Frequently Asked Questions about Bitcoin transactions

Becoming a genuine Bitcoin expert is no easy task. There is so much to know - and things change all the time, too. Even the most ardent Bitcoin users can find themselves in a position of not knowing something they thought they knew. It is the nature of the beast. Take Bitcoin transactions, for example. How much do you know about them?

Casual Bitcoin users may understand the basics. They understand that sending a remittance in BTC involves transferring coin from their wallets to recipient wallets. Yet there is a lot more to Bitcoin transactions than meets the eye.

A little bit of online research revealed a number of questions related to Bitcoin transactions that people seem to ask frequently. Those questions are listed below, along with comprehensive answers. As you read, you might be surprised by some of the things you didn't previously know about Bitcoin transactions.

Can Bitcoin transactions be tracked?

This first question may be born out of fear that government agencies could discover the identity of Bitcoin gamblers simply by tracking transactions. It is a legitimate fear, but one that can be laid to rest with a little bit of explanation. To start with, Bitcoin transactions can be tracked by anyone who wants to do so. It is as simple as using a software tool known as a transaction tracker.

A transaction tracker is simply an app capable of running fast and thorough searches based on strings of information input by the user. You can track transactions by address, block number, and transaction hashes. You can identify individual transactions to make sure they have actually been completed and finalised.

Now, before you panic, understand that transaction tracking is not the same thing as discovering user identities. The Bitcoin network utilises something known as pseudonymity. What is pseudonymity? It is a means of providing a certain level of anonymity so that transactions cannot be linked to individual identities.

Bitcoin accomplishes this through the use of encryption. Every piece of data related to every single transaction is fully encrypted. So even if you downloaded the most current copy of the Bitcoin blockchain, the information would be useless to you without the ability to crack the encryption. This is the one thing transaction trackers do not do.

A tracker can confirm that coins went from one wallet to another, for example. It cannot link those coins to anyone's identity. That information remains encrypted.

Do government authorities use trackers?

It was only a few years ago that government agencies wanting to crack down on illicit cryptocurrency activities complained that they had no means of tracking Bitcoin transactions. That has since changed. Government authorities can use the same transaction trackers that Bitcoin users have access to. And yes, they use them.

As things currently stand, government use of transaction trackers is limited to investigating illicit activity. There is talk of tracking transactions in the future to prevent tax evasion, at least in some countries. However, no verified instances of such tracking have ever been admitted to by government taxing authorities.

Why does it take 10 minutes to clear a Bitcoin transaction?

One of the advantages of cryptocurrency touted by evangelists is transaction speed. They say you can deposit into an online casino nearly instantly. That's not quite true. In terms of Bitcoin transactions, clearing typically takes about 10 minutes at non-peak times. They can take up to a day when traffic is hot and heavy.

The big problem here is scalability. As solid as Bitcoin's code was when originally released, its creator never managed to solve the scalability issue. As such, the Bitcoin network often has trouble keeping up with demand. At a painfully slow seven transactions per second, the Bitcoin network doesn't even hold a candle to the Visa and MasterCard networks.

A 10-minute clearing time is not necessarily a bad thing. But if you are trying to spend your BTC at peak trading times, waiting a day or longer isn't so much fun. There may be a solution on the way in something known as the Lightning Network. And that leads us to the next question.

What is the Lightning Network?

The Lightning Network is a new Bitcoin network that will ostensibly reduce transaction clearing times by creating a secondary layer for minor transactions. Its operation is best explained by using some sort of illustration. For our purposes, imagine you and your extended family are all taking a trip overseas.

Between you, your parents, your siblings and all their in-laws, your travel party represents 10 families. Imagine you have been chosen to deal with the travel planner to make all arrangements and facilitate all the payments. You could collect credit card information from all 10 families, then pass that information to your travel planner for payment. Doing so would be time-consuming and laborious for you and her.

An alternative would be to have each of the families pay you in cash. You could then submit your credit card information to the travel planner and instruct her to process a single payment that covers everyone. Such is the essence of the Lightning Network.

The Lightning Network will eventually process all lower value Bitcoin transactions on the side, then combine large sets of them into a single transaction to be processed on the main network. The thinking is that minor transactions might be grouped into 30-day increments.

How long does it take for transactions to be finalised?

Most casual Bitcoin users do not know that there is a difference between transaction clearing and finalisation. Clearing a transaction is like giving initial approval so that both parties can get on with it. Finalising a transaction involves making it a permanent part of the blockchain. Rest assured that finalisation doesn't occur in 10 minutes. It rarely occurs in a day.

It is not uncommon for some low priority transactions to get stuck for weeks before being finalised. The reason for this can be traced back to transaction fees. As Bitcoin's blockchain has grown, it has required a lot more work from miners. Those miners want to get paid for their efforts, so they prioritise transactions with higher fees.

Let's say you transfer BTC directly from your wallet to a friend's wallet without any payment processor in between. What you are doing qualifies as a no-fee transaction. It is going to be a low priority transaction among miners because they will not make any money off it directly.

Let us say another transaction comes in with a hefty fee attached. Miners are going to process that transaction before they process yours. Therefore, it is quite possible that your transaction could continually get bumped in favour of other transactions with fees attached.

Can transactions be reversed?

This is a question that is asked frequently by people who confuse Bitcoin transactions with digital fiat transactions. When you are dealing with fiat, transactions are reversible. Your credit card company can reverse a purchase you are contesting, for example. That cannot happen in the Bitcoin realm.

Most cryptocurrency networks, Bitcoin included, operate from a position of immutability. Once a transaction has been verified and entered into a block, that's it. It is permanent. It can neither be reversed nor modified. While this may seem like a hassle, it is actually one of the characteristics that enhances Bitcoin's security.

Immutability prevents miners from changing the ledger in order to steal from people. It also makes it extremely difficult for a single entity to take over the network by gaining at least a 51% share of the mining capacity. Immutability has been built-in to the system for security purposes. While it may make for inconvenient refunds, it is still a good system to have in place.

What role do payment processors play?

The vast majority of Bitcoin transactions in the commercial realm are handled by payment processors. These are entities that offer the same kind of services found in the traditional banking system. A payment processor's primary role is to accept payment from the purchaser and remit it to the seller.

Now, you might be wondering why sellers would engage the services of a payment processor when they could just receive payments directly. That is a good question for which there is a very good answer. The answer is found in Bitcoin's volatility.

Commercial enterprises willing to accept Bitcoin payments are taking a significant financial risk due to constant - and sometimes drastic - price fluctuations. They can minimise that risk by running payments through a payment processor.

A typical payment processor will accept your BTC and convert it to fiat. Instead of remitting BTC to the seller, the payment processor remits fiat. That takes the risk out of the cryptocurrency equation, making sellers more willing to accept cryptocurrency payments. Payment processors protect themselves by constantly trading different coins in order to maintain strong positions.

You should now have a better understanding of how Bitcoin transactions work. There is more to learn, but at least this post offers enough to get you started. Now do some additional research on your own. There is plenty of valuable information available online.

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