The Bitcoin wallet is where you can send and receive Bitcoin to or from other people or services that have a Bitcoin wallet. The process is very simple and straightforward to perform.
If you are sending Bitcoin to someone else, you need to access your Bitcoin wallet and go to the “send” section. There you will find a place to input the Bitcoin wallet address (a long string of letters and numbers), you want to send the Bitcoin to. (You must get this address from the person you are sending the Bitcoin to).
Most Bitcoin wallets have the option to scan a QR code to get the Bitcoin address. In case you don’t know, a QR code looks like this…
But if you are not familiar with QR code, and I personally have not used it, just copy and paste the address. Make sure you input the correct address for the wallet you are sending to. There is no way to get the Bitcoin back once you send it.
Then you will need to input the amount of Bitcoin you want to send. Remember, there will be some type of fee involved for the sending of the Bitcoin.
Hit “send” or whatever command your wallet uses, and the Bitcoins are on their way.
If you are receiving Bitcoin from someone else, you need to access your Bitcoin wallet and go to the “receive” section. There you will find your Bitcoin address, (a long string of letters and numbers). You must give this address to the person exactly as you see it in order to get the Bitcoin. They will use their Bitcoin wallet to send the amount of Bitcoin to your wallet using the address you provide.
Pretty simple, right?
Behind The Scenes
Now lets go over what happens behinds the scenes when you send Bitcoin.
OK, let’s say you are going to send Bitcoin to someone else. You go to your wallet, fill in their Bitcoin address and the amount of Bitcoin you want to send and hit the send button. In order for the Bitcoin to be sent from your wallet and received in the other person’s wallet, a three part process must happen.
Once you hit send, the wallet creates a transaction message with all the details of the transaction. Then the wallet mixes this message with your private key in order to produce a unique digital signature for the transaction.
It is important to note that each transaction will have a completely different digital signature. If you think about it, this digital signature is actually more secure than a “real” signature because it is different for each transaction, and therefore cannot be forged for future transactions, like a real signature can.
Finally, the transaction message and signature are compiled into a small file. This brings us to step 2.
In this step, the file is sent out to the Blockchain. Remember, the Blockchain is a chain of computers (called nodes), that hold an exact copy of the transaction ledger. Each node receives the file and verifies the legitimacy of the signature and checks to make sure the funds are available. When that is done, it passes the file to the next node in the chain, until all the nodes verify the file.
At this point in the process, the transaction is still “unconfirmed”. Basically, the transaction is going through the verification process, but has not become part of the Blockchain yet.
IMPORTANT: If you are receiving Bitcoin, you will see this “unconfirmed” transaction in your wallet. But the Bitcoin should not be considered really yours, or proof of payment, until it has been confirmed. This brings us to the next step.
This is where the Bitcoin Miners come into play. They group transactions into blocks. There is a certain amount of transactions that can be in a block. After that number of transactions is reached, the miners will compete with each other in order to get that block into the Blockchain so they can collect the fees. (Remember, this competition is based on mathematical calculations, so the miner with the most powerful computing power usually wins).
Once the block is successfully inserted into the Blockchain, it is considered “confirmed”. As more and more blocks are added to the chain with your transaction in it, the number of confirmations will grow.
It is important to keep in mind that this confirmation process can take time. Usually, this can be something like 10-15 minutes. But it could be faster or take longer. So, when sending or receiving Bitcoin you must wait until the transaction is “confirmed” before you consider the transaction complete.
If you are dealing with large amounts of Bitcoin, and want to be more secure there is nothing that can happen to the transaction, the more confirmations you have the better. Most people say that once the number of confirmations reaches 6, the transaction is 99.9% secure. (Don’t worry, it would be very difficult, and require a lot of computing power to manipulate a transaction even at one confirmation, so the likelihood this will happen is very small).
Don’t get overwhelmed by all this, the process of sending and receiving Bitcoin is very easy. Basically, once you fill in the information and hit send, everything else happens behind the scenes and there is nothing for you to do. I just wanted to give you an understanding of what is happening in the background after you hit the send button.
This concludes the section on Bitcoin Fundamentals. In the next lecture, we will go over why you should trade Bitcoin instead of simply buying and holding Bitcoin…