A Bitcoin Transaction Example

Let’s step through a typical bitcoin transaction to see how things work.

Jane wants to buy a cup of coffee at Bert’s Coffee using bitcoin. The transaction will look like this:

A cup of coffee is $2.95 and the price of bitcoin is $650.

$2.95/$650 is 0.00453846 bitcoin.

But we can express fractions of a bitcoin in a different and better way.  A satoshi is 1/100,000,000 of a bitcoin so 0.00453846 would be 453,846 satoshi.

To encourage miners to include this sale in the next block (takes about 10 minutes to settle), you will need to spend ~7 cents or 10,615 satoshis. This is called the transaction fee.

The transaction fee isn’t actually part of the transaction. It is found by subtracting the price of the coffee (or the output) from the total paid(or the input). The transaction will look like this:

Total paid = coffee fee + transaction fee = 453,846 + 10,615 = 464,461 satoshi

So the transaction will look like this

INPUT                                       ->   OUTPUT
464,461 satoshi from Jane     ->   453,846 satoshi to Bert’s Coffee

Which is pretty straightforward. In fact, this is too simple. In reality, Jane probably doesn’t have exactly 464,461 satoshi so she’ll need some change. This is similar to having a $5 bill and buying a $2.95 coffee and getting the change back (except for the transaction fee).

Granted, cash doesn’t have a transaction fee, but then let’s look at this as being similar to a credit card transaction fee.

Let’s assume Jane has a number of partial bitcoins such as shown below. I’m truncating the hashes for space reasons. In reality these are

  • 1/4 bitcoin = 25,000,000 satoshi (Hash = 6a45764f)
  • 1/8 bitcoin = 12,500,000 satoshi  (Hash = 23d5fd56)
  • 1/100 bitcoin = 1,000,000 satoshi (Hash = 43ed2dac)

Jane’s wallet will probably select the 1/100 bitcoin to spend.

so the transaction will look like this:
INPUT                                         ->  OUTPUT
1,000,000 satoshi (43ed2dac) ->  453,846 satoshi to Bert’s Coffee(2bc4545b)
535,539 satoshi change to Jane(3ce69d26)

Note that in this case the transaction fee is staying the same.

Jane’s original amount = Jane’s change + Bert’s coffee + transaction fee
1,000,000 = 453,846 + 545,539 + 10,615

When all is finished, the wallets will look like this:


  • 1/4 bitcoin = 25,000,000 satoshi (Hash = 6a45764f)
  • 1/8 bitcoin = 12,500,000 satoshi  (Hash = 23d5fd56)
  • 535,539 satoshi (Hash = 3ce69d26)

And Joe’s Coffee:

  • other sales & other hashes
  • 453,846 satoshi (2bc4545b)


Bitcoin Core vs Bitcoin Classic – The Civil War

Bitcoin, this seemingly revolutionary crypto currency that’s been around for a significant amount of time now, is currently on the verge of a civil war. This is fueled by the fact that one of the leading and prominent developers – Mike Hearn, who used to be a Google engineer, openly stated that he truly believes that Bitcoin was, in fact, a failed experiment.

With this in mind, it’s worth noting that there are two separate fronts starting to form – the bitcoin core which is consisted of the core members of the initial development team and the bitcoin classic. The latter contains an enthusiastic group of miners with influence, startups as well as exchanges that are proposing the exact opposite of the core. This difference seems to have paralyzed the system with the infighting that has occurred throughout the last few months. Although Bitcoin Core and Bitcoin Classic are using the same  source code base, they are essentially two entirely different groups advocating completely different roadmaps.

Whichever group wins will have an impact on the particular implementation and resilience of the blockchain technology which is an underlying part of Bitcoin. Some believe that the revolutionary bitcoin idea which is currently valued at around $5 billion could just as well turn to dust. I’m not one of those people.

To understand the context, it’s essential to understand that the system works as miners are using complex processing power to go through math problems on an openly distributed ledger (meaning everyone with an internet connection can access and download it) which is referred to as the blockchain. For this work, they are rewarded with bitcoins in blocks and up until this moment, each block in the blockchain has been limited to be no more than 1 mb in size. This particular limit becomes troubling for people who want the system to thrive, a.k.a the Bitcoin classic as the volume becomes incapable of satisfying the needs of suppliers and providers, and hence – the bitcoin is becoming unreliable.

The opposite fraction – the Bitcoin core, comes from the fact that if they increase the volume of the blocks in the chain this would lead to a huge requirement for larger computing power which is going to significantly limit the ability of the majority to mine bitcoins in the first place because they would simply be unable to.

It’s currently unclear how this metaphorical civil war is going to end but one thing is clear – the nature of bitcoin as we know it so far is much likely to change entirely and this is likely to have an impact on a lot of associated startups and miners and even exchanges that trade with the crypto currency.

What is Bitcoin Mining?

What is Bitcoin Mining?

Bitcoin is a peer to peer network that operates as a form of currency. Everyone who uses Bitcoin is a tiny fraction of the “bank of Bitcoin.” Bitcoins are tracked using a global ledger (called the bitcoin blockchain) that anyone can download.

Bitcoin uses software that answers math problems to “mine for Bitcoins.” Then, when these problems are answered correctly, bitcoins are released to the users and recorded in the global ledger where everyone can see it.

As more bitcoin are created by more users solving the math problems correctly, the difficulty of the problems becomes higher.  The idea is that as computers became more powerful, the problems get harder and the average time to create bitcoin will remain constant.

Getting the right software/hardware for bitcoin mining.

When bitcoin mining was first developed, users could mine for bitcoins using their personal computer CPU or a high speed video processor card. Today, with the attention that bitcoin is getting there is a large network of bitcoin miners trying to solve the problems. As a result, the problems can be very difficult for an individual to solve on their own with personal computers or a high speed video processor card.

Instead many miners must buy custom Bitcoin ASIC chips to successfully mine for bitcoins. Mining with anything less powerful will use more electricity than you are likely earning from the bitcoins you successfully create. The most successful miners use the best mining hardware. Today, many different companies offer products and services that help users mine efficiently.

Bitcoin Mining Services

To become familiar with bitcoin mining, it may be useful to sign up for a cloud mining contract. The following companies offer services for someone who wants to get started in Bitcoin mining. These companies buy mining hardware and rent the processing power out to people. People usually buy processing time on a $/Hash. Although they started selling MHash (1000 hashes/second), to remain competitive, most cloud bitcoin mining is sold in GH (1,000,000 Hashes/second).

Examples of Cloud Mining (no recommendations are being suggested – use at your own risk) are below:

  • Hashflare
  • Hashnet
  • Genesis Mining
  • Minergate
  • NiceHash
  • Eobot
  • MineOnCloud

Joining a “Bitcoin Mining Pool

Because the math problems, and software required to successfully mine for bitcoins can be difficult for individuals, most people recommend joining a Bitcoin Mining Pool when first starting. These are groups of users who join together to solve the math problems and distribute the rewards. It is very possible that without joining a Bitcoin mining pool that you could mine for a year and not successfully mine any coins.

Storing Bitcoins in a Bitcoin Wallet

Your Bitcoin wallet will be the place where all of your bitcoins that you successfully mine are stored. Bitcoins will be sent to your wallet via a specific address for your user. For safely, it is important to keep this wallet on an a computer that does not have access to the internet and is strictly offline. This will prevent any threats or someone hacking your mined bitcoins. With your wallet and collected bitcoins you may also want to sell your bitcoins. There are several services that Bitcoin do this including: Coinbase, Kraken, Buy Bitcoin Worldwide, and Local Bitcoins.



How Bitcoin Mining Is Used for Block Chain Transactions

Did you recently hear about bitcoin mining? Bitcoins and Bitcoin Mining is so popular nowadays that you probably did. Bitcoin is an entirely new  currency, a new payment system that is  a digital asset. Bitcoin is a global currency which was invented by an anonymous person in the year 2008.

Bitcoin is largely credited to someone with the pseudonym “Satoshi Nakamoto” who published a paper describing the Bitcoin concept. Satoshi is either an individual developer or a group of developers behind the creation of the proof-of-work system that utilizes Bitcoin Mining.

There is no central person or central authority in charge of Bitcoin. Many programmers spend their time developing the open source Bitcoin software. They can make changes which are approved by the lead developer Gavin Andresen. The individual miners can choose if they update their mining software to the new version or continue using their old one.

  • Bitcoin wallet program, which connects you to the Bitcoin network, is needed to make Bitcoin currency transfers. Bitcoin aren’t stored in your Bitcoin wallet. They are stored in the Bitcoins network and your Bitcoin wallet gives you access to them.
  • Wallets communicate directly with each other to send and receive payments within the Bitcoin network. In the process the network collectively verifies payments and records them in a public ledger which is huge in size. That public ledger is called  the block chain or blockchain. This is similar to an accounting ledger that records transactions.

The transactions in the blockchain are recorded and confirmed anonymously.  It is a record of events that is shared among many parties. Once information is entered, it cannot be altered. Since everyone has access to the ledger, anyone can verify a transaction.

The blockchain’s integrity is secured by a cryptographic process called proof-of-work, which we mentioned earlier. It is a very hard mathematical puzzle that is solved by powerful computers in the network in order to validate a block.

Miners collect transactions and put them into a single block. A block generally contains four pieces of information:

  • Reference to the previous block
  • summary of included transaction
  • time stamp
  • and Proof-of-Work that went into creating the secure block.

There are no bad checks in the system. Once a transaction is added to the blockchain, it is essentially “locked down” and is used for the base of the next transaction. All blocks are strung together in one chain.

A fluid chain doesn’t allow any inconsistencies. All transactions entered are valid and can be processed. The entire system is effectively self-regulated and fully secure because it self-checks the Blockchain and confirms the preceding transactions. Each block is securely hashed. It is rendered into seemingly random data and it is nearly impossible to invert or undo. Once a transaction is stored in the blockchain it stays there forever.

Miners need to spend a lot money to buy expensive hardware for mining so the first miner that solves the mathematical puzzle is currrently rewarded with 25 freshly generated Bitcoins.

The reward is halved for every 210.000 block until the maximum number of available Bitcoins is reached. The maximum number of available Bitcoins is 21 million and at some point all of these will be mined.

In order to compensate for the ever increasing hardware speed the difficulty of mining is increased roughly every two weeks. Often the computing power is bundled together to reduce variance in miner income. Individual miners often have to wait for long periods of time so that the block of a transaction is confirmed and the payment is received.

For the miners that were working together in a “mining pool” the payment is proportional to the amount of work the individual miner helped in finding that block.

Mining was typically done with a CPU in the beginning, but it evolved to mining with a GPU and now is mining occurs with specifically designed chips called ASICs.

Bitcoin is not perfect.It has a lot of problems that need to be overcome. It’s clear that bitcoin is evolving. As time goes on and Bitcoin gains acceptance, it is increasingly likely that the future of bitcoin is bright.