phone or computer.
  • Hardware Wallets: Physical devices like Ledger or Trezor for enhanced security.
  • Paper Wallets: Printed keys for offline storage.
  • Custodial Wallets: Managed by exchanges like Coinbase, where they hold your keys.
• Obtaining Bitcoin: You can buy BTC on exchanges (e.g., Binance, Kraken) with fiat currency, earn it, or receive it as payment.

• Initiating a Transaction:
  • You open your wallet and enter the recipient’s Bitcoin address (a string of letters and numbers, e.g., 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa).
  • Specify the amount of BTC to send.
• Signing the Transaction:
  • Your wallet uses your private key to create a digital signature, proving you own the funds without revealing the key itself.
  • This signature, along with the transaction details (sender address, recipient address, amount), is broadcast to the Bitcoin network.
• Network Verification:
  • Nodes (computers in the network) check the transaction:
    • Is the signature valid?
    • Do you have enough BTC in your wallet (confirmed by previous transactions in the blockchain)?
    • Has the BTC already been spent (preventing double-spending)?
• Mining and Confirmation:
  • Miners, who maintain the blockchain, group your transaction with others into a “block.”
  • They solve complex mathematical puzzles (Proof of Work) to add this block to the blockchain, earning a reward (newly minted BTC + transaction fees).
  • Once the block is added, your transaction is “confirmed.” Typically, 1 confirmation takes ~10 minutes, but merchants may wait for 3–6 confirmations for larger amounts.
• Completion: The recipient sees the BTC in their wallet once confirmed. The transaction is now permanently recorded on the blockchain.

• Bitcoin transactions aren’t free. You pay a fee to miners to prioritize your transaction.
• Fees vary based on:
  • Network Congestion: High demand increases fees.
  • Transaction Size: Measured in bytes (not BTC amount), influenced by inputs/outputs complexity.
  • Speed Preference: Higher fees mean faster confirmation.
• Example: During low traffic, fees might be a few cents; during peaks, they could rise to several dollars.

• Share your wallet’s public address (or a QR code) with the sender.
• Once they send BTC, it appears in your wallet after confirmation.
• You can generate new addresses for each transaction for privacy.

• Irreversible: Once confirmed, transactions can’t be undone—no chargebacks like with credit cards.
• Pseudonymous: Addresses aren’t tied to your identity, but transactions are public, so privacy depends on how you manage your wallet.
• Security: Protect your private key. If lost, your BTC is inaccessible; if stolen, it’s gone.
• Volatility: Bitcoin’s price fluctuates, affecting its value between sending and receiving.

• Sending BTC: You want to pay 0.01 BTC for a coffee. In your wallet, you input the café’s address, set the amount, adjust the fee (e.g., $0.50 for 10-minute confirmation), and hit send. The café sees the payment after 1–6 confirmations.
• Receiving BTC: A friend owes you 0.05 BTC. You give them your address, they send it, and after ~10 minutes, your wallet balance updates.

• UTXO Model: Bitcoin uses Unspent Transaction Outputs (UTXOs). Your wallet balance is the sum of unspent outputs from past transactions, which are spent as “inputs” in new transactions.
• SegWit & Lightning Network: Upgrades like SegWit reduce transaction size (lowering fees), while the Lightning Network enables fast, cheap off-chain transactions for everyday use.